Three years of progress: Hong Kong regulation moves from OTC “vacuum” to comprehensive management
This article is sourced from BlockSec, compiled and written by Foresight News.
(Previous summary: Strict laws! Hong Kong fully regulates cryptocurrency OTC traders: unlicensed operations face up to 7 years in prison and fines of HKD 5 million)
(Background information: Hong Kong passes the “Stablecoin Bill”: issuers must apply for a license, next step is to regulate OTC trading and cryptocurrency custody)
In May 2025, the Hong Kong police dismantled a virtual asset money laundering group worth USD 15 million (approximately HKD 117 million), with the involved gang primarily using OTC channels located in Tsim Sha Tsui to split and transfer funds. Earlier, in the sensational JPEX case, the Commercial Crime Bureau (CCB) revealed that a significant amount of the funds involved were exchanged and transferred through local OTC stores, becoming an important part of the fraud chain.
In June 2025, the Hong Kong government released the public consultation document titled “Legislative Proposal to Regulate Dealing in Virtual Assets,” recommending that all virtual asset trading services, including OTC, be incorporated into a unified licensing regulatory framework. Although this proposal is still in the consultation phase and has not yet formed regulations, it outlines a clear blueprint for the next steps in Hong Kong’s virtual asset regulation—from the initial licensing of VATP platforms to the regulation of cryptocurrency stores, culminating in comprehensive coverage of VA dealing services.
In summary: Over the course of three years, Hong Kong regulation has transitioned from the OTC “vacuum” to comprehensive management.
Phase One (2023): VATP regulation commenced, but OTC remains a “loophole”
At the end of 2022, Hong Kong passed the “Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance,” which implemented a licensing regime for virtual asset trading platforms (VATPs) starting from June 2023, regulated by the Securities and Futures Commission (SFC).
According to the definition of VA exchange:
- Facilitating virtual asset trading between buyers and sellers through electronic means;
- Handling customer assets (holding, controlling, or arranging custody).
Thus, the system at that time targeted only the “electronic platform + handling customer assets” business, leaving physical cryptocurrency stores, counters, and ATMs unregulated, resulting in a regulatory vacuum.
Phase Two (2024): Customs licensing, cryptocurrency OTC also requires a license
From February to April 2024, the Financial Services and the Treasury Bureau (FSTB) launched the first round of consultations for the “Virtual Asset Over-the-Counter Trading Services Licensing Regime,” marking the first time that physical OTC services were included in the regulatory framework.
Main contents:
- All persons operating virtual asset spot trading (physical or online) in Hong Kong are required to be licensed;
- Licensing is managed by the Hong Kong Customs and Excise (CCE);
- Covers fiat exchanges and transfers such as USDT, BTC.
Phase Three (2025): OTC integrated into the VASP family, unified regulation by SFC
In June 2025, Hong Kong released the second round of the “Legislative Proposal to Regulate Dealing in Virtual Assets,” enhancing both the scope and depth of regulation:
- Expanded scope: covers complex services such as block trading, brokerage, settlement exchanges, and asset management;
- Regulatory authority adjustment: licensing by SFC, with HKMA overseeing banking/SVF businesses;
- Principle continuation: same business, same risk, same rules;
- Exemption arrangements: only issuers that issue/redeem stablecoins in the primary market and have HKMA approval may be exempt.
Reason for changes: This round of proposals was developed based on over 70 written opinions received during the first round of consultations, with the government detailing that feedback highlighted issues such as the high-risk nature of OTC, cross-border money laundering loopholes, and insufficient regulatory coverage. Therefore, the original OTC regulatory proposals were expanded into a broader “VA Dealing” framework.
Important note: The contents of this phase are still in the public consultation stage and have not yet been formally legislated; final details may be adjusted during the legislative process.
Driving Forces Behind Policy Changes
The evolution of Hong Kong’s OTC regulatory policy is not an isolated occurrence, but rather the result of multiple overlapping factors, driven primarily by three core motivations:
Driving Force One: Frequent Major Cases Expose Regulatory Vacuums
In the May 2025 USD 15 million money laundering case, the involved gang utilized OTC services to split funds and bypass bank monitoring, rapidly completing multiple cross-border transfers. In the JPEX case, the CCB found that many victims’ funds were exchanged through local OTC stores for cash or stablecoins, before quickly flowing to overseas wallets. These cases revealed a significant issue: even with tighter platform regulations, the anonymity and instantaneous settlement characteristics of offline OTC services can still circumvent regulations, becoming a “last mile” risk channel.
Driving Force Two: International Regulatory Pressure and FATF Standards
Since the Financial Action Task Force (FATF) updated Recommendation 15 in 2019, it has explicitly required jurisdictions to fully integrate virtual asset service providers (VASPs) into their anti-money laundering/anti-terrorist financing (AML/CFT) frameworks. When Hong Kong first introduced VATP licensing, it met some FATF requirements, but the “loophole” status of OTC services was repeatedly pointed out by international evaluators and partners. To maintain Hong Kong’s reputation as an international financial center, regulatory authorities must address this gap and ensure that “same business, same risk, same rules” is effectively implemented. For Hong Kong to become an international virtual asset hub, it must resolve AML/CFT vulnerabilities.
Driving Force Three: Local Public Opinion Drives Policy Upgrades
In the first round of OTC consultations in 2024, the government received over 70 written public opinions from banks, compliance institutions, crypto enterprises, law enforcement agencies, and others. Most feedback highlighted the high risk of anonymous OTC transactions, the difficulty of tracking cross-border fund flows, and the significant intermediary role of OTC in fraud and money laundering cases. In the “VA Dealing” legislative proposal released by the government in 2025, it was explicitly stated that these feedbacks led to the expansion of the original regulatory scope from merely OTC exchanges to a more comprehensive VA Dealing framework.
Summary
OTC was once the “underground waterway” of Hong Kong’s cryptocurrency market; now it is being brought into the light. From platform regulation in 2023, to the regulation of cryptocurrency stores in 2024, and to the proposed comprehensive “VA Dealing” framework in 2025, Hong Kong’s virtual asset regulation is moving towards systematic and international standards. The latest chapter of this development is currently in the public consultation phase, awaiting the finalization of legislation.
