Hong Kong launches public consultation on licensing regimes for digital asset dealing and custodian services

Overview of the proposed licensing regimes

The proposals introduce two distinct licensing regimes:

1. Licensing Regime for Digital Asset Dealing Service Providers; and
2. Licensing Regime for Digital Asset Custodian Service Providers.

Licensing regime for digital asset dealing service providers

Under the regime proposed in the Consultation, any person, by way of business, making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into or to offer to enter into an agreement in respect of the following would require a licence granted by or registration with the SFC:

1. for or with a view to acquiring, disposing of, subscribing for or underwriting VAs; or

1. the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of VAs or by reference to fluctuations in the value of VAs.

The definition is intended to capture not only simple dealing activities (such as small-scale conversions between digital assets or between digital assets and fiat currency), but also more complex activities like brokerage activities, block trading, advisory, or asset management involving VAs, irrespective of whether the services are provided online or offline. Peer-to-peer trading of VAs where no intermediary is involved will be excluded from the scope.

Under the proposed regime, licensees must be fit-and-proper and comply with requirements relating to financial resources, expertise, risk management, financial reporting, conduct of business, client asset protection, investor safeguards, and record keeping.

Licensing regime for digital asset custodian service providers

The scope captures the safekeeping, by way of business, of:

1. VAs on behalf of clients; or
2. instruments enabling transfer of VAs of clients (including but not limited to private keys) on behalf of clients.

Similar to dealing service providers, custodians must meet fit-and-proper standards and comply with regulatory obligations relating to client asset protection, financial resources, expertise, risk management, reporting, conduct, and record keeping.

Both regime will be fully implemented upon the commencement of the statutory provisions, without any deeming arrangements.

Conclusion

Hong Kong has been progressively enhancing its regulatory regime for VAs, reflecting global trends and local market needs. Previously, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 introduced a licensing regime requiring virtual asset service providers (VASPs) to obtain licences from the SFC to operate virtual asset exchanges, which came into effect on 1 June 2023.

The Consultation expands this regulatory framework by covering a wider range of VA activities beyond exchanges, including dealing and custody services. This holistic approach aligns with international best practices and aims to position Hong Kong as a trusted and sustainable digital asset hub.

The launch of the Consultation marks a significant step in Hong Kong’s journey to establish a robust and clear regulatory framework for digital assets. By inviting broad stakeholder input, the FSTB and SFC demonstrate their commitment to transparency and collaboration in shaping the future of digital asset regulation.

Authored by Tommy Liu and Katherine Tsang.