Original Authors: Huang Wenjing, Yan Xuesong
Introduction
As an international financial center, Hong Kong reaffirms its commitment to becoming a global innovation hub in digital assets through the “Digital Asset Development Policy Declaration 2.0.” The upgrade of crypto asset trading platforms and Hong Kong Securities and Futures Commission (SFC) traditional licenses “VA upgrade” is more like the first step in a comprehensive regulated system for digital assets.
By 2026, with the progress of consultations on two key “regulatory vacuum areas”—Virtual Asset (VA) Dealing and VA Custody—Hong Kong’s Financial Services and the Treasury Bureau (FSTB) and Securities and Futures Commission (SFC) have clarified legislative directions. They aim to introduce two dedicated licensing regimes through amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). This formalizes the existing “upgrade” system of SFC Licenses 1, 4, and 9, indicating that a professional and formalized crypto asset regulatory framework will soon be fully established in Hong Kong.
As of now, the consultation conclusions were published on December 24, 2025. Further public consultations on “Providing Opinions on Crypto Assets” and “Crypto Asset Management” are nearing completion (deadline January 23, 2026). This article summarizes the regulatory development ideas, analyzes key documents and core changes, and provides an overview for license applicants.
Timeline Overview
Hong Kong’s VA regulation evolution dates back to 2018, when the SFC issued its first VA regulatory approach statement, establishing the principle framework of “Same Business, Same Risks, Same Rules.” Although this statement did not directly target OTC and custody services, it set the tone for subsequent developments.
The SFC released a position paper on VA trading platform regulation, introducing a voluntary opt-in framework requiring platforms to comply with investor protection, asset segregation, and AML/CFT requirements. At this stage, custody was considered an ancillary service of VATP, while OTC remained on the regulatory fringe.
The AMLO amendments introduced the definition of Virtual Asset Service Providers (VASP), bringing trading and custody into AML scope but still lacking dedicated licenses. On June 1, 2023, the VASP regime under AMLO officially took effect, launching mandatory VATP licensing. VATPs must custody client assets through wholly owned subsidiaries (98% cold storage, 2% hot storage) and comply with strict asset segregation, insurance, and audit requirements. This marked a mature phase of centralized trading regulation, but gaps remain for OTC and independent custody, with increasing market risk accumulation.
FSTB and SFC launched consultations on OTC VA trading. Early 2025, SFC published the “A-S-P-I-Re” roadmap on February 19, supporting the introduction of OTC-specific licenses on equal footing with VATP, and exploring flexible custody technologies (e.g., dynamic storage ratios). The roadmap aims to complete legislative preparations by the end of 2025.
- Key Turning Point: June 27, 2025
FSTB and SFC jointly released consultation papers on legislation for VA trading (including OTC) and custody services. The consultation period ended on August 29, gathering over 190 feedback submissions from industry, investors, and regulators. On November 3, the SFC issued a circular expanding VATP products and services, allowing VATPs to custody non-trading VAs (such as stablecoins and tokenized securities), relaxing the 12-month track record requirement. This marked a clear transition, enabling diversified custody forms.
FSTB and SFC published conclusions on the legislative proposals for VA trading and custody, and launched further consultations on VA opinion provision and management services (until January 23, 2026).
As further consultations conclude, amendments to the AMLO are expected to be introduced to the Legislative Council in the first half of the year, with the effective date depending on the legislative process. From this, we can roughly grasp the regulatory direction: custody and trading are moving from peripheral to central focus. The era of learning and exploration is ending; regulators are determined to reshape Hong Kong’s VA ecosystem comprehensively, not just patching parts. Industry voices also emphasize that compliance costs are preferable to operating in gray areas.
Document Analysis and Legislative Trends
The key question for all is: which existing core regulatory documents have been implemented, and which will continue to evolve? Are there new regulatory requirements?
Focusing on the 2025 legislative consultation process, the June 27 proposal and the December 24 conclusions are most representative. The former proposed a standalone legislative framework for AMLO licensing, while the latter refined it based on industry feedback.
VA Trading
1. Definition: Closely aligned with License Type 1 under the Securities and Futures Ordinance (SFO). Specifically, anyone engaging in the following activities as a business must apply for a license under the AMLO framework:
- Entering or offering to enter into agreements to buy, sell, subscribe, or underwrite virtual assets
- Inducing others to enter into such agreements
This definition covers a broad range of trading activities, including simple VA-fiat/VA-VA conversions, as well as more complex brokerage, block trades, margin trading, staking, etc. However, derivatives, structured products, and tokenized securities remain under traditional SFO licenses and are not included in the new VA licensing scope.
2. Compliance Requirements: VA trading service providers must adhere to strict AML requirements, including customer due diligence (CDD) and record-keeping.
3. Custody: Mandatory for VA licensees to custody client assets in SFC-regulated custodial institutions initially, to reduce risks of insolvency, fraud, and cyberattacks.
4. Minimum Financial Requirements: At least HKD 5 million in share capital plus HKD 3 million in working capital.
5. Exempt Activities: Include internal trading, proprietary trading, VA payments for goods/services, and issuance of stablecoins (already regulated by the HK Monetary Authority), among others.
6. No transitional or “deemed license” arrangements.
7. Fast Track: Existing SFC-licensed VATPs and those holding upgraded License Type 1 will receive expedited approval assistance.
VA Custody
1. Definition: Encompasses “custodians holding tools for virtual asset transfer for anyone” (from initial consultation). SFC emphasizes that this definition is technology-neutral, focusing on risk management based on business substance rather than form: whether licensing is required depends on actual operational risk, not decentralization tech.
2. Core Consideration: Private Key Management
If an entity holds private keys or similar tools with unilateral transfer capability, licensing is required; MPC providers where clients can independently reconstruct private keys and transfer VA without support are exempt; if additional support (e.g., multi-signature MPC) is needed, it may fall under regulation. Custodial services involving custody mode (where the custodian can transfer unilaterally) require licensing; non-custodial wallets or delegated custody are exempt.
3. Exemptions:
- Internal group custody (charged or not)
- Private key backups held by legal or accounting professionals, or court-appointed scenarios
- Licensed stablecoin issuers only holding their own stablecoins
- PE/VC fund managers self-custodying investment tokens
- Excludes trust/fund managers with delegated custody and multi-party computation (MPC) services without transfer capability
4. Personal Licensing: Notably, senior executives, private key access personnel, signing scheme participants, and key contact persons must obtain individual licenses (RO or equivalent) and meet relevant requirements—effectively “personal licensing.”
5. Minimum Financial Requirements: At least HKD 100 million in share capital plus HKD 3 million in working capital.
6. No transitional or “deemed license” arrangements.
7. Fast Track
Compared to previous frameworks, the core change in consultation opinions and conclusions is the introduction of standalone licenses. Previously, OTC involving securities VA might require SFO Type 1 license; custody relied on trust company licenses or VATP subsidiaries, leading to fragmented regulation.
Meanwhile, the existing SFC Licenses 1, 4, and 9 upgrades required holding traditional licenses simultaneously, which posed a heavy burden for startups exploring Web3. The new framework adopts dedicated AMLO licenses, covering broader business models (e.g., P2P, decentralized services) and emphasizing technological flexibility.
The changes also include no transitional period but offer expedited procedures for existing licensees, minimizing market disruption. The regulatory shift toward “pre-emptive” measures—such as minimum capital thresholds and bans on active marketing to Hong Kong residents—aims to enhance overall compliance.
These adjustments reflect market feedback, balancing rigor and flexibility, avoiding the rigidity of early VATP regimes. Overall, these documents mark a shift in Hong Kong VA regulation from a VATP-centric approach to full-chain coverage, focusing on filling gaps, standardization, and paving the way for institutional entry.
FSTB and SFC will finalize the AMLO amendments based on these conclusions. Further consultations will focus on VA opinions and licensing, with feedback integrated after January 23, 2026. The legislation is expected to be introduced in the first half of the year, with passage possibly by mid-year if no major disputes arise, and effective date in late 2026.
Mankiw’s Recommendations
For well-known mid-to-large exchange shops, maintaining an upgraded SFC license is costly and offers little practical benefit—waste of resources. Industry respondents generally recognize the need to expand regulation, viewing it as a natural step for Hong Kong’s digital asset ecosystem.
The strengthened connection with the existing SFO framework, the emphasis on technological neutrality, and friendly design for institutions (to attract banks and traditional finance) will further energize the local scene; meanwhile, Hong Kong plans to localize the CARF framework in 2027, enhancing cross-border AML cooperation. Overall, smooth legislative implementation could elevate Hong Kong’s VA status to a new level. The previous cautious, piecemeal approach to regulation was somewhat irresponsible; clearer rules are preferable to vague uncertainty.
For companies aiming to apply for OTC or custody licenses, early preparation is crucial:
- First, clarify your business model to determine licensing needs, avoid later adjustments, and facilitate pre-application discussions with SFC. Existing licensees can leverage fast-track channels.
- Second, strengthen internal compliance systems. Meet minimum capital requirements, ensure AML/CFT mechanisms are robust. Custody applicants should invest in technical infrastructure; OTC applicants should plan cooperation with SFC-regulated custodians, avoiding self-custody initially.
- Finally, monitor legislative developments, participate in industry associations’ feedback, and train your team early. While compliance costs increase, opportunities for institutional funding will grow.
If you’re already considering this before legislation is enacted, congratulations—you might be on the platform, waiting for the train from Hong Kong to the next crypto spring. Whether the ticket is yours after reading this may be a topic you’d like to discuss with us.
