Strengthening Hong Kong's Virtual Asset Regulatory Framework: Proposed Regulations for OTC Brokerage

Hong Kong is enhancing its regulatory framework for virtual asset (VA) exchanges by proposing regulations for over-the-counter (OTC) spot brokerage of certain unregulated VAs. The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) regulate VA exchanges, while the proposed regime for VA OTC services will be overseen by the Customs & Excise Department.

Under the proposed legislation, providers of VA OTC services will need to obtain a license from Customs & Excise and comply with anti-money laundering and counter-terrorist financing (AML/CFT) requirements. Exemptions include SFC-regulated VATPs, SFC-licensed corporations, and HKMA-regulated banks.

Marketing of VA OTC services will also require licensing, and criminal penalties will apply for unauthorized advertising. The regime will cover both digital and physical services, ensuring comprehensive oversight.

The licensing process will assess the fitness and propriety of applicants, with a focus on criminal history and compliance with AML/CFT rules. Business restrictions will apply to licensed providers, with feedback sought on the appropriateness of these restrictions.

Transitional arrangements will support existing brokers, allowing them to continue operations while their license applications are processed. Deemed licenses may be granted to ensure continuity of services during the application review period.

Responses to the consultation paper are due by April 12, 2024, and stakeholders are encouraged to provide input on the proposed regulatory framework. Overall, the proposed regulations aim to enhance consumer protection, mitigate financial crime risks, and foster a more robust VA ecosystem in Hong Kong.

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