The Hong Kong Special Administrative Region government is advancing a comprehensive regulatory framework for virtual asset over-the-counter (OTC) trading services. This initiative aims to strengthen investor protection, combat money laundering and terrorist financing risks, and align with international standards set by the Financial Action Task Force (FATF). The proposed legislation, introduced under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), seeks to establish a licensing regime for OTC service providers—marking a pivotal step in ensuring that all virtual asset activities operate under the principle of "same business, same risk, same rules."
This article explores the core components of the proposed regulatory framework, including its scope, licensing requirements, compliance obligations, and enforcement mechanisms. We’ll also examine the implications for market participants and investors, while integrating key insights to support informed understanding and decision-making.
Why Regulate Virtual Asset OTC Trading?
Virtual assets have evolved from niche digital experiments into mainstream financial instruments. With increasing adoption, however, come significant risks—particularly in unregulated or loosely supervised environments such as OTC trading.
Unlike centralized exchanges, which are already regulated under Hong Kong’s existing virtual asset trading platform regime, OTC services often operate through physical outlets or digital platforms with minimal oversight. These channels can facilitate large-volume transactions using cash or bank transfers, making them vulnerable to misuse for illicit purposes.
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In 2023, several high-profile fraud cases involving alleged virtual asset platforms revealed that OTC stores were used as conduits to funnel retail investors' funds into suspicious schemes. Some operators misled clients about their licensing status or used aggressive marketing tactics via social media and physical storefronts.
Given these developments, extending regulation to OTC trading is both timely and necessary. The new framework ensures consistent oversight across all forms of virtual asset trading and closes potential loopholes that bad actors might exploit.
Core Keywords:
- Virtual asset OTC trading
- Regulatory compliance
- Investor protection
- Anti-money laundering (AML)
- Licensing regime
- FATF standards
- Hong Kong financial regulation
- Crypto regulation
Scope of the Proposed Regulation
Under the draft legislation, any person or entity conducting virtual asset OTC trading business in Hong Kong—or actively promoting such services to the Hong Kong public—must obtain a license from the Commissioner of Customs and Excise.
The definition of virtual asset follows the one established under the AMLO, meaning digitally represented value protected by cryptography, usable for payment of goods or services, debt settlement, or investment purposes. It includes cryptocurrencies like Bitcoin and Ethereum but excludes securities tokens already regulated under the Securities and Futures Ordinance.
What Constitutes Regulated Activity?
A business will be considered engaged in regulated OTC activity if it:
- Operates on a commercial basis (excluding peer-to-peer transactions unless part of a business);
- Provides spot trading services between virtual assets and fiat money;
- Uses physical locations (including ATMs) or digital platforms;
- Offers temporary custody or holding of virtual assets during transactions.
Importantly, licensed virtual asset trading platforms already regulated by the Securities and Futures Commission (SFC) will be explicitly exempted to avoid dual regulation.
However, the inclusion of temporary custody services raises important questions. While intended only for transaction facilitation, such functions could pose operational and security risks. Stakeholders are invited to comment on whether these activities should fall within the regulatory perimeter.
Licensing Requirements and Eligibility Criteria
To ensure effective supervision and accountability, only entities with substantial local presence will be eligible to apply for a license. Applicants must meet one of the following conditions:
- Be incorporated in Hong Kong with a fixed place of business; or
- Be registered under the Companies Ordinance (Cap. 622) if incorporated outside Hong Kong.
Digital-only operators must provide local contact addresses, management office details, and information on where transaction records are stored.
The Commissioner will assess applicants based on an "appropriate person" test, considering factors such as:
- Criminal history related to fraud, corruption, or dishonesty;
- Involvement in bankruptcy or insolvency proceedings;
- Past non-compliance with AML/CFT regulations;
- Convictions for serious crimes under the Organized and Serious Crimes Ordinance.
This stringent vetting process aims to uphold market integrity and protect consumers from bad actors.
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Permitted Activities and Restrictions
Licensed OTC operators will be authorized to conduct spot exchanges between virtual assets and fiat currency (e.g., HKD, USD). However, they will not be allowed to facilitate direct swaps between two different virtual assets (e.g., BTC to ETH), as such activities resemble those of a trading platform and should require an SFC license instead.
Additionally:
- Funds can only be transferred after meeting specified conditions;
- Virtual assets may only be sent to wallets where customers can prove ownership—verified through methods like micro-payment tests;
- All operational wallets must be registered with and approved by the Commissioner;
- Operators must not offer advisory, referral, lending, staking, margin trading, or derivative products.
Approved Virtual Assets List
To safeguard retail investors, only certain types of virtual assets may be offered:
- Tokens listed on at least one SFC-licensed virtual asset trading platform for retail access (e.g., Bitcoin, Ethereum);
- Stablecoins issued by entities licensed under the upcoming Stablecoin Issuer Regime by the Hong Kong Monetary Authority (HKMA).
This restriction prevents exposure to highly speculative or unvetted tokens and minimizes regulatory arbitrage.
Compliance and Risk Management Obligations
Licensing comes with robust compliance responsibilities aligned with international AML/CFT standards:
Mandatory Requirements Include:
- Customer Due Diligence (CDD): Full identity verification for all clients.
- Record Keeping: Maintenance of transaction logs accessible by regulators.
- Compliance Officer & MLRO: Appointment of qualified individuals responsible for internal oversight.
- Risk Management Policies: Implementation of cybersecurity measures and anti-fraud protocols.
- Business Soundness: Operation in a prudent manner that protects customer interests.
- Conduct Standards: Honest, fair conduct with due skill, care, and diligence.
Operators must also deploy AML software capable of tracking fund flows and detecting suspicious patterns—critical given the pseudonymous nature of blockchain transactions.
Transition Period and Licensing Renewal
Recognizing that many current OTC operators are operating legally but unlicensed, the government proposes a six-month transition period following enactment.
Two options are under consideration:
- No Deemed License: Operators must submit applications within the first three months to continue operating until the end of the transition period.
- Deemed License Option: Successful applicants meeting preliminary criteria receive temporary authorization ("deemed license") allowing continued operation until final approval is granted.
The standard license term would be two years, renewable upon re-evaluation of fitness and compliance.
Enforcement Powers and Penalties
The Commissioner of Customs will have broad supervisory powers:
- Conduct inspections and investigations;
- Seize evidence and make arrests;
- Impose disciplinary actions (fines, suspension, revocation);
- Request data sharing from other regulators (e.g., SFC, HKMA);
- Potentially block access to unlicensed or fraudulent websites.
Proposed Penalties:
| Offense | Penalty |
|---|---|
| Operating without a license | Up to HK$1 million fine and 2 years’ imprisonment |
| Advertising unlicensed services | Up to HK$50,000 fine and 6 months’ imprisonment |
| Breach of AML/CFT rules | Up to HK$1 million fine and 2 years’ imprisonment |
| Fraudulent conduct | Up to HK$10 million fine and 10 years’ imprisonment |
These penalties mirror those applied to money service operators and licensed trading platforms, ensuring proportionality and deterrence.
Frequently Asked Questions (FAQ)
Q1: Who needs a license under the new OTC regime?
Any individual or company offering virtual asset-to-fiat exchange services on a commercial basis in Hong Kong must obtain a license. This includes physical shops, ATM-based services, and online platforms targeting Hong Kong users.
Q2: Are peer-to-peer transactions affected?
No. Casual peer-to-peer trades are excluded unless conducted as part of a business model. The regulation targets commercial operations, not private exchanges between individuals.
Q3: Can OTC providers offer crypto-to-crypto swaps?
No. Such activities are not permitted under this regime. Providers wishing to offer cross-crypto trades should consider applying for a virtual asset trading platform license from the SFC.
Q4: Why is temporary custody being considered for regulation?
Even short-term holding of customer assets introduces risks related to theft, misappropriation, or system failures. Regulating this function ensures proper safeguards are in place during transaction processing.
Q5: How does this align with global standards?
The proposal fully complies with FATF Recommendation 15, which mandates regulation of virtual asset service providers to mitigate money laundering and terrorist financing risks across jurisdictions.
Q6: Will banks refuse services to licensed OTC businesses?
Licensed operators complying with AML/CFT requirements should not face unjustified de-banking. Regulatory clarity aims to improve banking relationships by enhancing transparency and trust.
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Conclusion
The proposed regulation of virtual asset OTC trading represents a critical evolution in Hong Kong’s digital asset ecosystem. By extending oversight to previously unregulated corners of the market, the government reinforces its commitment to financial integrity, investor protection, and global regulatory alignment.
As consultation closes and legislative drafting progresses, stakeholders—from operators to investors—should prepare for a more transparent, secure, and sustainable future in virtual asset trading.
Public feedback on the 15 consultation questions remains vital in shaping a balanced and effective framework. The path forward must combine innovation with responsibility—ensuring that Hong Kong remains a trusted hub for responsible digital finance innovation.