Hong Kong is tightening its grip on over-the-counter (OTC) crypto services in a recent regulatory crackdown.

Hong Kong is tightening its grip on over-the-counter (OTC) crypto services in a recent regulatory crackdown. The city, known as a significant digital asset exchange center in East Asia, boasts around 450 outlets, ATMs, and online platforms facilitating OTC crypto transactions, which play a pivotal role in its $64 billion digital asset ecosystem. However, escalating worries regarding illicit activities and financial instability have spurred the government to impose stricter regulations.

In an effort led by the customs department, OTC crypto providers in Hong Kong are now required to maintain comprehensive customer records and bolster monitoring mechanisms to detect any misconduct. This initiative reflects a broader agenda aimed at channeling digital asset transactions through regulated crypto exchanges. These exchanges are under pressure to obtain or apply for permits by February 29, in line with guidelines set forth by the Securities & Futures Commission in mid-2023.

Chengyi Ong, APAC policy head at Chainalysis, anticipates that the proposed OTC framework will lead to consolidation and reduced usage of these platforms as entry points into the crypto sphere.

To combat money laundering, terrorism financing, and fraud, the Financial Services and the Treasury Bureau have initiated a consultation on OTC regulations. However, the decision to designate the customs department as the regulatory authority has sparked debate among legal experts like Jason Chan, who raise concerns about a potentially fragmented regulatory landscape. Despite criticism, the Financial Services and the Treasury Bureau defend their choice, citing the customs department’s extensive experience as vital for overseeing the new regulatory framework.

For OTC businesses such as One Satoshi, these regulatory changes present significant challenges. Co-founder Roger Li acknowledges that while his company already implements necessary anti-money laundering and know-your-customer checks, complying with the new regulations will inevitably escalate operational expenses. Faced with these obstacles, OTC companies must weigh the decision to adapt to the new framework or exit the crypto business altogether.

Notably, Huobi has opted to withdraw its application in light of these regulatory shifts, highlighting the hurdles confronting crypto enterprises under the revised framework.

This regulatory overhaul aligns with Hong Kong’s broader strategy to establish itself as a leading global crypto hub. With these regulatory reforms, the crypto market’s revenue in Hong Kong is projected to reach $254.6 million by 2028. Amid concerns over Beijing’s growing influence, the city is committed to fostering a regulated and secure crypto environment, as evidenced by recent guidelines issued by the Hong Kong Monetary Authority on crypto custody, which set a high standard for digital asset management.