Hong Kong is exploring whether to have the Securities and Futures Commission (SFC) involved in regulating over-the-counter (OTC) virtual asset trading services, along with the Customs and Excise Department (C&ED), as the city struggles to regulate the industry.
The SFC has sought opinions from industry players about potentially putting in place a new licensing regime for cryptocurrency OTC services, which will see the securities regulator work with the C&ED to oversee these companies, according to people familiar with the matter who declined to be named because the discussions were private.
Planned OTC regulations and licensing were previously the sole domain of the C&ED under a proposal made public in February . OTC services facilitate direct and private large-volume cryptocurrency transactions between two parties.
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The SFC has also consulted companies in recent months about introducing a new licensing regime for cryptocurrency custodian services, the people said. Discussions about both licences are still in the early stages and are subject to change, they said.
"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," an SFC representative said in a statement on Wednesday.
The JPEX scandal that resulted HK$1.6 billion led to increased scrutiny of the OTC crypto market. Photo: Handout alt=The JPEX scandal that resulted HK$1.6 billion led to increased scrutiny of the OTC crypto market. Photo: Handout>
Detailed plans to regulate OTC services first emerged months after one of the largest financial frauds in Hong Kong's history, which involved the allegedly fraudulent crypto exchange JPEX . It resulted in roughly HK$1.6 billion (US$225 million) in losses .
This brought attention to physical OTC shops, which were found to be one of the "main avenues for channelling retail investors' funds" into fraudulent schemes.
However, 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, according to the people familiar with the matter.
The Financial Services and the Treasury Bureau (FSTB), which sought public feedback on the OTC regulation for two months, has not published any results from the consultation.
The proposal has "received general support from respondents", an FSTB representative said in a statement. "We are reviewing the design of the regulatory framework in light of the comments received."
For the past two years, Hong Kong has been evolving its approach to the crypto industry in an effort to court business to the city through "regulatory clarity". The government has sought to make Hong Kong attractive to investors while also guarding against risks to retail investors.
The Asian financial hub announced its policy shift just ahead of its FinTech Week in 2022, and the first licence requirement for cryptocurrency exchanges took effect in June 2023.
Since then, Hong Kong has allowed the launch of exchange-traded funds (ETF) that invest directly into crypto tokens, becoming the first major financial market to allow for spot ether ETFs. It is also working on a regulatory regime for stablecoins, which are pegged to other assets, typically fiat currencies such as the US dollar.
However, the perception of a more crypto-friendly environment in the US has taken some of the wind out of Hong Kong's sails this year. Both candidates for US president, Donald Trump and Kamala Harris , have voiced at least some support for the crypto industry.
The US has also launched spot bitcoin and ether ETFs this year, with trades in the much larger ETF market dwarfing those seen in Hong Kong. The SFC has weighed whether to allow ether ETF staking - locking up tokens on a blockchain for the purpose of validating transactions while earning passive yields - something that is not allowed in the US.
Hong Kong has also faced criticism within the crypto industry over regulations that some see as too onerous. Several large crypto exchanges withdrew their licence applications this year, while platforms that have been allowed to continue operating in the city have yet to receive a full licence since the application deadline in February.
This article originally appeared in the South China Morning Post (SCMP) , the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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