OTC crypto stores flood Hong Kong, but regulations may impact their presence

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Hong Kong, one of the largest and most important financial centers in the world, has played an important role in the development of cryptocurrencies. For example, Chinese territory has spawned some of the most established and successful crypto companies to date, including the FTX crypto derivatives exchange, as well as the digital asset platform Crypto.com.

Yet with billions of dollars traded regularly through Hong Kong-based crypto exchanges, the “Vertical City” also contains an abundance of physical over-the-counter crypto stores. Henri Arslanian, head of crypto at PwC and former chairman of the Fintech Association of Hong Kong, told UKTN that the number of traditional OTC crypto brokers in Hong Kong certainly stands out. “They are literally brick and mortar stores for the retail public,” he said.

An anonymous source further told UKTN that on a trip to Hong Kong he couldn’t help but notice a huge increase in OTC crypto exchanges, some of which even give access to crypto ATMs. -cash. .

Photo of an OTC retail exchange in Hong Kong captured by an anonymous spectator OTC retail stores are the crypto culture of Hong Kong

Compared to regions like the United States or Europe where buying and selling cryptocurrency on regulated exchanges is quite easy, Hong Kong physical cryptocurrency storefronts are a unique brand that offers individuals another way to access crypto.

Kelvin Yeung, CEO and founder of Hong Kong Digital Asset Exchange, or HKD, shed light on the matter. Yeung told UKTN that the HKD crypto exchange was founded in 2019, the physical store was established in January of this year, and they employ more than 30 people to provide customer service.

Image source: HKD

Yeung further noted that HKD’s store acts the same as a traditional bank, offering customers the opportunity to gain a hands-on approach to buying crypto, as well as access to advisory services. in person. As such, he believes retail stores will most likely be a global trend in the future as crypto becomes mainstream:

“As more and more investors and institutional investors enter the industry and digital currency becomes mainstream, there will be a trend to open physical stores in combination with online platforms.”

Yeung added that he believes greater customer trust is established between HKD and its user base due to its physical presence. “Most of our users are between 40 and 70 years old. An older clientele is important to create widespread adoption because many of these people still hold fiat currency and only trust traditional financial systems, ”he said. points out.

Interestingly, it’s not just the older generation buying crypto in these physical locations. Priscilla Ng, founder of Coiner HK – another Hong Kong OTC retail exchange – told UKTN that CoinerHK was launched in early 2020 to focus on the female market: “We wanted to create a market for women. women because we want to promote the idea that women could be financially independent and practice personal investment. “

As such, Ng said that CoinerHK’s customers are predominantly female, typically between the ages of 20 and 50, and around 70% of them trade money for crypto. Ng also noted that CoinerHK has two physical stores in the Golden Quarter of Hong Kong.

Image source: CoinerHK

Echoing Yeung, Ng added that having physical over-the-counter exchanges can provide clients with greater opportunities, “We treat them as friends in negotiations and also give our clients confidence in us. since we have physical locations. ”Ng further noted that CoinerHK’s Wanchai location also serves as an art gallery that offers non-fungible tokens (NFTs).

Regulation could crowd out physical over-the-counter exchanges

While over-the-counter physical crypto exchanges like HKD and CoinerHK appear to offer better access to crypto in Hong Kong, there are a number of regulatory risks associated with these types of establishments.

For example, Arslanian explained that in addition to repeat customers, mainland Chinese tourists have been target customers for these establishments. He noted that many of these stores are located in tourist areas to attract users, but are particularly attractive to Chinese tourists due to the ban on crypto in China: “One would assume that if Chinese tourists from the mainland are visiting Hong Kong, nothing will stop them from buying crypto in these OTC stores.

With that in mind, Arslanian believes there may be an increase in OTC retail hubs in Hong Kong due to the influx of Chinese tourists interested in buying crypto. On the flip side, Arslanian mentioned that Hong Kong’s upcoming regulatory framework for crypto exchanges could result in these stores shutting down completely.

As UKTN previously reported, Financial Services and the Hong Kong Treasury Office have considered restricting access to crypto to wallets with at least $ 1 million in assets. If passed, the new guidelines would restrict access to crypto to around 93% of the city’s population.

While this is a major challenge for physical OTC stores, Arslanian noted that OTC stores can simply move their operations underground. However, he noted that this would then pose an increased risk to customers: “If something is wrong, the public is less likely to report it to authorities. “

Regarding uncertain regulations, Yeung commented that the main challenge HKD currently faces is understanding whether Hong Kong will soon allow only institutional investors to invest in crypto: “It will have a big influence on our business. Arslanian added that regulated crypto exchanges that cannot serve retail clients is something the crypto community strongly opposes, as it could very well cause users to turn to unregulated platforms.

Unfortunately, Arslanian further pointed out that it would be extremely difficult for physical over-the-counter stores to receive the correct licenses, even as they attempt to be fully regulated. For now, Yeung has mentioned that HKD only needs a valid identity and address verification to buy and sell cryptos on the exchange.

It’s interesting to see that currently the only regulated crypto exchange in Hong Kong is OSL, which is also a unit of the BC Group backed by Fidelity. OSL Managing Director and Head of Exchange Andrew Walton told UKTN that OSL was deliberately designed with regulations in mind and even practiced self-regulation before some of the current laws were enacted.

Additionally, Walton reported that OSL is grandfathered under the Singapore Payment Services Act, or PSA, and has also applied for a digital payment token license, or DPT, through the Singapore Monetary Authority. Recently, impressive regulatory approvals have allowed OSL to expand its business in Latin America. “In Latin America, the OSL Exchange product will initially be available to institutional and professional investors in the region, in Mexico, Colombia and Argentina. OSL’s offering in Latin America will also seek to obtain the appropriate licenses as regulatory developments in the region occur, ”Walton added.

Retail investors are needed from a business perspective

While OSL’s efforts are indeed notable, Arslanian pointed out that a lot of income is typically generated by retail clients who buy and sell cryptos on exchanges and that the flow of retail, in turn, attracts. client. institutional. As such, he noted that Hong Kong’s willingness to force crypto exchanges to target only institutional investors is a difficult question from a business perspective. While this may be the case, Walton noted that OSL has seen a significant increase in interest from the institutional segment over the past year.

Given the continued regulatory uncertainty for the cryptocurrency, Arslanian mentioned that Hong Kong may very well be best suited for institutional investors, while Singapore may make more sense for retail clients.

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