Hong Kong is considering changes to its regulatory framework for cryptocurrencies, particularly with regard to over-the-counter (OTC) virtual asset trading services.
The Securities and Futures Commission (SFC) could play a greater role in overseeing the sector, working alongside the Customs and Excise Department (C&ED), according to a recent study. a report From the South China Morning Post.
Hong Kong’s OTC Cryptocurrency Market to Be Regulated
It is worth noting that the proposed changes will shift from the current system, where C&ED primarily deals with OTC services. In this context, OTC services facilitate direct, private cryptocurrency transactions between large parties, bypassing the need for a public exchange.
The South China Morning Post reported that the SEC’s potential involvement in regulating OTC services would be in line with its broader responsibilities regarding financial markets, potentially providing more clarity for the crypto industry.
Citing unnamed sources familiar with the discussions, the report revealed that the SEC has consulted with industry players on the new licensing regime.
Collaboration between the SEC and the FRA will be a key part of these regulatory developments, addressing concerns about the separation of responsibilities between the two entities.
In addition to OTC trading services, the SEC is also considering introducing a licensing regime for cryptocurrency custody services, a key component of the market infrastructure.
Why OTC regulation?
Hong Kong’s approach to regulating cryptocurrencies comes in the wake of major financial losses and growing concerns about fraud in the sector.
The collapse of the JPEX exchange, in particular, prompted authorities to look more closely at the role of over-the-counter services, which have become “major avenues for channeling retail investor funds” into illicit schemes, the report said.
The report noted that these services often operate through “physical stores,” many of which are linked to fraudulent activities, highlighting the need for “stricter oversight.”
In response to the increased risks, a representative of the Securities and Exchange Commission noted the following:
To promote the sustainable and responsible development of the virtual assets industry in Hong Kong, the SEC is working closely with the government and other regulatory bodies in developing a strong, clear and consistent regulatory environment in Hong Kong.
However, despite the strong case for regulating the OTC crypto sector in the region, the report stated that individuals remain concerned about how regulation will work, noting:
Some in the industry complained that placing all OTC shops under the C&ED, which regulates money changers, was causing confusion given that the SFC regulates other areas of cryptocurrency investing.
However, the Financial Services and Treasury Bureau (FSTB), which initially sought public comment on the OTC trading regulations over a two-month consultation period, noted that the proposal received “general support from respondents”.
Furthermore, although the full results of the consultation have not yet been made public, the FSB has revealed that the office is now reviewing the design of the regulatory framework based on the comments provided.
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