Mainland Chinese Take Advantage of Hong Kong’s Crypto Gray Areas

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Almost every month, Zhang travels from the Futian district of Shenzhen to a mall populated by fast food joints and a few empty stores in Hong Kong’s business district to buy crypto.

On a trip in June, the 27-year-old whose daily job includes a bit of everything that earns money exchanged some cash for around 10,000 to 20,000 Rmb (1,380 to 2,760 $) of USDT, a stable coin pegged to the US dollar.

Zhang, who declined to give his full name on the sensitivity of crypto trading on the mainland, said having digital currencies is useful for transferring money to other places, adding that ‘he would make the 90-minute cross-border trip whenever needed.

Cryptocurrency transactions are illegal on the mainland, where Beijing has also banned foreign exchanges from serving local customers on the internet. But in Hong Kong, crypto trading is legal, and the city is looking to become a digital asset trading hub.

Lightly regulated brick-and-mortar crypto stores are prevalent in tourist and shopping areas of the city. The stores are booming, helped by growing demand from mainland Chinese visitors and ambiguity over their regulatory status. Their main appeal is that they can help customers easily purchase digital assets with cash, often without disclosing the origin of the money or their identity.

Unlike the strict licensing rules crafted for online exchanges in the city that is pushing to become a virtual asset trading hub, these over-the-counter crypto stores allow customers to buy large volumes of cryptocurrencies with lighter or even zero checks.

Before China and Hong Kong fully reopened their shared border in February, mainland Chinese customers made up less than 5% of customers at Crypto HK, an OTC crypto firm with two branches in the city, founder Merton Lam said. Now it’s probably like half, he said.

Roger Li, co-founder of One Satoshi, a crypto store that has nine branches in Hong Kong, said the company’s overall trading volumes from January to May were around 20-25% higher than those the same period last year. For the full year, he expected trading to grow between 35 and 40 percent.

Li said he hadn’t taken on any mainland clients due to concerns over Beijing’s crypto ban, but he was optimistic the restrictions would alleviate a widespread belief in the city’s crypto circles after that Hong Kong announced its intention to become a hub of virtual assets in October.

I would say about 30% of new inquiries actually come from customers in mainland China, Li said. What we advise them is that they will soon be able to trade with us, he said, probably that the regulatory landscape in China will change.

Hong Kong introduced a new regime for cryptocurrency exchanges in June that requires all online platforms operating in the city to apply for a license.

Yet unlike other jurisdictions, including the United States and Singapore, which are clamping down on crypto following the collapse of FTX and other top exchanges, Hong Kong is looking to encourage its growth.

Even with the new regulations, most OTC stores remain outside the mandate of the Hong Kong Securities and Futures Commission.

I think for any new regulations, that would also be something the government would continue to look at, said Elizabeth Wong, head of the commissions fintech unit, in a briefing last month.

Carlton Lai, head of blockchain research at Daiwa Capital Markets, said OTC stores were mainly used as easy ways to send and withdraw money to unlicensed online exchanges.

There are probably more [stores] in Hong Kong than in other places for a number of reasons, such as these businesses are largely unregulated and tend to be easy to start, as long as you have enough capital, he added .

Some stores welcome greater regulation of the industry. Having regulation will be great for the development of our industry, said David Huang, whose business card reads crypto explorer at OTCXpert, an OTC crypto platform.

In April, the company opened a store at Chungking Mansions, a densely populated and sprawling building in Kowloon that is home to immigrant communities from across Asia.

OTCXperts knows your customer process includes asking new customers for ID before allowing them to transact, Huang said.

Other stores don’t require customers to show ID, with slogans such as no KYC and apply in as little as 10 minutes advertised on OTC store websites.

This leaves them well below the investor protection controls required for online platforms seeking licenses to trade crypto with retail clients.

Government regulators haven’t said what we should do, Huang said of OTC stores, adding that having a clear guide is very important.

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But Hong Kong’s lack of control over OTC stores and their proximity to mainland China, which remained the world’s fourth-largest market for crypto trading in 2022, made it attractive to Chinese citizens still drawn to the business class. assets, customers said.

In China, people are very sensitive, because they [Beijing] banned it, said David, a research consultant from Shanghai on his first trip to buy crypto in Hong Kong since the pandemic began. He refused to give his last name for fear of reprisals when he returned to China.

But so far I haven’t used it to move money. I just hope it can appreciate so I can afford very expensive apartments.

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