Further development of Hong Kong’s virtual assets regulatory framework

Etelka Bogardi, Asia Head of FinTech and Financial Services Regulatory and Partner (HK), Jeremy Koo, Associate, and Nina Stammbach, Legal Executive, Norton Rose Fulbright, explore the SFC’s newly unveiled regulatory roadmap, which outlines key initiatives to position Hong Kong as a global leader in virtual assets regulation.

The Securities and Futures Commission (SFC) has on 19 February 2025 rolled out a new regulatory roadmap setting out its core guiding principles to continue Hong Kong’s development as a virtual assets (VA) hub. The roadmap adopts the ‘ASPIRe’ slogan, representing its five pillars – Access, Safeguards, Products, Infrastructure and Relationships.

Current challenges and future trends

In formulating the roadmap, the SFC has identified key challenges in regulating the VA market, including:

• the concentration of VA holdings among institutional investors, especially in more established instruments such as Bitcoin, in contrast with the trend of retail investors engaging in speculative trading, especially in niche instruments such as memecoins
• the risks posed by different trading venues (both centralised and decentralised exchanges, and over-thecounter (OTC) desks), and
• the risks of regulatory arbitrage as a result of divergences in regulations across jurisdictions.

The SFC has also identified two key trends defining the future of the VA landscape, which are:

1. the push to harmonise regulatory regimes across jurisdictions in alignment with global standards set by the Financial Action Task Force, International Organization of Securities Commissions and the Financial Stability Board, and
2. the convergence between traditional finance and VAs, particularly the compliance standards of the former and the blockchain-based innovations of the latter.

We now explain each of the five pillars under the SFC’s new roadmap.

Pillar A (Access) – streamline market entry through regulatory clarity

The SFC has recognised that Hong Kong’s VA regime currently covers only a limited group of market participants, such as VA trading platform operators (VATPs) (that is, centralised exchanges) and other existing SFC-regulated intermediaries. Conversely, there is a lacuna in regulations for other non-VATP entities such as OTC dealers and VA custodians.

To rectify this, the SFC plans to introduce a licensing framework for VA OTC trading, which will provide for parity in regulatory treatment between VATPs and OTC dealers. Additionally, the SFC will also introduce a licensing regime for VA custodians, which will mirror requirements applied to traditional custodians such as capital adequacy, cybersecurity and segregation of assets. While no timeline has been provided for the VA OTC trading regime, the SFC has indicated that it aims to complete preparing legislation for the VA custody regime by the end of 2025.

The SFC intends to attract both global VATPs and VA liquidity providers through providing greater clarity on regulatory treatment, in order to enhance liquidity provision in Hong Kong’s VA market and increase its appeal.

Pillar S (Safeguards) – optimising compliance burdens without compromising security

The SFC also recognises that its current regulatory framework leans towards putting in place prescriptive requirements such as rigid custody rules and compensation mandates, and has now signalled an intention to adjust these rules to allow more flexibility for market participants, whilst still ensuring robust investor protection.

Some proposed initiatives include:

• transitioning custody standards away from specific hardware solutions to more technologyneutral and outcome-based standards to facilitate the adoption of emerging custody technologies
• transitioning away from mandatory hot and cold storage ratios to alleviate liquidity constraints, and moving towards a holistic security approach that introduces other safeguards such as real-time transaction monitoring, thirdparty audits and compensationbacked hot wallets
• aligning insurance and compensation frameworks with global practices whilst allowing market participants the flexibility to tailor compensation strategies to their operational needs
• providing more guidance to clarify investor onboarding processes and allow for effective assessments of investor profiles, and
• regulating VAs in a technologically neutral manner, based on the nature of the activity and underlying asset, rather than the digital form.

Pillar P (Products) – expand product offerings and services based on investor categorisation

The SFC recognises that the regulatory regime currently restricts certain products and services that VATPs can provide, meaning that new tokens, margin trading, derivatives, staking, lending and borrowing are not permitted. While the SFC continues to emphasise the need to sufficiently protect retail investors, it has indicated that it is considering allowing more advanced and diverse product offerings to investors with sufficient expertise and experience.

Some proposed initiatives include:

• allowing professional investors (PIs) to subscribe to new token listings, moving beyond the historic focus on well-established VAs
• allowing PIs to participate in VA derivatives trading, which VATPs are currently not permitted to offer
• introducing VA margin financing requirements aligned with requirements present in the traditional securities market
• allowing for staking services that are supported by technical and custodial safeguards, and
• allowing PIs to receive VA borrowing and lending services subject to robust risk management safeguards.

Pillar I (Infrastructure) – modernise reporting, surveillance and crossagency collaboration

The SFC recognises the existing limitations of VA reporting, which tends to be incident-specific and hinders the surveillance efforts of regulators and law enforcement agencies.

To address this, the SFC will consider introducing options to allow automated reporting of VA information and adopt various datadriven surveillance tools to improve its ability to oversee the VA market, as well as to monitor transactions, wallets and blockchain activities. Modernising the existing reporting and surveillance solutions will help build trust in Hong Kong’s VA market.

The SFC will also collaborate more closely with local regulators and law enforcement agencies to improve risk monitoring and surveillance efforts, and improve collaborative efforts with global regulators at a crossborder level.

Pillar Re (Relationships) – empower investors and industry through education, engagement and transparency

Finally, the SFC recognises that the Hong Kong public lacks awareness of the nature of and risks presented by VAs, increasing the risks of uninformed decisions and financial losses. Some industry stakeholders may also lack a complete understanding of the SFC’s policymaking process.

To address the education gap among the Hong Kong public, the SFC intends to regulate financial influencers (or ‘finfluencers’), who represent an increasingly significant channel affecting the perceptions and financial behaviour of the Hong Kong public. This will come in the form of best practices in responsible communication and engagement to promote responsible behaviour and accountability. For its part, the SFC will also increase its direct interactions with investors through its own educational initiatives.

Additionally, the SFC will leverage global forums and the Virtual Asset Consultative Panel, which was established to engage with licensed VATPs, to obtain the perspectives of industry stakeholders, address their concerns and communicate its regulatory viewpoints clearly.

Finally, the SFC will also develop the VA talent pool in Hong Kong by proactively identifying existing knowledge and skill gaps in the market, and will deliver training programmes to meet market needs.

Our perspective

The new ASPIRe roadmap informs the VA industry of the upcoming regulatory developments that can be expected from the SFC in the medium to long term. While the SFC works out the specific details, setting out in advance the broad contours of how it intends to shape the VA regulatory regime serves to instil confidence in market participants looking to establish a Hong Kong presence, as well as provide predictability on how they may be impacted in the future.

Whilst the introduction of additional licensing regimes and regulatory requirements close gaps in the existing framework, this is balanced by the SFC’s intention to allow (to some extent) for a more diverse range of VA-related activities, which in our view will boost Hong Kong’s bid to be a leading VA hub.

Etelka Bogardi, Asia Head of FinTech and Financial Services Regulatory and Partner (HK), Jeremy Koo, Associate, and Nina Stammbach, Legal Executive

Norton Rose Fulbright

©Copyright Norton Rose Fulbright, February 2025