Hong Kong Industry Group Slams Draconian Virtual Asset Rules

In a response letter sent on 20 Jan, the group argued that the proposed licensing and custody requirements for digital asset management would deter institutional entry and effectively ban local Web3 venture capital.

The dispute centers on a consultation published on 24 Dec 2025 that outlines a new specific licensing regime for virtual asset advisory and management. If passed, these rules would bring custodians under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with a formal bill expected to reach the Legislative Council later in 2026.

The most contentious proposal is the removal of the de minimis threshold. Currently, Type 9 asset management licensees can allocate up to 10% of a portfolio’s gross asset value to crypto assets without a full virtual asset license. The new framework seeks to eliminate this exemption entirely, requiring a full license for any exposure, even a 1% allocation to Bitcoin.

HKSFPA Chairman Mofiz Chan described this "all-or-nothing" approach as disproportionate. The group argues that the measure imposes an immense compliance burden for negligible risk exposure, contradicting the government's stated goal of integrating Web3 with traditional finance. By forcing a full licensing process for even the smallest diversification plays, the SFC is likely to scare off traditional stock portfolio managers who were just beginning to experiment with the asset class.

The association also took aim at the mandate requiring managers to use only SFC-regulated custodians for private fund assets. The HKSFPA called this requirement "impractical" for the venture capital sector. Most SFC-licensed custodians only support a narrow list of large-cap tokens, meaning local managers would be legally unable to hold the early-stage tokens that form the core of Web3 VC portfolios.

To prevent a flight of capital, the group is urging the SFC to allow self-custody or the use of qualified offshore custodians for private funds serving professional investors. They also requested a grace period of up to 12 months for existing practitioners to comply. Without a "deeming arrangement" in place, many firms may be forced to suspend operations the moment the new rules take effect.

While Hong Kong has spent the last year marketing itself as a global virtual asset hub, the slow pace of licensing, particularly for stablecoin issuers following the 1 Aug 2025 ordinance, suggests a disconnect between policy and execution. The SFC's ASPIRe blueprint, launched on 19 Feb 2025, was intended to streamline market entry, but industry leaders clearly feel the current path is creating more barriers than bridges.