Industry Opposes Hong Kong's Digital Asset Regulation Proposal; What Are the New Proposed Changes?

In response to the Hong Kong authorities’ proposal for a new digital asset management framework, industry objections are mounting. The Hong Kong Securities and Futures Professionals Association (HKSFPA) submitted feedback to regulators expressing concerns over several restrictive measures and calling for a review of the unrealistic regulatory approach.

The proposed digital asset regulations could bring significant changes to financial institutions handling crypto assets. The gap between the current regulatory system and the proposed content threatens to introduce new challenges to Hong Kong’s financial industry.

The Key Point: Repealing the 10% Allocation Cap

Under current rules, institutions holding a Type 9 license (Asset Management) can allocate up to 10% of their total fund assets to crypto assets, subject to reporting to regulators. This “de minimis” arrangement has allowed traditional asset management firms to flexibly enter the digital asset sector.

However, the proposed framework plans to eliminate this allocation cap. Under the new regulations, even a 1% allocation to Bitcoin would require obtaining a full virtual asset management license. HKSFPA points out that this “binary” regulatory approach is overly strict and, despite limited risk exposure, would impose significant compliance costs on companies.

Custody Requirements Pose Heavy Burdens on the Industry

The proposed digital asset regulations also include stringent custody (asset safekeeping) requirements. The draft regulation stipulates that virtual asset managers must use custodians licensed by the Securities and Futures Commission (SFC) for asset custody.

The association expresses concerns that this requirement could hinder the development of token investments and Web3-related businesses. Especially in the early stages of token investment and Web3 venture capital, using SFC-approved custodians may be impractical and could significantly restrict local firms’ participation.

HKSFPA supports alternative options, such as allowing self-c custody for professional investors and utilizing internationally recognized overseas custodians.

Concerns Over Barriers to Web3 Investment Entry

These digital asset regulation proposals are still in progress. Hong Kong authorities have already announced an outline of related consultation frameworks and are conducting a new consultation on licensing systems for crypto trading, advisory, and management services.

If implemented, the proposed regulations are expected to substantially raise barriers for traditional asset management firms entering the digital asset sector. This could result in missed early-stage investment opportunities and impact the diversity of Hong Kong’s digital financial ecosystem.

Ongoing dialogue between industry players and regulators is expected to continue regarding the review of these regulatory proposals.