Hong Kong prepares sweeping rules to foil stealthy crypto purchases

DOTTED throughout Hong Kong are small outlets that convert between money and crypto with few questions requested, a modern-day echo of town’s freewheeling previous. Soon, many might shut beneath a looming crackdown.

Officials estimate that 450 outlets, automated teller machines and web sites in Hong Kong provide such companies. They are a key slice of over-the-counter or OTC crypto trades, which accounted for the majority of the US$64 billion in digital belongings that flowed by way of town within the 12 months to June, based on Chainalysis.

Some crypto outlets are suspected of facilitating banned exercise, as an illustration, Chinese nationals flouting international switch limits or scammers luring buyers into frauds. Against that backdrop, Hong Kong plans a licensing regime beneath the customs division that can drive crypto OTC suppliers to gather buyer information and add employees to watch for misconduct, portending a bounce in prices.

The metropolis, in parallel, is aiming for a deck of tightly regulated crypto exchanges as the principle various to the OTC route into digital belongings. Such exchanges face a Feb 29 deadline to acquire or apply for a allow beneath a rulebook imposed by the Securities & Futures Commission (SFC) in mid-2023.

‘Consolidation’ possible

The deliberate OTC framework “will lead to consolidation and a reduction in the use of these platforms as on-ramps into crypto”, stated Chengyi Ong, Apac coverage head at Chainalysis, which tracks digital-asset transactions. Providers must higher handle crime, cybersecurity and different operational dangers, she stated.

Hong Kong’s Financial Services and the Treasury Bureau this month started a session until Apr 12 on the OTC guidelines. The focus is on stopping cash laundering, terrorism financing and fraudulent exercise. The provisions won’t apply to service suppliers akin to digital-asset exchanges which are already topic to sturdy SFC or Hong Kong Monetary Authority oversight.

Bringing town’s customs division into the combination alongside the opposite businesses dangers giving the impression of rules being devised on a “piecemeal basis”, stated Jason Chan, a Hong Kong-based companion at legislation agency Howse Williams, which specialises in monetary regulatory recommendation.

A spokesperson for the Financial Services and the Treasury Bureau stated the customs division is essentially the most acceptable authority to supervise crypto OTC service suppliers given the company’s expertise. The deliberate rulebook delivers wanted controls and most investor safety, the spokesperson added.

Rising prices

One of Hong Kong’s OTC firms is One Satoshi, which operates a series of shops. Co-founder Roger Li stated the enterprise largely serves retail buyers, sometimes for small trades of HK$10,000 (S$1,278) or much less.

While the agency already conducts anti-money-laundering and know-your-customer checks, new necessities associated to compliance employees and file protecting might carry prices, Li stated. OTC corporations “will either have to stop the crypto business or apply for the new license”, he stated, including extra steering is awaited.

Hong Kong pivoted in direction of fostering a digital asset hub in late 2022, a part of an effort to seem cutting-edge amid doubts in regards to the metropolis’s future given Beijing’s rising management over the previous British colony. The SFC rolled out guidelines for crypto exchanges final June, welcoming license purposes whereas stressing the necessity for investor safety given the sector’s historical past of volatility and fraud.

There are at present two authorised digital-asset exchanges, HashKey Exchange and OSL Group. Some 18 others have utilized for permits. The SFC can also be open to permitting exchange-traded funds that make investments straight in crypto, whereas town’s financial authority is framing guidelines for stablecoins – a kind of token meant to carry a relentless worth, sometimes US$1.

Regulatory problem

“Bringing OTC transactions into the regulatory structure is a natural extension of the regime,” stated Vince Turcotte, an adviser to crypto exchanges. “The primary impact will be to further legitimise the market in Hong Kong.”

Hong Kong is vying with the likes of Singapore and Dubai to woo digital-asset companies. The jury is out on how properly it’ll do, in addition to whether or not crypto and its underlying blockchain know-how are price pursuing at scale in any respect. Last 12 months, the blowup of the unlicensed JPEX crypto platform in Hong Kong led to HK$1.6 billion of losses, highlighting once more the dangers within the sector.

The metropolis’s drive to police the trade and floor transactions is way from an easy activity, given the plethora of crypto platforms globally in addition to alternatives for peer-to-peer buying and selling which are difficult to trace.

“The decentralised nature of crypto makes the industry very hard to regulate,” stated Carlton Lai, head of blockchain analysis at Daiwa Capital Markets. “There are numerous crypto exchanges and apps based offshore that users can easily access without oversight from the government.” BLOOMBERG