Hong Kong is legislating a licensing system for virtual asset exchanges and custodians. The move, moving beyond the existing optional registration system to a mandatory licensing system, aims to simultaneously enhance market confidence and investor protection.
Hong Kong's financial regulator, the Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC), announced that they are pursuing legislation to establish a licensing system for virtual asset trading and custodians. Consultations on this matter are already in the final stages. This system will build on the optional licensing system introduced in 2020, but will apply to all relevant businesses regardless of whether they meet the requirements.
To date, eleven virtual asset operators have received approval from the SFC. Through this legislation, Hong Kong authorities aim to curb unlicensed operations and clarify standards for anti-money laundering (AML), segregated custody of customer assets, and internal control. In particular, the intent appears to be to strengthen regulations in the custody sector, removing obstacles to the influx of large institutional investors.
On the same day, the SFC released a public comment document outlining a proposal to introduce a separate licensing system for companies providing virtual asset advisory and asset management services. This strategy aims to establish a regulatory framework encompassing not only trading and custody but also advisory and management, bridging the gap between traditional finance and digital assets within the institutional framework.
This news was reported by Cointelegraph. Industry insiders interpret this as Hong Kong's move to reaffirm its status as an Asian digital asset hub by emphasizing a "clear rules-based market" that differentiates it from the US and Europe. As regulatory uncertainty diminishes, the likelihood of global exchanges, custodians, and asset management companies converging on Hong Kong is expected to increase.
While the mandatory licensing transition may raise barriers to entry in the short term, it's seen as a win-win strategy in the medium to long term, aiming to restore market confidence and attract institutional capital. It remains to be seen whether Hong Kong's decision will become a watershed moment in the Asian virtual asset regulatory race.
