How the SFC plans to shape Hong Kong’s virtual asset ecosystem

The SFC has recently published a "A-S-P-I-Re" roadmap which sets out the regulator’s intended direction of travel for the regulation of the virtual assets (VA) market in Hong Kong and which is designed to future-proof Hong Kong's VA market. The SFC’s intention is to create a balanced regulatory framework that promotes growth while ensuring investor protection and systemic stability.  

This proposed move towards a more risk-based approach for VA overall, is similar to what we have in the traditional financial services regime, with a wider range of products and services with appropriate controls to ensure that higher risk products are permitted only for more sophisticated investors. 

Five pillar roadmap

The roadmap consists of five key pillars: Access, Safeguards, Products, Infrastructure, and Relationships. Each pillar includes initiatives aimed at streamlining market access, enhancing compliance, expanding product offerings, modernising infrastructure, and fostering better engagement with investors and industry stakeholders. We take a quick look at some of the points raised under each pillar:

1| Access

• Market Entry and Licensing: The SFC aims to streamline entry for virtual asset service providers (VASPs), such as supporting the introduction of an OTC trading regime and a clear licensing regime for VA custodians. The approach seeks to encourage responsible global participation, enhancing investor choice and increasing market efficiency.
   
• Integration of global platforms and increase participation of liquidity providers: The SFC invites international virtual asset platforms to operate in Hong Kong, boosting liquidity by tapping into global order books. The regulator will work on clarifying regulatory expectations to make it easier for institutional liquidity providers such as market makers to set up and connect with VA trading platforms. 

2| Safeguards

• Optimised Compliance: Align compliance with international standards while providing flexibility for innovation and focusing on outcomes rather than prescriptive requirements. The focus will shift to more dynamic custody solutions and tailored storage ratios (for example by reviewing current requirements such as the insurance and compensation requirements, and the hot/cold storage ratios).
   
• Insurance and Compensation: The roadmap includes a more diverse risk-based compensation framework, aligned with global practices, to ensure investor protection.

3| Products

• Expanding Offerings: By categorising investors, the SFC allows for tailored product offerings, such as token listings and derivative trading. New services like staking and lending may become possible under clear guidelines.
   
• Margin Requirements: Explore how to the possibility of margin financing in line with securities markets risk management standards.

4| Infrastructure

• Reporting and Surveillance: Upgrading reporting and surveillance mechanisms to detect illicit VA activities efficiently. Collaboration with local and global regulators is emphasized for better cross-border cooperation.
   
• Cross-Agency Collaboration: Strengthen cooperation with other agencies to maintain market integrity and oversight and promote innovation.

5| Relationships

• Investor and Industry Engagement: The SFC plans to empower investors with better educational resources and transparent policymaking processes through different engagement channels, including a framework for financial influencers (Finfluencers).
   
• Industry Feedback: Encouraging industry participation in shaping regulations to reflect market realities while considering stakeholder concerns continuously.

When will the changes happen?

This regulatory roadmap for Hong Kong’s VA market does not yet set out any concrete next steps in terms of changes to rules or set out whether and when there will be consultations on particular changes, however it does indicate a commitment to foster an internationally competitive VA environment in Hong Kong.

Understanding the intended movement for the VA ecosystem in Hong Kong will help firms align strategies with new regulations and position themselves competitively in a rapidly evolving VA environment. Let us know if you would like to talk about what the changes could mean for you.