Hong Kong authorities propose regulatory shake-up for over-the-counter virtual asset stores, with unlicensed outlets to risk 2-year jail term
Hong Kong authorities have proposed punishing anyone caught operating virtual asset exchange stores without a licence with up to two years in jail and a HK$1 million (US$127,873) fine, after investors lost more than HK$1.7 billion in cryptocurrency scams last year.
The Financial Services and the Treasury Bureau on Thursday launched a public consultation as part of efforts to create a licensing regime for over-the-counter (OTC) virtual asset trading services.
The government proposal defined OTC services as those involving the spot trading of virtual assets.
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Lawmaker Johnny Ng Kit-chong said that while virtual asset trading platforms performed in a manner similar to stock exchanges, those offering OTC services were more akin to money changers.
Such services allowed customers to trade their currency for virtual assets through physical or online storefronts, he explained.
Unlike OTC shops, trading platforms have been under regulatory control since last June, with only two approved thus far.
According to government estimates, there are currently 450 stores offering OTC services in Hong Kong, 250 of which operate online. The rest are physical outlets.
"Nowadays we don't have any regulations for those OTC exchange shops, so anybody can open a shop anywhere in Hong Kong," Ng said.
Authorities last year introduced similar regulations for large trading platforms in a bid to close regulatory loopholes.
The government said the proposed rules for OTC stores were necessary after such services were found to be one of the "main avenues for channelling retail investors' funds" into fraudulent schemes such as the JPEX scandal.
The scandal emerged in September last year and grew into the city's largest fraud case, with more than 2,600 Hongkongers losing over HK$1.61 billion in connection with the cryptocurrency platform.
Police on Thursday said they had made three additional arrests in relation to the case, bringing the total number of arrests to 70, adding that they could not rule out more arrests in the future.
The virtual asset exchange platform Hounax was also accused of duping 158 Hongkongers out of about HK$155 million, with the case entering the media spotlight in November.
In its proposal, the bureau wrote: "Under such circumstances, the government sees a need to bring [virtual asset] OTC services within the statutory regulatory remit through legislative amendments, with a view to ensuring that the 'same activity, same risks, same regulation' principle is observed and sufficient investor protection is provided for."
Under the bureau's proposal, OTC operators must apply for a two-year licence from the commissioner of customs and excise. Traders will only be allowed to exchange virtual assets available on at least one of the city's approved trading platforms.
OTC operators will also be able to exchange stablecoins, which are cryptocurrencies pegged to another asset such as a fiat currency, once they are licensed under a planned regulatory regime overseen by the Hong Kong Monetary Authority.
Those looking to make token-to-token trades would be limited to using licensed trading platforms, the proposal said.
All virtual wallets used by operators in transactions would need to be registered with the commissioner, it added.
The proposal recommends that those operating an OTC virtual asset service without a licence would face a HK$1 million fine and up to two years in prison.
Anyone found to be advertising such unlicensed services would also face a maximum penalty of six months in jail and a fine of up to HK$50,000.
OTC shops, alongside celebrities and influences, played a key role in the saga by heavily promoting the exchange, encouraging retail investors to part from their life savings with the promise of high returns.
The bureau said the public had until April 12 to share their views on the proposal, adding it hoped to introduce a bill for the licensing regime "as soon as practicable", without providing an exact timeline.
This article originally appeared on the South China Morning Post (SCMP).
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