Hong Kong Securities Body Opposes Stricter Crypto Licensing Rules

The Hong Kong securities industry is voicing concerns over proposed stricter licensing rules for cryptocurrency exposure. The Hong Kong Securities and Futures Professionals Association argues that these changes may deter mainstream asset managers when the city is trying to expand its digital asset market.

Key Takeaways

The Hong Kong Securities and Futures Professionals Association opposes proposals to tighten crypto licensing.
Current rules allow Type 9 asset managers to invest under 10% in virtual assets without a separate license.
Proposed changes would remove this threshold, which the industry fears could lead to higher compliance costs and deter investment.
The association suggests reinstating a “de minimis” exemption for smaller allocations.
Hong Kong regulators aim to enhance its digital asset market while maintaining compliance standards.

Hong Kong

Opposition to Proposed Licensing Changes

The Hong Kong securities sector is raising objections against a plan that aims to tighten regulations regarding cryptocurrency in traditional investment portfolios. The industry fears that such changes could deter mainstream asset managers at a time when Hong Kong seeks to cultivate a more vibrant digital asset market.

In a submission on Tuesday, the Hong Kong Securities and Futures Professionals Association called on regulators to maintain a long-established “de minimis” exemption for Type 9 licensed asset managers. The association warned that eliminating this exemption may turn even minor allocations into a requirement for full licensing.

Type 9 refers to Hong Kong's standard license for discretionary portfolio managers, which is commonly held by traditional fund managers in order to manage client investments under the rules set by the Securities and Futures Commission (SFC).

Proposed Rule Would Eliminate the 10% Crypto Threshold

Currently, under the existing rules, Type 9 managers can invest up to 10% of a fund's overall value in virtual assets without needing a separate virtual asset management license, as long as they inform the SFC. The new proposal under discussion would remove this 10% threshold altogether.

The industry group has illustrated that this change would create a situation where firms need to make an "all-or-nothing" decision if they wish to include cryptocurrency as part of their investment strategy.

This “all-or-nothing” stance is seen as excessive by the association, which claims it would lead to significant compliance costs even if the risk exposure remains minimal. They strongly recommend reinstating a de minimis exemption, arguing that managers below a predefined limit should only be required to notify the authorities rather than comply with the entire virtual asset management regime.

This feedback comes amidst Hong Kong's broader initiative to expand its digital asset regulatory framework. The Financial Services and the Treasury Bureau and the SFC released consultation conclusions last December regarding the licensing of virtual asset dealing services, and they opened another public consultation on licensing for virtual asset advisory and management services.

Licensing Expansion Aims to Align with Institutional Growth

Custody regulations are facing criticism as well. The association has taken issue with proposals that would mandate virtual asset managers to exclusively utilize SFC-licensed custodians. They argue that this requirement could be impractical for private equity and venture funds dealing with early-stage tokens that local custodians do not yet support.

Hong Kong’s regulators have framed the new licensing overhaul as a strategy to attract more domestic activity while setting higher standards amid an increase in institutional participation. Officials have indicated a desire for a regulatory framework that integrates with existing regulated activities instead of relying on ad hoc interpretations regarding crypto exposure.

The ongoing debate is significant as it influences how swiftly traditional finance will embrace cryptocurrency trading. Maintaining a 10% threshold would ease the entry for stock and bond managers looking to add a minor investment in Bitcoin or other digital tokens. In contrast, removing this threshold would necessitate obtaining a full license, presenting a higher cost barrier before firms can gauge actual market demand.

Hong Kong is trying to strike a balance between expanding its licensing framework while also improving market efficiency through various measures, including enhancing liquidity at regulated virtual asset trading platforms.

Regulators have yet to finalize their advisory and management proposals. The current consultation aims to gather industry feedback before proceeding with legislative action. The government has indicated its intentions to refine these proposals and submit them to Hong Kong's legislature by 2026.