Hong Kong Explores Joint SFC-C&ED Oversight for Crypto OTC Services
Hong Kong is considering a significant shift in its approach to regulating cryptocurrency over-the-counter (OTC) trading services, according to a recent report by the South China Morning Post. The city’s Securities and Futures Commission (SFC) is exploring the possibility of introducing a new licensing regime that would involve joint oversight with the Customs and Excise Department (C&ED).
This potential change comes as Hong Kong continues to position itself as a global cryptocurrency hub while simultaneously tightening its regulatory framework. The move is partly in response to the JPEX scandal, which resulted in losses exceeding $200 million and highlighted vulnerabilities in the current regulatory structure.
Initially, the regulation and licensing of OTC services were to be handled exclusively by the C&ED under a proposal made public in February. However, the SFC has recently sought opinions from industry participants about potentially implementing a new licensing regime for cryptocurrency OTC and custodian services.
These discussions are still in the early stages and subject to change, according to sources familiar with the matter who spoke to the South China Morning Post. The proposed joint oversight aims to address regulatory gaps and provide more comprehensive supervision of the cryptocurrency sector.
In parallel with these considerations, the SFC has published an “alert list” naming suspicious virtual asset trading platforms and unlicensed entities that may be targeting Hong Kong investors. This list includes entities flagged since January 2020, further demonstrating the regulator’s commitment to protecting investors.
Currently, only two virtual asset trading platforms, Hash Blockchain and OSL Digital Securities, hold full licenses to operate in Hong Kong. Several other prominent exchanges, including Crypto.com, Bullish, and HKbitEX, are still awaiting full operational licenses.
The SFC has also reported identifying unsatisfactory practices at several cryptocurrency exchanges applying for full licenses following on-site inspections. Concerns include over-reliance on a small number of executives for client asset custody and inadequate safeguards against cybercrime risks.
As Hong Kong continues to evolve its approach to cryptocurrency regulation, the industry remains watchful. In March, Alessio Quaglini, co-founder and CEO of crypto custodian Hex Trust, expressed concerns that overly stringent requirements could drive businesses to relocate to more crypto-friendly jurisdictions.
The potential involvement of the SFC in OTC crypto licensing represents a significant development in Hong Kong’s regulatory landscape. As discussions progress, the cryptocurrency industry will be closely monitoring how these changes may impact the city’s ambitions to become a leading global crypto hub while maintaining robust investor protections.
