Will OTC stores step out of the gray area? Hong Kong promotes a licensing system for coin law exchanges, managing physical stores without a grace period.

A lawyer once observed on the streets of Hong Kong that OTC Trading exchange shops are everywhere, from Wan Chai and Causeway Bay to Tsim Sha Tsui, with many stores discreetly offering instant cash exchange services for Bitcoin and USDT, without the need for banks or inquiries into the source. However, this encryption physical exchange ecosystem is facing a significant turning point.

The Hong Kong Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC) jointly launched a public consultation on 6/27, proposing to establish a licensing system for digital asset (virtual asset) trading and custody services. It is explicitly stated that regardless of whether the fiat currency exchange services for virtual coins are provided through physical stores or platforms, they must be included in the SFC's licensing and registration system.

The OTC storefront is thriving, but the regulatory vacuum has lasted for a long time.

According to estimates, there are currently over 200 physical OTC trading outlets in Hong Kong, along with more than 250 online OTC service providers. Many brands such as CryptoHK, One Satoshi, and HKD.com have formed a semi-financial service model. Many outlets are equipped with professional counters, real-time exchange rate display screens, and even support multiple languages, making it convenient for users from various countries to exchange cash for coins or convert USDT to Hong Kong dollars.

However, these types of exchange shops are mostly not regulated under the current "Securities and Futures Ordinance" or "Anti-Money Laundering Ordinance," creating a funding circulation channel that exists in a gray area. Their high anonymity and cash transaction characteristics have long made them regarded as a breeding ground for potential money laundering, capital flight, and even the "cleaning" of fraudulent funds.

The new licensing system will force the regulation of OTC Trading stores, with no grace period.

This consultation document proposes that all providers of digital asset trading services (including coin-to-coin exchanges and coin-to-fiat exchanges), whether through platforms or physical stores, must obtain a license or registration from the Securities and Futures Commission and comply with a series of strict regulatory requirements, including:

Fit and Proper Test

Financial resource threshold and asset protection

Customer Identification (KYC) and Anti-Money Laundering Measures (AML)

Business Ethics and Risk Management

Complete transaction record retention and information disclosure obligations

At the same time, the system does not provide for a "grace period" or an "assumed licensed" arrangement, which means that existing OTC trading stores that have not applied for a license in accordance with the law will be operating illegally in the future, facing the risk of closure or criminal penalties.

Hong Kong's OTC Trading ecosystem will undergo a major reshuffle.

This new regulatory policy will have several significant impacts on the OTC Trading ecosystem:

Market reshuffling is imminent.

Some small and medium-sized OTC shops may not be able to afford compliance costs, or may be unable to obtain licenses due to background checks not meeting requirements. A wave of "clearing" is expected, leaving behind operators with capital strength and professional management capabilities.

Consumer trust and transparency enhancement

The new system requires record-keeping, exchange rate disclosure, and investor protection measures, which are expected to improve the current issues of information asymmetry and price opacity in OTC Trading shops, thereby increasing retail investor confidence.

Anti-Money Laundering and International Rating Enhancement

In response to the KYC/AML regulations for OTC Trading, this will address the concerns of the Financial Action Task Force (FATF) regarding money laundering prevention in Hong Kong, further solidifying Hong Kong's status as an international financial center.

Promoting the integration of formalized finance

Once the OTC store obtains a legal license, there will be opportunities to establish partnerships with banks and payment providers in the future, facilitating the channels for fiat currency deposits and withdrawals, and promoting the integration of virtual assets with traditional finance.

The Financial Secretary, Paul Chan, pointed out that the licensing system is a core foundation for Hong Kong to build a "high market credibility" virtual asset ecosystem, rather than merely a restrictive measure. The CEO of the Securities and Futures Commission, Ashley Alder, also emphasized that this move will create a "safe and vibrant" digital asset market, attracting institutional and retail participants.

Taiwan comparison: Prohibit cash transactions and withdraw unregistered OTC traders.

The Financial Supervisory Commission of Taiwan has recently strengthened restrictions on OTC physical operators through the revision of self-regulatory norms and requirements for fund flow tracking.

According to a letter issued by the Financial Supervisory Commission's Securities and Futures Bureau in May this year, the VASP association is required to amend its self-regulatory guidelines within a month, prohibiting member operators from accepting cash transactions to prevent fraud and money laundering loopholes, which will officially take effect by the end of June 2025.

In addition, there has been a significant market elimination trend in Taiwan:

Multiple unregistered operators exit the market.

The number of Class B physical members has decreased from 10 to only 4.

Cash transactions will be replaced by customers transferring funds to the company's account, replacing the previous anonymous cash-to-coin model.

The Securities and Futures Bureau emphasizes: Although OTC or New Taiwan Dollar transactions are not explicitly prohibited, the policy direction is clear, which is to comprehensively enhance the traceability of financial flows. Physical operators must undergo digital transformation or exit the market.

( Dispel rumors, Financial Supervisory Commission explains the battle against fraud: Cash transactions in the virtual asset industry will be restricted, with new regulations coming into effect as early as the end of June ).

Will the OTC stores in this article step out of the gray area? Hong Kong promotes a licensing system for coin-law exchanges, bringing physical stores under regulation without any exemption period. First appeared in Chain News ABMedia.