Hong Kong financial affairs chief vows to move ahead with regulating stablecoins, over-the-counter crypto trading

The government will submit a bill on licensing rules for stablecoin issuers and OTC trading services to the legislature ‘as soon as practicable’
Hong Kong police have arrested 70 people involved in the JPEX case, although prosecution has yet to begin, official says

Blockchain

Xinmei Shen

Published: 6:30pm, 23 Feb 2024

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The Hong Kong government is committed to regulating stablecoins and over-the-counter (OTC) crypto exchanges, according to the city’s financial affairs chief, as regulators in the Asian financial hub continue to expand their legal toolkit to supervise the broader virtual-asset industry.

The government will submit bills on licensing rules for OTC trading services and stablecoin issuers to the Legislative Council “as soon as practicable”, wrote Christopher Hui Ching-yu, secretary for the Financial Services and the Treasury Bureau (FSTB), in a reply to queries from lawmaker Carmen Kan Wai-mun on Wednesday.

Hong Kong is contending with a surge of crypto scams that have defrauded local retail investors out of hundreds of millions of dollars, as the city seeks to polish its image as a global virtual-asset hub and attract relevant businesses to set up shop.

The number of virtual-asset-related criminal cases more than doubled between 2021 and 2023, rising from just under 1,400 in 2021 to over 3,400 last year, according to Hui. The money involved jumped more than fivefold from HK$824 million in 2021 to over HK$4 billion last year.

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The cryptocurrency scandal gripping Hong Kong

Calls for Hong Kong to regulate OTC cryptocurrency shops grew louder after last year’s implosion of JPEX, the platform at the centre of the city’s biggest-ever alleged fraud, involving thousands of victims and more than HK$1.5 billion in financial losses.

As of Tuesday, Hong Kong police had arrested 70 people involved in the JPEX case, Hui said. None have been prosecuted yet.

The FSTB proposed earlier this month that providers of virtual-asset spot-trading services, including both physical outlets and online platforms, must seek a licence from customs authorities to operate in Hong Kong. Offenders could face two years in jail and a HK$1 million (US$127,800) fine.

The proposal, open for public comment until April 12, came after the FSTB and Hong Kong Monetary Authority (HKMA) unveiled draft rules in December that will require stablecoin issuers to obtain a licence to sell to retail investors.

Stablecoins are cryptocurrencies that are pegged to a real-world asset. Some of the most well-known ones include the US dollar-pegged Tether and USD Coin.

The draft rules in Hong Kong target stablecoins that aim to “maintain a stable value with reference to one or more fiat currencies”, regulators said.

Hong Kong last year also put in place a mandatory licensing regime for centralised cryptocurrency exchanges serving retail investors. Nineteen companies had submitted applications to the Securities and Futures Commission as of Friday.

As the February 29 application deadline approaches, the regulator has also ramped up efforts to warn the public of the risks of trading on unregulated exchanges, having called out several platforms, including MEXC, Aramex and DIFX.

Separately, the HKMA earlier this month laid out plans to implement international standards on how much capital the city’s banking institutions must set aside for their cryptoassets exposure. It also introduced new rules for banks providing virtual-asset custody services.

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