Hong Kong OTC Regulation's Three Evolutions: From "Coin Shop Jianghu" to Comprehensive Management

Written by: BlockSec

In May 2025, the Hong Kong police dismantled a virtual asset money laundering group worth 15 million USD (about 117 million HKD), with the involved gang mainly splitting and transferring funds through OTC channels located in Tsim Sha Tsui.

Earlier, in the sensational JPEX case that shocked Hong Kong, the Commercial Crime Bureau (CCB) revealed that a significant amount of the funds involved was exchanged and transferred through OTC shops in Hong Kong, becoming an important 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," suggesting that all virtual asset trading services, including OTC, be included in 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 steps in virtual asset regulation in Hong Kong—from the early licensing of VATP platforms, to the regulation of coin shops, and ultimately to comprehensive coverage of VA Dealing services.

In one sentence: In three years, Hong Kong regulation has moved from an OTC "vacuum zone" to comprehensive chain management.

Phase One (2023) VATP is brought under regulation, but OTC becomes the "fish that slips through the net".

At the end of 2022, Hong Kong passed the "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance", which will implement a licensing system for Virtual Asset Trading Platforms (VATP) starting from June 2023, 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 VA exchange:

Facilitating transactions of virtual assets between buyers and sellers through electronic means.

Contact with client assets (holding, controlling, or arranging custody)

Therefore, the system at that time only targeted businesses that involved "electronic platforms + contact with customer assets," and OTC scenarios such as physical coin shops, counters, and ATMs were not included, which led to a regulatory vacuum.

Phase Two (2024) Customs Licensing, Cryptocurrency OTC also requires licensing.

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

Main content:

Everyone conducting virtual asset spot trading (whether physical or online) in Hong Kong must be licensed;

Issued by the Hong Kong Customs (CCE);

Covers fiat currency exchanges and transfers such as 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 ..."

Stage Three (2025) OTC merges into the VASP big family, SFC unified supervision.

In June 2025, Hong Kong released the second round of the Legislative Proposal to Regulate Dealing in Virtual Assets, with both the scope and depth of regulation being upgraded.

Scope expansion: covering complex services such as block trading, brokerage matching, settlement exchange, and asset management.

Regulatory adjustment: Licensing by SFC, HKMA regulates banking/SVF business;

Principle of Continuity: Same business, same risk, same rules;

Exemption arrangement: Only issuers who issue/redeem stablecoins in the primary market and have obtained HKMA approval can be exempted.

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 changes: This round of recommendations is based on over 70 written opinions received during the first round of consultations. The government explained in the document that the opinions concentrated on issues such as the high risks of OTC, cross-border money laundering loopholes, and insufficient regulatory coverage. Therefore, the original OTC regulatory recommendations have been 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 content of this phase is currently still in the public consultation stage and has not been formally legislated. Final details may be adjusted during the legislative process.

The driving force behind policy changes

The three evolutions of Hong Kong's OTC regulatory policies did not occur in isolation, but are the result of multiple overlapping factors, with at least three core drivers behind them:

Driving Force 1: Frequent major cases expose regulatory vacuum

In the $15 million money laundering case in May 2025, the involved gang used OTC to split funds and bypass bank monitoring, completing multiple cross-border transfers in a short period. In the JPEX case, the Commercial Crime Bureau (CCB) discovered that many investors' defrauded funds were exchanged for cash or stablecoins through local OTC shops, and then quickly flowed to overseas wallets.

These cases expose a problem: even with tighter platform regulations, the anonymous and instant settlement features of offline OTC can still bypass regulations, becoming a risk channel of the "last mile."

Driver Two: International Regulatory Pressure and FATF Standards

The FATF (Financial Action Task Force) has clearly required jurisdictions to fully incorporate Virtual Asset Service Providers (VASPs) into the Anti-Money Laundering/Counter-Terrorism Financing (AML/CFT) framework since the update of Recommendation 15 in 2019. Although Hong Kong partially met some FATF requirements when it first introduced VATP licensing, the "loophole" status of OTC businesses has been pointed out multiple times by international assessment bodies and partners. To maintain Hong Kong's reputation as an international financial center, regulators must address this loophole and ensure that "same business, same risk, same rules" is implemented.

To establish Hong Kong as an international virtual asset center, it is essential to address the AML/CFT risks.

Driver Three: Local Public Opinion Drives Policy Upgrades

In the first round of OTC consultations in 2024, the government received more than 70 written public opinions from banks, regulatory agencies, cryptocurrency companies, law enforcement departments, and others. Most opinions focused on reflecting that: the risks of anonymous OTC transactions are high; cross-border capital flows are difficult to trace; OTC plays an important intermediary role in cases of fraud and money laundering.

The government clearly stated in the legislative proposal "VA Dealing" released in 2025 that it was based on this feedback that the regulatory scope originally covering only OTC exchanges was expanded to a more comprehensive 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 used to be the "underground channel" of the cryptocurrency market in Hong Kong, but now it is being brought into the open. From platform regulation in 2023, to the management of cryptocurrency shops in 2024, and then to the proposed full-chain "VA Dealing" framework in 2025, the regulation of virtual assets in Hong Kong is moving towards systemization and internationalization. The latest chapter of all this is currently in the public consultation period, awaiting the final draft of the legislation.