Hong Kong, one of the most significant and leading financial centers in the world, has played a huge 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 and the digital asset platform Crypto.com.
However, since trillions of dollars are regularly traded via Hong Kong-based crypto exchanges, there is also an abundance of physical over-the-counter crypto shops in the “Vertical City”. Henri Arslanian, PwC head of crypto and former chairman of the Hong Kong Fintech Association, told Cointelegraph that the number of traditional OTC crypto brokers in Hong Kong certainly stands out. “These are literally brick and mortar stores for the retail audience,” he said.
An anonymous source told Cointelegraph that while traveling around Hong Kong, he saw a huge surge in OTC crypto exchanges, some of which even offer access to cryptocurrency ATMs.
OTC retail stores make up Hong Kong’s cryptoculture
Compared to regions like the United States or Europe, where buying and selling cryptocurrencies on regulated exchanges is quite easy, Hong Kong’s physical crypto storefronts are a unique brand that offers individuals a different way to access crypto.
Kelvin Yeung, CEO and founder of Hong Kong Digital Asset Exchange (HKD), sheds light on the matter. Yeung told Cointelegraph that the HKD crypto exchange was launched in 2019, the physical shop opened in January of this year, and it employs over 30 people for customer service.
Yeung further noted that HKD’s shop acts much like a traditional bank, giving customers the opportunity to find a practical approach to buying crypto, along with access to personal advisory services. Hence, he believes retail stores will most likely be a global trend that will advance as crypto becomes mainstream:
“As more and more investors and institutional investors enter the industry and the digital currency becomes mainstream, there will be a tendency to open physical stores in combination with online platforms.”
Yeung added that in his opinion, having a physical presence will build greater customer trust between HKD and its user base. “Our users are mainly between 40 and 70 years old. An older customer base is important for mainstream adoption as many of these people still hold fiat currency and only trust traditional financial systems, ”he noted.
Interestingly, it’s not just the older generation who buy crypto from these physical locations. Priscilla Ng, founder of Coiner HK – another OTC retail exchange in Hong Kong – told Cointelegraph that CoinerHK was launched in early 2020 to focus on the female market: “We wanted to create a market for women because we have the Want to promote the idea that women could be financially independent and invest themselves. “
Hence, Ng shared that CoinerHK’s customers are mostly women between the ages of 20 and 50 and about 70% of them trade cash for crypto. Ng also noted that CoinerHK has two physical business locations in the golden area of Hong Kong.
Following Yeung, Ng added that physical OTC exchanges can offer customers greater opportunities: “We treat them like friends when we trade, and we also give our customers confidence in us because we have physical locations.” CoinerHK’s Wanchai location also serves as an art gallery offering non-fungible tokens (NFTs).
Regulations could crowd out physical OTC exchanges
While physical OTC crypto exchanges like HKD and CoinerHK appear to offer better access to crypto across Hong Kong, there are a number of regulatory risks associated with these types of facilities.
For example, Arslanian stated that in addition to regular customers, Chinese mainland tourists are also target customers for these facilities. He noted that many of these shops are located in tourist areas to attract users, but are particularly attractive to Chinese tourists because of the crypto ban in China: crypto in these OTC shops. “
With this in mind, Arslanian believes that due to the influx of Chinese tourists interested in buying cryptocurrencies, there could be a surge in OTC retail centers in Hong Kong. On the flip side, Arslanian mentioned that Hong Kong’s upcoming regulatory framework for crypto exchanges could result in these deals being closed entirely.
As Cointelegraph previously reported, Hong Kong financial services and tax authorities have been considering restricting crypto access to portfolios with assets of $ 1 million or more. If passed, the new guidelines would limit crypto access to around 93% of the city’s population.
While this is a huge challenge for physical OTC stores, Arslanian noted that OTC stores may simply move their stores underground. However, this then represents an increased risk for customers: “If something goes wrong, there is less likelihood that the public will report it to the authorities.”
Regarding uncertain regulations, Yeung commented that the biggest challenge for HKD right now is understanding whether Hong Kong will soon only allow institutional investors to invest in crypto: “This will have a huge impact on our business,” Arslanian added added that regulated crypto exchanges that cannot serve retail customers is something that the crypto community strongly opposes as it could very well lead users to turn to unregulated platforms.
Unfortunately, Arslanian went on to point out that getting the right licenses would be a huge challenge for physical OTC stores, even if they tried to be fully regulated. So far, Yeung mentioned that HKD only needs valid ID and address verification to buy and sell crypto on the exchange.
It’s interesting to see that OSL is currently the only regulated crypto exchange in Hong Kong that is also a unit of the Fidelity-backed BC Group. OSL’s chief executive officer and chief financial officer Andrew Walton told Cointelegraph that OSL was deliberately built with regulations in mind, and even practiced self-regulation before some of the current laws were enacted.
In addition, Walton announced that OSL has been grandfathered under the Payment Services Act of Singapore (PSA) and has also applied for a digital payment token or DPT license through the Monetary Authority of Singapore. Impressive regulatory approvals recently enabled OSL to expand its business to Latin America. “In Latin America, the OSL Exchange product will initially be available to institutional and professional investors in the Mexico, Colombia and Argentina region. OSL’s LatAm offering will also seek appropriate licenses as regulatory developments take place across the region, ”added Walton.
Private investors are needed from a business perspective
While OSL’s efforts are indeed noteworthy, Arslanian pointed out that typically much of its revenue comes from retail customers who buy and sell crypto on exchanges, and the retail flow, in turn, attracts institutional customers. Hence, he noted that Hong Kong’s willingness to force crypto exchanges to only serve institutional investors is a tough one from a business perspective. While this may be so, Walton noted that interest in OSL has increased significantly in the institutional segment over the past year.
Given the ongoing regulatory uncertainty for cryptocurrencies, Arslanian mentioned that Hong Kong may be best for institutional investors while Singapore might be more logical for retail clients.