Virtual Currency Swap Shop Life and Death Cards! Hong Kong OTC Regulation Deadline Approaching

Unlicensed operators face up to a million dollar fine + two years in prison.

In February 2024, Hong Kong's Secretary for Financial Services and the Treasury, Mr. HUI Ching-yu, dropped a shock bomb:Government to bring virtual currency over-the-counter (OTC) exchanges fully under the regulatory regimeIt is expected that the legislative consultation will commence shortly. This means that over 450 virtual asset OTC merchants in Hong Kong are about to undergo a radical compliance revolution!

OTC Market: Three Hidden Dangers Behind Convenience

According to the LEAs' on-site investigations, there were about200 physical virtual asset OTC stores(including cryptocurrency ATMs), and250 Network Active TradersThe "convenient channel" that does not require KYC (customer identity verification) is particularly attractive to mainland users who are restricted by mainland policies. These "easy access" channels, which do not require KYC (customer identity verification) and allow transactions to be completed in a few minutes, are particularly attractive to mainland users, who are subject to the restrictions of the mainland policy, but they also pose a fatal risk:

  1. money-laundering hotbedThe key person involved in the JPEX fraud case that rocked Hong Kong in 2023 was Bruce Chen, the CEO of OTC service provider Crypto Leopard. The lack of regulation of cash trading has become a perfect cover for fraud and money laundering.
  2. black box operationSome merchants use "high return and zero threshold" to induce irrational transactions, with opaque services and varying quality, resulting in a lack of fairness in the market.
  3. Users run nakedThe user has no identity verification, no risk warning and no dispute mechanism, so there is no way for the user to lodge a complaint when he/she suffers from fraud or loss of funds, and his/her personal data may be abused.

Regulatory Fists! The four core provisions hit the nail on the head

On February 8, 2024, the Hong Kong government formally announced its legislative proposal for OTC regulation, the highlights of which are set out below:

I. "Full Coverage" of Supervisory Scope

  • Whether it'sPhysical stores, ATMs or online platformsIn addition, the conversion of virtual assets into fiat currencies is regulated as long as it involves virtual assets.
  • Tradable currencies are limited:Retail tokens (e.g. BTC, ETH) on SFC licensed platformsand the future HKMA licensing systemCompliance Stabilized Currency.
  • Strictly prohibit cross-border operations: licensees are not allowed to provide services such as virtual asset consultancy and derivatives trading (e.g. pledging and lending) at the same time.

License Application "Three Locks"

  1. Ironclad Local Connections: The applicant must be a Hong Kong registered company or an overseas company registered in Hong Kong.
  2. Physical Stores Require Compliant Venues: Offline operations are required to provide government-authorized business premises.
  3. Online Services Leave a Trace: The address of the local administrator, the mailing address, and the location where the books are stored are required to be reported.

C. Customs and Excise Department at the helm of the "Real Name of Wallet" System

  • Supervisory powers are handed over toCommissioner of Customs and ExciseIt is responsible for license approval and compliance monitoring.
  • Wallet Full Registration: The licensee must register all operational wallets with the Customs and Excise Department, andTransfers can only be made to customer's real name wallet.
  • License validity for two years: A new application for renewal is required upon expiry, and a successful renewal will be granted a further two years' authorization.

4. The cost of non-compliance is "bankruptcy".

Non-compliance Maximum Penalty
Operating OTC without a license A fine of one million dollars + two years in prison.
Publicity for the unlicensed 50,000 fine + 6 months in jail.
Violation of anti-money laundering regulations A fine of one million dollars + two years in prison.
Fraud or misrepresentation to induce a transaction 10 million dollar fine + 10 years in prison.

The Age of Compliance: Sunshine in the Dark Corner at Last

Hong Kong's regulation of virtual currency OTCs is by no means a stifling of innovation, but rather a clear race track for the industry:

  • For MerchantsThe grey areas are no longer there, and the compliance license has become the strongest endorsement to attract institutional capital.
  • For Users: The safety of funds is protected by law, and fraudulent claims can be pursued in accordance with the law.
  • To the marketThe Government will continue to work closely with the industry to promote the development of Hong Kong as an international financial center.

When the regulatory sun shines into the once "hidden corners", the real players will finally understand:Clear rules are the strongest cornerstone of a free market.I'm not ready. Are you ready for the battle of the licenses?

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