Hong Kong to Implement Universal AML Requirements for OTC Crypto Traders

The Hong Kong government is set to expand its Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations to include over-the-counter (OTC) cryptocurrency transactions.

The adjustment is aimed at aligning OTC digital asset trades with the regulatory standards applied to retail cryptocurrency exchanges.

Extending AML Ccontrols to OTC cryptocurrency transactions

Hong Kong authorities launched a “Public Consultation on Legislative Proposals for the Regulation of Over-the-Counter Trading of Virtual Assets” on February 8. This consultation, active until April 12, suggests including OTC cryptocurrency trades within the scope of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). The proposed regulatory expansion marks a strengthening of measures, addressing the previously lower regulatory scrutiny on OTC transactions, which involve direct transactions between buyers and sellers without an intermediary exchange. The expected enforcement of these updated regulations is scheduled for June 2023.

The legal advancement underscores Hong Kong’s dedication to reinforcing supervision in the virtual asset realm, tackling possible issues linked to money laundering and counter-terrorism financing. The expansion of regulatory control over OTC trading is in harmony with worldwide initiatives aimed at elevating the trustworthiness and security of digital asset transactions.

The government’s proposal specifically targets “spot trade of any virtual assets for any money” under the OTC category, leaving peer-to-peer exchanges outside of the regulation. The focused approach is intended to mitigate risks associated with money laundering and terrorist financing that can arise from less regulated trading environments.

New licensing and compliance measures for OTC traders

Under the proposed regulations, both physical and online OTC trading platforms, which include approximately 200 outlets and 250 digital platforms or postings, will be required to meet the same AML/CTF standards as other virtual asset service providers (VASPs). It includes obtaining a license from the Commissioner of Customs and Excise and providing detailed information about operational and management practices.

Furthermore, licensed OTC traders will be limited to conducting transactions from their registered wallets to client wallets, with clients needing to verify ownership and control of their wallets. The measure aims to improve transaction transparency and prevent the misuse of digital assets.

Strengthening Hong Kong’s cryptocurrency regulatory framework

The inclusion of OTC trades under stringent AML and CTF regulations reflects Hong Kong’s commitment to maintaining a secure financial environment while accommodating the growing digital asset market. Prohibiting the trade of unlisted virtual assets and stablecoins issued by non-licensed entities emphasizes the importance of a regulated and transparent market.

Following closely on the initiative is the financial services department’s deadline for virtual asset service provider (VASP) applications, indicating that unlicensed operations must shut down by May 31. The deadline is part of Hong Kong’s broader effort to ensure compliance and security within the cryptocurrency sector.

Conclusion

these legislative updates underscore Hong Kong’s intent to adapt its regulatory framework to the evolving landscape of cryptocurrency trading. By introducing specific requirements for OTC cryptocurrency transactions, Hong Kong aims to close regulatory gaps, protect against financial crimes, and support the healthy development of its digital asset market.