The current situation and challenges of the OTC Trading market for digital assets in Hong Kong

Regulatory Environment and Capital Security

The over-the-counter trading market for digital assets in Hong Kong is currently in a regulatory transition period. Most traders have not yet been directly incorporated into the regulatory scope of the Hong Kong Money Services Operators (MSO) or the Securities and Futures Commission (SFC). However, some merchants have obtained money exchange licenses issued by Hong Kong Customs, which has, to some extent, increased their credibility.

According to the public consultation document on the “Legislative Proposal for Virtual Asset Over-the-Counter Trading” released by the Hong Kong government, the future regulatory framework will require all virtual asset over-the-counter trading service providers to obtain operating licenses. This measure is expected to significantly enhance market transparency while reducing the risk of non-compliance.

The inadequacy of the current regulatory environment has led to some potential risks, such as customers potentially facing the situation of having their bank accounts frozen after receiving funds from OTC merchants. To mitigate such risks, it is recommended to choose merchants that hold money exchange licenses or have mainstream CEX certifications for transactions.

Data Security and Privacy Protection

Since 2012, exchange shops in Hong Kong have implemented a real-name policy, requiring the collection of customer personal information before transactions. By 2023, the requirements for exchanging Renminbi have further increased, with customers needing to provide bank account information from Hong Kong or mainland China, as well as a Hong Kong and Macau travel permit.

Some exchanges even require access to the transaction records of customers' domestic bank accounts. This sensitive information is kept independently by each exchange, lacking a unified regulatory standard, which poses a high risk of information leakage. The current laws in Hong Kong have much lower confidentiality requirements for exchanges compared to the financial sectors such as banking, securities, and insurance, and information review does not require legal authorization, which poses a potential threat to the privacy protection of high-net-worth clients. Therefore, it is crucial to choose compliant and reputable service providers.

Transaction Cost Analysis

• Spread and Trading Fees: The spread for OTC trading typically ranges between 2%-4%, which is higher than the publicly listed orders on exchanges. However, OTC offers flexibility in trading scale and speed.
• Large Transaction Discounts: For high-value transactions, the OTC market typically offers lower spreads and fees than exchanges. Some service providers may adjust rates based on customer needs, providing more attractive options for large traders.
• Price Negotiation Space: The flexibility of the OTC market allows users to negotiate prices with merchants. Long-term customers may receive additional discounts. Compliant platforms typically provide transparent rate information to avoid hidden fees. However, on non-compliant platforms, customers may encounter opaque exchange rates or extra charges.

Analysis of Transaction Convenience

• 24/7 Service: Major OTC platforms provide trading services 24/7 to meet users' needs for trading at any time.
• High Efficiency for Large Transactions: The OTC market can efficiently handle large transactions in the millions of dollars, unaffected by market slippage, which is particularly beneficial for institutions or high-net-worth clients.
• Physical Trading Options: Physical OTC trading counters are available in Hong Kong's financial center, such as Central. Customers considering large exchanges are advised to trade directly in-store.

Views of Hong Kong Financial Regulatory Experts

Hong Kong's OTC market finds it difficult to achieve a perfect balance in security, convenience, and cost. However, its flexibility, diverse services, and geographical advantages have alleviated the withdrawal pressure on digital asset investors to some extent. As the Hong Kong government gradually introduces regulatory measures for virtual asset trading, the security and transparency of the OTC market are expected to improve significantly.

Nevertheless, users should remain highly cautious when selecting trading partners, prioritizing compliant and reputable merchants, weighing security, convenience, and cost factors to find the solution that best meets their needs, thereby effectively avoiding potential risks.

Regulatory Trends and Market Outlook

The Hong Kong government is actively promoting the construction of a regulatory framework for virtual asset trading. Future regulatory measures are expected to further standardize the OTC market, enhancing trading transparency and security. This trend may lead to the following changes:

1. Implementation of the licensing system: Requiring all virtual asset OTC service providers to obtain operating licenses helps to filter out compliant and capable market participants.

2. Enhancement of Information Security Standards: Stricter regulations for customer information protection may be introduced to reduce the risk of data breaches.

3. Improvement of the Transaction Reporting Mechanism: Introduce a more standardized transaction reporting system to enhance market transparency, facilitating effective supervision by regulatory authorities.

4. Strengthening Risk Management Requirements: Higher demands are placed on the risk management capabilities of OTC service providers, including aspects such as anti-money laundering and customer due diligence.

The implementation of these regulatory measures will help Hong Kong consolidate its position as an international financial center, while providing digital asset investors with a safer and more regulated trading environment.