Hong Kong's virtual asset OTC compliance is imminent, with technological regulation set to become a key factor in market standardization
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Hong Kong's virtual asset OTC compliance is imminent, with technological regulation set to become a key factor in market standardization
After the public consultation on Hong Kong's OTC licensing regime concluded on April 12, OKLink Research Institute published a column article in Sing Tao Daily, sharing its research findings on Hong Kong's OTC market and emphasizing that technological regulation is key to standardizing Hong Kong's OTC and Web3 ecosystem.
Navigating Web3 tides with focused insightsAuthor: Jason Jiang, OKLink Research Institute
Preface:
Following the conclusion of the public consultation on Hong Kong's OTC licensing regime on April 12, the OKLink Research Institute published a column in Sing Tao Daily, sharing its research findings on Hong Kong’s OTC market and emphasizing that technological regulation is key to standardizing Hong Kong's OTC and Web3 ecosystem. The institute also believes that as OTC regulation and spot virtual asset ETFs progress, Hong Kong is gradually transforming from a global Web3 follower into a leader.
Column link:
https://www.stheadline.com/columnists/plus_corporate/501298745/
Below is the original article:
As Hong Kong provisionally approves spot virtual asset ETFs, over-the-counter (OTC) trading of virtual assets is also accelerating into a new era of compliance. According to the Hong Kong Economic Journal, the public consultation on Hong Kong’s OTC licensing regime concluded on April 12. However, concerns have arisen among some industry participants because the proposed regime covers only a very limited number of cryptocurrencies such as Bitcoin and Ethereum.
The OKLink Research Institute actively participated in the consultation process for the OTC licensing framework and submitted policy recommendations to the Hong Kong government in early April. Since last year, the institute has closely monitored the OTC market, conducting in-depth research through online surveys and field visits, and plans to release a comprehensive global OTC research report soon.
1. From "Follower" to "Leader"
Hong Kong is transitioning from a "follower" to a "leader" in the virtual asset space. After more than a year of steady development, this leadership manifests in several ways: heightened focus on fiat on- and off-ramps, and the gradual inclusion of fiat-backed stablecoins and OTC services under regulatory oversight through new licensing frameworks—an approach that is globally pioneering and unique. Additionally, Hong Kong is proactively driving integration between virtual assets and traditional financial markets, accelerating Web3 innovation adoption via financial instruments such as tokenized securities and spot ETFs.
In this transformation, technology-driven regulation is playing an increasingly critical role. Ren Yunan, Executive Director, Chairman of the Board, and CEO of OKLink Holdings (01499.HK), stated in a media interview last year that licensing is merely the starting point for Hong Kong’s compliant virtual asset development, while technological regulation is the key to governing future Web3 markets. Recently, Hong Kong approved physically settled spot virtual asset ETFs—a decision we believe was largely possible due to regulators’ and institutions’ confidence in using technical tools like KYT (Know Your Transaction) and KYA (Know Your Asset) to manage risks associated with custody and settlement. In OTC regulation, we similarly believe Web3 RegTech centered on on-chain data will become an indispensable component.
Figure: The value of RegTech in the issuance process of spot virtual asset ETFs
Source: OKLink Research Institute, “Learning from the U.S.: Exploring the Future Development of Hong Kong Bitcoin Spot ETFs”
In our response to the public consultation, the OKLink Research Institute specifically recommended that the Hong Kong government consider adopting more Web3 regulatory technologies and encourage OTC license applicants to equip themselves with blockchain analytics tools and other compliance solutions to enhance regulatory transparency and reduce compliance costs.
2. Why Advocate Greater Use of Web3 Compliance Technologies?
Although frequent virtual asset fraud incidents in recent years have heightened public vigilance and exposed previously overlooked OTC risks, overall sentiment toward upcoming OTC regulation remains positive and constructive across Hong Kong’s stakeholders.
However, we observe that while OTC services resemble traditional currency exchange operations, they differ significantly in operational processes and risk profiles. Hong Kong’s OTC businesses typically operate complex hybrid models combining off-chain and on-chain activities—using cash for off-chain fiat transfers while relying on blockchain networks for on-chain asset transactions. This hybrid nature makes OTC operations more intricate than conventional currency exchanges, meaning risks may stem not only from the fiat system but also from newer, more sophisticated on-chain components. To match this complexity, static risk identification and prevention techniques centered solely on KYC are insufficient. The market demands more flexible and targeted Web3 compliance solutions.
Figure: Common transaction flow at physical Hong Kong OTC outlets
Source: OKLink Research Institute OTC Research Report (forthcoming)
Therefore, we recommend that OTC operators seeking licenses in Hong Kong integrate technologies such as KYA and KYT into their existing KYC workflows. By deeply analyzing on-chain OTC patterns—such as screening wallet address risks and monitoring transactions in real time—operators can proactively identify and respond to suspicious or fraudulent activities, shifting from a reactive to a proactive stance against on-chain risks and enhancing capabilities to prevent and combat money laundering through OTC channels.
Moreover, blockchain analytics tools can empower regulators to supervise the OTC market more effectively, improving oversight efficiency through visualized interfaces. A February survey by the Cambridge RegTech Lab found that current regulatory technology efforts primarily focus on banking and investor protection, with only 21% of institutions prioritizing virtual asset regulation. As the Hong Kong government actively promotes Web3 development, embracing blockchain analytics could set a benchmark for global regulators.
No healthy industry can thrive indefinitely in the shadows—only when sunlight enters can there be hope.
About OKLink Research Institute
OKLink Research Institute is the strategic research arm of OKLink Group, dedicated to helping global commercial, public, and social sectors better understand the evolution of fintech and blockchain economies. It produces in-depth analyses and expert content covering technology applications and innovations, technological and societal transformations, and challenges in fintech, aiming to advance the application and sustainable development of frontier technologies such as blockchain.
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