Hong Kong's Regulatory Blueprint for Virtual Assets Takes Shape

Hong Kong's financial regulators have set a definitive timeline for establishing a comprehensive licensing regime for virtual asset (VA) dealers and custodians. Following the conclusion of a joint consultation by the Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC), the government plans to introduce a new bill to the Legislative Council (LegCo) in 2025, with the aim of having the new regulatory framework fully operational by 2026. This move represents a critical next step in Hong Kong's ambition to become a global hub for responsible virtual asset innovation, building upon its existing regime for Virtual Asset Trading Platforms (VATPs).

Key Takeaways

  • Hong Kong regulators plan to table a new bill in 2025 to license and regulate virtual asset dealers and custodians, targeting a 2026 implementation.
  • The regime will mandate licensing for all VA dealing and custodial services, closing a significant regulatory gap for OTC desks and wallet providers.
  • Key requirements will include fit-and-proper tests, capital requirements, custody standards, and AML/CFT controls.
  • The move aims to enhance investor protection and market integrity, potentially attracting more institutional capital into the Hong Kong VA ecosystem.
  • Traders and service providers must prepare for increased compliance but will benefit from a clearer, more legitimate operating environment.

From Consultation to Legislation: The Path to 2026

The FSTB and SFC's concluded consultation marks a pivotal transition from policy discussion to concrete legislative action. The proposed regime aims to bring all entities conducting VA dealing (including over-the-counter or OTC desks) and providing custodial services under the SFC's regulatory purview. Currently, while centralized VATPs require an SFC license, many OTC dealers and wallet service providers operate in a less defined regulatory space. The 2026 target for legislation seeks to eliminate this gap, creating a unified and robust regulatory perimeter. The bill's introduction to LegCo next year will initiate a detailed legislative process, including committee reviews and debates, which will shape the final ordinances governing these activities.

Expected Core Requirements of the New Regime

Based on the consultation conclusions and Hong Kong's existing regulatory philosophy, the new regime is expected to impose several key requirements on licensed VA dealers and custodians:

  • Licensing & Fit-and-Proper Tests: Entities must obtain a license from the SFC. Directors and ultimate owners will be subject to rigorous fit-and-proper assessments.
  • Capital and Financial Requirements: Licensees will need to maintain prescribed levels of paid-up capital and liquid assets to ensure operational resilience.
  • Robust Custody Standards: For custodians, rules will likely mandate strict standards for client asset segregation, secure storage (including cold wallet usage), private key management, and proof-of-reserves.
  • AML/CFT Compliance: Stringent anti-money laundering and counter-financing of terrorism obligations, aligned with Financial Action Task Force (FATF) standards, will be mandatory.
  • Disclosure and Conduct Rules: Clear disclosure of risks, fees, and conflicts of interest, alongside prohibitions against market misconduct, will be enforced.

What This Means for Traders

The impending regulatory shift will have profound implications for both retail and institutional traders operating in or through Hong Kong.

Enhanced Protection and Reduced Counterparty Risk

Traders will benefit from significantly heightened investor protections. Licensed OTC desks and custodians will be subject to ongoing SFC supervision, capital requirements, and clear conduct rules. This reduces the risk of fraud, insolvency, or malpractice by service providers. For institutional traders, in particular, the ability to engage with licensed, audited custodians is a prerequisite for meaningful allocation. The new rules will make Hong Kong a more viable jurisdiction for fund managers and family offices to hold and trade virtual assets.

Potential for Improved Market Liquidity and Access

By bringing OTC dealers into the regulated fold, the market's overall transparency and integrity should improve. While compliance costs may lead to some consolidation, the surviving licensed entities will likely offer more professional and reliable services. This could attract more high-net-worth and institutional liquidity to the Hong Kong market, potentially improving depth and tightening spreads on large trades executed through OTC channels.

Operational Adjustments and Due Diligence Imperative

Traders must prepare for a transition period. When the regime takes effect, using an unlicensed dealer or custodian will carry legal and financial risk. Traders should begin due diligence now on their current service providers' ability and plans to secure a future SFC license. Expect service providers to update terms of service, fee structures, and KYC procedures as they align with new regulatory expectations. Traders should factor in the possibility of some smaller, non-compliant operators exiting the market.

A Framework for Institutional-Grade Products

A regulated custody foundation is essential for developing more complex financial products like VA exchange-traded funds (ETFs), structured products, and derivatives. Hong Kong's successful launch of spot crypto ETFs in 2024 demonstrated this link. The 2026 dealer and custodian rules will further solidify the infrastructure needed for the next wave of institutional product innovation, creating new trading opportunities.

Conclusion: Solidifying Hong Kong's Competitive Edge

Hong Kong's targeted 2026 legislation for virtual asset dealers and custodians is not merely a compliance exercise; it is a strategic move to build a complete, trustworthy, and institutionally-friendly digital asset ecosystem. By methodically closing regulatory gaps, Hong Kong is distinguishing itself from jurisdictions with ambiguous or fragmented rules. While the path to 2026 will require adaptation from industry participants, the outcome promises a more stable, transparent, and mature market. For global traders and asset managers, Hong Kong is systematically constructing a regulatory on-ramp that balances innovation with the investor protections necessary for mainstream adoption. The next two years will be critical for businesses to prepare, positioning themselves to thrive in a newly formalized—and likely more competitive—Hong Kong virtual asset landscape.