Hong Kong Tightens Crypto Rules: SFC May Take Charge Of OTC Trading—Here’s Why

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

The Securities and Futures Commission (SFC) may play a larger role in overseeing the sector, working alongside the Customs and Excise Department (C&ED), according to a recent report from the South China Morning Post.

Hong Crypto OTC To Be Regulated

Notably, the proposed changes would shift from the current system, where the C&ED primarily handles OTC services. For context, OTC services facilitate direct, private cryptocurrency transactions between large parties, bypassing the need for a public exchange.

South China Morning Post reported that the SFC’s potential involvement in regulating OTC services would align it with its broader responsibilities over the financial markets, potentially providing more clarity for the crypto industry.

Citing unnamed sources familiar with the discussions, the report further disclosed that the SFC has consulted with industry players on this new licensing regime.

The SFC and the C&ED collaboration would 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 SFC is also exploring introducing a licensing regime for cryptocurrency custodian services, a critical element of the market’s infrastructure.

Why The Regulation On OTC?

Hong Kong’s approach to cryptocurrency regulation follows the significant financial losses and growing concerns over fraud in the sector.

According to the report, the collapse of JPEX, in particular, has pushed authorities to look closer at the role of OTC services, which have become “main avenues for channeling retail investors’ funds” into illicit schemes.

The report highlighted further that these services often operate through “physical shops”, many of which have been tied to fraudulent activities, highlighting the need for more “stringent oversight.”

In response to the growing risks, an SFC representative noted:

To foster the sustainable and responsible development of the virtual assets industry in Hong Kong, the SFC works closely with the government and other regulators in developing a robust, clear and consistent regulatory environment in Hong Kong

However, despite the considerable justification for regulating the OTC crypto sector in the region, the report mentioned that individuals are still worried about how the regulation will work, noting:

Some in the industry complained that putting all OTC shops under the C&ED, which regulates money changers, was causing confusion given that the SFC regulates other areas of crypto investment.

Regardless, the Financial Services and the Treasury Bureau (FSTB), which initially sought public feedback on the OTC regulations over a two-month consultation period noted that the proposal received “general support from respondents.”

Additionally, although the full results of the consultation are yet to be released, the FTB disclosed that the bureau is now reviewing the design of the regulatory framework based on the feedback provided.

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