Hong Kong’s SFC is exploring the potential for a new licensing framework for over-the-counter (OTC) cryptocurrency services and seeking industry feedback on the proposal. The move is part of a broader attempt to curb the future growth of the city’s virtual asset sector.
In the past, the Customs and Excise Department (C&ED) was responsible for regulating OTCs, and it appears that the SFC could play a more proactive role based on information suggested by subsequent discussions. This government agency aims to focus its regulatory efforts on high-profile incidents that expose regulatory gaps.
In terms of the regulatory measures they will propose, the SFC’s engagement is expected to fill some of the gaps that have been highlighted in high-profile cases of this nature in the city, such as the case of the so-called JPEX, a crypto exchange that was singled out for fraudulent activity that cost the city a considerable amount of money in financial terms.
The main objective of this case is to strengthen the control of these physical OTC sites, which criminal actors can exploit to target naive retail investors. The SFC is debating whether to place these services under its jurisdiction in order to create a more coherent legal space.
However, the proposal is still in its early stages and input from industry players will certainly influence the final regulatory structure. In addition to the OTC, the SFC has also been intensively discussing the possibility of imposing licensing requirements for cryptocurrency custody services, which is close to full regulation of virtual assets.
Balancing Innovation with Cryptocurrency Investor Protection
The regulatory development reflects Hong Kong’s continued efforts to foster innovation and ensure investor protection. The Financial Services and the Treasury Bureau (FSTB), which previously handled OTC regulation alone, reported that public feedback on the proposed framework was generally positive. However, no formal consultation results have yet been released.
Hong Kong’s push for regulatory clarity follows a series of policy changes aimed at positioning the city as a crypto investment hub. The introduction of a licensing regime for crypto exchanges in June 2023 and the subsequent launch of exchange-traded funds (ETFs) investing directly in crypto tokens mark important steps in this direction.
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