A lawyer once observed on the streets of Hong Kong that OTC (over-the-counter) exchange shops are everywhere, from Wan Chai to Causeway Bay to Tsim Sha Tsui, with many stores discreetly offering instant cash exchange services for Bitcoin and USDT, without banks and without asking about the origin. However, this crypto physical exchange ecosystem is facing a major turning point.
The Hong Kong Financial Services and the Treasury Bureau (Financial Bureau) and the Securities and Futures Commission (SFC) jointly launched a public consultation on 6/27, intending to establish a licensing system for digital asset (virtual asset) trading and custody services, clearly stating that USDT-to-fiat exchange services provided through physical stores or platforms must be included in the SFC's licensing and registration system.
According to estimates, Hong Kong currently has over 200 physical OTC stores and more than 250 online OTC service providers, with many brands like CryptoHK, One Satoshi, and HKD.com forming semi-financial service models. Many stores are equipped with professional counters, real-time exchange rate screens, and even support multiple languages, facilitating cash exchange for users from various countries.
However, these exchange shops are mostly unregulated under the current Securities and Futures Ordinance or Anti-Money Laundering Ordinance, forming a gray area for fund circulation. Their high anonymity and cash transaction characteristics have long been viewed as a breeding ground for potential money laundering, capital flight, and even fraud fund "whitewashing".
This consultation document proposes that all digital asset trading service providers (including cryptocurrency and fiat currency exchanges), whether through platforms or physical stores, must obtain SFC licensing or registration and comply with a series of strict regulatory requirements, including:
- Fit and Proper Test
- Financial resource thresholds and asset protection
- Customer identification (KYC) and anti-money laundering (AML) measures
- Business conduct and risk management
- Complete transaction record preservation and information disclosure obligations
Simultaneously, the system has no "exemption period" or "deemed licensed" arrangements, meaning existing OTC stores that do not apply for licenses legally will be considered illegal operations, facing potential closure or criminal risks.
This regulatory policy will bring several major impacts to the OTC ecosystem:
Market Reshuffling
Some small and medium-sized OTC stores may be unable to afford compliance costs or fail background checks. A "clearance wave" is expected, leaving only operators with capital strength and professional management capabilities.
Consumer Trust and Transparency Enhancement
The new system's requirements for record keeping, exchange rate disclosure, and investor protection measures are expected to improve current information asymmetry and non-transparent pricing issues, increasing retail trader confidence.
Anti-Money Laundering and International Rating Strengthening
OTC-specific KYC/AML regulations will address the Financial Action Task Force's (FATF) concerns about Hong Kong's money laundering prevention, further consolidating Hong Kong's international financial center status.
Promoting Normalized Financial Integration
Once OTC stores obtain legal licenses, they will have opportunities to establish cooperative relationships with banks and payment providers, opening fiat currency deposit and withdrawal channels, and promoting virtual asset and traditional financial integration.
Financial Bureau Secretary Christopher Hui noted that the licensing system is the core foundation for building a "high market credibility" virtual asset ecosystem, not merely a restrictive measure. SFC CEO Julia Leung also emphasized that this will create a "safe and vibrant" digital asset market, attracting institutional and retail participants.
Taiwan Comparison: Prohibit Cash Transactions, Phase Out Unregistered OTC Operators
Taiwan's Financial Supervisory Commission recently strengthened restrictions on OTC physical operators through self-regulatory amendments and financial flow tracking requirements.
According to the FSC's Securities and Futures Bureau's letter in May this year, VASP associations are required to modify self-regulatory guidelines within one month, prohibiting member operators from accepting cash transactions to prevent fraud and money laundering, officially implemented by the end of June 2025.
Additionally, Taiwan is experiencing a clear market elimination trend:
Multiple unregistered operators have exited the market
Category B physical member count reduced from 10 to only 4 remaining
Cash transactions will be replaced by customer transfers to company accounts, replacing the previous anonymous cash exchange model
The Securities and Futures Bureau emphasizes: While not explicitly banning OTC or New Taiwan Dollar transactions, the policy direction is clear - comprehensively improving financial flow traceability, with physical operators required to digitally transform or exit the market.
(Breaking rumors, FSC explains anti-fraud frontline: Virtual asset cash transactions will be restricted, with new regulations potentially implemented by the end of June)
[The rest of the document is about Trump, Iran, Israel, and oil prices, which I have omitted for brevity.]
