Hong Kong is considering changes to its cryptocurrency regulations, particularly regarding over-the-counter (OTC) virtual asset trading services.

The Securities and Futures Commission (SFC) could play a bigger role in overseeing the sector by working with the Customs and Excise Department (C&ED), a recent report suggests. report from the South China Morning Post.

Hong Crypto OTC will be regulated

It is worth noting that the proposed changes would shift away from the current system, where C&ED is primarily concerned with OTC services. For context, OTC services facilitate direct, private cryptocurrency transactions between enormous parties, bypassing the need for a public exchange.

The South China Morning Post reported that the SFC’s potential involvement in regulating OTC services would align the institution with its broader responsibilities in financial markets, potentially bringing greater transparency to the cryptocurrency industry.

The report, citing anonymous sources familiar with the discussions, further revealed that the SFC had been consulting with industry representatives on the novel licensing system.

The collaboration between the SFC and C&ED would play a key role in these regulatory changes, allaying concerns about the division of responsibility between the two entities.

In addition to over-the-counter trading services, the SFC is also considering introducing a licensing regime for cryptocurrency custodian services, which is a key element of the market infrastructure.

Why OTC regulation?

Hong Kong’s approach to regulating cryptocurrencies follows significant financial losses and growing concerns about fraud in the sector.

The JPEX collapse in particular prompted authorities to take a closer look at the role of OTC services, which had become “primary channels for directing retail investor funds” into illegal schemes, according to the report.

The report further highlighted that these services are often provided through “brick and mortar stores”, many of which have been linked to fraud, underlining the need for “more rigorous oversight”.

In response to the growing risk, the SFC representative noted:

To support the sustainable and responsible development of the virtual asset industry in Hong Kong, the SFC works closely with the government and other regulators to develop a sound, clear and consistent regulatory environment in Hong Kong.

However, despite the compelling reasons behind regulating the OTC cryptocurrency sector in the region, the report mentions that people are still concerned about how these regulations will work, noting:

Some industry players have complained that bringing all OTC outlets under the C&ED regulations, which govern the activities of currency exchanges, creates confusion, given that the SFC regulates other areas of cryptocurrency investment.

Regardless, the Financial Services and Treasury Bureau (FSTB), which initially sought public comment on the OTC rules during a two-month consultation period, noted that the proposal was met with “general support from respondents.”

Furthermore, while the full results of the consultation have not yet been published, the FTB revealed that the office is currently reviewing the draft regulatory framework based on the feedback received.

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