On January 20, the Hong Kong Securities and Futures Professionals Association (HKSFPA) submitted its opinion to regulators, explicitly opposing the proposed removal of the "exemption from virtual asset allocation of up to 10%" under the current Type 9 license. The association warned that this change would mean that even with a mere 1% allocation to crypto assets, traditional asset management institutions would have to apply for a full set of virtual asset management licenses. This would create a severe mismatch between compliance costs and the small risk exposure, potentially stifling incremental innovation in the industry.
Tightening regulations are sometimes not intended to hinder progress, but rather to establish a new order amidst chaos. Hong Kong regulators are pushing digital asset management from "special exemptions" to "comprehensive regulation," attempting to cover all potential risks with a unified and robust licensing network. However, industry voices remind us that excessively high compliance thresholds may deter cautious explorers, ultimately slowing down the integration of traditional finance and digital assets.
A deeper conflict lies in the future path of RWA (Real-World Assets). Many institutions are exploring hybrid strategies of "RWA + Digital Assets," adding innovative growth points to robust underlying assets. However, the "all or nothing" regulatory logic may force strategies into polarization: either pure RWA or pure digital assets, making it difficult to establish a foothold in the middle ground of innovation. Does this either-or choice truly align with the essence of risk management?
The consultation period ends on January 23. The outcome of this debate will not only affect the compliance costs of hundreds of asset management institutions in Hong Kong, but will also test Hong Kong's commitment as an "international digital asset center"—whether it can design "smart regulation" that encourages gradual exploration, or build a high wall that keeps cautious explorers out. Major global financial centers are all searching for a balance, and Hong Kong's choice will become an important model.
I. New regulations spark strong opposition from the industry
In January 2026, a circular from the Hong Kong Securities and Futures Professionals Association (HKSFPA) stirred up waves in the intersection of traditional finance and digital assets. In its submission to regulators, the association explicitly opposed the proposed new rules for virtual asset management that would remove the "minor exemption" clause.
Under Hong Kong’s current regulatory framework, institutions holding a Type 9 (asset management) license only need to notify the Securities and Futures Commission (SFC) if they allocate no more than 10% of the total assets of the funds they manage to virtual assets, without having to apply for a separate virtual asset management license.
This arrangement is seen as a "safe passage" for traditional asset management institutions to cautiously test the waters of digital assets.
The proposed new regulations would completely change this situation. According to Cointelegraph, the reform plan aims to eliminate this percentage threshold, meaning that even if an institution allocates only 1% of its assets to digital assets such as Bitcoin, it would still need to apply for and obtain a full virtual asset management license.
This "all or nothing" approach to regulation has been criticized by industry groups as disproportionate.
The Hong Kong Securities and Futures Professionals Association warned that such an arrangement would impose disproportionate compliance costs with limited risk exposure, potentially hindering traditional asset management firms from entering the crypto asset space.
The regulatory framework targeted by this industry rebound is already on the fast track. Last December, Hong Kong authorities released a consultation summary report on relevant reform proposals following a public consultation that began in June.
Second, the regulatory approach has shifted from "special cases" to "normal practices".
To understand the essence of this controversy, it is necessary to trace the evolution of digital asset regulation in Hong Kong. The current arrangement, which allows Type 9 license holders to allocate virtual assets within a 10% limit without additional licenses, can be traced back to the framework established in November 2018. This arrangement is essentially a transitional measure, providing traditional financial institutions with a manageable space for exploration during a period when digital asset regulation was not yet fully mature.
The reforms being pushed forward by Hong Kong regulators mark a fundamental shift in regulatory thinking. In its consultation conclusion in December 2025, the Hong Kong Securities and Futures Commission (SFC) defended the removal of the threshold, stating that it was intended to prevent companies from circumventing regulations through structured investments and to maintain consistent investor protection standards.
According to the documents, the Securities and Futures Commission (SFC) received 101 submissions during the consultation period. The proposed new system would replace the existing notification system with an independent licensing system under the Anti-Money Laundering and Counter-Terrorism Financing Ordinance. According to Coinspeaker, managers without the new license could face up to seven years in prison and a fine of HK$5 million.
This tightening of regulations is closely related to Hong Kong's grand strategy of building a "global digital asset center." Christopher Hui, Hong Kong's Secretary for Financial Services and the Treasury, has stated that this licensing system is "an important step in strengthening our legal framework for digital assets."
Since launching its trading platform regime in June 2023, Hong Kong has been accelerating its efforts to issue crypto licenses. At a deeper level, this regulatory shift reflects a fundamental adjustment in Hong Kong's understanding of digital assets. In June 2025, the Hong Kong SAR Government released the "Hong Kong Digital Asset Development Policy Declaration 2.0," explicitly using the term "digital assets" instead of "virtual assets."
This shift in terminology is not merely a change in wording, but a redefinition of the nature of the asset class. The term "virtual" is prone to the misunderstanding of being "detached from reality," while "digital assets" more accurately emphasizes their nature as valuable, tradable assets.
III. Traditional asset management institutions face cost dilemmas
For traditional asset management institutions, the most direct impact of the proposed new regulations is a sharp increase in compliance costs. According to industry assessments, obtaining a full virtual asset management license requires significant resources in areas such as legal fees, compliance staffing, system upgrades, and ongoing reporting. For institutions that allocate only a very small percentage of their assets to digital assets, these costs are severely disproportionate to the risks they actually bear.
Traditional asset management firms typically adopt a gradual approach when entering the digital asset space. According to Cointelegraph's industry research, most institutions (especially small and medium-sized ones) currently maintain a digital asset allocation of less than 1% of their portfolios. This cautious approach reflects a balance between institutions' perception of the risks and their expected returns for this emerging asset class.
The Hong Kong Securities and Futures Professionals Association's core concern is that the new regulations may "hinder traditional asset managers from gradually trying or allocating to crypto assets." This warning is not without merit, as digital asset allocation is still in the experimental stage for many traditional institutions. They need to test internal processes, risk assessment models, and client responses in practice before considering increasing their allocation.
Beyond the direct licensing costs, the proposed custody requirements have also raised concerns within the industry. The new regulations would require virtual asset managers to use only SFC-licensed custodians for asset custody. Industry groups believe this requirement is impractical for early-stage token investments and Web3 venture capital. Compliant custody becomes particularly difficult when private equity and venture capital funds invest in early-stage tokens not yet supported by local service providers.
IV. The integration path of RWA and digital assets encounters obstacles.
From the perspective of RWA (Real-World Assets) development, this regulatory controversy touches upon a deeper issue: the integration path between RWA and native digital assets. Traditional asset management institutions often adopt a hybrid strategy of "RWA + digital assets" when exploring the digital asset field. This strategy can provide stable returns and real-world asset backing through the RWA portion, while also leveraging the growth potential and innovative exposure through the digital asset portion.
Projects like BounceBit are practitioners of this hybrid strategy. As one of the pioneers of the centralized-decentralized finance trend, BounceBit has built a two-tiered yield structure: users can stake tokens representing real assets (such as US Treasury bonds) at the base layer to obtain stable returns, while participating in on-chain derivative strategies at the advanced layer to optimize performance. In an experiment in May 2025, some strategies of this model achieved an annualized return of over 24%.
However, the proposed new regulations may force traditional asset management firms planning to venture into digital assets to reconsider their strategy choices. If even a very small allocation to digital assets requires a full suite of virtual asset management licenses, firms may be more inclined to issue "pure RWA" or "pure digital asset" products rather than a complex strategy that mixes the two. This will undoubtedly stifle product innovation and flexibility in asset allocation.
Market practice shows that institutional digital asset allocation is becoming increasingly diversified. In addition to mature spot assets such as Bitcoin and Ethereum, more and more institutions are participating in this space through regulated futures, options, structured notes, or tokenized real-world assets. The implementation of these complex strategies requires a regulatory framework that understands and accommodates the characteristics of hybrid assets.
Taking the Asseto platform as an example, in May 2025, the platform successfully deployed a funding rate arbitrage strategy to a public blockchain, opening this traditional financial strategy to professional investors on-chain for the first time. This innovation, which integrates traditional financial strategies with blockchain technology, is precisely the kind of business model that Hong Kong, as a digital asset center, hopes to cultivate. An overly rigid regulatory framework may hinder such innovative experiments.
V. Comparison and Implications of Global Regulatory Practices
Globally, major financial centers have adopted different regulatory strategies regarding traditional funds allocating to crypto assets. Understanding these international practices can help assess the rationale behind Hong Kong's proposed new regulations and the possible directions for adjustments.
As another major financial center in Asia, Singapore has adopted a relatively flexible approach to digital asset regulation. While Singapore also requires institutions engaged in digital asset-related activities to obtain the corresponding licenses, its regulatory framework places greater emphasis on a risk-based approach. For traditional asset management institutions, the Monetary Authority of Singapore (MAS) has provided clearer guidance and transitional arrangements, enabling institutions to gradually adapt to digital asset regulatory requirements.
Dubai, as an emerging digital asset hub, has adopted a more open approach. It has established a dedicated Virtual Asset Regulatory Authority (VARA) to provide a comprehensive regulatory framework for digital asset businesses. Notably, Dubai offers greater incentives to attract traditional financial institutions, including tax breaks and streamlined licensing processes. These measures give Dubai a unique advantage in the global competition to become a digital asset hub.
The European Union has established a unified regulatory framework for digital assets through its Crypto Asset Market Regulation (MiCA). MiCA adopts an activity-based approach, imposing requirements based on the specific types of activities an institution engages in. For traditional asset management institutions, MiCA provides clear boundaries and exemptions, enabling them to more clearly plan their digital asset strategies.
Compared to international practices, Hong Kong's proposed "all or nothing" approach appears rather rigid. The Hong Kong Securities and Futures Professionals Association has recommended that regulators reconsider this approach and seek a more appropriate regulatory solution. Industry groups have also called for a transitional arrangement to allow existing practitioners time to adapt to the new regulations.
The core challenge facing Hong Kong regulators is finding a balance between encouraging innovation and preventing risks. On the one hand, overly lenient regulations could lead to insufficient investor protection and market disorder; on the other hand, overly strict regulations could stifle innovation and competitiveness. As an international financial center, Hong Kong's regulatory framework not only affects the local market but also sends a signal globally.
VI. Future Regulatory Directions and Industry Adaptation
Looking ahead, the final form of Hong Kong's digital asset regulatory framework still has room for adjustment. The consultation process will close on January 23, after which regulators will assess feedback from all parties and may revise the proposal. The industry hopes that regulators will consider a more refined approach.
One possible compromise is to establish a tiered licensing system. Under this system, different levels of regulatory requirements would apply based on the proportion of digital assets allocated or the scale of management. For example, institutions with an allocation proportion below a certain threshold (such as 5%) could be subject to simplified licensing requirements, focusing on information disclosure and risk management rather than a comprehensive compliance system.
Another possibility is the introduction of a "sandbox" or pilot arrangement. This would allow traditional asset management firms to experiment with digital asset allocations on a limited scale and within a limited scope, while being subject to close supervision from regulators. Such an arrangement would give institutions room to explore while ensuring that risks are controlled.
With the success of the pilot program, regulatory requirements can be gradually increased, and allocation restrictions can be gradually relaxed. Industry groups have also proposed the possibility of exemptions for specific types of funds. For example, more flexible regulatory requirements could apply to private equity funds that target only professional investors, as these investors are considered to have a higher risk identification and tolerance capacity. This differentiated regulation based on investor suitability is a common practice in many jurisdictions.
From a broader perspective, this regulatory controversy reflects the growing pains of the digital asset industry as it moves from the periphery to the mainstream. As more traditional financial institutions enter this field, the regulatory framework needs to continuously evolve to adapt to the new realities. Hong Kong's regulatory choices will not only impact the local market but will also provide important reference for global digital asset regulation.
For asset management firms, regardless of the final regulatory framework, a reassessment of their digital asset strategies is necessary. Firms should consider establishing dedicated digital asset compliance teams, investing in relevant technologies and systems, and enhancing training for their staff.
At the same time, institutions should actively participate in the regulatory consultation process to ensure that the regulatory framework fully considers the actual situation of the industry.
In the long run, the integration of digital assets and traditional finance is an irreversible trend. An improved regulatory framework will provide a more stable and predictable environment for this integration. As reflected in Hong Kong Policy Declaration 2.0, the shift in terminology from "virtual assets" to "digital assets" signifies that this asset class is gradually gaining equal status and recognition with traditional assets.
The core of this controversy surrounding Hong Kong's new regulations on virtual asset management lies in the dilemma of balancing regulation and efficiency in financial innovation. The industry's concerns about the cost of requiring a 100% license for "1% allocation," coupled with the regulators' prudent logic of seeking "full coverage" of risks, reveal the inevitable friction that must be faced in the mainstreaming process of digital assets.
The outcome will clearly define Hong Kong's regulatory philosophy as an "international digital asset center"—the key being the ability to design sophisticated rules that ensure security without stifling incremental exploration. This tests the institutional wisdom to fine-tune the balance between "encouraging innovation" and "investor protection."
The first quarter of 2026 will mark a crucial juncture in the controversy surrounding the "10% exemption." The Hong Kong Legislative Council plans to review the relevant bill within the year, while global financial institutions are closely watching every regulatory development in this Eastern financial center.
Regardless of the outcome, Hong Kong's choice will outline a compliant path, whether broad or narrow, for the integration of traditional finance and digital assets.
Some of the information comes from the following sources:
Hong Kong undergoes a major upgrade! "Digital assets" officially replace "virtual assets," and four strategies are reshaping the new global financial order.
Hong Kong industry opposes stricter regulations on asset management virtual asset licenses, arguing it could hinder traditional institutions from entering the market.
Author: Liang Yu; Editor: Zhao Yidan
