Hong Kong’s OTC trading proposal to prioritise investor protection

In response to recent instances of fraud, the FSTB in Hong Kong has issued a public consultation on legislative proposals to regulate over-the-counter trading of virtual assets. Firms have until the 12 April 2024 to understand the implications of the proposed regime and to express their views.

In October 2022, the Hong Kong Government released a Policy Statement on Development of virtual assets (VAs) in Hong Kong, emphasising the need for a comprehensive regulatory framework. The licensing regime for VA service providers established under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance started in June 2023 to regulate the operations of VA trading platforms. Published on 8 February 2024, the consultation paper’s proposed regime follows the principle of “same activity, same risks, same regulation”.

What are OTC businesses?

The consultation defines a VA over-the-counter (OTC) business as providing spot trade services for any VA, regardless of whether the service is offered through physical outlets (such as ATMs) or digitally. This broad definition ensures that all relevant activities fall within the regulatory gambit.

What are the regulatory objectives?

The proposed licensing regime aims to achieve several crucial objectives:

  • AML/CTF compliance: Operators providing VA OTC services must adhere to anti-money laundering and counter-terrorist financing (AML/CTF) regulations. This aligns with global efforts to combat financial crimes associated with VAs.
  • Investor protection: By subjecting VA OTC providers to licensing requirements, the regime enhances investor protection. It ensures that market participants receive services from reputable and compliant operators.
  • Consistent regulation: The principle of “same activity, same risks, same regulation” underscores the need for consistent oversight across different VA-related activities. This approach promotes regulatory clarity and reduces arbitrage opportunities.

What key parameters should I keep in mind?

The consultation document outlines the conceptual framework for the licensing regime including the following factors worth being mindful of:

  1. AML/CTF compliance: Licensees must adhere to the AML/CFT requirements specified in Schedule 2 of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.
  2. Appointment of key officers: Licensees must appoint a competent Compliance Officer and a Money Laundering Reporting Officer.
  3. Corporate governance structure: Licensees are required to establish a proper corporate governance structure.
  4. Prudent and sound operation: Licensees must operate their business in a prudent and sound manner, considering risk management and financial stability.
  5. Ethical conduct: Licensees must act honestly, fairly, with due skill, care, and diligence, prioritising the best interests of clients and market integrity.
  6. Risk management policies: Licensees must have appropriate risk management policies and procedures to address money laundering, terrorist financing, cybersecurity, and other risks.
  7. Record keeping: Licensees are required to maintain records of transactions and fund flows.

What can I do?

The FSTB is actively seeking feedback from industry stakeholders, legal experts and the public on the proposed licensing regime until 12 April 2024. This scheme aims to strike a balance between investor protection and industry growth, and foster innovation while upholding market integrity.

We can help

We support our clients navigate the complexities of the proposed licensing regime and can help you secure the necessary licenses to thrive in Hong Kong’s financial markets.

With expertise in regulatory requirements, our team advise organisations in identifying new business opportunities in VA OTC trading while keeping them compliant with evolving regulatory standards.