Key Insights:
- Hong Kong’s crypto licensing reforms can compel comprehensive licensing even for small digital asset allocations.
- Industry organizations caution that increased compliance expenses will lead to cautious crypto adoption among fund managers.
- Regulators are examining thresholds, timelines, and reporting requirements as part of broader digital asset reforms.
Hong Kong crypto licensing is at the center of a fresh debate after the city’s securities industry cautioned that proposed rule changes could raise compliance thresholds for traditional portfolio managers seeking limited exposure to digital assets.
Industry response to proposed licensing changes
In a formal submission on Tuesday, the Hong Kong Securities and Futures Professionals Association asked regulators to retain an existing carve-out that allows small allocations to virtual assets without triggering a separate license, arguing that removing this threshold would materially alter how asset managers approach crypto exposure within regulated funds.
The submission was addressed to the Securities and Futures Commission and focuses on a proposal under consultation that would remove the current “de minimis” exemption for Type 9 licensed managers.
Type 9 is the standard license held by discretionary portfolio managers in Hong Kong, covering firms that manage client assets under the SFC’s regulatory framework.
Source: The Block
Moreover, under the existing regime, Type 9 managers may invest less than 10% of a fund’s gross asset value in virtual assets without applying for a dedicated virtual asset management license, provided they notify the regulator.
The association stated that the change would transform minimal allocations into a licensing event, even where exposure remains limited and subject to internal risk controls.
Hong Kong crypto licensing and the “all-or-nothing” issue
In its submission, the industry group described the proposal as creating an “all-or-nothing” outcome for firms exploring digital assets as a portfolio diversifier.
According to the filing, removing the exemption would require firms to absorb the full compliance burden associated with virtual asset management, regardless of whether crypto holdings represent a marginal portion of assets under management.
The group stated that this approach would impose additional operational and regulatory costs on managers that currently hold small crypto allocations within broader portfolios. It argued that these costs would apply even when virtual assets do not materially alter a fund’s overall risk profile.
The association urged regulators to reintroduce the exemption in a clear, risk-based form, proposing that managers below a defined threshold remain subject to notification requirements rather than the complete virtual asset licensing regime.
Broader regulatory context in Hong Kong
The consultation takes place as Hong Kong continues to expand its regulatory architecture for digital assets.
In December, the Financial Services and the Treasury Bureau and the SFC published consultation conclusions on licensing requirements for virtual asset dealing services.
Regulators also opened a further public consultation covering proposed licensing regimes for virtual asset advisory and management service providers.
Transitional arrangements and licensing timelines
Beyond the de minimis exemption, the industry group raised concerns about the lack of transitional arrangements for existing practitioners. In its submission, it called for a deeming or grace period for firms that submit license applications before the new regime takes effect.
The group stated that without transitional measures, firms already operating in the market could be required to suspend activities while awaiting regulatory approval.
It noted that virtual asset license applications are complex and that processing delays could create backlogs, increasing the risk of operational disruptions for compliant managers.
According to the submission, the absence of transitional provisions could affect firms actively seeking to align with the new framework but constrained by regulatory timelines.
Hong Kong crypto licensing and institutional participation
The consultation has implications for how quickly traditional asset managers participate in the digital asset market.
The industry group stated that higher fixed compliance costs could delay or discourage experimentation by traditional managers, particularly when crypto exposure is intended to remain small and supplementary.
Regulators have indicated that the revised licensing architecture is designed to support institutional participation while strengthening oversight as the market matures. The current debate centers on how those objectives are implemented in practice.
Separately, the association also commented on Hong Kong’s planned adoption of the OECD’s Crypto Asset Reporting Framework.
In an earlier submission, the group supported the direction of implementation while warning that poorly calibrated reporting requirements could expose firms to operational and legal risks.
