Hong Kong Tightens OTC Crypto Oversight with New Regulatory Measures

• Hong Kong’s SFC and C&ED collaborate to tighten OTC crypto regulation and enhance oversight.
• New custodial regulations are being explored to ensure safe digital asset management in Hong Kong.
• Recent fraud cases, including the JPEX incident, drive stricter oversight in the OTC crypto market.

Through enhanced oversight mechanisms, Hong Kong is intensifying its regulation of over-the-counter (OTC) crypto services. The Securities and Futures Commission (SFC) and the Customs and Excise Department (C&ED) lead this regulatory push, reflecting the city’s commitment to a safer and more transparent virtual asset market.

In a significant shift from earlier proposals, the SFC and C&ED are now working together to oversee OTC crypto services. This dual-agency approach departs from the initial plan, which set only the C&ED to manage these services. 

The collaboration aims to enhance regulatory enforcement, ensuring that both agencies can effectively monitor and regulate large transactions outside public exchanges. This move is part of Hong Kong’s broader strategy to align its crypto market with global standards.

The SFC is also exploring new regulations for cryptocurrency custodial services. These discussions focus on creating a robust framework to ensure the safe storage and handling of digital assets. 

The SFC seeks to promote long-term growth and stability in Hong Kong’s virtual asset market by establishing stringent custodial service regulations. The commission has emphasized its dedication to working closely with other regulators and the government to achieve these regulatory goals.

The Financial Services and the Treasury Bureau (FSTB) has extended a public consultation period for feedback on the proposed regulations. 

While the outcomes are yet to be announced, initial responses have been largely supportive. The FSTB is refining the regulatory framework based on feedback, indicating a responsive and adaptive approach to policy-making.

Recent fraud cases, including the high-profile JPEX exchange incident, have underscored the need for stricter oversight in the OTC market.

The JPEX fraud, which resulted in losses of approximately HK$1.6 billion (US$225 million), highlighted vulnerabilities in the current system. Physical OTC outlets were identified as major channels for fraud against retail investors, prompting the call for more stringent regulations.