Hong Kong's virtual asset OTC compliance is imminent, and technological regulation will become the key to market standards

Author: Jason Jiang, OKLink Research Institute

Introduction:

After the public consultation on the Hong Kong OTC licensing system ended on April 12, the OKLink Research Institute published a column in Sing Tao Daily, sharing its research findings on the Hong Kong OTC market and stating that technological regulation is key to the standardization of the Hong Kong OTC and Web3 ecosystem. At the same time, the OKLink Research Institute believes that as OTC regulation and events like virtual asset spot ETFs progress, Hong Kong is gradually completing its transition from a global Web3 follower to a leader.

Column link: ++https://www.stheadline.com/columnists/plus_corporate/501298745/++

The following is the original text of the column:

As the virtual asset spot ETF in Hong Kong has received principle approval, the virtual asset over-the-counter (OTC) market is also accelerating its entry into a compliant era. According to the Hong Kong Economic Journal, the public consultation on the Hong Kong OTC licensing system ended on April 12; however, since this system only covers a few currencies such as Bitcoin and Ethereum, it has raised concerns among some practitioners.

The OKLink Research Institute has also actively participated in the consultation work for the OTC licensing system and submitted recommendations to the Hong Kong government in early April. Since last year, the institute has closely monitored the OTC market and conducted in-depth research on the Hong Kong OTC market through online surveys and on-site visits, planning to release the latest OTC research report globally soon.

1. From "Follower" to "Leader"

Hong Kong is transitioning from being a "follower" to a "leader" in the virtual asset field. After more than a year of steady development, this leadership is primarily reflected in: a focus on the inflow and outflow of virtual assets, and gradually incorporating fiat stablecoins and OTC into regulation through the introduction of new licenses, which is leading and unique globally; at the same time, actively guiding the integration of virtual assets with traditional financial markets, accelerating Web3 innovation adoption through financial tools such as tokenized securities and spot ETFs.

In this process, technological regulation plays an increasingly important role. Ren Yunan, Executive Director, Chairman, and CEO of OKLink Holdings (01499.HK), mentioned in a media interview last year that the licensing system is only the starting point for the compliant development of virtual assets in Hong Kong; technological regulation is the key to standardizing the Web3 market in the future. Recently, Hong Kong approved the issuance of virtual asset spot ETFs in a physical delivery model, and we believe a significant reason for this is that regulatory authorities and relevant institutions are confident in using technologies and compliance tools such as KYT and KYA to address various risks that may arise during the custody and delivery of virtual assets. In the process of OTC regulation, we also believe that Web3 regulatory technology, centered on on-chain data, will become an indispensable part.

Image: The value of RegTech in the issuance process of virtual asset spot ETFs

Source: OKLink Research Institute "Learning from the US: Exploring the Future Development of Bitcoin Spot ETFs in Hong Kong"

In response to this public opinion consultation, the OKLink Research Institute also emphasized the suggestion for the Hong Kong government to consider using more Web3 regulatory technologies and encouraged OTC license applicants to equip themselves with compliance products such as blockchain analysis tools to enhance regulatory transparency and reduce compliance costs.

2. Why suggest adopting more Web 3 compliance technologies?

Although there have been many virtual asset trading scams in recent years, making the public more alert to virtual asset activities, the previously often overlooked OTC risks are gradually being exposed. Overall, however, the various parties in Hong Kong are positive and proactive about the upcoming OTC regulation.

However, we have found that although the services provided by OTC merchants are similar to traditional currency exchange services, there are significant differences in business processes and risk situations. Hong Kong's OTC business is more of a complex off-chain + on-chain hybrid model, where the currency side is transferred off-chain through cash, while the asset side requires on-chain transactions via blockchain networks. This hybrid model is more complex than traditional currency exchange services and means that OTC risks may not only stem from the fiat currency system but also from newer and more complex on-chain aspects. To match this hybrid model, static risk identification and prevention technologies centered on KYC cannot meet the requirements; the market needs more flexible and targeted Web3 compliance solutions.

Image: Common transaction process of OTC physical stores in Hong Kong

Source: OKLink Research Institute OTC Research Report (to be released soon)

Therefore, we suggest that OTC merchants intending to apply for licenses in Hong Kong consider integrating technologies such as KYA and KYT into their existing KYC processes, deeply exploring the on-chain characteristics of OTC, actively identifying and promptly responding to various potential bad or fraudulent transactions through wallet address risk screening and real-time transaction monitoring, thus changing the passive situation in dealing with on-chain risks and enhancing the proactivity in preventing and combating OTC money laundering activities.

At the same time, using blockchain analysis tools can also help regulators more effectively monitor the OTC market and improve regulatory efficiency through visual interfaces. A survey conducted by the Cambridge RegTech Lab in February this year found that current regulatory technology mainly focuses on banking and investor protection, with only 21% of institutions prioritizing virtual asset regulation. While the Hong Kong government actively promotes Web3, the proactive adoption of blockchain analysis tools may set an example for global regulation.

No healthy industry can forever hide in the shadows; only by letting the sunlight in is there hope.

About OKLink Research Institute

OKLink Research Institute is a strategic research institution under the OKLink Group, dedicated to helping global businesses, public, and social sectors gain a deeper understanding of the evolution of fintech and blockchain economy, providing in-depth analysis and professional content covering topics such as technology application and innovation, technology and social evolution, and challenges in fintech, committed to promoting the application and sustainable development of cutting-edge technologies such as blockchain.