Hong Kong regulators are proposing legislation to license and regulate over-the-counter (OTC) cryptocurrency shops in an effort to prevent fraud. The legislation would create new standards for anti-money laundering (AML) and know-your-customer (KYC), according to the Financial Services and Treasury Bureau consultation document released this week.

“Under the proposed regime, any person who conducts a business in providing services of spot trade of any [virtual assets] in Hong Kong is required to be licensed by the Commissioner of Customs and Excise (“CCE”), subject to a fit-and-proper test and other factors deemed relevant by CCE,” the document said. 

The regulations are similar to a “fitness test” and licensing regime begun last year for Virtual Asset Trading Platforms (VATPs). Hong Kong regulators attempting to position the city as a crypto hub want retail investors to have the same kinds of protections as clients of institutional investors, banking corporations and money lending services. The specific focus on OTC stalls is said to be because of a spate of fraudulent exchange activity, which saw retail funds siphoned through OTC on their way to dubious exchanges. 

“Some VA OTC shops have served as one of the main avenues for channeling retail investors’ funds to the suspected fraudulent schemes,” the FSTB said in their consultation document. Decential has asked FSTB for more comments on this issue. 

Hong Kong for the past several years of the crypto craze has been a relatively easy jurisdiction for onboarding users to crypto, with many routes to push fiat into crypto and crypto back into fiat banking operators. That now looks subject to drastic change. 

One OTC operator in a market area in Kowloon, “Daniel,” who asked that his real name not be used, said that many OTC operators including himself support the move. But there are doubts about the pressures  that they will feel once things become stricter, he said.

“All OTC operators want to keep doing the OTC,” he said, “But the feeling [is that] Hong Kong government and Regulatory Authorities want to set a high threshold [and] high standard.” 

Read more: Hong Kong Privacy Watchdog Searched Six Worldcoin Offices About Biometric Operations

The concern, he said, is if the threshold for AML and KYC are made so high that it becomes burdensome for OTC operators to continue the business. The government estimates that at least 200 such shops like Daniel’s exist – market stalls operated in retail heavy districts by a single person or a small team with a money changing machine and access to the Internet. There are by government estimates another 250 OTC shops that operate exclusively online. 

The operator usually puts up a liquidity guarantee for an exchange like Binance using his own money. Or they have their own connections to less well-known exchanges, or private investors that act as backstops to their operations. 

Business has been brisk, even in a bear market. It’s not unusual to see queues of people waiting patiently outside of these stalls to cash dollars into crypto. The operator in some of the smaller OTC shops in the city can take a certain amount of money under the threshold (US$10k) and doesn’t have to take a record of the person’s identity. 

“Taking into account the roles of these VA OTC services in channeling the investing public’s funds, as well as their significant presence in the Hong Kong market, there is a strong need to bring their operations into the regulatory remit to ensure that AML/CTF measures are put in place and investor protection is catered for,” the FSTB said in their document released Feb. 8.  

Decential has reached out to the Securities and Finance Commission and the FSTB for more comment.