Hong Kong’s new licensing approach to cryptocurrency management has triggered a significant debate in the financial industry. Hong Kong Securities and Futures Professionals Association (HKSFPA), one of the city’s leading industry representatives, warned in its official opinion to regulators that the proposed rules would make it difficult for traditional asset managers to access cryptocurrencies. In the application made on Tuesday, it was argued that eliminating the current flexibility, especially that enables low-rate cryptocurrency investments, would limit the market’s innovation capacity. The debate comes in tandem with Hong Kong’s aim to position itself as a global cryptocurrency hub.
Reactions to the Licensing Threshold Removal
Central to the HKSFPA’s objection is the removal of the “de minimis” threshold that applies to portfolio and asset managers with a Type 9 licence. In current practice, companies with this license can operate without obtaining an additional license when they allocate less than 10 percent of the total asset value of their funds to cryptocurrencies and are only obliged to inform the regulator. This framework, conveyed by local law firm JunHe LLP, is seen as a controlled balance for the industry.
The proposed changes completely eliminate this threshold. Accordingly, even a limited Bitcoin investment of 1 percent in the portfolio will require a full-fledged virtual asset management license. HKSFPA describes the approach as “all or nothing” and points out that it will result in high compliance costs for investments with limited risk. The association argues that such a burden would push traditional fund managers away from experimenting in the cryptocurrency space.
The history of the regulatory process also deepens the debate. Hong Kong authorities published their conclusions on the recommendations in December last year, following a public consultation launched in June. The Financial Services and Treasury Bureau and the Securities and Futures Commission subsequently launched new consultations on additional licensing regimes for cryptocurrency trading, advisory and management.
Custody Rules and Impact on Web3 Funds
The second focus of the reactions is the planned rules that require cryptocurrencies to be held only through SFC licensed custodians. The HKSFPA states that this regulation is particularly unworkable for private equity and venture capital funds investing in early-stage cryptocurrencies. It warns that Hong Kong-based Web3-focused funds may become virtually inactive due to assets that local custodians do not yet support.
According to JunHe lawyers, the proposed system represents a significant shift in regulatory expectations. Some managers who currently allocate their entire portfolio to cryptocurrencies do not carry a Type 9 license because their activities do not fall within the definition of traditional securities. If the new regime comes into effect, these organizations will also need to obtain a virtual asset management license and the scope of the regulatory framework will be significantly expanded.
Despite all its criticism, the Union is in line with the government on some points. He welcomes the evaluation of self-custodial facilities and the use of qualified foreign custodians for funds serving professional investors. The discussions highlight the industry’s quest for a balance between growth and regulation at a time when Hong Kong is rapidly rolling out licensing systems for cryptocurrency exchanges and stablecoin issuers.
