Three evolutions of OTC regulation in Hong Kong: from

Author: BlockSec

In May 2025, the Hong Kong Police dismantled a virtual asset money laundering syndicate worth $15 million (approximately HK$117 million). The involved gang mainly split and transferred funds through OTC channels located in Tsim Sha Tsui.

Earlier, in the high-profile JPEX case that shocked the entire Hong Kong, the Commercial Crime Bureau (CCB) revealed that a large amount of the involved funds were exchanged and transferred through OTC stores in Hong Kong, becoming a key link in the fraud chain.

In June 2025, the Hong Kong government released a public consultation document titled *Legislative Proposal to Regulate Dealing in Virtual Assets*, proposing to bring all virtual asset trading services, including OTC, under a unified licensing regulatory framework. Although the proposal is still in the consultation stage and has not yet formed regulations, it outlines a clear blueprint for the next step of virtual asset regulation in Hong Kong – from the early licensing of VATP platforms, to the inclusion of cryptocurrency stores in regulation, and then to full coverage of VA Dealing services.

To summarize in one sentence: Over three years, Hong Kong's regulation has evolved from an "unregulated zone" for OTC to full-chain supervision.

### Phase 1 (2023): VATPs Brought Under Regulation, but OTC Became a "Loophole"

At the end of 2022, Hong Kong passed the *Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance*. Starting from June 2023, a licensing system was implemented for Virtual Asset Trading Platforms (VATPs), regulated by the Securities and Futures Commission (SFC).

VA Dealing Consultation Paper, 1.3  

"In December 2022, ... a licensing regime for VA trading platforms ("VATPs") ... commenced operation in June 2023 ... must be licensed by the SFC unless otherwise permitted by the law." VADEALING_consultation_…

According to the definition of a VA exchange:  

- Matching virtual asset transactions between buyers and sellers through electronic facilities;  

- Access to customer assets (holding, controlling, or arranging custody).  

Therefore, the system at that time only targeted businesses involving "electronic platforms + access to customer assets". OTC scenarios such as physical cryptocurrency stores, counters, and ATMs were not included, leading to a regulatory vacuum.

### Phase 2 (2024): Customs Licensing, Cryptocurrency OTC Also Requires Licensing

From February to April 2024, the Financial Services and the Treasury Bureau (FSTB) launched the first round of consultation on the *Licensing Regime for Virtual Asset Over-the-Counter Trading Services*, bringing physical OTC under regulation for the first time.

Main contents:  

- All persons operating virtual asset spot trading (physical or online) in Hong Kong must hold a license;  

- Licensing is handled by the Hong Kong Customs and Excise Department (CCE);  

- Covers fiat currency exchange and transfers involving USDT, BTC, etc.  

VA Dealing Consultation Paper, 1.6(a)-(b):  

"Scope and coverage: Any person ... services of spot trade of any VAs ... would have to be licensed by the Commissioner of Customs and Excise ("CCE"). Eligibility: A licensee would be required to be a locally incorporated company ..."  

### Phase 3 (2025): OTC Merged into the VASP Family, Unified Regulation by SFC

In June 2025, Hong Kong released the second round of *Legislative Proposal to Regulate Dealing in Virtual Assets*, with both expanded scope and deeper regulation:  

- Expanded scope: Covers complex services such as block trading, brokerage matching, settlement and exchange, and asset management;  

- Adjustment of regulatory authorities: Licensing by the SFC, with the Hong Kong Monetary Authority (HKMA) regulating banking/SVF businesses;  

- Continuation of principles: Same business, same risk, same rules;  

- Exemption arrangements: Only issuers approved by the HKMA for issuing/redeming stablecoins in the primary market are exempt.  

VA Dealing Consultation Paper, 1.10:  

"Under the proposed regime, any person ... providing the VA service of dealing in any VAs in Hong Kong is required to be licensed by or registered with the SFC... including conversion, brokerage, block trading..."  

Reasons for the change: This round of proposals was formulated based on over 70 written comments received during the first round of consultation. The government stated in the document that the comments focused on issues such as the high risks of OTC, loopholes in cross-border money laundering, and insufficient regulatory coverage. Therefore, the original regulatory proposals for OTC were expanded into a broader "VA Dealing" framework.  

VA Dealing Consultation Paper, 1.8:  

"Following the conclusion of the first round of consultation, we received over 70 written submissions from various stakeholders... We have refined our proposal to expand the scope to VA dealing services to better address AML/CFT risks."  

Important note: The contents of this phase are still in the public consultation stage and have not been formally legislated. The final details may be adjusted during the legislative process.  

### Drivers Behind Policy Changes

The three evolutions of Hong Kong's OTC regulatory policies did not occur in isolation but were driven by a combination of multiple factors, with at least three core drivers:  

#### Driver 1: Frequent Major Cases Exposed Regulatory Vacuums

In the $15 million money laundering case in May 2025, the involved gang used OTC to split funds, bypass bank monitoring, and complete multiple cross-border transfers in a short period. In the JPEX case, the Commercial Crime Bureau (CCB) found that much of the funds defrauded from investors were exchanged for cash or stablecoins through local OTC stores before quickly flowing to overseas wallets.  

These cases exposed a problem: Even as platform regulation tightens, the anonymous and instant settlement characteristics of offline OTC can still bypass supervision, becoming a "last-mile" risk channel.  

#### Driver 2: International Regulatory Pressure and FATF Standards

Since updating Recommendation 15 in 2019, the Financial Action Task Force (FATF) has clearly required all jurisdictions to fully incorporate Virtual Asset Service Providers (VASPs) into anti-money laundering/counter-terrorist financing (AML/CFT) frameworks. When Hong Kong first introduced VATP licensing, although it met some FATF requirements, the "unregulated" status of OTC business was repeatedly pointed out by international assessment agencies and partners. To maintain Hong Kong's reputation as an international financial center, regulators must plug this loophole and ensure that "same business, same risk, same rules" is implemented.  

For Hong Kong to become an international virtual asset hub, it must address AML/CFT risks.  

#### Driver 3: Local Public Opinions Promoted Policy Upgrades

In the first round of OTC consultations in 2024, the government received over 70 written public comments from banks, compliance agencies, cryptocurrency enterprises, law enforcement departments, etc. Most comments focused on: high risks of anonymous OTC transactions; difficulty in tracking cross-border capital flows; and the role of OTC as a key intermediary in fraud and money laundering cases.  

The government clearly stated in the 2025 *VA Dealing* legislative proposal that it was based on this feedback that the regulatory scope, originally covering only OTC exchanges, was expanded to include a more complete VA Dealing full-chain business.  

VA Dealing Consultation Paper, 1.8:  

"Following the conclusion of the first round of consultation, we received over 70 written submissions from various stakeholders... We have refined our proposal to expand the scope to VA dealing services to better address AML/CFT risks."  

### Summary

OTC was once the "underground waterway" of Hong Kong's cryptocurrency market, but now it is being brought into the open. From platform regulation in 2023, to the inclusion of cryptocurrency stores in 2024, and then to the proposed full-chain "VA Dealing" framework in 2025, Hong Kong's virtual asset regulation is moving toward systematization and internationalization. The latest chapter of this process is currently in the public consultation period, awaiting the finalization of legislation.  

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