Mastering in One Article: A Systematic Review of Hong Kong's Virtual Asset Regulatory Policy Framework

In recent years, the territory of virtual assets has expanded rapidly around the world, and decentralized financial products have not only impacted the boundaries of the traditional financial system, but also challenged the existing financial regulatory framework. As we all know, virtual assets have two major characteristics: high price volatility and high leverage in trading. This presents a series of unprecedented regulatory challenges for both regulators and trading platforms: how to regulate cross-border capital flows? How is KYC done? How to avoid systemic financial risks such as a death spiral? ...... This series of question marks expresses the fact that the regulation of virtual assets will inevitably become a comprehensive issue that requires cross-departmental and cross-border collaboration.

The importance of Hong Kong's regulatory policy on virtual assets is well known: on the one hand, Hong Kong, as the world's third largest global financial center, occupies a key position in the global financial system; On the other hand, Hong Kong carries the special system under China's "one country, two systems" principle. Its regulatory policies should not only shoulder the mission of promoting the global virtual asset financial market, but also meet the central government's requirements for financial stability. Hong Kong must find a balance between linking the international capital market with the Mainland's financial security. At the same time, Hong Kong is bound to be an important window and testing ground for China to explore the development of emerging financial markets. Therefore, the regulatory path of virtual assets in Hong Kong is inevitably complex, and it is a process of reconciling globalization and localisation, innovation and robustness.

Therefore, in this article, Crypto Salad will systematically outline the regulatory policy framework for virtual assets in Hong Kong, hoping to help everyone establish a more comprehensive and clear understanding.

2017-2021: From Risk Warning to Institutional Prototype

This stage is the "initial stage" of virtual asset regulation in Hong Kong, where the Hong Kong government mainly focuses on risk warnings and gradually introduces pilot regulatory elements. During this period, the government's regulatory attitude has gradually transitioned from a prudent wait-and-see approach to an orderly and standardized one. Specifically:

• On September 5, 2017, the Hong Kong Securities and Futures Commission (SFC) issued a statement on Initial Coin Offerings (ICOs), stating that some ICOs may constitute "securities" under the Securities and Futures Ordinance, laying the foundation for the classification of virtual assets.
• On December 11, 2017, the SFC issued a circular entitled "To licensed corporations and registered institutions regarding Bitcoin futures contracts and cryptocurrency-related investment products," requiring financial institutions that offer cryptocurrency-related products to comply with existing financial regulations.

The issuance of these two "first-generation" regulations reflects the conservative and cautious attitude of Hong Kong towards the regulation of virtual assets at that time, but it has already begun to attempt to incorporate virtual assets into the existing legal regulatory framework through a classification method based on their securities attributes.

• **On 1 November 2018, the SFC issued the Statement on the Regulatory Framework for Virtual Asset Portfolio Management Companies, Fund Distributors and Trading Platform Operators, which aims to clarify the regulatory framework for virtual asset portfolio management and trading platform operations, and proposes to include virtual asset trading platform operators that meet the standards in the SFC's regulatory sandbox. The core of the SFC's conceptual framework for regulation are regulations for professional investors, prohibitions on leverage and derivatives, restrictions on ICO trading (which can only be traded for at least 12 months after issuance), and segregation of client assets.
• On March 28, 2019, the China Securities Regulatory Commission issued a "Statement on the Issuance of Security Tokens," which defined STO and made preliminary regulations on the responsibilities of intermediaries. This statement has been replaced and updated by a circular issued on November 2, 2023.
• On November 6, 2019, the Securities Regulatory Commission issued a "Warning on Virtual Asset Futures Contracts" and a "Position Paper: Regulation of Virtual Asset Trading Platforms," advising investors to be aware of the risks associated with purchasing virtual asset futures contracts. The "Position Paper" proposed a licensing system, reiterating that platforms must self-certify compliance with strict standards and voluntarily apply for a license to be included in the regulatory sandbox of the Securities Regulatory Commission. In this document, the Securities Regulatory Commission also proposed review rules for token admission and plans to establish a committee to assess the compliance of tokens.
• In November 2020, the Financial Services and the Treasury Bureau launched a consultation on the amendments to the Anti-Money Laundering Ordinance, and plans to include virtual asset service providers (VASP) in the licensing regime.
• In May 2021, the Treasury Department released a summary of the above consultation, officially confirming the introduction of a licensing system for VASP, requiring those engaged in related businesses to apply for a license and comply with anti-money laundering regulations.

Hong Kong has gradually shifted from a risk warning to a specific regulation of conduct, beginning to define the responsibilities of virtual asset market participants. At this time, regulators have recognized that virtual assets will become an important part of the financial market, and their attitudes are slowly beginning to shift towards positive management. However, for the participants in the ecosystem, the principle of "voluntary participation" is still based. The Hong Kong government has introduced a prototype of a licensing mechanism, and if a platform chooses to accept supervision, it needs to take the initiative to apply for a license and prove that it meets the standards.

One aspect worth noting is that the mechanism of "regulatory sandbox" has also entered the public's view and is being used in the regulation of virtual asset trading platforms. The concept of the sandbox was first proposed and practiced in the UK, allowing emerging fintech companies or projects to test products, services, or other business models in a specific, controlled environment and within a limited scope, without having to fully meet all existing regulatory requirements. As traditional regulatory models inevitably lag behind the development of technology, the sandbox mechanism can provide relatively free and ample soil for some promising innovative projects to grow. The significance of the sandbox lies in its difference from the traditional one-way government regulation; it is more like regulators and the market "crossing the river by feeling the stones" together, fully testing the waters in a small area, with considerable inclusiveness and practical significance.

At this point, Hong Kong's regulatory framework for virtual assets has reached a mature and institutionalized threshold. The focus of regulation is no longer limited to the classification of products, but is moving towards building a complete compliance ecosystem. Considering the global trends during this period, even in the United States and the European Union, the virtual asset market is still in its early stages, and excessive regulatory intervention may stifle technological innovation and industry exploration.

In addition, during this period, mainland China has maintained a high-pressure stance on crypto assets: In 2017, seven ministries issued the "Notice on Preventing Risks of Token Issuance and Financing" to comprehensively halt ICOs and shut down related trading platforms in the country; after 2018, the mainland strengthened its crackdown on "disguised trading" and "over-the-counter trading"; in September 2021, ten departments jointly issued the "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation," categorizing all businesses related to virtual currencies (trading, exchange, intermediary, advertising, etc.) as illegal financial activities.

In the regulatory direction of "polarization", Hong Kong has chosen a third regulatory strategy: neither aggressively releasing nor implementing a one-size-fits-all ban. As a Special Administrative Region under the "one country, two systems" framework, Hong Kong does not have the space to urgently establish an independent path in relevant policies. Moreover, at that time, there was no unified regulatory consensus internationally, and Hong Kong neither had the conditions to take the lead nor the necessity to do so.

2022: A Key Turning Point in Policy Transition

By 2022, this lukewarm regulatory style underwent a significant shift, formally transitioning from previous limited regulation characterized by a wait-and-see approach to active and proactive policy support.

**2022 officially became a watershed year for Hong Kong's virtual asset regulatory policy: ** On 31 October 2022, the FSTB issued its first Policy Statement on the Development of Virtual Assets in Hong Kong, which for the first time clarified that Hong Kong will "actively promote" the development of the virtual asset ecosystem. The policy statement not only states that it will implement a VASP licensing system, but also proposes to support emerging scenarios such as tokenization, green bonds, and NFTs, marking a shift in regulatory thinking from "risk-oriented" to "opportunity-oriented", and establishing a strategic direction for subsequent system reforms.

This declaration marks a substantial shift in the Hong Kong government's attitude towards the regulation of virtual assets. Crypto Salad believes that this change is not without reason, and in light of the international situation at the time, the underlying motivations can be roughly summarized into two points:

**1. International competition intensifies, and Hong Kong needs to maintain its status as a financial center. **At that time, although the global virtual asset market experienced fluctuations, the development of emerging Web3 fields such as Web3, NFT and Metaverse accelerated, and the world's major financial centers increased their virtual asset layout. As an international financial center, Hong Kong has lagged behind competitors such as the United States and Singapore. In particular, after Singapore introduced the Payment Services Act in 2020, it has attracted a large number of Web3 companies and projects to new landing, and Hong Kong urgently needs to adjust its policies to compete for industry resources, otherwise it is likely to miss the window for global digital financial development.

2. From a market perspective, the development of virtual assets has given rise to multiple demands, and Hong Kong happens to play the role of a key connection point. **Hong Kong itself needs a breakthrough and transformation opportunity for the new financial industry to strengthen its status as an international financial centre; Chinese mainland hopes to have a "testing ground" that can explore the digital economy under the premise of compliance; The pioneer practitioner group is also eager to find a "regulated and orderly" foothold in Hong Kong to achieve legal compliance with assets, business and identity; Trading platforms, on the other hand, aspire to institutional protection and legitimacy within the legal framework. These needs gradually converged around 2022, providing realistic conditions for a significant relaxation of Hong Kong's virtual asset policy.

In summary, this transition is not only about catering to innovative financial markets but also a proactive strategic choice for Hong Kong to maintain its status as a financial center in a complex international environment.

2023 - Present: Rapid Iteration, Deepening and Transformation of Regulatory Policies

From 2023 onwards, the regulation of virtual assets in Hong Kong has officially entered the stage of "practical implementation". The experimental model of the past has been gradually replaced by a complete and mandatory legal and licensing system, and the Hong Kong government's policy has officially evolved from a "policy statement" to a "regulatory implementation", which is gradually complete and institutionalized.

• In February 2023, the Hong Kong SAR government issued its first tokenized green bond. This bond is custodied by Bank of China (Hong Kong) and HSBC, and cash tokens are managed through the Central Moneymarkets Unit (CMU) of the Monetary Authority.
• In June 2023, the SFC officially implemented the "Guidelines for Virtual Asset Trading Platforms," launching the VASP licensing system, with only two platforms—OSL and HashKey—successfully approved during the transition period.

• In the same month, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance came into effect, marking that virtual asset trading platforms (VATPs) must be licensed to operate, and the regulatory requirements cover capital adequacy, cold wallet custody, KYC/AML, market manipulation prevention, investor suitability assessment, etc. With the promulgation of the Guidelines for Virtual Asset Trading Platforms, Hong Kong has completely shifted from "optional supervision" to "compulsory licensing", establishing clear market entry thresholds and operational norms. In addition, restrictions on investors have also been relaxed from "professional investors" to retail investors, but only if the platform meets additional protection requirements such as investor suitability assessment, risk disclosure, cold wallet custody, etc.
• In August 2023, HashKey became the first licensed exchange in Hong Kong to open to retail investors, marking the compliance of retail investors in virtual asset trading, with the first listings of Bitcoin (BTC) and Ethereum (ETH), signaling the beginning of compliance in the retail market.

The series of legislative measures in 2023 marks the official entry of Hong Kong's virtual asset licensing system into the practical stage, with regulation of platforms shifting from "voluntary compliance" to "mandatory requirements." At the same time, Hashkey, as the first platform to be granted a license during the transition period, has established industry standards. Meanwhile, the effectiveness of anti-money laundering legislation formally incorporates virtual asset trading platforms into the same anti-money laundering regulatory framework as traditional financial institutions, reinforcing the legal basis of the licensing system.

• In November 2023, the SFC issued a circular regarding intermediaries engaging in activities related to tokenized securities, reiterating that although tokenized securities are issued using blockchain technology, they fundamentally remain traditional securities and must comply with existing securities regulations. Intermediaries must conduct due diligence, ensure product suitability, and notify the securities regulatory authority in advance when distributing, trading, or managing such assets.
• In December 2023, the Monetary Authority and the SFC jointly released an updated circular regarding intermediary activities related to virtual assets, which for the first time clarifies that spot and futures ETFs of virtual assets can be sold compliantly. The release of this circular signifies that Hong Kong's regulatory requirements have expanded from trading platforms to intermediary institutions (such as brokers, banks, and financial advisors), marking the beginning of virtual asset regulation covering the entire financial distribution chain, forming a complete regulatory loop. The circular also allows intermediary institutions to sell virtual asset-related ETFs for the first time, paving the way for the future introduction of spot and futures ETF products.
• In the same month, the SFC issued a circular regarding the recognition of funds investing in virtual assets by the Securities and Futures Commission, stating that the relevant regulations must be met when considering allowing funds for public offering, and that the net asset value ("NAV") of the fund involved in virtual assets ("VA") must exceed 10%.
• In January 2024, GF Securities (Hong Kong) successfully issued the first tokenized securities applicable under Hong Kong law.
• In March 2024, the Monetary Authority launched the "Ensemble Project," aimed at exploring the integration of tokenized assets with wholesale Central Bank Digital Currency (wCBDC), testing atomic settlement mechanisms across scenarios including green bonds, carbon credits, real estate, and supply chain finance. Among them, the Ensemble sandbox focuses on exploring application scenarios of tokenization technology, with several RWA projects already successfully implemented. In July 2024, the HKMA launched the Stablecoin Regulatory Sandbox Scheme, which allows institutions to test stablecoin issuance and application models in a controlled environment. The first batch of participants included JD Technology, Circle and Standard Chartered Bank. Among them, JD.com took the lead in launching the "JD-HKD" stablecoin pegged to the Hong Kong dollar, exploring its scenario implementation in payment settlement and supply chain management. This marks Hong Kong taking the lead in the world in exploring the path of localization, practicality and compliance of stablecoins.
• In August 2024, Langxin Technology cooperated with Ant Group to launch the Charging Pile Revenue Rights RWA project.
• In September 2024, Xiexin Energy Technology collaborated with Ant Group to launch the photovoltaic power station revenue rights RWA project.
• In February 2025, the Financial Secretary Paul Chan announced the release of the second "Virtual Asset Policy Declaration," which plans to integrate TradFi with blockchain technology to promote over-the-counter trading and custody service systems.
• In February 2025, Huaxia Fund (Hong Kong, China) announced that its Huaxia Hong Kong Dollar Digital Currency Fund has been approved by the Hong Kong Securities and Futures Commission (SFC), becoming the first tokenized fund in the Asia-Pacific region aimed at retail investors, and is expected to be officially listed on February 28.
• In March 2025, the number of licensed exchanges increased to 10, with 8 under review, significantly improving regulatory efficiency and market confidence. At the same time, the SFC released the "A-S-P-I-Re" regulatory roadmap to deepen market development through five pillars: connection, security, products, infrastructure, and engagement.
• In the same month, the Xunying Group successfully launched the world's first battery swapping physical asset RWA project.

Analysis and Clarification of Hong Kong's Regulatory System

Through the above overview of the regulatory policies of developed countries for virtual assets, as well as the combing of Hong Kong's regulatory path, Crypto Salad believes that Hong Kong has not simply copied the regulatory framework of Europe and the United States, but has formed its own governance logic on the basis of international rules.

Hong Kong's regulation of virtual assets has consistently adopted a "stamping" regulatory strategy based on the existing legal framework, which means regulating digital assets in a "patching" manner through the issuance of guidelines or circulars, rather than learning from the European Union and starting from scratch to formulate a new specialized code. Considering Hong Kong's identity as an international financial center, we can make some judgments about the logic behind the regulatory strategy:

The Hong Kong government believes that virtual assets are essentially tantamount to traditional financial assets, and can even be regarded as an extension of traditional financial assets. Therefore, the most important thing in the supervision of virtual assets is to firmly adhere to the three lines of defense of financial compliance, anti-money laundering and investor protection, which can be incorporated into the current financial regulatory system for management. As an international city with scarce resources but a mature system, Hong Kong is highly dependent on the financial sector in terms of economic structure, and its GDP, employment and international influence are closely linked to the stability, transparency and efficiency of the financial system. The rise of virtual assets is an opportunity for Hong Kong, but it is also a challenge. Objectively speaking, Hong Kong's "patching" supervision is the most efficient and adaptable regulatory method in this field.

Hong Kong's regulatory bodies and financial practitioners are quite familiar with risk control and regulatory operations in areas such as securities, banking, and asset management. Although virtual assets differ in technical form, they are highly similar to financialized assets in terms of functionality—they can be valued, traded, have markets, and carry risks, and can be incorporated into a familiar regulatory framework. Therefore, Hong Kong's regulation seems to be more inclined to treat them as extensions of financial assets. This not only reduces regulatory coordination costs but also builds a bridge between financial institutions and emerging technology companies, allowing institutional transformation and industrial development to integrate well.

The views expressed in this article are solely those of the author and do not constitute legal advice or opinions on specific matters.