Mainland Chinese take advantage of Hong Kong’s crypto grey zones

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Almost every month, Zhang travels from the Futian district of Shenzhen to a mall populated with fast-food joints and some empty shops in Hong Kong’s business district to purchase crypto.

On a trip in June, the 27-year-old — whose daily work includes “a bit of whatever makes money” — exchanged cash for about Rmb10,000-Rmb20,000 ($1,380-2,760) worth of USDT, a stablecoin pegged to the US dollar.

Zhang, who declined to give his full name over sensitivity about crypto trading on the mainland, said having digital currencies was useful for “transferring money to other places”, adding he would make the 90-minute cross-border trip “whenever there’s a need”.

Cryptocurrency transactions are illegal on the mainland, where Beijing has also banned overseas exchanges from serving onshore clients on the internet. But in Hong Kong, crypto trading is legal and the city is seeking to become a digital assets trading hub.

Lightly regulated bricks-and-mortar crypto shops are prevalent throughout the city’s tourism and shopping districts. The stores are thriving, helped by surging 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.

In contrast with the tight licensing rules drafted for online exchanges in the city’s push to become a virtual assets trading hub, these over-the-counter crypto stores allow customers to purchase large volumes of cryptocurrencies with lighter, or sometimes zero, checks.

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

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

Li said that he did not take mainland customers due to concerns over Beijing’s crypto ban but he was optimistic that the restrictions would ease — a widely held belief in the city’s crypto circles after Hong Kong announced plans to become a virtual assets hub in October.

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

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

Yet unlike other jurisdictions, including the US and Singapore, which are clamping down on crypto following the collapse of FTX and other high-profile exchanges, Hong Kong is seeking to encourage its growth.

Even with the new regulation, most OTC stores remain outside the remit of Hong Kong’s Securities and Futures Commission.

“I think for any new regulations, this would also be something that the government would continue to look at,” said Elizabeth Wong, head of the commission’s fintech unit, at a briefing last month.

Carlton Lai, head of blockchain research at Daiwa Capital Markets, said that OTC stores were primarily used as simple ways to on-and-off ramp money to unlicensed online exchanges.

“There’s likely more [stores] in Hong Kong than 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 shops welcome more regulation of the sector. “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.

The company in April opened a store in Chungking Mansions, a densely populated and sprawling building in Kowloon, home to immigrant communities from all over Asia.

OTCXpert’s “know your customer” process included asking for a form of ID from first-time customers before allowing them to conduct transactions, Huang said.

Other shops do not require customers to show any identification, with slogans such as “no KYC” and “apply in as quick as 10 minutes” advertised on the websites of the OTC stores.

That leaves them well short of the investor protection checks required for online platforms seeking to obtain licences to trade crypto to retail clients.

“The government regulators haven’t said what we have to do,” Huang said about OTC shops, adding that having a clear guide was “pretty important”.

But the lack of scrutiny of Hong Kong’s OTC shops and their proximity to mainland China, which remained the world’s fourth biggest market for crypto trading in 2022, made it attractive to Chinese citizens still drawn to the asset class, 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 declined to give his last name over fear of retribution when he returns to China.

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