Hong Kong's Web3 and Virtual Asset Regulatory Landscape Explained

Introduction

In late October 2022, Hong Kong’s Financial Services and the Treasury Bureau (FSTB) released the Policy Declaration on Development of Virtual Assets in Hong Kong. This landmark document outlines the government’s stance and approach to fostering a dynamic virtual asset industry and ecosystem. The declaration sent a strong signal to global markets, positioning Hong Kong as a future hub for crypto innovation. This article breaks down the key regulatory changes, compliance requirements, and strategic developments shaping the future of virtual assets and Web3 in Hong Kong.

A Positive Signal for the Market

The policy declaration is a clear and encouraging message from one of the world’s leading fintech hubs. It demonstrates the government’s commitment to Web3 development through two main channels: first, by proposing experimental government-led initiatives, and second, by establishing a clear, consistent regulatory framework focused on anti-money laundering (AML), counter-terrorist financing (CTF), and investor protection.

Many see this move as Hong Kong’s strategic effort to reclaim its status as a leading Asian crypto hub, especially after competing regions like Singapore gained momentum with events like the Token2049 summit.

Two Types of Virtual Assets

Hong Kong’s regulatory approach distinguishes between two primary forms of virtual assets:

Fungible Tokens: These include cryptocurrencies and utility tokens. The Securities and Futures Commission (SFC) has regulated Initial Coin Offerings (ICOs) since 2017. While ICOs are permitted, tokens classified as securities under the Securities and Futures Ordinance are subject to securities laws.
Non-Fungible Tokens (NFTs): The government categorizes NFTs as either collectibles or security-like assets. NFTs that function as securities fall under the virtual asset service provider licensing regime. For non-security NFTs, agencies like the Intellectual Property Department and Trade Development Council actively promote innovation and discuss tech-driven changes in intellectual property trade.

Three Key Regulatory Bodies

Hong Kong’s virtual asset regulatory landscape involves three main authorities:

Securities and Futures Commission (SFC): Regulates security-type tokens and licensed virtual asset trading platforms (VATPs). To date, only two exchanges—OSL and HashKey—have received full licensing.
Hong Kong Monetary Authority (HKMA): Oversees stablecoins, digital Hong Kong Dollar (e-HKD), and other financial virtual assets. The HKMA has released multiple discussion papers to gather public and industry feedback.
Financial Services and the Treasury Bureau (FSTB): Focuses on AML and CTF regulations. It classifies virtual asset exchange operations as “regulated virtual asset activities” under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

Four Types of Government Support

The declaration is backed by substantial financial support designed to boost startups and scale-ups in the virtual asset and fintech sectors:

A HK$40 billion fund dedicated to fintech and virtual currency development, highlighted during Hong Kong Fintech Week.
The Cyberport incubation program, offering seed funding and market expansion support.
The Science Park incubation schemes, which include multiple tiers of support for tech enterprises.
The establishment of the Hong Kong Investment Corporation Ltd., a government-led initiative to promote strategic industries.

Five Regulated Entities

Hong Kong’s regulatory system covers various market participants:

Virtual Asset Portfolio Managers: Must obtain SFC licenses depending on whether they manage securities or non-securities virtual assets.
Virtual Asset Fund Distributors: Required to hold Type 1 (dealing in securities) licenses.
Virtual Asset Trading Platforms: Must be licensed; a new regime is under development to improve accessibility beyond the current two licensed platforms.
Professional Investors: Previously, only professional investors could use VATPs. The criteria include portfolio size—HK$8 million for individuals or HK$40 million for corporations.
Retail Investors: The new declaration opens the door for retail participation, pending public consultation.

Six Key Innovations Introduced

The policy declaration introduces several forward-looking measures:

Allowing retail investors to trade virtual assets under certain conditions.
Developing a dedicated licensing system for VATPs, moving beyond the traditional securities regulatory framework.
Applying the “same business, same risk, same rules” principle to security token offerings (STOs).
Issuing NFTs for Hong Kong FinTech Week to enhance community engagement.
Regulating stablecoins due to their critical role as a bridge between crypto and fiat currencies.
Advancing the digital Hong Kong Dollar (e-HKD) as a backbone for future virtual asset innovation.

Seven Major Risk Considerations

The regulatory framework also highlights important risks:

Valuation, Volatility, and Liquidity Risk: Virtual assets lack universally accepted valuation standards.
Accounting and Auditing Risk: Consistent accounting standards are still evolving.
Cybersecurity and Custody Risk: Online storage of assets makes platforms targets for hackers.
Market Integrity Risk: Potential for market manipulation due to limited transparency.
Money Laundering and Terrorist Financing Risk: Anonymity features increase exposure to financial crimes.
Conflict of Interest Risk: Platforms acting as both agent and market participant may create conflicts.
Fraud Risk: Inadequate due diligence may lead to investor exposure to fraudulent schemes.

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Eight Core Policy Documents

Hong Kong’s regulatory approach is grounded in multiple policy papers and legal guidelines issued by the SFC, HKMA, and FSTB. These include the 2017 Statement on Initial Coin Offerings, the 2018 Framework for Regulatory Approaches, and recent consultation papers on stablecoins and e-HKD.

Frequently Asked Questions

What was the main purpose of Hong Kong’s 2022 Virtual Asset Policy Declaration?
It aimed to position Hong Kong as a leading global virtual asset hub by clarifying the government’s supportive stance, enhancing regulatory certainty, and encouraging responsible innovation in the sector.

Can retail investors currently trade virtual assets in Hong Kong?
Not yet. The SFC is conducting a public consultation on permitting retail trading. Currently, only professional investors can trade on licensed platforms.

What types of virtual assets are regulated by the SFC?
The SFC regulates security-type tokens and licensed trading platforms. NFTs that function as securities also fall under its oversight.

How does Hong Kong plan to regulate stablecoins?
The HKMA is leading the effort and has published discussion papers to shape future regulation, focusing on stability, redemption rights, and governance.

What support does the government offer to Web3 startups?
Initiatives include the Cyberport and Science Park incubation programs, special funds introduced during Fintech Week, and strategic investments through the Hong Kong Investment Corporation Ltd.

Are NFT creators subject to licensing in Hong Kong?
Only if the NFT is considered a security under existing laws. Most collectible NFTs do not require a license, but creators should monitor regulatory updates.

Conclusion

Hong Kong’s reemergence as a potential virtual asset hub reflects a balanced strategy of open innovation and prudent regulation. With a clear regulatory framework, significant government support, and a focus on integrating traditional and digital finance, Hong Kong is poised to play a critical role in the global Web3 ecosystem. The market is watching closely as these policies develop and take effect.

This article is based on publicly available regulatory documents and news sources and does not constitute legal advice.