In recent years, Hong Kong has emerged as a forward-thinking hub for virtual asset innovation, balancing technological advancement with robust regulatory oversight. With a clear vision to foster financial modernization while safeguarding investor interests, the Hong Kong government—through key institutions like the Securities and Futures Commission (SFC), the Financial Services and the Treasury Bureau (FSTB), and the Hong Kong Monetary Authority (HKMA)—has laid out a comprehensive roadmap for the responsible growth of digital assets.
This article explores the latest developments in Hong Kong's virtual asset regulatory landscape, focusing on tokenized securities, virtual asset ETFs, and the proposed stablecoin issuer licensing regime. These initiatives reflect Hong Kong’s commitment to becoming a global leader in fintech and blockchain-based finance.
Tokenized Securities: Bridging Traditional Finance with Blockchain
One of the most transformative trends in finance today is real-world asset (RWA) tokenization—the process of converting tangible or financial assets into blockchain-based digital tokens. In 2023, this trend gained significant momentum in Hong Kong, culminating in the government’s own issuance of an HK$800 million tokenized green bond.
Recognizing both the opportunities and risks, the SFC released two pivotal circulars on November 2, 2023:
- Circular on Tokenized Securities-Related Activities by Intermediaries
- Circular on Tokenized SFC-Authorized Investment Products
These documents establish a clear framework for how traditional financial instruments can be securely digitized without compromising regulatory integrity.
Understanding Tokenized vs. Digital Securities
While often used interchangeably, tokenized securities specifically refer to conventional financial products—such as bonds or funds—that leverage distributed ledger technology (DLT) for ownership tracking and transfer. They remain backed by real-world rights and obligations.
In contrast, broader digital securities may include native tokens with complex or purely digital structures that don’t necessarily map to external assets. The SFC clarifies that non-tokenized digital securities are more likely to be classified as complex products, subjecting them to stricter distribution rules.
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Key Risk Considerations for Intermediaries
Because tokenized securities retain their fundamental nature as regulated financial instruments, existing securities laws continue to apply. However, new technology-driven risks must also be managed:
- Ownership risk: Ensuring accurate recording and transfer of tokenized ownership.
- Cybersecurity threats: Including network forks, outages, or private key loss.
- Smart contract vulnerabilities: Unaudited code could lead to irreversible losses.
Intermediaries engaging in trading, advisory, or portfolio management involving tokenized securities must conduct thorough due diligence on issuers, third-party service providers, and the technical infrastructure involved.
Notably, fund managers investing in tokenized securities under the “de minimis” exemption (i.e., less than 10% of assets in virtual assets) do not need to upgrade their Type 9 license—providing flexibility for traditional asset managers exploring digitalization.
Client Disclosure Requirements
Transparency is critical. Intermediaries must disclose essential details about the tokenization arrangement, including:
- Whether off-chain or on-chain settlement is final
- Transfer restrictions on tokens
- Results of smart contract audits
- Business continuity plans for DLT-related incidents
- Custody arrangements for underlying assets
These disclosures empower investors to make informed decisions in an evolving technological environment.
Clarification on Product Complexity
The SFC has clarified that tokenization alone does not increase a security’s complexity. Therefore, tokenized versions of simple products (e.g., standard bonds) are not automatically deemed “complex.” This reverses earlier guidance from March 2019 that imposed blanket restrictions on retail distribution of security tokens.
However, non-tokenized digital securities—especially those with novel economic models—may still fall under the “complex product” category, requiring enhanced investor protection measures.
Virtual Asset ETFs: Opening the Floodgates for Retail Access
The approval of spot Bitcoin ETFs in the U.S. in January 2024 marked a watershed moment for crypto adoption. Hong Kong swiftly followed suit, signaling readiness to authorize spot virtual asset ETFs for public offering.
On December 22, 2023, the HKMA and SFC jointly updated their Joint Circular on Virtual Asset-Related Activities of Intermediaries, confirming that the SFC is now accepting applications for spot virtual asset ETFs, in addition to already approved futures-based ETFs.
Simultaneously, the SFC issued a new Circular on SFC-Authorized Funds Investing in Virtual Assets (“ETF Circular”), replacing its 2022 guidance and setting out updated requirements.
Regulatory Requirements for Virtual Asset ETFs
To ensure investor protection and market stability, the SFC mandates the following:
Manager Qualifications:
- Proven compliance track record
- At least one qualified staff member with virtual asset experience
- Hold an upgraded Type 9 asset management license
Eligible Underlying Assets:
- Only virtual assets listed on licensed Hong Kong exchanges accessible to retail investors
Leverage Restrictions:
- No leverage permitted at the fund level
Subscription and Redemption Mechanisms:
- Cash-based: Assets acquired via on- or off-platform trades
- In-kind: Requires participation by intermediaries holding an upgraded Type 1 license
Custody Safeguards:
- Assets must be held by licensed exchanges or HKMA-recognized institutions
- Strict segregation between custodian and manager accounts
- Majority of holdings in cold storage; private keys stored within Hong Kong
These measures reflect a cautious yet progressive approach, enabling institutional-grade exposure to digital assets while minimizing operational and custody risks.
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Stablecoin Regulation: Building Trust in Digital Currencies
Stablecoins—digital assets pegged to fiat currencies like the U.S. dollar or Hong Kong dollar—are central to the functionality of decentralized finance (DeFi). Recognizing their systemic importance, Hong Kong launched a formal consultation on fiat-referenced stablecoin (FRS) regulation on December 27, 2023.
The proposed framework aims to ensure stability, transparency, and accountability in stablecoin issuance.
Scope of the Proposed FRS Regime
The legislation targets only fiat-backed stablecoins, excluding algorithmic variants (which failed spectacularly during market downturns). It will apply when:
- Issuing FRS in Hong Kong
- Issuing any FRS linked to the Hong Kong dollar anywhere
- Actively promoting FRS to Hong Kong residents
Importantly, existing regulated instruments like bank deposits or e-wallet balances are excluded.
Licensing and Operational Requirements
FRS issuers must meet stringent criteria:
- Maintain full reserve backing at all times (reserves ≥ outstanding FRS value)
- Segregate reserves from operational assets
- Prohibit interest payments to holders
- Enable timely redemption at par value
- Be incorporated in Hong Kong with senior leadership based locally
- Minimum paid-up capital: HK$25 million or 2% of circulating supply (whichever higher)
Additional requirements cover anti-money laundering (AML), corporate governance, risk management, and audit transparency.
Recognized financial institutions (e.g., banks) will be partially exempt due to existing oversight.
Market Access Rules
Only authorized entities may offer FRS purchase services:
- Licensed virtual asset exchanges
- Authorized FRS issuers
- SFC-licensed corporations
- HKMA-regulated institutions
Crucially, only licensed FRS issuers’ tokens can be sold to retail investors. All other stablecoins are restricted to professional investors.
Frequently Asked Questions (FAQ)
Q: Are all digital securities treated the same under Hong Kong law?
A: No. Tokenized versions of traditional securities follow existing regulations, while novel digital-native tokens may be classified as complex products with stricter rules.
Q: Can retail investors buy spot Bitcoin ETFs in Hong Kong?
A: Yes—once approved by the SFC. These ETFs will be available through licensed intermediaries under strict custody and disclosure rules.
Q: Will algorithmic stablecoins be allowed under the new regime?
A: Unlikely. The requirement for full reserve backing disqualifies most algorithmic models, which rely on code rather than collateral.
Q: Do fund managers need special licensing to invest in tokenized securities?
A: Only if they exceed 10% exposure to virtual assets. Smaller allocations qualify under the de minimis exemption.
Q: Where must private keys for ETF assets be stored?
A: Within Hong Kong, under secure custody arrangements—primarily in cold wallets.
Q: Who can issue stablecoins for public sale in Hong Kong?
A: Only entities holding an FRS issuer license from the HKMA after meeting capital, reserve, and governance requirements.
The Road Ahead: A New Era of Digital Finance
Hong Kong’s virtual asset regulatory journey is accelerating. With VASP licensing deadlines passed, stablecoin consultations concluding, and OTC provider frameworks under review, 2024 marks a turning point.
By embracing innovation while enforcing high standards, Hong Kong is positioning itself as Asia’s premier gateway for secure, compliant digital finance.
👉 Stay ahead of regulatory trends shaping the future of digital finance.