Hong Kong is developing a new cryptocurrency licensing regime

Amid the surge of global digital asset regulation, Hong Kong is taking steady and clear steps to accelerate the consolidation of its position as a leading global virtual asset hub. Recently, the Hong Kong Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC) jointly announced that after completing public consultation, they will formally advance legislation for a licensing regime targeting virtual asset (VA) OTC traders and custodians. This move not only adds an important piece to Hong Kong’s regulatory framework but is also seen as a key step in opening the “main and collateral channels” for institutional funds to enter the crypto market.

Regulatory Puzzle

Since 2020, Hong Kong’s cryptocurrency regulation has mainly focused on Virtual Asset Trading Platforms (VATPs), requiring all centralized exchanges targeting Hong Kong investors to obtain an SFC license. However, a mature financial ecosystem is far more than just publicly traded platforms. In traditional finance, brokers, traders, and custodians form the “invisible infrastructure” supporting market operations, handling block trades and safeguarding asset security. In the crypto world, OTC traders and custodians play equally vital roles.

In the past, these mid-tier participants operated in regulatory gray areas. Institutional investors, even if highly interested in crypto assets, often hesitated due to counterparty risks and concerns over asset security. The new regulation aims to fill this gap. The FSTB and SFC explicitly state that the new licensing system will adhere to the core principle of “same business, same risk, same rules,” bringing OTC traders and custodians under a regulatory framework similar to that of existing securities traders and financial institutions.

Under the proposed rules, entities providing virtual asset trading services—especially OTC platforms conducting large OTC trades—will need to apply for a license similar to a Type 1 securities license. Companies offering virtual asset custody services must meet strict requirements for private key management, asset segregation, and customer asset protection. This means every step from asset storage to trade execution will be under the close supervision of the SFC, providing a highly trustworthy environment for institutional funds.

Alarm Bells

While regulators push forward with legislation, an incident on the streets of Hong Kong has starkly highlighted the urgency of regulating OTC trading. On December 18, 2025, two staff members carrying four suitcases containing 1 billion Japanese Yen (about HKD 50 million) in cash planned to trade at a crypto OTC shop but were robbed at knifepoint by masked assailants en route, with all cash looted in just 30 seconds.

This case shocked the entire Web3 community and sparked widespread discussion about the structural risks of offline OTC trading models. Due to increasingly strict anti-money laundering (AML) regulations worldwide and cautious attitudes from compliant banks regarding crypto account openings, large “fiat-to-crypto” exchanges often rely on offline cash transactions. This “manual cash transport” model makes physical security the weakest link, easily becoming a target for criminal groups.

This robbery undoubtedly serves as a wake-up call for regulators. An opaque and unregulated OTC market not only fosters crime but also seriously threatens investors’ assets. The upcoming OTC licensing regime aims to bring these transactions into the light. Licensed OTC platforms will be required to implement strict customer due diligence (KYC) and AML measures, and may need to adopt safer settlement methods, such as completing transfers within bank vaults or introducing blockchain collateral mechanisms, to fundamentally change the current high-risk cash transaction model.

Grand Blueprint

The legislation targeting traders and custodians is not an isolated move but a key part of the Hong Kong Securities and Futures Commission’s broader “ASPIRe” five-pillar strategy. This strategy aims to comprehensively and systematically build Hong Kong’s virtual asset regulatory ecosystem to attract top global digital asset companies.

Looking back over the past year, Hong Kong’s regulatory progress is clearly visible: Stablecoin Licensing Regime: Early 2025, the “Stablecoin Issuers (Licensing) Ordinance” came into effect, establishing a dedicated licensing regime for stablecoin issuers. Spot ETF Approvals: Since 2024, Hong Kong has approved multiple Bitcoin and Ethereum spot ETFs for listing, providing retail and institutional investors with a compliant indirect investment channel. Tokenization Initiatives: The Hong Kong Monetary Authority (HKMA), in collaboration with industry, actively tests asset tokenization technology, exploring the possibility of bringing traditional assets (such as bonds) onto the blockchain. Expanding Regulatory Scope: Alongside the licensing of traders and custodians, the SFC released a new consultation paper on the same day, seeking public input on licensing regimes for virtual asset advisors and asset management service providers, with plans to extend regulation into investment advice and fund management.

As Ms. Carrie Lam, CEO of the SFC, stated, the significant progress in Hong Kong’s virtual asset regulation will “cultivate a trustworthy, competitive, and sustainable ecosystem,” ensuring Hong Kong remains a leader in the global digital asset market. Mr. Christopher Hui, Secretary for Financial Services and the Treasury, also added that the proposed licensing regime strikes a “prudent balance between promoting market development, managing risks, and protecting investors.”

Looking Ahead

In summary, Hong Kong is shifting from merely regulating retail trading platforms to building a comprehensive, institutional-level regulatory system covering custody, trading, advisory, and asset management. The core goal of this transformation is to attract global institutional capital with the highest standards of security and compliance. By establishing clear rules for the “invisible infrastructure” of the crypto world, Hong Kong is not only responding to market demands but also paving the final mile toward becoming an undisputed global digital asset hub.

According to the official timetable, the relevant legislative draft is expected to be submitted to the Hong Kong Legislative Council for review in 2026. Before that, regulators encourage interested license applicants to engage in “pre-application discussions” to better understand regulatory expectations and prepare for formal applications. This open and pragmatic approach contrasts sharply with regulatory trends in other regions.

On the regional competition front, Hong Kong’s move clearly aims to gain an advantage over other Asian financial centers like Singapore. At the same time, it starkly contrasts with mainland China’s strict restrictions on cryptocurrencies, further highlighting Hong Kong’s unique role as a “super connector” and “firewall” linking China with global capital markets.

Looking globally, from the full implementation of the EU’s MiCA framework to Russia’s setting of investment limits for retail investors, 2026 is undoubtedly set to be the “compliance year” for the crypto industry. The era of unregulated growth is coming to an end, giving way to a new era of licensed operation and high regulation.