What To Know:
- Hong Kong’s securities industry group opposed plans to remove the 10% crypto investment threshold.
- The association said the proposal would raise compliance costs and deter traditional asset managers from cautiously entering the digital asset market.
- Concerns were also raised over strict custody rules, which could limit Web3 venture funds and restrict the use of offshore or self-custody arrangements.
A prominent Hong Kong securities industry group has raised concerns over the city’s proposed tightening of cryptocurrency licensing laws. The group warned that the measures could discourage traditional fund managers from gaining exposure to cryptos.
Hong Kong Group Objects to Tighter Crypto Rules
The Hong Kong Securities and Futures Professionals Association (HKSFPA) has expressed several objections to the proposed guideline for crypto management in a formal submission sent to regulators on Tuesday. At the centre of its criticism is the proposed removal of the current “de minimis” threshold that applies to Type 9 licensed asset managers. Currently, companies operating under a Type 9 license (which applies to discretionary portfolio and asset management) can invest less than 10 percent of a fund’s gross asset value in crypto without needing to file for an additional virtual asset license.
The arrangement requires notification to the regulator but allows managers limited exposure to crypto within a traditional portfolio structure.
According to legal analysis published by JunHe LLP, the proposed reforms would eliminate that threshold entirely. Even a marginal allocation, such as a 1% holding in bitcoin, would trigger the requirement for a full virtual asset management license.
The HKSFPA described the proposal as disproportionate and argued that it imposes heavy compliance obligations regardless of the size of exposure.
“This approach creates significant regulatory cost for minimal risk,” the association said in its response. The association added that it could discourage established asset managers from testing or gradually adopting crypto assets.
The objections come as the regulatory process gains momentum. In December, Hong Kong authorities published consultation conclusions following a public review launched in June. Since then, the Financial Services and the Treasury Bureau and the Securities and Futures Commission have opened additional consultations covering licensing regimes for virtual asset dealing, advisory, and management services.
Legal advisers at JunHe noted that the proposed rules would mark a material expansion of regulatory oversight. The new framework would also capture firms that currently fall outside the Type 9 licensing perimeter.
Some digital asset managers operate portfolios composed entirely of cryptocurrencies but do not hold a Type 9 license, as their activities do not meet the traditional definition of managing securities portfolios. Under the revised structure, those firms would also be required to obtain a virtual asset management license.
That shift would significantly widen the regulatory net and reshape how crypto-focused managers operate in the city.
Custody requirements have emerged as another area of concern. The proposals would require virtual asset managers to hold client assets exclusively with custodians licensed by the Securities and Futures Commission.
The HKSFPA argued that such a mandate would be difficult to implement in practice. Local custodians often support only a limited range of large-cap tokens, while private equity and venture capital funds frequently invest in early-stage or newly issued assets.
According to the association, a strict custody requirement could effectively prevent Hong Kong-based firms from running Web3-focused venture funds, as many tokens would not be eligible for local custody.
The group also highlighted institutional risk management practices, noting that professional investors often require diversified custody arrangements to reduce counterparty exposure.
Even as opposing mandatory local custody, the association expressed support for regulatory flexibility. It backed proposals that would permit limited self-custody for private funds and allow the use of qualified offshore custodians regulated in jurisdictions such as the US, Japan, or Singapore.
Beyond management rules, the submission addressed advisory services and licensing mechanics. The HKSFPA agreed in principle with aligning virtual asset advisory definitions with existing Type 4 regulated activities, and cited consistency and clarity.
At the same time, it urged regulators to distinguish between licensed advisory services and general market commentary. The group noted that the crypto sector relies heavily on online commentators and influencers, many of whom provide investment-style guidance without regulatory oversight.
The association also warned of practical challenges around professional indemnity insurance. Coverage for crypto-related advisory risks remains limited, and insurers are often unwilling to underwrite such policies. The group suggested that higher liquid capital requirements could serve as an interim alternative.
Another concern is that the proposal currently offers no grace period for existing operators. Firms would be required to secure licenses by the commencement date or halt operations.
The association cautioned that application bottlenecks could disrupt legitimate businesses and urged regulators to introduce a six to twelve month transitional arrangement.
Also Read: Hong Kong Backs Mandatory Crypto Reporting Under OECD CARF Rules
