How to conduct Hong Kong’s virtual currency OTC business in compliance with regulations?

Hong Kong’s virtual currency supervision is focused on both sides

February 2, 2024, Hui Ching-yu, Secretary for Financial Services and the Treasury of Hong Kong, said that the government believes that it is necessary to bring virtual currency over-the-counter exchanges (OTC) into supervision and will launch a consultation on the proposed regulatory framework in the short term. We hope that citizens and stakeholders will actively express their opinions. .

We are not sure how short this short term will be, but what is certain is: Virtual CurrencyOTCThe era of compliance is coming in Hong Kong.

As an established international financial center, Hong Kong has always been relatively open and tolerant towards the new thing of virtual currency. Hong Kong does not regard virtual currencies as legal tender or financial instruments, but defines them as a "virtual asset" and adopts corresponding regulatory measures based on the activities and risk levels involved.

At present, Hong Kong’s supervision of virtual currencies mainly focuses on two aspects: one is the supervision of virtual asset trading platforms (VASP), and the other is the supervision of over-the-counter Supervision of trading (OTC) merchants.

According to the "Licensing System for the Provision of 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 (HashKey and OSL) in Hong Kong that have upgraded their licenses to provide Bitcoin (BTC) and Ethereum (ETH) trading services to retail investors. In addition, there are several platforms that are applying for licenses or are in the transition period. SFC stated that it will review and improve the licensing system from time to time based on market conditions and investor protection needs.

Mankiw lawyers have previously written many articles to share with you articles related to the regulation of licensed transactions in Hong Kong "One article explains the licensing system of Hong Kong virtual currency exchanges" ", "One article explains how virtual currency funds operate in compliance with regulations in Hong Kong? 》, in this article we 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 (Over-the-counter) services. OTC trading refers to the buying and selling of cryptocurrencies on platforms or channels other than exchanges, usually involving cash or other fiat currencies. OTC trading has the following forms:

·  Online platform:Through websites, social media, chat software and other networks Tools that connect buyers and sellers and provide matching, custody, clearing and other services.

·  Offline stores: Provide cash-for-cryptocurrency or vice versa services in physical stores , which typically does not require real-name authentication or other compliance requirements.

·  ATM machine: A self-service device set up in a public place that allows you to buy or sell cryptocurrency with cash or bank cards.

Based on preliminary on-site observations by Hong Kong law enforcement agencies, there are roughly 200 physical virtual asset over-the-counter trading shops in Hong Kong (including over-the-counter trading shops operated by automated teller machines). Trading shops) are operating, and there are approximately 250 active virtual asset buying and selling service providers on the network.

In most offline stores and ATMs of OTC merchants, KYC is generally not required, and transactions only take a few minutes to complete, which provides cryptocurrency users with It provides a convenient, flexible and private transaction method, which is especially popular among mainland users.

Why do you say that? Although China clearly does not allow virtual currency exchanges to operate in China, the amazing thing is: 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 being frozen more and more frequently due to buying and selling virtual currencies. Therefore, more and more experienced players in the currency circle choose to deposit and withdraw funds at OTC merchants when traveling freely in Hong Kong.

Why should OTC be regulated?

Everything has two sides. While OTC merchants provide users with convenient and private deposit and withdrawal channels, they are also abused by criminals. On September 5, 2023, the Hong Kong police arrested 6 men involved in the JPEX case. One of the people involved was Chen Xiaolong, CEO of the virtual currency OTC service provider Crypto Leopard.

  The suspect in the JPEX case was arrested by the Hong Kong police, picture source Techub News

Overall, the current virtual currency OTC has the following three problems.

·  Lack of effective supervision: Currently, Hong Kong does not have a clear regulatory framework and requirements for virtual currency OTC merchants, which has led to some Irregular and illegal conduct. For example, some OTC merchants are suspected of criminal activities such as fraud, money laundering, and terrorist financing, which have harmed the interests of investors and social order. Some fraud gangs attract funds from retail investors through associated OTC trading shops.

·  Lack of industry standards: At present, OTC merchants in Hong Kong do not have unified industry standards and self-discipline mechanisms, and they work independently, resulting in market confusion. chaos and unfair competition. For example, in order to attract customers, some OTC merchants offer high returns, low fees, unlimited limits and other conditions to induce users to engage in irrational transactions. In addition, some OTC merchants also have problems such as opaque information and low service quality, which affects the credibility and efficiency of the market.

·  Lack of user protection: OTC merchants in Hong Kong currently do not provide users with adequate protection measures and relief channels. When problems are encountered, they often cannot be solved in a timely and effective manner. For example, some OTC merchants do not provide users with identity verification and risk warnings, nor have they established a complete complaint handling and dispute resolution mechanism. This makes it difficult for users to hold accountable or make claims when encountering fraud, delays, errors, etc. In addition, some OTC merchants do not fully protect users' privacy and data, causing user information to be leaked or abused.

How will Hong Kong supervise virtual currency OTC?

2024 On February 8, the Hong Kong government launched a public consultation on the legislative proposal to establish a licensing system for virtual asset over-the-counter trading service (OTC) providers. By sorting out this legislative proposal, we have sorted out the relevant key issues for everyone.

1. Which OTC businesses will be subject to supervision?

(1) According to the legislative proposal, all virtual asset OTC trading services, whether through offline physical stores (including ATMs) or All online website services need to be regulated.

(2) The types of virtual assets available for customers to buy and sell can be covered by at least one virtual asset trading platform licensed by the China Securities Regulatory Commission for retail investment. Tokens traded by investors, as well as stablecoins issued by issuers licensed by the Hong Kong Monetary Authority (HKMA) after the implementation of the proposed stablecoin issuer licensing system.

(3) Based on the principle of "same business, same risks, same rules", if the licensee provides legal currency remittance services, it must apply for a money service operator license. Licensed operators are not allowed to provide other services, including any form of virtual asset advisory or referral services, providing virtual asset derivatives or other financial products (including but not limited to pledges, loans and margin transactions).

2. What are the conditions to apply for an OTC license?

(1) In order to ensure that the license applicant has sufficient connections with the local area so that the authorities can carry out effective supervision and supervision, the applicant must be (i ) a company established in Hong Kong with a fixed place of business, or (ii) a company established elsewhere and registered in Hong Kong under the Companies Ordinance.

(2) If the OTC service provider operates in the form of a physical store, the applicant must provide a suitable operating location. If the service is provided online, information such as the office address and correspondence address of the local management personnel and the location where the books and records are stored locally must be provided.

3. Which agency is responsible for compliance licenses?

(1) Any person who engages in business related to any virtual asset spot trading services in Hong Kong must apply for a license from the Commissioner of Customs and Excise, and must comply with fit and proper criteria and such other factors as the Commissioner of Customs and Excise considers relevant. Licensed virtual asset over-the-counter trading operators must comply with the anti-money laundering and counter-terrorist financing requirements and other regulatory requirements stipulated in the Anti-Money Laundering Ordinance.

(2) Wallet registration system: The licensee must apply to the Commissioner of Customs and register all wallets used for its operations, and ensure that the list of wallets is constantly updated . To mitigate the risk of money laundering and terrorist financing, licensees will only be allowed to transfer such virtual assets from their registered wallets to wallets where customers can provide proof of ownership and/or control.

(3) The license has a validity period: Successful applicants will be issued a two-year license and may apply for a two-year renewal upon the satisfaction of the Commissioner of Customs.

4. What is the cost of breaking the law?

(1) Any person who engages in regulated over-the-counter virtual asset trading services without a license shall, upon conviction through public prosecution procedures, The penalty is a fine of NT$1 million and imprisonment for two years.

(2) Any person who knowingly publishes an advertisement regarding the provision of virtual asset over-the-counter trading services by a non-licensed person commits an offense and is liable to Level 5 Fine (currently $50,000) and six months' imprisonment.

(3) If the licensee violates the statutory anti-money laundering and terrorist financing requirements, he may be fined NT$1 million and imprisoned upon conviction through public prosecution procedures. Two years. In addition, if the licensee commits misconduct (such as breaching other regulatory requirements), administrative penalties may be imposed, including suspension or revocation of the license, reprimand, order to make corrections, and/or a fine (not exceeding $500,000).

(4) Offenses related to fraudulent and misleading activities under the current Anti-Money Laundering Regulations will apply to virtual asset over-the-counter trading licensees. Any person who commits fraud or deception in a transaction involving virtual assets commits an offense and is liable to a fine of $10 million and imprisonment for ten years. In addition, any person who makes a fraudulent or reckless misrepresentation to induce others to engage in transactions involving virtual assets is also guilty of an offense and is liable to a fine of $1 million and imprisonment for seven years.

Conclusion

As an innovative financial tool, Hong Kong’s regulation of virtual currencies is to find the best solution between balancing market development and investor protection. By establishing a reasonable and effective regulatory framework, Hong Kong can promote the healthy development of the virtual currency industry while protecting public interests and financial stability.

This Hong Kong legislative proposal on virtual currency OTC is just the beginning of compliance supervision. For practitioners in the currency circle, it seems to be a tightening of policies. , but actually makes the rules of the game clearer. After all, the healthy development of an industry cannot stay in a dark corner forever. Only when the sun shines in can everything shine brighter.