The Evolution of Virtual Asset Regulation in Hong Kong: From Risk-Oriented to Opportunity-Driven

In recent years, virtual assets have rapidly developed globally, not only impacting the boundaries of the TradFi system but also posing challenges to the existing regulatory framework. The high Fluctuation and high leverage characteristics of virtual assets present a series of unprecedented problems for regulatory authorities and trading platforms, such as cross-border capital flow regulation, customer identification, and systemic financial risk prevention. These issues indicate that the regulation of virtual assets is inevitably a comprehensive topic that requires cross-departmental and cross-national collaboration.

As the world's third-largest financial center, Hong Kong plays a key role in the regulation of virtual assets. Hong Kong's unique institutional background requires it to strike a balance between promoting the development of the global virtual asset market and meeting the central requirements for financial stability. At the same time, Hong Kong is also an important window and testing ground for China to explore emerging financial markets. Therefore, Hong Kong's regulatory path for virtual assets is bound to be complex and is a continuous process of reconciling globalization with localization, innovation with stability.

The period from 2017 to 2021 was the "initial stage" of virtual asset regulation in Hong Kong. During this phase, regulatory agencies mainly transitioned from a wait-and-see attitude to an orderly and regulated approach by issuing risk warnings and introducing pilot regulatory elements. In September 2017, the Hong Kong Securities and Futures Commission (SFC) first clarified that certain ICOs may constitute securities and need to be regulated. In November 2018, the SFC proposed to include qualified virtual asset trading platforms in the regulatory sandbox. In November 2020, the Financial Services and the Treasury Bureau began considering the inclusion of virtual asset service providers (VASP) in the licensing system.

2022 became a turning point for the regulatory policy of virtual assets in Hong Kong. On October 31, the Financial Services and the Treasury Bureau released the first "Policy Declaration on the Development of Virtual Assets in Hong Kong", clearly stating that it will "actively promote" the development of the virtual asset ecosystem. This marks a shift in regulatory thinking from "risk-oriented" to "opportunity-oriented", establishing a strategic direction for subsequent institutional reforms.

Since 2023, Hong Kong's virtual asset regulation has entered the "operational implementation" stage. In June 2023, the SFC officially implemented the "Virtual Asset Trading Platform Guidelines" and launched the VASP licensing system. In the same month, the "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance" came into effect, requiring virtual asset trading platforms to operate with a license. In August, HashKey, the first licensed exchange open to retail investors, went live, marking the beginning of the compliance of the retail market.

Since the second half of 2023, Hong Kong has continued to deepen and improve its regulatory framework for virtual assets. In November, the SFC issued a circular clarifying the regulatory requirements for tokenized securities. In December, the Monetary Authority and the SFC jointly released an updated version of the "Circular on Intermediaries' Virtual Asset-Related Activities," which for the first time allows the sale of virtual asset-related ETFs. In 2024, Hong Kong will continue to promote innovative pilot projects in areas such as stablecoins, central bank digital currencies, and RWA.

Overall, Hong Kong has adopted a "stamping regulatory" strategy based on the existing legal framework, implementing "patchwork" regulation of digital assets through the release of guidelines or circulars. This approach maintains continuity and stability in regulation while providing flexibility for emerging technologies and business models. Hong Kong's regulatory thinking tends to view virtual assets as an extension of financial assets, incorporating them into the existing financial regulatory system for management, while focusing on core issues such as financial compliance, anti-money laundering, and investor protection.

This regulatory strategy reflects Hong Kong's positioning and characteristics as an international financial center. By gradually adapting to and accommodating emerging technologies within the existing institutional framework, Hong Kong has maintained the stability of its financial system while creating a relatively relaxed environment for the development of the virtual asset industry. In the future, as the virtual asset market continues to develop and mature, Hong Kong's regulatory framework may continue to evolve to better balance the relationship between innovation and risk.