The Hong Kong Special Administrative Region government is advancing a comprehensive regulatory framework to oversee virtual asset over-the-counter (OTC) trading services. This initiative aligns with the broader vision of ensuring a secure, transparent, and investor-protected digital asset ecosystem. The proposed legislation, built upon the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), aims to introduce a licensing regime administered by the Commissioner of Customs and Excise. This article explores the key elements of the proposal, its implications for market participants, and the critical role of compliance in fostering sustainable growth in Hong Kong’s virtual asset sector.
Introduction: Why Regulate Virtual Asset OTC Trading?
Virtual assets have evolved from niche digital experiments into significant components of the global financial landscape. However, their rapid growth has brought heightened risks—particularly in areas like money laundering, terrorist financing, fraud, and investor protection. While Hong Kong has already implemented a robust licensing regime for virtual asset trading platforms under the Securities and Futures Commission (SFC), a regulatory gap remains for OTC trading services.
These services—often conducted through physical stores, ATMs, or online platforms—have increasingly been linked to fraudulent schemes. In several 2023 cases, unregulated OTC outlets were used to channel retail investors’ funds into suspected scams, often through misleading claims about platform licensing status. To close this loophole and uphold the principle of “same business, same risk, same rules,” the Financial Services and the Treasury Bureau (FSTB) has proposed extending regulatory oversight to virtual asset OTC service providers.
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Scope of the Proposed Licensing Regime
What Constitutes Regulated OTC Activity?
Under the proposed framework, any person or entity operating a business that provides spot trading services for virtual assets in Hong Kong must obtain a license from the Commissioner of Customs and Excise. This applies regardless of whether the service is delivered via:
- Physical storefronts (including OTC ATMs)
- Digital platforms or websites
- Social media-based operations
The definition explicitly excludes peer-to-peer (P2P) transactions unless they form part of a commercial business. It also exempts licensed virtual asset trading platforms already regulated by the SFC, avoiding duplication of oversight.
A critical clarification involves temporary custody or holding of assets during transactions. If an OTC provider temporarily holds customer funds as part of the trade execution process, this activity may fall under the proposed regime. Stakeholders are invited to comment on whether such services should be formally included and subject to specific safeguards.
Who Must Apply for a License?
To ensure effective supervision, applicants must demonstrate a substantial local presence. Eligible entities include:
- Companies incorporated in Hong Kong with a fixed business address
- Overseas companies registered under the Companies Ordinance (Cap. 622) with local operational details
Digital-only operators must provide local contact addresses, office locations of key personnel, and details of where transaction records are stored. The licensing authority will assess each applicant’s fitness based on factors such as criminal history (especially related to fraud, corruption, or financial crimes), insolvency proceedings, and past compliance failures.
Regulatory Requirements for Licensed OTC Providers
Permitted Activities and Restrictions
Licensed OTC operators will be authorized to conduct spot conversions between virtual assets and fiat currency (e.g., HKD, USD). However, trading one virtual asset for another (e.g., BTC to ETH) will not be permitted under this regime. Entities offering such services should instead apply for a virtual asset trading platform license from the SFC.
Additionally, transfers of converted funds—especially cross-border remittances—will require separate licensing under the Money Service Operators (MSO) regime, reinforcing compliance with anti-money laundering (AML) standards.
When transferring virtual assets to customers, providers may only send them to wallets where the customer can prove ownership or control, such as through micro-payment verification tests.
Approved Virtual Assets for Trading
To protect retail investors, licensed OTC providers may only offer tokens that meet strict eligibility criteria:
- Listed on at least one SFC-licensed virtual asset trading platform for retail access (e.g., Bitcoin, Ethereum as of early 2024)
- Stablecoins issued by entities licensed under the upcoming Hong Kong Monetary Authority (HKMA) stablecoin regime
This restriction prevents exposure to high-risk or unvetted tokens and eliminates regulatory arbitrage opportunities.
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Compliance and Risk Management Obligations
To mitigate systemic risks, licensed OTC operators must adhere to a comprehensive set of regulatory requirements modeled after existing frameworks for virtual asset platforms and money service operators.
Key obligations include:
- Appointment of Compliance and MLRO Officers: Designated personnel responsible for AML/CFT compliance
- Robust Corporate Governance: Clear internal controls and staff training on virtual asset operations
- Operational Resilience: Secure systems to prevent outages or cyberattacks
- Ethical Conduct: Fair dealing, conflict avoidance, and client interest prioritization
- Risk Management Frameworks: Policies tailored to business scale, covering cybersecurity, fraud prevention, and AML
- Record Keeping: Accurate logs of transactions and fund flows accessible to regulators
Providers must also register all operational cryptocurrency wallets with the licensing authority and keep this information updated.
Transition Period and Licensing Duration
Recognizing the need for a smooth transition, the FSTB proposes a six-month grace period following the enactment of the new rules. Two transition models are under consultation:
- Option 1: No deemed licensing. Existing operators must apply within three months to continue operating until the end of the transition period. Unlicensed operators must cease activities by month four.
- Option 2: Deemed licensing. Eligible applicants who submit within three months receive temporary authorization (“deemed license”) until final approval is granted. The Commissioner retains authority to revoke or modify these temporary licenses.
Licensing will be granted for two-year terms, renewable upon reassessment of fitness and compliance.
Enforcement Powers and Penalties
The Commissioner of Customs will be empowered with extensive supervisory and enforcement capabilities:
- Conducting on-site inspections
- Investigating suspected violations
- Seizing evidence and making arrests
- Imposing disciplinary actions (fines, suspension, revocation)
Additional powers may include blocking access to websites or digital platforms linked to unlicensed or fraudulent OTC operations—both within and outside Hong Kong.
Penalties for Non-Compliance
To deter illegal activity, proposed penalties are severe:
- Unlicensed operation: Up to HK$1 million fine and 2 years imprisonment
- Advertising unlicensed services: Up to HK$50,000 fine and 6 months imprisonment
- AML/CFT violations by licensees: Up to HK$1 million fine and 2 years imprisonment
- Fraudulent conduct: Up to HK$10 million fine and 10 years imprisonment
Administrative penalties include fines up to HK$500,000, public censure, corrective orders, or license suspension/revocation.
Exemptions and Appellate Mechanisms
Entities already regulated under other regimes—including SFC-licensed firms, HKMA-regulated institutions, and future licensed stablecoin issuers—will be exempt from the OTC licensing requirement when offering such services.
Decisions by the Commissioner can be appealed to the Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal, whose jurisdiction will be expanded to cover OTC licensing matters.
Frequently Asked Questions (FAQs)
Q1: Why is regulating OTC trading necessary if exchanges are already licensed?
A: OTC services often operate outside exchange systems and have been exploited in fraud cases. Regulating them ensures all customer-facing virtual asset activities meet consistent AML and investor protection standards.
Q2: Does this affect peer-to-peer (P2P) trading between individuals?
A: No. Personal P2P transactions are excluded unless conducted as part of a business operation.
Q3: Can I still trade altcoins not listed on SFC platforms?
A: Not through licensed OTC providers. Only tokens available on regulated platforms or issued by licensed stablecoin issuers are permitted.
Q4: What happens if I don’t apply during the transition period?
A: You must cease all regulated OTC activities by the deadline. Continuing operations without a license carries criminal penalties.
Q5: How will customer wallet verification work in practice?
A: Providers may use methods like micro-payment tests—sending a small amount to a wallet and confirming the user can return it—to verify control.
Q6: Will this stifle innovation in Hong Kong’s crypto sector?
A: On the contrary—it enhances credibility. Clear rules attract institutional investment and position Hong Kong as a responsible global hub for digital assets.
Conclusion: Building a Trusted Virtual Asset Ecosystem
The proposed regulation of virtual asset OTC trading marks a pivotal step in Hong Kong’s journey toward becoming a leading Web3 and fintech hub. By closing regulatory gaps, enforcing strict AML standards, and prioritizing investor protection, the government reinforces market integrity without stifling innovation.
Stakeholders—including operators, legal advisors, and technology providers—are encouraged to engage with the consultation process before the April 12, 2025 deadline. Their input will shape a balanced, future-ready framework that supports responsible growth in one of finance’s most dynamic sectors.
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