In recent years, trading and investment activities involving crypto assets, including Bitcoin, have become increasingly active. As a global financial hub and the primary gateway for mainland China's outreach, Hong Kong has been proactive in embracing blockchain and cryptocurrency technologies. Several government officials have actively advocated seizing the opportunities presented by blockchain, even warning that "if Hong Kong misses the chance to become a base for global virtual assets, the consequences could be more severe than losing Alibaba."
However, the decentralized and anonymous nature of cryptocurrency transactions poses challenges for financial regulation. This article explores the current state of cryptocurrency in Hong Kong, covering regulatory frameworks, policy dynamics, public adoption, trading practices, exchange licensing, and legal cryptocurrencies.
Regulatory Approach: Cautious Openness
International standard-setting bodies have been closely monitoring and addressing the risks associated with virtual assets. Securities regulators worldwide have adopted various strategies, and Hong Kong has maintained a cautiously open attitude toward blockchain and cryptocurrency.
Three main regulatory bodies oversee this space: the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), and the Insurance Authority. The SFC regulates securities and futures markets and serves as the primary regulator for cryptocurrencies. The HKMA manages financial policies, banking, and currency operations, functioning similarly to a central bank. Other agencies, like the Insurance Authority, also play collaborative roles in regulation. Currently, these bodies use sandbox regulation to test and oversee cryptocurrency and blockchain technologies in a controlled environment.
In Hong Kong, cryptocurrencies are classified into security tokens, utility tokens, and virtual commodities (e.g., Bitcoin). Each category is subject to different regulatory policies. The primary focus is on investor protection, with clear regulatory requirements and implementation rules for security tokens. Non-security tokens face fewer specific policies, but Hong Kong lacks dedicated legislation for cryptocurrencies, relying instead on existing laws covering anti-money laundering (AML), anti-fraud, and counter-terrorist financing (CTF).
As cryptocurrencies gain influence, regulators have introduced a series of policies to better protect investors. At the Hong Kong FinTech Week in November last year, Christopher Hui, Secretary for Financial Services and the Treasury, announced a new licensing regime for Virtual Asset Service Providers (VASPs). Unlike the voluntary regulatory sandbox initiative launched by the SFC in late 2019, this proposed licensing system is mandatory. It aims to comprehensively regulate trading services for both security and non-security tokens, requiring all crypto asset trading platforms to operate transparently under SFC licensing. Platforms must comply with measures under the AML and CTF Ordinance, along with other investor protection and market manipulation prevention requirements. The proposed licensing regime is currently undergoing public consultation.
Key Regulatory Policies Overview
As the industry evolves, Hong Kong's regulatory policies have become increasingly clear.
In September 2017, the SFC issued a Statement on Initial Coin Offerings, clarifying that, depending on the facts and circumstances, digital tokens offered or sold in ICOs might constitute "securities" under the Securities and Futures Ordinance and be subject to Hong Kong securities laws. The statement emphasized that if digital tokens involved in an ICO meet the definition of "securities," providing trading services, advice, or managing funds investing in such tokens could constitute "regulated activities." Individuals or institutions engaged in regulated activities must be licensed or registered with the SFC, regardless of their location, if their business targets the Hong Kong public.
In December 2017, the SFC released a Circular to Licensed Corporations and Registered Institutions: Bitcoin Futures Contracts and Cryptocurrency-Related Investment Products. Intermediaries providing Bitcoin futures contract trading services and related activities (including transmitting or executing orders) must obtain a license from the SFC and comply with regulations. The SFC also reminded investors to be cautious of investment risks.
In November 2018, the SFC issued the Statement on Regulatory Framework for Virtual Asset Portfolios Managers, Fund Distributors, and Trading Platform Operators (the Regulatory Framework), introducing new rules for virtual asset investments. This framework provided a compliance path for platform operators willing to adhere to strict standards, distinguishing between licensed and unlicensed operators. The process involved: initial communication on regulatory standards (including AML/CTF requirements) and platform operations; inclusion in the SFC's regulatory sandbox to assess suitability for regulation; and a 12-month post-licensing sandbox phase with frequent reporting, monitoring, and reviews to develop robust internal controls under close SFC supervision.
In March 2019, the SFC issued a Statement on Security Token Offerings, reminding companies or individuals involved in STOs of applicable laws and regulations. It stressed that if security tokens qualify as "securities," promoting and distributing them (whether in Hong Kong or targeting Hong Kong investors) requires a license for Type 1 regulated activity (securities trading) unless exempted. Unlicensed regulated activities constitute a criminal offense.
In October 2019, the SFC introduced Terms and Conditions for Licensed Corporations Managing Virtual Asset Portfolios, outlining requirements for company qualifications, risk management, compliance audits, AML, and CTF for virtual asset fund management companies.
In November 2019, the SFC published a Warning on Virtual Asset Futures Contracts and the Position Paper on Regulation of Virtual Asset Trading Platforms, clarifying the new regulatory framework. From November 6, 2019, companies operating central virtual asset trading platforms in Hong Kong and offering trading services for at least one security token could apply for Type 1 and 7 licenses. Licensed operators would enter the SFC regulatory sandbox, subject to intensified reporting, monitoring, and reviews to identify areas for improvement in internal controls and risk management.
In November 2020, the Financial Services and the Treasury Bureau conducted a public consultation on legislative proposals to strengthen AML and CTF regulations, recommending a licensing system for VASPs. The industry expects this to become the 11th financial license alongside the SFC's existing 10 licenses. The proposed regulations cover virtual asset trading, transfer, custody, management, and financial services for token issuance. Virtual assets are defined as "digital representations of value that can be traded or transferred digitally or used for payment or investment purposes."
Thriving Fintech Ecosystem
Despite increasing regulation, the fintech industry is highly valued in Hong Kong.
"As one of the world's leading international financial centers, Hong Kong's fintech sector has flourished in recent years, providing a solid foundation for exploring the development and application of financial technologies like digital currency," said Financial Secretary Paul Chan at the Hong Kong Foundation Forum in November 2020.
As early as 2017, the HKMA conducted a study on central bank digital currency (Project LionRock), concluding that while Hong Kong already has efficient retail payment systems, CBDC has greater potential in wholesale and cross-border payments. "Hong Kong has been monitoring the development of the Digital Yuan by the People's Bank of China. The Financial Development Council has formed a working group to study how Hong Kong can seize the opportunities presented by the Digital Yuan," Chan added. If the Digital Yuan can be used for cross-border payments, it could further enhance connectivity between Hong Kong and mainland China, especially the Guangdong-Hong Kong-Macao Greater Bay Area.
"The government and the HKMA are prepared to actively explore various feasible solutions with the PBOC to improve and expand cross-border RMB two-way flow channels."
Beyond CBDC, Hong Kong has maintained close communication with mainland authorities, actively promoting cross-border cooperation in fintech. In cross-border payments, the HKMA is working with the PBOC's Digital Currency Institute on technical testing for using the Digital Yuan in cross-border payments, making corresponding preparations.
Currently, Hong Kong is home to over 600 fintech startups and companies, along with globally renowned innovation labs and accelerator programs, such as the Bank for International Settlements Innovation Hub Centre, Accenture FinTech Innovation Lab, and Deloitte's Asia Pacific Blockchain Lab. According to the EY Global FinTech Adoption Index, Hong Kong's consumer fintech adoption rate reached 67% last year, ranking among the global leaders, ahead of the US and Japan. Several government-driven fintech projects and measures have been implemented, including the Faster Payment System "FPS," the trade financing platform "eTradeConnect," virtual banks, virtual insurers, and the new licensing framework for virtual asset trading platforms.
From the perspective of China's blockchain industry financing performance in 2020, Hong Kong's developed economy, innovative environment, and supportive policies for blockchain-related industries have attracted significant capital attention. According to incomplete statistics from 01 Blockchain, China's blockchain industry witnessed 81 financing events in 2020, with publicly disclosed total financing reaching RMB 1.112 billion. Hong Kong led with 17 financing events, accounting for over 50% of the national total with RMB 592 million in funding.
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Frequently Asked Questions
What is Hong Kong's stance on cryptocurrency?
Hong Kong adopts a cautiously open approach, encouraging innovation while implementing robust regulations to protect investors and ensure market integrity. The focus is on balancing growth with risk management through frameworks like licensing and sandbox supervision.
How are cryptocurrencies classified in Hong Kong?
They are categorized into security tokens, utility tokens, and virtual commodities (e.g., Bitcoin). Security tokens face stricter regulations under securities laws, while non-security tokens are governed by general financial regulations like AML and CTF.
What are the key regulatory bodies for crypto in Hong Kong?
The Securities and Futures Commission (SFC) is the primary regulator, overseeing securities-related activities. The Hong Kong Monetary Authority (HKMA) handles broader financial policies, and other agencies like the Insurance Authority contribute to collaborative oversight.
Is there a licensing system for crypto exchanges?
Yes, a mandatory licensing regime for Virtual Asset Service Providers (VASPs) is under development. It will require all trading platforms to obtain SFC licenses and comply with AML, CTF, investor protection, and market manipulation prevention measures.
How does Hong Kong support fintech innovation?
Initiatives include regulatory sandboxes, cross-border collaboration with mainland China (e.g., Digital Yuan testing), and infrastructure projects like "FPS" for payments. The government actively promotes fintech growth through policies and funding.
What is the future of crypto in Hong Kong?
With ongoing regulatory refinement and strong fintech adoption, Hong Kong aims to be a global hub for virtual assets. Emphasis on cross-border integration and technological advancement positions it for sustained growth in the ecosystem.