September 16, 2024
By Our Correspondent
Hong Kong is currently assessing the potential involvement of the Securities and Futures Commission (SFC) in the regulation of over-the-counter (OTC) virtual asset trading services, in collaboration with the Customs and Excise Department (C&ED), as the city faces challenges in overseeing the industry, according to media reports.
The SFC has reached out to industry stakeholders to gather feedback on the establishment of a new licensing framework for cryptocurrency OTC services, which would enable the securities regulator to partner with the C&ED in monitoring these entities.
Previously, the responsibility for proposed OTC regulations and licensing rested solely with the C&ED, as outlined in a proposal released in February. OTC services facilitate direct and private transactions involving large volumes of cryptocurrency between two parties. In recent months, the SFC has also engaged with companies regarding the introduction of a new licensing framework for cryptocurrency custodian services. The discussions surrounding both licensing initiatives are still in their preliminary stages and may evolve over time.
The initiative to regulate OTC services gained prominence following one of the most significant financial fraud cases in Hong Kong’s history, which involved the allegedly deceptive crypto exchange JPEX and resulted in approximately HK$1.6 billion (US$225 million) in losses. This incident highlighted the role of physical OTC shops, which were identified as a primary channel for directing retail investors’ funds into fraudulent operations.
There have been concerns within the industry regarding the decision to place all over-the-counter (OTC) shops under the jurisdiction of the Customs and Excise Department (C&ED), which oversees money changers. This has led to confusion, particularly since the SFC is responsible for regulating other aspects of cryptocurrency investment, as reported by sources familiar with the situation. The Financial Services and the Treasury Bureau (FSTB) conducted a two-month public consultation on OTC regulation but has yet to release any findings from this process.
Over the past two years, Hong Kong has been refining its strategy towards the cryptocurrency sector, aiming to attract business to the city through enhanced regulatory clarity. The government is focused on making Hong Kong appealing to investors while simultaneously protecting retail investors from potential risks.
This policy shift was announced just prior to the FinTech Week in 2022, and the initial licensing requirements for cryptocurrency exchanges came into effect in June 2023. Since that time, Hong Kong has permitted the introduction of exchange-traded funds (ETFs) that invest directly in cryptocurrency tokens, positioning itself as the first major financial market to allow spot ether ETFs.
Additionally, efforts are underway to establish a regulatory framework for stablecoins, which are typically pegged to fiat currencies like the US dollar. Nevertheless, the perception of a more favorable environment for cryptocurrencies in the United States has somewhat diminished Hong Kong’s momentum this year. Both presidential candidates, Donald Trump and Kamala Harris, have expressed varying degrees of support for the cryptocurrency sector. Furthermore, the US has introduced spot bitcoin and ether ETFs this year, with trading volumes in the significantly larger ETF market far surpassing those in Hong Kong.
The SFC is currently considering the possibility of allowing ether ETF staking, a practice that
involves locking tokens on a blockchain to validate transactions while earning passive income, which is not permitted in the US.
