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Over-the-counter crypto businesses are flooding Hong Kong, but regulations could affect their presence

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Hong Kong, one of the most important and prominent financial centers in the world, has played an important role in the development of cryptocurrencies.


Hong Kong, one of the most important and prominent financial centers in the world, has played an important role in the development of cryptocurrencies. For example, China has founded some of the most established and successful crypto companies, including cryptocurrency exchange FTX and digital asset platform

However, with trillions of dollars regularly traded through Hong Kong-based cryptocurrencies, Vertical City also has plenty of over-the-counter physical cryptocurrencies. Henri Arslanyan, PwC crypto moderator and former chairman of the Hong Kong Fintech Association, said that the number of traditional over-the-counter crypto brokers in Hong Kong clearly stands out. "It's really a retail store open to the public," he said. An anonymous source said that while traveling in Hong Kong, he saw a huge spike in over-the-counter cryptocurrencies, some of which even offered access to cryptocurrency ATMs.

OTC retail stores shape Hong Kong's cryptocurrency

Compared to regions like the United States or Europe, where buying and selling cryptocurrencies on regulated exchanges is relatively easy, Hong Kong's physical storefront is a unique brand that offers a different way to access crypto.

Kelvin Yong, CEO and founder of the Hong Kong Digital Asset Exchange (HKD), sheds light on the topic. Yong said crypto exchange HKD was founded in 2019, the physical store opened in January this year, and more than 30 people will be hired for customer service. Yeung further noted that HKD's business operates like a traditional bank, allowing customers to take an interactive approach to buying crypto, along with access to private consulting services. Therefore, he believes retail stores will likely become a global trend that will develop as cryptocurrencies become mainstream:

"As more investors and institutional investors enter the industry and digital currencies become mainstream, the trend is to open physical stores in combination with online platforms." Yong added that he thinks a physical presence will build greater customer trust between HKD and its customer base. “Our customers are mostly between 40 and 70 years old. "An older customer base is important for creating mass adoption because many of these people still hold fiat currency and only trust the traditional financial system," he said.

Interestingly, it's not just the older generation buying crypto from these physical locations. Priscilla Ng, founder of Coiner HK, another Hong Kong trading exchange, said that CoinerHK was launched in early 2020 to focus on the women's market: “We wanted to create a market for women because we wanted to promote the idea that women can become financially independent and invest economically." Therefore, Ng said that CoinerHK's customers are mostly women between the ages of 20 and 50 and about 70% of them exchange cash for crypto. Ng also noted that CoinerHK has two physical stores in Hong Kong's Gold Zone.

Ng echoes Yeung, adding that physical OTC exchanges can offer customers greater options: "We treat them like friends when we trade, and also because we have a physical location, we trust our customers." Ng further noted that the CoinerHK Wanchai location also serves as a conflicting Token (NFT) art gallery.

Regulations may interfere with physical OTC exchanges

While physical OTC cryptocurrencies such as HKD and CoinerHK appear to offer better access to crypto throughout Hong Kong, there are a number of regulatory risks associated with this type of establishment.

 For example, Arslanyan said that apart from regular customers, tourists from mainland China were the target group for the facility. He noted that many of these stores are located in tourist areas to attract consumers, but are particularly attractive to Chinese tourists because of China's crypto ban: "It can be assumed that nothing happens when tourists from mainland China visit Hong Kong." prevent them from buying crypto at these over-the-counter stores. "

With this in mind, Arslanyan believes that Hong Kong shopping malls can thrive due to the influx of Chinese tourists who are interested in buying cryptocurrencies. On the other hand, Arslanyan mentioned that Hong Kong's upcoming regulatory framework for cryptocurrency exchanges could lead to the complete closure of these shops. As previously reported, the financial services provider and the Hong Kong Ministry of Finance are considering restricting crypto access to portfolios with assets of at least $1 million. If the new guidelines are adopted, access to crypto will be limited to around 93% of the city's population.

While this is a huge challenge for brick-and-mortar shops, Arslanyan notes that brick-and-mortar shops can be easily moved. He noted, however, that this poses an increased risk for customers: "If something goes wrong, the public is less likely to report it to the authorities." Regarding the uncertain regulations, Yong commented that the biggest challenge for HKD is understanding whether Hong Kong will soon allow institutional investors to invest in crypto: “This will have a huge impact on our business,” Arslanyan added that regulated crypto exchanges cannot serve retail customers is something that the crypto community strongly opposes because it can lead consumers to turn to unregulated platforms.

Unfortunately, Arslanyan adds that getting the right license will be a huge challenge for brick-and-mortar shops, even if they try to be fully regulated. So far, Yong has mentioned that HKD only requires identification and verification of a valid address to buy and sell crypto on the exchange. It is interesting to see that OSL is currently the only regulated crypto exchange in Hong Kong that is also a unit of the group backed by Fidelity BC. Andrew Walton, Managing Director and Exchange Manager of OSL, said that OSL was designed in a way to regulate, and even practiced self-regulation before some of the current laws were passed.

In addition, Walton said that OSL was established under the Singapore Payment Services Act, or PSA, and had also applied for a digital payments brand license, or DPT, a license granted by the Monetary Authority of Singapore. Recent impressive regulatory approvals have allowed OSL to expand its business into Latin America. "In Latin America, OSL Exchange products will initially be available to institutional and professional investors in the Mexico, Colombia and Argentina regions. The OSL LatAm proposal will also seek licensing as regulatory changes occur across the region," added Walton.

Private investors are needed from a business perspective

While OSL's efforts are truly extraordinary, Arslanyan says that most of its revenue is typically generated from retail customers buying and selling cryptocurrencies on exchanges, and retail flows, in turn, attract institutional customers. Therefore, he finds that Hong Kong's willingness to force cryptocurrencies to only serve institutional investors is a tough business issue. While this may be the case, Walton notes that OSL has seen a significant increase in interest from the institutional segment over the past year.

Given the ongoing regulatory uncertainty over cryptocurrencies, Arslanyan mentioned that Hong Kong might be best for institutional investors, while Singapore might be more logical for retail clients.

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