Written by: Xiao Za Legal Team
Recently, the new regulatory rules for virtual assets jointly released by the Hong Kong Securities and Futures Commission (SFC) and the Financial Services and the Treasury Bureau (FSTB) have attracted widespread attention in the industry. The most significant change is that the previous focus on regulating trading platforms is now expanding to the entire business chain—from over-the-counter (OTC) trading, investment advice, to asset management, all included under a unified licensing system.
In response, many people's first reaction is "Another layer of approval", but a close reading of the documents reveals that the regulatory intent is not to create barriers, but to establish a clear, stable, and predictable rule system. This system not only improves upon the previous VATP system but also provides certainty signals for institutional funds and long-term capital.
In other words, Hong Kong is not contracting but is paving the way for larger-scale compliant capital to enter. For institutions that genuinely want to develop long-term here, the focus should not be on anxiety about "whether to obtain a license", but rather on how to effectively utilize this set of rules.
1. How to obtain an OTC license? What are the thresholds?
In the past, over-the-counter (OTC) trading of virtual assets has long been in a regulatory gray area. Many institutions believed that as long as they did not directly operate an exchange aimed at the public, they did not need to apply for a license. However, this understanding was completely shattered at the end of 2025— the Hong Kong Securities and Futures Commission and the Financial Services and the Treasury Bureau jointly announced the formal initiation of the licensing legislative process for virtual asset OTC traders.
The new rules clearly state: any entity providing large-scale fiat currency and virtual asset exchange services to clients in a business manner, regardless of whether it is profitable or claims to be a "technology platform" or "intermediary," constitutes a regulated activity and must apply for a license. This means that OTC business has officially transitioned from the "self-regulatory exploration" phase to the "statutory licensing" era.
(1) Who needs a license? What entities are covered by regulation?
The core judgment standard for regulation is not subjective intent or revenue model, but whether the activities are conducted "in a business manner." Accordingly, the following types of institutions will fall under the licensing scope:
Professional OTC market makers: Providing large-scale buy and sell quotes for mainstream assets like Bitcoin and Ethereum to institutional clients, family offices, or high-net-worth individuals;
OTC departments of trading platforms: Even if the main platform holds a Virtual Asset Trading Platform (VATP) license, if its large transactions or fiat currency channels operate as independent business lines, a separate OTC license must still be applied for;
Financial technology companies providing fiat currency deposit and withdrawal services: If they essentially provide two-way exchange services between virtual assets and fiat currency, and possess continuity and commercial characteristics;
Cross-border payment or remittance service providers: If they use virtual assets as intermediaries to complete cross-border fund transfers, they may also trigger licensing requirements.
It is worth noting that even non-profit or auxiliary services, as long as they have repetitiveness and organization, may be deemed regulated activities. For example, if a private equity fund regularly provides BTC/USD exchange services to its limited partners (LPs) as a value-added service, even if no separate fee is charged, it may still be considered as engaging in OTC business.
(2) Licensing thresholds: It's not just about "submitting materials," but also about building systematic compliance capabilities
The proposed OTC license will be designed based on the framework of the traditional Type 1 (Securities Trading) license, but with higher and more specific compliance requirements due to the unique risks associated with virtual assets:
Capital adequacy: Applicants must maintain a minimum paid-up capital (expected to be no less than HKD 5 million) and have liquidity reserves to cope with market fluctuations and counterparty defaults;
Anti-money laundering and KYC systems: Must establish customer due diligence processes that comply with FATF international standards and implement enhanced scrutiny for large transactions (e.g., single transactions exceeding HKD 800,000);
Transaction monitoring and reporting mechanisms: All transactions must be traceable and auditable, and suspicious activities must be reported to the SFC as required by regulation;
Security of fund settlement: Cash settlement is strictly prohibited. Licensed OTC must complete fiat currency settlements through regulated banking channels; if physical delivery is necessary, it must occur in designated vaults or approved secure locations;
Technical risk control capabilities: Encouraged to adopt smart contracts, on-chain collateral, or third-party custody mechanisms to reduce human operational risks—this requirement is a direct response to the offline OTC security risks exposed by the "hundred million cash robbery case" in December 2025.
(3) "Unintentional violations" are not a reason for exemption: The space for exemptions has essentially disappeared
A crucial detail in the new rules is that whether an activity constitutes a regulated activity depends on whether the behavior itself is conducted "in a business manner," rather than whether there is intent to engage in financial business or whether profits are made.
Similar logic applies to other virtual asset businesses. For example, if a research institution regularly sends market reports containing specific token purchase recommendations to paid subscribers, even if no separate "investment advisory fee" is charged, as long as the service is part of its regular business, it may be deemed to be engaging in regulated activity of Type 4 (providing opinions on virtual assets).
Likewise, a family office's investment portfolio for clients that includes even just 3% Bitcoin can no longer rely on the previous vague area of "small holdings being exempt." The new rules explicitly cancel such proportional exemptions, sending a clear signal: risks do not disappear due to small scale, and responsibilities are not exempted due to "unintentional violations." No platform or institution can evade compliance obligations by claiming "we didn't intend to engage in financial business."
2. Custody requirements may seem tightened, but they actually open up channels for institutional funds
It is noteworthy that the new rules clearly state that there will be no "deemed to be licensed" arrangements for existing service providers. This means that regardless of whether you currently have users or have been operating for many years, if you do not complete a formal application by the time the regulations take effect, you must cease related business.
This stands in stark contrast to the "grandfathering" practices in some markets. Hong Kong has chosen a stricter but fairer path: all participants start from the same starting line and apply under the same set of standards.
For institutions, this means they can no longer wait for "policy clarity before taking action." With less than three weeks until the consultation deadline (January 23, 2026), after which the legislative process will begin, it is recommended that teams already engaged in related businesses immediately do three things:
Identify which aspects of their existing business may trigger licensing requirements;
Confirm with the SFC or legal advisors whether any exemption scenarios apply;
Initiate the pre-application process, including capital preparation, custody integration, and risk control document organization.
Starting early reduces the risk of business interruption.
3. There are no "transitional period benefits," only "advantages for early preparation"
Another somewhat controversial point is that client assets must be held by custodians recognized by the SFC. Some practitioners worry that this will limit operational flexibility, especially for teams accustomed to self-custody or multi-signature solutions.
However, from another perspective, this requirement precisely addresses the biggest concern of institutional investors—asset security. One of the core obstacles preventing pension funds, sovereign wealth funds, and large asset management companies from entering the virtual asset space on a large scale is the lack of custody solutions that meet regulatory standards.
By mandating licensed platforms to use compliant custody, Hong Kong sends a signal to global capital: here, client assets are strictly separated from the platform's own assets, with independent audits, regulatory oversight, and accountability mechanisms. This institutional arrangement is more effective in alleviating traditional capital concerns than technical "decentralization."
In Conclusion
The Xiao Za team believes that the virtual asset industry has experienced a process of enthusiasm to correction over the past few years. Now, the market no longer pursues "speed" and "novelty," but places greater importance on "stability" and "trustworthiness."
This regulatory upgrade in Hong Kong aligns with this trend. It does not deny innovation but rather incorporates innovation into a regulatory framework. For practitioners, the real opportunity lies not in exploiting loopholes or skirting the edges, but in who can first transform compliance capabilities into service advantages—such as demonstrating a complete custody chain, clear suitability assessment processes, and verifiable transaction records to clients. These details will become the core basis for institutions to choose partners in the future.
Compliance is not the end point, but the starting point for participating in the next round of competition.
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