Hong Kong takes two-pronged approach to virtual currency regulation
On February 2024, 2, Hong Kong Financial Services and the Treasury Bureau Director Paul Chan said that the government believes that it is necessary to bring virtual currency over-the-counter (OTC) exchanges under regulation, and will launch a consultation on the proposed regulatory framework in the short term, hoping that citizens and stakeholders will actively express their opinions.
We are not sure how short this short period will be, but one thing is certain: virtual currency OTC will usher in a compliance era in Hong Kong.
As a long-established international financial center, Hong Kong has always been relatively open and tolerant to the new thing of virtual currency. Hong Kong does not regard virtual currency as legal tender or financial instruments, but defines it as a kind of "virtual asset" and takes corresponding regulatory measures according to the activities involved and the degree of risk.
At present, Hong Kong's regulation of virtual currencies mainly focuses on two aspects: one is the regulation of virtual asset trading platforms (VASPs), and the other is the regulation of over-the-counter (OTC) merchants.
According to the "Licensing System for Providing Virtual Asset Trading Services under the Securities and Futures Ordinance" issued by the Hong Kong Securities and Futures Commission (SFC) in June 2023, all platforms that provide virtual asset trading services in Hong Kong need to apply for a license from the SFC and comply with relevant laws, regulations and regulatory requirements. Currently, there are two licensed virtual asset trading platforms in Hong Kong (HashKey and OSL) that can provide Bitcoin (BTC) and Ethereum (ETH) trading services to retail investors through license upgrades. In addition, there are many platforms that are applying for licenses or are in the transition period. The SFC stated that it will review and improve the licensing system from time to time based on market conditions and investor protection needs.
Previously, Mankiw lawyers have written many articles to share with everyone related to Hong Kong's licensed trading supervision, including "One Article Explains the Licensing System of Hong Kong Virtual Currency Exchanges" and "One Article Explains How Can Virtual Currency Funds Conduct Business in Compliance in Hong Kong?" In this article, we will mainly talk about the supervision of virtual currency OTC merchants.
How many virtual currency OTC merchants are there in Hong Kong?
Virtual currency OTC merchants are institutions or individuals that provide over-the-counter (OTC) services. OTC trading refers to the purchase and sale of cryptocurrencies on platforms or channels other than exchanges, usually involving cash or other legal currencies. OTC trading has the following forms:
Online platforms: connect buyers and sellers through websites, social media, chat software and other online tools, and provide services such as matchmaking, custody and clearing.
Offline stores: Providing services of exchanging cash for cryptocurrencies or vice versa in physical stores, usually without the need for real-name authentication or other compliance requirements.
ATMs: Self-service devices set up in public places that can buy or sell cryptocurrencies with cash or bank cards.
According to rough estimates based on preliminary field observations by Hong Kong law enforcement agencies, there are approximately 200 physical virtual asset OTC trading shops (including OTC trading shops operated by ATMs) operating in Hong Kong, and approximately 250 active online virtual asset trading service providers.
In most offline stores and ATMs of OTC merchants, KYC is generally not required and transactions only take a few minutes to complete. This provides cryptocurrency users with a convenient, flexible and private transaction method, which is especially popular among mainland users.
Why do you say that? Although China explicitly prohibits virtual currency exchanges from operating in China, the amazing thing is that according to Chainalysis data, mainland China is still the fourth largest cryptocurrency trading market in the world. However, due to mainland policies, bank cards are increasingly frozen due to buying and selling virtual currencies, so more and more old players in the cryptocurrency circle choose to deposit and withdraw money at OTC merchants when traveling to Hong Kong.
Article author: Mankiw Blockchain Law