The Securities and Futures Commission (SFC) of Hong Kong has launched a public consultation on proposed regulatory enhancements for virtual asset trading platforms. The consultation outlines key recommendations on licensing conditions, retail investor access, token eligibility criteria, risk management, and safeguarding client assets. With a submission deadline of March 31, the new regulatory framework is set to take effect on June 1, 2025. Licensed platforms will be publicly listed on the SFC website to enhance investor transparency and identification.
This marks a significant step in Hong Kong’s strategy to establish a balanced, secure, and innovation-friendly digital asset ecosystem—aligning with global best practices while prioritizing investor protection.
Expanding Retail Access to Qualified Large-Cap Tokens
A central focus of the consultation is the potential opening of virtual asset trading to retail investors. Under current rules, only professional investors—such as institutional or qualified corporate investors—are permitted to trade on licensed platforms. However, the SFC now proposes to allow retail participation under strict conditions.
Platforms wishing to offer virtual assets to retail clients must ensure that only qualified large-cap virtual assets are listed. To qualify, a token must be included in at least two “accepted indices” published by no fewer than two independent index providers. This criterion aims to filter out highly speculative or illiquid assets, ensuring that only well-established, market-recognized digital assets are accessible to non-professional investors.
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It’s important to note that while the SFC will regulate trading platforms, it will not directly oversee individual tokens. The final decision on which tokens to list remains with the platform operators, provided they comply with the SFC’s risk and governance standards.
Risk Management: Personalized Limits Over Fixed Caps
To protect retail investors, the SFC emphasizes personalized risk assessment over rigid, one-size-fits-all limits. Platforms will be required to evaluate each client’s financial situation, investment experience, and risk tolerance before granting access to virtual asset services.
Based on this assessment, operators must set individual risk exposure limits—ensuring clients do not allocate disproportionate portions of their portfolios to high-volatility digital assets. These limits should be reviewed regularly to reflect changes in market conditions or personal circumstances.
The SFC deliberately avoids imposing a universal cap (e.g., limiting investments to 10% of net worth), citing concerns that fixed thresholds may not reflect individual realities or adapt to dynamic markets. Instead, the focus is on prudent judgment, ongoing monitoring, and platform accountability.
Safeguarding Client Assets: Custody and Security Protocols
Security of client funds and digital assets is a cornerstone of the proposed framework. The SFC mandates that platforms hold client money and virtual assets in trust through a wholly-owned subsidiary—referred to as a “connected entity.” This separation ensures that client assets are protected in the event of platform insolvency.
To minimize exposure to cyber threats:
- No more than 2% of client virtual assets may be stored in hot wallets (online storage).
- The remaining 98% must be kept in cold storage with robust encryption.
Since access to virtual assets depends on private keys, their secure management is critical. Platforms must implement written policies for the secure generation, storage, backup, and access control of cryptographic seeds and private keys.
Furthermore, platforms are prohibited from:
- Lending, pledging, re-pledging, or otherwise encumbering client assets
- Engaging in proprietary trading or market-making activities
- Using client funds for any commercial purpose
A comprehensive insurance policy must also be maintained to cover risks related to custody failures, cyberattacks, or internal fraud.
Independent Audits and Ongoing Reporting
Transparency and accountability are reinforced through mandatory auditing and reporting requirements. Platforms must appoint auditors with proven experience in blockchain and digital asset audits. Each fiscal year, they must submit an auditor’s report that includes a formal statement on compliance with regulatory obligations.
In addition:
- Monthly operational reports must be submitted to the SFC within two weeks of each calendar month’s end
- Auditors must verify the accuracy and completeness of these reports
These measures ensure continuous regulatory oversight and enable early detection of potential risks or misconduct.
Transition Arrangements for Existing Platforms
The SFC has established a clear transition path for existing virtual asset service providers:
- Platforms operating in Hong Kong before June 1, 2023, were required to submit full license applications by February 29, 2024, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).
- Those meeting the criteria were automatically deemed licensed starting June 1, 2024.
- Platforms not seeking licensure must have ceased operations in Hong Kong by May 31, 2024, in an orderly manner.
New entrants—platforms not operating in Hong Kong before June 1, 2023—can only begin operations or market services to Hong Kong investors after obtaining formal SFC approval. Unlicensed activity is a criminal offense.
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Investor Education and Market Integrity
The SFC stresses the importance of investor awareness. It will continue collaborating with the Investor and Financial Education Council (IFEC) to enhance public understanding of virtual asset risks and opportunities. Educational campaigns will target both novice and experienced investors, promoting informed decision-making.
Platform operators are also expected to provide clear risk disclosures and educational materials to users—especially retail clients—before onboarding.
Frequently Asked Questions (FAQ)
Q: Can retail investors currently trade cryptocurrencies in Hong Kong?
A: Yes—but only on SFC-licensed platforms offering approved products like Bitcoin and Ethereum futures ETFs. Full spot trading access for retail is being considered under the new consultation.
Q: What makes a token “qualified” under the SFC’s proposal?
A: A token must be included in at least two accepted indices from independent providers. This typically includes major cryptocurrencies like BTC and ETH, but excludes speculative or low-market-cap tokens.
Q: Are licensed platforms allowed to lend or stake client assets?
A: No. The SFC strictly prohibits platforms from lending, pledging, or re-pledging client virtual assets. All client holdings must remain unencumbered.
Q: How does the SFC protect investors from platform insolvency?
A: Client assets must be held in trust via a separate legal entity and kept segregated from platform funds. Additionally, insurance coverage is required for custody-related risks.
Q: Is private key management mandatory for licensed platforms?
A: Yes. Platforms must have documented internal policies for securely generating, storing, and backing up private keys and seed phrases to prevent loss or theft.
Q: What happens if a platform operates without an SFC license?
A: Operating without a license is a criminal offense under Hong Kong law. Penalties include fines and imprisonment, and investors have no regulatory recourse for losses incurred on unlicensed platforms.
The SFC’s consultation reflects a forward-looking approach—fostering innovation while enforcing rigorous standards for security, transparency, and investor protection. As Hong Kong positions itself as a global hub for responsible digital finance, compliance-focused platforms are leading the way.
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