LEAP Forward: Hong Kong Consults On Regulatory Frameworks For Virtual Assets Dealing And Custodian Services

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Introduction

On 26 June 2025, the Hong Kong government unveiled its second policy statement on the development of virtual assets ("VA"), outlining its vision to position Hong Kong as a premier global hub for digital assets under a "LEAP" framework, i.e. Legal and regulatory streaming, Expanding tokenised products, Advancing use cases and cross-sectoral collaboration and People and partnership development.

Hot on the heels of this second policy statement, the Financial Services and the Treasury Bureau ("FSTB") and the Securities and Futures Commission ("SFC") on 27 June 2025 jointly published two consultation papers aimed at introducing regulatory regimes for VA dealings ("2^nd Consultation Paper on VA Dealing") and custodian services ("Consultation Paper on VA Custody").

Background - VA Dealing

This 2^nd Consultation Paper on VA Dealing builds on the earlier February 2024 consultation paper which proposed a licensing framework for over-the-counter (OTC) VA trading services.

Drawing on the stakeholder feedback from the first consultation paper on the VA OTC trading regime, the 2^nd Consultation Paper on VA Dealing proposes a broader legislative proposal, which (1) covers a wider range of settings including VA trading activities in physical locations, operations with mixed mode, digital-only platforms and payment networks, (2) includes more complex services such as trade settlements, and asset-management activities, (3) expands the clientele covering individual and institutional investors, small-and-medium enterprises, and other market participants, and (4) integrates VA custodial services into VA dealing activities.

Background - VA Custodian Services

Hong Kong currently does not have a stand-alone licensing regime for VA custodian services. SFC-licensed virtual asset trading platforms ("VATPs") are required to provide custodian services through their wholly-owned subsidiaries (i.e., their associated entities) that must be licensed under the trust and company service provider (TCSP) regime to hold the client assets of the VATP's clients.

SFC-licensed intermediaries or banks providing VA-related services to its clients are required to hold the client VAs in custody with (i) SFC-licensed VATPs and (ii) banks or subsidiaries of locally-incorporated banks.

To complement the 2^nd Consultation Paper on VA Dealing and complete Hong Kong VA ecosystem, the FSTB and SFC propose a licensing regime for VA custodian services in the Consultation Paper on VA Custody to bring VA custodian services within regulatory remit.

Proposed Regulators

The 2^nd Consultation Paper on VA Dealing and Consultation Paper on VA Custody propose that either an open-ended licence (i.e. licence remains valid until revoked) or registration will be required for VA dealing service providers and VA custodian service providers.

It is currently proposed that the SFC will be the licensing and registration authority and the standard setter for regulatory requirements applicable to licensed or registered VA dealing service providers and VA custodians.

For banks and stored value facilities ("SVFs"), the approach in the division of regulatory and supervisory responsibilities of the SFC and Hong Kong Monetary Authority ("HKMA") of which will follow that of the securities business of banks, where the HKMA will be the frontline regulator.

HKMA-licensed stablecoin issuers are proposed to be exempt from being licensed or registered as a VA custodian service provider if they (i) conduct offering or redemption of the stablecoins they offer in the primary market, and (ii) only custody the stablecoins they issues for their clients.

Key Legislative Proposals

The key legislative proposals for both consultation papers are summarised in the table below.

Concluding Remarks

The public consultation for both the 2^nd Consultation Paper on VA Dealing and the Consultation Paper on VA Custody closes on 29 August 2025. Howse Williams' regulatory team stands ready to engage with market participants, draft responses to the FSTB and SFC, and support the development of licensing regimes that strengthen Hong Kong's VA ecosystem.

Given the absence of a transition period or deeming arrangements, industry stakeholders currently engaged in VA dealing or custody services are urged to promptly reach out to the SFC and/or HKMA to initiate pre-application processes. Early engagement will be critical to navigating the upcoming regulatory requirements effectively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.