Hong Kong’s new licensing approach towards cryptocurrency management has sparked significant debate in the finance sector. The Hong Kong Securities and Futures Professionals Association (HKSFPA), representing leading industry members, warned that the proposed regulations could hinder traditional asset managers’ access to cryptocurrencies. In a submission made on Tuesday, they argued that removing the existing flexibility, which allows for low-level cryptocurrency investments, could limit market innovation. This discussion coincides with Hong Kong’s ambition to position itself as a global cryptocurrency hub.
Reactions to Removing the Licensing Threshold
Central to HKSFPA’s objection is the removal of the “de minimis” threshold applicable to Type 9 licensed portfolio and asset managers. Under current practices, companies holding this license can allocate less than 10% of their total asset value to cryptocurrencies without needing an additional license, only requiring notification to the regulator. This framework, outlined by local law firm JunHe LLP, is seen as a controlled balance within the industry.
However, the proposed changes would eliminate this threshold entirely. Even a limited investment of 1% in Bitcoin would necessitate a full virtual asset management license. The HKSFPA describes this approach as “all or nothing,” emphasizing the high compliance costs for investments with limited risk. The association argues that such a burden would deter traditional fund managers from experimenting in cryptocurrency.
The history of the regulatory process deepens the discussion. Last December, following public consultations initiated in June, Hong Kong authorities released results regarding the proposals. Subsequent new consultations for additional licensing regimes for cryptocurrency trading, advisory, and management were launched by the Financial Services and the Treasury Bureau and the Securities and Futures Commission.
Custody Regulations and Impact on Web3 Funds
The second focus of criticisms involves the planned rules mandating cryptocurrencies to be held exclusively through SFC-licensed custodians. HKSFPA points out that this regulation may be impractical for private equity and venture capital funds investing in early-stage cryptocurrencies. Due to assets not yet supported by local custodians, there is a warning that Web3-focused funds based in Hong Kong could effectively become non-operational.
According to JunHe lawyers, the proposed system represents a significant shift in regulatory expectations. Currently, some managers dedicating their entire portfolios to cryptocurrencies do not have a Type 9 license since their activities don’t qualify as traditional securities. The new regime would require these organizations to acquire a virtual asset management license, significantly expanding the regulatory framework.
Despite its criticisms, the association aligns with the government on some points. They welcome the evaluation of self-custody options and the use of qualified foreign custodians for funds serving professional investors. These discussions highlight the industry’s search for a balance between growth and regulation, as Hong Kong rapidly implements licensing systems for cryptocurrency exchanges and stablecoin issuers.
