Author: Liang Yu Editor: Zhao Yidan

The Hong Kong Securities and Futures Professionals Association (HKSFPA) submitted opinions to the regulator on January 20, clearly opposing the proposed cancellation of the "10% virtual asset allocation exemption" under the current Type 9 license. The association warns that this change will mean that traditional asset management institutions must apply for a full set of virtual asset management licenses even if they allocate only 1% of crypto assets. There is a serious mismatch between compliance costs and small risk exposures, which may stifle incremental innovation in the industry.

Regulations are sometimes tightened not to stop progress but to establish new order amidst chaos. Hong Kong regulators are promoting digital asset management from "special exemption" to the era of "comprehensive regulation", trying to use a unified and strict license network to cover all possible risk corners. However, industry voices remind us that excessively high compliance thresholds may deter prudent explorers and instead slow down the integration of traditional finance and digital assets.

The deeper conflict is over the future path of RWA (Real World Assets). Many institutions are exploring the hybrid strategy of "RWA + digital assets" to add innovative growth points to the stable underlying assets. However, the “all or nothing” regulatory logic may force strategies to become polarized: either pure RWA or pure digital assets, and the innovation zone in the middle will become difficult to establish. Does this either-or choice really conform to the essence of risk management?

The consultation period will end on January 23. The outcome of this dispute is not only related to the compliance costs of hundreds of local asset management institutions in Hong Kong, but also will test Hong Kong's commitment as an "international digital asset center" - whether it can design "smart regulation" that encourages gradual exploration, or whether it will build a high wall to keep out cautious testers. The world's major financial centers are looking for a balance, and Hong Kong's choice will become an important model.

1. New regulations trigger strong opposition from the industry

In January 2026, a circular from the Hong Kong Securities and Futures Professionals Association (HKSFPA) caused waves in the intersection of traditional finance and digital assets. In a document submitted to the regulatory agency, the association clearly opposed the elimination of the "de minimis exemption" clause in the proposed new regulations on virtual asset management.

According to Hong Kong's current regulatory framework, institutions holding a Type 9 (asset management) license, if they allocate no more than 10% of the total assets of their managed funds to virtual assets, only need to notify the Securities and Futures Commission (SFC) without applying for an additional special virtual asset management license.

This arrangement is regarded as a "safe channel" for traditional asset management institutions to cautiously test the digital asset field.

The proposed new regulations would drastically change that. According to Cointelegraph, the reform plan plans to eliminate this proportion threshold, which means that even if only 1% of digital assets such as Bitcoin are allocated, relevant institutions must apply for and obtain a complete virtual asset management license.

This "all or nothing" regulatory approach has been criticized by industry groups as lacking proportionality.

The Hong Kong Securities and Futures Professionals Association warned that this arrangement will bring disproportionate compliance costs when risk exposure is limited, and may hinder traditional asset managers from trying to enter the field of crypto assets.

The regulatory framework for this industry rebound has entered the fast lane. In December, Hong Kong authorities released a consultation summary report on proposed reforms following a public consultation that began in June.

2. The regulatory thinking shifts from "special cases" to "normality"

To understand the nature of this controversy, we must trace the evolution of digital asset regulation in Hong Kong. Current arrangements that allow Category 9 license holders to allocate virtual assets up to a 10% limit without the need for an additional license date back to the framework established in November 2018. This arrangement is essentially a transitional measure, providing traditional financial institutions with a risk-controllable exploration space at a time when digital asset regulation has not yet fully matured.

The reforms promoted by Hong Kong regulators now mark a fundamental change in regulatory thinking. Hong Kong's Securities and Futures Commission (SFC) defended the removal of the threshold in its December 2025 consultation conclusion, saying it was to prevent companies from circumventing regulation through structured investments and to maintain consistent investor protection standards.

According to the documents, the SFC received 101 submissions during the consultation period. The proposed new system will replace the existing notification system with an independent licensing system under the Anti-Money Laundering and Counter-Terrorism Financing Ordinance. According to Coinspeaker, managers without a new license could face up to seven years in prison and a fine of HK$5 million.

This regulatory tightening is closely related to Hong Kong’s grand strategy of building a “global digital asset center”. Hong Kong Secretary for Financial Services and the Treasury Hui Ching-yu once called this licensing system "an important step in strengthening our legal framework for digital assets."

Hong Kong has been accelerating its crypto license issuance since the launch of its trading platform system in June 2023. Looking at a deeper level, this regulatory shift reflects a fundamental adjustment in Hong Kong’s understanding of digital assets. In June 2025, the Hong Kong SAR government issued the "Hong Kong Digital Asset Development Policy Declaration 2.0", clearly and uniformly using the term "digital assets" to replace "virtual assets".

This shift in terminology is not just a change of wording, but a redefinition of the very nature of the asset class. The word "virtual" can easily lead to the misunderstanding of being "detached from reality," while "digital assets" more accurately emphasize their essence as valuable, tradable assets.

3. Traditional asset management institutions face cost dilemma

For traditional asset management institutions, the most direct impact of the proposed new regulations is a sharp increase in compliance costs. Industry groups assess that obtaining a full virtual asset management license means investing significant resources in legal fees, compliance staffing, system upgrades and ongoing reporting. For institutions that only allocate a very small proportion of digital assets, this cost is seriously inconsistent with the actual risks they bear.

Traditional asset management institutions usually adopt a gradual strategy when entering the digital asset field. According to Cointelegraph’s industry research, most institutions (especially small and medium-sized institutions) currently still maintain less than 1% of their investment portfolios in digital asset allocation. This cautious attitude reflects the balance between institutions' risk perceptions and return expectations for emerging asset classes.

The core concern raised by the Hong Kong Securities and Futures Professionals Association is that the new regulations may "prevent traditional asset managers from gradually trying or allocating crypto assets." This warning is justified, as digital asset allocation is still in an experimental stage for many traditional institutions. They need to test internal processes, risk assessment models and customer responses in real operations before they can consider expanding allocations.

In addition to the direct licensing costs, the proposed hosting requirements also raise industry concerns. The new regulations require virtual asset managers to only use custody institutions licensed by the China Securities Regulatory Commission for asset custody. For the early-stage token investment and Web3 venture capital space, industry groups believe this requirement is unrealistic. Compliant custody becomes particularly difficult when private equity and venture capital funds invest in early-stage tokens that are not yet supported by local servicers.

4. The integration path of RWA and digital assets encounters obstacles

Viewed from the perspective of the development of RWA (real world assets), this regulatory controversy touches on a deeper issue: the path to the integration of RWA and native digital assets. When traditional asset management institutions explore the field of digital assets, they often adopt a hybrid strategy of "RWA + digital assets". This strategy can not only provide stable income and real asset support through the RWA part, but also gain growth potential and innovation exposure through the digital asset part.

Projects such as BounceBit are practitioners of this type of hybrid strategy. As one of the pioneers of the centralized decentralized finance trend, BounceBit has built a two-tiered income structure: users can pledge tokens representing real assets (such as U.S. Treasury bonds) at the base level to obtain stable income, while participating in on-chain derivatives strategies at the advanced level to optimize performance. In experiments with this model in May 2025, some strategies achieved annualized returns of over 24%.

However, the proposed new regulations may force traditional asset managers planning to get involved in digital assets to reconsider their strategic options. If allocating even a very small proportion of digital assets requires a full set of virtual asset management licenses, institutions may be more inclined to issue "pure RWA" or "pure digital asset" products rather than complex strategies that mix the two. This will undoubtedly inhibit product innovation and asset allocation flexibility.

From the perspective of market practice, institutional-level digital asset allocation is showing a diversified trend. In addition to mature spot assets such as Bitcoin and Ethereum, more and more institutions are beginning to participate in this field through regulated futures, options, structured notes or tokenized real-world assets. The implementation of these complex strategies requires a regulatory framework that understands and adapts to the characteristics of hybrid assets.

Take the Asseto platform as an example. The platform successfully deployed the funding rate arbitrage strategy to the public chain in May 2025, opening this traditional financial strategy to professional investors in an on-chain form for the first time. This kind of innovation that combines traditional financial strategies with blockchain technology is exactly the business format that Hong Kong hopes to cultivate as a digital asset center. Overly rigid regulatory frameworks may hinder such innovative experiments.

5. Comparison and Enlightenment of Global Supervision Practices

Globally, major financial centers have adopted different regulatory strategies for traditional funds’ allocation of crypto assets. Understanding these international practices will help evaluate the rationality and possible adjustment directions of Hong Kong's proposed new regulations.

Singapore, as another important financial center in Asia, has adopted a relatively flexible approach to digital asset regulation. Although Singapore also requires institutions engaging in digital asset-related activities to obtain corresponding licenses, its regulatory framework focuses more on a risk-based approach. For traditional asset management institutions, the Monetary Authority of Singapore (MAS) has provided clearer guidance and transition arrangements to enable institutions to gradually adapt to digital asset regulatory requirements.

As an emerging digital asset center, Dubai has adopted a more open attitude. Dubai has established a dedicated Virtual Asset Regulatory Authority (VARA) to provide a comprehensive regulatory framework for digital asset businesses. Notably, Dubai offers more incentives to attract traditional financial institutions, including tax incentives and streamlined licensing processes. These measures give Dubai a unique advantage in the competition as a global digital asset center.

The EU has established a unified regulatory framework for digital assets through its Markets in Crypto-Assets Regulation (MiCA). MiCA takes an activity-based approach to regulation, imposing requirements based on the specific types of activities an institution engages in. For traditional asset managers, MiCA provides clear boundaries and exemptions, allowing institutions to plan their digital asset strategies more clearly.

Compared with international practice, Hong Kong's proposed "all or nothing" approach appears relatively rigid. The Hong Kong Securities and Futures Professionals Association recommends that regulators reconsider this approach and find a more proportionate regulatory solution. Industry groups have also called for transitional arrangements to be implemented to give existing practitioners time to adapt to the new rules.

The core challenge facing Hong Kong regulators is how to find a balance between "encouraging innovation" and "preventing risks." On the one hand, overly loose regulation may lead to insufficient investor protection and market disorder; on the other hand, overly strict regulation may inhibit innovation and competitiveness. As an international financial center, Hong Kong's regulatory framework not only affects the local market, but also sends signals to the world.

6. Future supervision and industry adaptation direction

Looking forward, there is still room for adjustment in the final shape of Hong Kong’s digital asset regulatory framework. The consultation process will close on January 23, after which the regulator will assess feedback from all parties and may revise the proposals. The industry expects regulatory agencies to consider more refined solutions.

One possible compromise is to establish a graded licensing system. Under this system, different levels of regulatory requirements apply depending on the digital asset allocation ratio or management scale. For example, for institutions with allocations below a certain threshold (such as 5%), a simplified version of the licensing requirements could apply, focusing on information disclosure and risk management rather than a comprehensive compliance system.

Another possibility is to introduce a "sandbox" or experimental arrangement. Allow traditional asset managers to experiment with digital asset allocation within a limited scale and scope while accepting close supervision from regulators. This arrangement gives institutions space to explore while ensuring risks are controlled.

With the success of the pilot, regulatory requirements can be gradually increased and configuration restrictions can be gradually relaxed. Industry groups have also raised the possibility of exemptions for specific types of funds. For example, more flexible regulatory requirements may apply to private equity funds that only target professional investors, as these investors are considered to have higher risk recognition and tolerance. This differentiated regulation based on investor suitability is a common practice in many jurisdictions.

From a broader perspective, this regulatory controversy reflects the growing pains of the digital asset industry from the fringes to the mainstream. As more traditional financial institutions enter this space, the regulatory framework will need to evolve to adapt to the new reality. Hong Kong’s regulatory choices will not only affect the local market, but will also provide an important reference for global digital asset regulation.

For asset managers, no matter how the final regulatory framework is determined, they need to re-evaluate their digital asset strategies. Institutions should consider establishing dedicated digital asset compliance teams, investing in relevant technologies and systems, and strengthening training for practitioners.

At the same time, institutions should actively participate in the regulatory consultation process to ensure that the regulatory framework fully considers the actual situation of the industry.

In the long term, the integration of digital assets and traditional finance is an irreversible trend. Improvements in the regulatory framework will provide a more stable and predictable environment for this integration. As reflected in Hong Kong Policy Declaration 2.0, the change in terminology from “virtual assets” to “digital assets” signals that this asset class is gradually gaining equal status and recognition with traditional assets.

The core of this controversy surrounding Hong Kong’s new virtual asset management regulations is the problem of balancing supervision and efficiency in financial innovation. The industry's doubts about the cost of "1% allocation requires 100% license", and the prudent logic of supervision seeking "full coverage" of risks, together reveal the challenges that must be faced in the process of mainstreaming digital assets.

The result will clearly define Hong Kong's regulatory philosophy as an "international digital asset center" - the key lies in whether refined rules can be designed to ensure safety without stifling progressive exploration. This tests the institutional wisdom of fine-tuning between "encouraging innovation" and "investor protection."

In the first quarter of 2026, this dispute over the "10% exemption" will reach a critical point. Hong Kong’s Legislative Council plans to review relevant bills within the year, and global financial institutions are paying close attention to every regulatory breath of this Oriental financial center.

No matter what the outcome is, Hong Kong’s choice will outline a wide or narrow compliance channel for the integration of traditional finance and digital assets.