Hong Kong is taking decisive steps to bring over-the-counter (OTC) cryptocurrency trading under formal regulation by introducing a new licensing mechanism administered by the Customs and Excise Department. This initiative aims to strengthen oversight of virtual asset activities, combat money laundering risks, and protect investors amid growing concerns over unregulated crypto transactions.
As part of its broader push to become a global Web3 hub, the Hong Kong government has recognized the urgent need to address gaps in its regulatory framework—particularly in the decentralized and often opaque world of OTC trading.
👉 Discover how regulatory clarity is shaping the future of digital assets in Asia.
Understanding OTC Crypto Trading in Hong Kong
Over-the-counter (OTC) crypto trading refers to peer-to-peer transactions that occur outside formal exchanges. These trades are typically facilitated through three main channels:
- Online platforms using social media or private messaging groups for matchmaking
- Physical exchange kiosks or stores, commonly found in shopping districts
- Cryptocurrency ATMs that allow direct cash-to-crypto conversions
According to preliminary estimates from Hong Kong authorities, there are approximately 200 physical OTC outlets—including ATM terminals—and around 250 active online service providers currently operating in the city. While these services offer convenience and privacy, they also present significant regulatory challenges.
The lack of Know Your Customer (KYC) procedures, minimal transaction monitoring, and absence of licensing requirements have made some OTC channels vulnerable to misuse. In high-profile cases such as the JPEX and Hounax scandals, unregulated OTC operators were exploited to lure investors with false claims of compliance, resulting in massive financial losses.
In the JPEX incident alone, investors lost an estimated $180 million**, while the Hounax fraud led to **$18.9 million in damages across 145 victims. To date, most of these funds remain unrecovered.
Why Regulation Is Now Inevitable
The core drivers behind Hong Kong’s move to regulate OTC trading include:
- Anti-money laundering (AML) vulnerabilities: Many OTC vendors do not verify customer identities, enabling illicit cross-border capital flows and potential circumvention of China's capital controls.
- Investor protection gaps: Without oversight, consumers face risks from scams, price manipulation, and irreversible transactions.
- Market integrity concerns: Unregulated actors can distort market behavior and damage public trust in legitimate digital asset innovation.
Roger Li, co-founder of OTC firm One Satoshi, acknowledged that while some businesses already follow AML practices, new compliance mandates will increase operational costs—particularly in staffing, record-keeping, and monitoring systems.
👉 Learn what this means for the future of compliant crypto trading platforms.
The Proposed Licensing Framework
On February 8, 2024, the Hong Kong government launched a public consultation on a proposed licensing regime for OTC virtual asset service providers. The consultation period ran until April 12, signaling the government’s intent to finalize rules swiftly.
Under the draft legislation:
- Any individual or entity offering virtual asset spot trading services in Hong Kong—including operators of crypto ATMs—must obtain a license from the Commissioner of Customs and Excise.
- Licensed operators will be required to comply with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).
Mandatory obligations include:
- Conducting full KYC checks on clients
- Maintaining detailed transaction records
- Reporting suspicious activities
- Appointing compliance officers
This marks the end of the "wild west" era for Hong Kong’s OTC market. From now on, businesses must choose: either apply for a license or cease operations.
Alignment With Broader Virtual Asset Regulations
This OTC licensing plan complements Hong Kong’s existing regulatory framework for virtual asset service providers (VASPs). Since June 1, 2023, companies operating centralized crypto trading platforms in Hong Kong have been required to apply for a VASP license from the Securities and Futures Commission (SFC).
The one-year transitional period ended on May 31, 2024. Any platform failing to submit an application by that date must shut down its Hong Kong operations. Investors are advised to close accounts or transfer assets to licensed platforms such as those on the SFC’s official list.
By integrating OTC operators into this same compliance ecosystem, Hong Kong is building a comprehensive regulatory wall around all forms of crypto trading—ensuring consistency, transparency, and accountability across both centralized exchanges and informal trading channels.
Key Implications for Industry Players
The shift toward full regulation brings both challenges and opportunities:
For OTC Operators:
- Increased compliance costs due to staffing, audits, and reporting requirements
- Need to upgrade IT systems for identity verification and transaction logging
- Risk of consolidation as smaller players exit the market
For Investors:
- Greater confidence in the legitimacy of trading venues
- Enhanced recourse in case of disputes or fraud
- Reduced exposure to scam projects and unverified sellers
For Hong Kong’s Crypto Ecosystem:
- Strengthened reputation as a responsible financial innovator
- Improved alignment with Financial Action Task Force (FATF) standards
- Potential to attract institutional-grade crypto firms seeking regulated environments
👉 See how global traders are adapting to evolving compliance landscapes.
Frequently Asked Questions (FAQ)
Q: What types of businesses are affected by the new OTC licensing rule?
A: The regulation covers all entities providing virtual asset spot trading services in Hong Kong, including physical exchange shops, online P2P platforms, and cryptocurrency ATMs.
Q: When will the OTC licensing regime take effect?
A: While the public consultation concluded in April 2024, the exact enforcement date has not yet been announced. However, authorities expect implementation within 2024–2025.
Q: Do I need a license if I only operate a crypto ATM?
A: Yes. All operators of crypto ATMs that facilitate buying or selling of digital assets must apply for a license under the proposed rules.
Q: How does this affect mainland Chinese users?
A: While Hong Kong maintains separate financial regulations from mainland China, the new rules aim to prevent OTC channels from being used to bypass capital controls. Services targeting mainland residents will face stricter scrutiny.
Q: Can unlicensed OTC operators still function after the deadline?
A: No. Operating without a license will be illegal once the law is enacted. Non-compliant businesses risk fines, asset seizures, or criminal prosecution.
Q: Is there a difference between VASP licenses and OTC licenses?
A: Yes. VASP licenses are issued by the SFC for centralized trading platforms, while OTC licenses will be managed by Customs for decentralized or informal trading services. Both require AML compliance but serve different segments of the market.
Conclusion
Hong Kong’s plan to license OTC cryptocurrency traders represents a critical step toward building a safe, transparent, and sustainable digital asset economy. By closing regulatory loopholes and enforcing KYC/AML standards across all trading venues—from exchanges to street-level kiosks—the city is positioning itself as a model for balanced crypto governance.
While short-term disruptions are expected as businesses adapt, the long-term outlook is positive: increased investor trust, reduced financial crime risks, and stronger foundations for Web3 innovation. As global regulators look for ways to manage crypto’s rapid evolution, Hong Kong’s approach may well serve as a blueprint for others to follow.