Hong Kong is considering involving the local securities regulator in licensing over-the-counter (OTC) crypto trading services. This move aims to bring these services under the joint oversight of the Securities and Futures Commission (SFC) and the Customs and Excise Department (C&ED), reflecting the city’s effort to tighten its regulatory framework.

The SFC is exploring a new licensing regime for OTC crypto services, working alongside the C&ED to address regulatory gaps identified following the JPEX scandal, which resulted in losses of more than $200 million. Previously, OTC services were regulated solely by the C&ED, but recent discussions indicate a shift towards a combined regulatory approach.

The SFC has been consulting industry players about the potential new regime and has also been evaluating regulations for cryptocurrency custodian services. These discussions are still in early stages and subject to change, according to sources familiar with the matter.

In mid-August, the SFC identified unsatisfactory practices during on-site inspections of 11 “deemed-to-be-licensed” crypto exchanges. The investigation revealed that some exchanges overly relied on a small number of executives to manage client asset custody, while others were not adequately guarding against cybercrime risks. This raises doubts about their ability to meet full licensing requirements.

Hong Kong’s regulatory landscape has been evolving, with new licensing requirements for crypto exchanges and the introduction of crypto exchange-traded funds. However, concerns persist among local players. In March, Alessio Quaglini, co-founder and CEO of crypto custodian Hex Trust, expressed worries about proposed OTC regulations, suggesting that stringent requirements could drive businesses like Hex Trust to relocate to more crypto-friendly jurisdictions.

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