Author: Liang Yu

Editor: Zhao Yidan

On January 20, the Hong Kong Securities and Futures Professional Association (HKSFPA) submitted comments to the regulatory authorities, clearly opposing the proposed removal of the "10% virtual asset allocation exemption" under the current Type 9 license. The association warned that this change would mean that even a 1% allocation to crypto assets would require traditional asset management institutions to apply for a full virtual asset management license, resulting in a severe mismatch between compliance costs and minimal risk exposure, potentially stifling the industry's incremental innovation.

The tightening of regulations is sometimes not to hinder progress but to establish a new order amid chaos. Hong Kong's regulatory authorities are pushing for digital asset management to transition from "exceptional exemptions" to a "fully regulated" era, attempting to cover all possible risk corners with a unified and stringent licensing network. However, the industry's voice reminds us that excessively high compliance thresholds may deter cautious explorers, thereby delaying the integration of traditional finance and digital assets.

A deeper conflict lies in the future path of RWA (Real World Assets). Many institutions are exploring a hybrid strategy of "RWA + digital assets," adding innovative growth points on a solid foundation of underlying assets. However, the "all or nothing" regulatory logic may force strategies into polarization: either pure RWA or pure digital assets, making the innovative space in between difficult to establish. Does this binary choice truly align with the essence of risk management?

The consultation period will end on January 23, and the outcome of this controversy not only concerns the compliance costs of hundreds of local asset management institutions in Hong Kong but will also test Hong Kong's commitment as an "international digital asset center"—whether it can design "smart regulation" that encourages incremental exploration or will build a high wall that keeps cautious testers at bay. Major global financial centers are all seeking a balance, and Hong Kong's choice will become an important model.

1. New Regulations Spark Strong Opposition in the Industry

In January 2026, a circular from the Hong Kong Securities and Futures Professional Association (HKSFPA) stirred waves in the intersection of traditional finance and digital assets. The association explicitly opposed the proposed new regulations for virtual asset management that would eliminate the "micro-exemption" clause in its submission to the regulatory authorities.

Under Hong Kong's current regulatory framework, institutions holding a Type 9 (Asset Management) license can allocate up to 10% of their total managed fund assets to virtual assets without needing to apply for a separate virtual asset management license, merely notifying the Securities and Futures Commission (SFC).

This arrangement is seen as a "safe passage" for traditional asset management institutions to cautiously explore the digital asset field.

The proposed new regulations would completely change this situation. According to Cointelegraph, the reform plan aims to eliminate this percentage threshold, meaning that even a 1% allocation to digital assets like Bitcoin would require the relevant institutions to apply for and obtain a full virtual asset management license.

This "all or nothing" regulatory approach has been criticized by industry groups for its lack of proportionality.

The Hong Kong Securities and Futures Professional Association warned that this arrangement would bring disproportionate compliance costs in the case of limited risk exposure, potentially hindering traditional asset management institutions from attempting to enter the crypto asset field.

This industry backlash targets a regulatory framework that has entered the fast lane. In December of last year, Hong Kong authorities released a summary report of the reform proposals following a public consultation that began in June.

2. Regulatory Thinking Shifts from "Exceptions" to "Norms"

To understand the essence of this controversy, one must trace the evolution of digital asset regulation in Hong Kong. The current arrangement allowing Type 9 license holders to allocate virtual assets within a 10% limit without needing an additional license dates back to the framework established in November 2018. This arrangement is essentially a transitional measure, providing traditional financial institutions with a controllable risk exploration space during a time when digital asset regulation was not yet fully mature.

The reforms now being promoted by Hong Kong's regulatory authorities mark a fundamental shift in regulatory thinking. The SFC defended the removal of the threshold in its consultation conclusions in December 2025, stating that it was to prevent companies from circumventing regulations 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-Terrorist Financing Ordinance. According to Coinspeaker, managers without a new license could face up to 7 years in prison and fines of up to 5 million HKD.

This tightening of regulations is closely related to Hong Kong's grand strategy of building a "global digital asset center." The Secretary for Financial Services and the Treasury, Christopher Hui, has described this licensing system as "an important step in strengthening our legal framework for digital assets."

Since the launch of the trading platform system in June 2023, Hong Kong has been accelerating its issuance of crypto licenses. 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 released the "Hong Kong Digital Asset Development Policy Declaration 2.0," clearly stating the unified use of the term "digital assets" to replace "virtual assets."

This terminology shift is not just a change in wording but a redefinition of the essence of the asset class. The term "virtual" can easily lead to misunderstandings of "detachment from reality," while "digital assets" more accurately emphasizes their nature as valuable, tradable assets.

3. Traditional Asset Management Institutions Face Cost Dilemmas

For traditional asset management institutions, the most direct impact of the proposed new regulations is a sharp increase in compliance costs. According to industry group assessments, obtaining a full virtual asset management license means significant resource investment in legal fees, compliance personnel, system upgrades, and ongoing reporting. This cost is severely mismatched with the actual risks borne by institutions that only allocate a very small percentage to digital assets.

Traditional asset management institutions typically adopt a gradual strategy when entering the digital asset field. According to Cointelegraph's industry research, most institutions (especially small and medium-sized ones) still maintain digital asset allocations below 1% of their portfolios. This cautious attitude reflects a balance between institutions' risk awareness and return expectations regarding the emerging asset class.

The core concern raised by the Hong Kong Securities and Futures Professional Association is that the new regulations may "hinder traditional asset managers from gradually attempting or allocating crypto assets." This warning is not without merit, as for many traditional institutions, digital asset allocation is still in the experimental stage. They need to test internal processes, risk assessment models, and client responses in practice before considering expanding their allocation ratios.

In addition to direct licensing costs, the proposed custody requirements have also raised industry concerns. The new regulations require virtual asset managers to use only SFC-licensed custodians for asset custody. For early token investments and Web3 venture capital, industry groups believe this requirement is unrealistic. Particularly when private equity and venture capital funds invest in early tokens that local service providers do not yet support, compliant custody becomes especially challenging.

4. RWA and Digital Asset Integration Pathways Encounter Obstacles

From the perspective of RWA (Real World Assets) development, this regulatory controversy touches on a deeper issue: the integration pathways of RWA and native digital assets. Traditional asset management institutions often adopt a hybrid strategy of "RWA + digital assets" when exploring the digital asset field. This strategy can provide stable returns and real asset support through the RWA portion while gaining growth potential and innovative exposure through the digital asset portion.

Projects like BounceBit are practitioners of this hybrid strategy. As one of the pioneers of the centralized decentralized finance trend, BounceBit has built a dual-layer revenue structure: users can stake tokens representing real assets (such as U.S. Treasury bonds) on the base layer to earn stable returns while participating in on-chain derivative strategies at the higher level to optimize performance. In experiments conducted in May 2025, certain strategies achieved annualized returns exceeding 24%.

However, the proposed new regulations may force traditional asset management institutions planning to venture into digital assets to reconsider their strategic choices. If even a minimal allocation of digital assets requires a full virtual asset management license, institutions may prefer to issue "pure RWA" or "pure digital asset" products rather than complex strategies that mix both. This will undoubtedly suppress product innovation and flexibility in asset allocation.

From market practice, institutional-level digital asset allocations are showing a trend of diversification. In addition to mature spot assets like Bitcoin and Ethereum, an increasing number of 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 can understand and adapt to the characteristics of hybrid assets.

For example, the Asseto platform successfully deployed a funding rate arbitrage strategy on a public chain in May 2025, opening this traditional financial strategy to professional investors in an on-chain format for the first time. This innovation, which merges traditional financial strategies with blockchain technology, is precisely the type of business model that Hong Kong hopes to cultivate as a digital asset center. An overly rigid regulatory framework may hinder such innovative experiments.

5. Global Regulatory Practices Comparison and Insights

Globally, major financial centers have adopted different regulatory strategies regarding traditional funds' allocation of crypto assets. Understanding these international practices can help assess the reasonableness of Hong Kong's proposed new regulations and possible adjustment directions.

Singapore, as another important financial center in Asia, has adopted a relatively flexible approach to digital asset regulation. While Singapore also requires institutions engaged in digital asset-related activities to obtain the appropriate licenses, its regulatory framework places more emphasis on a risk-based approach. For traditional asset management institutions, the Monetary Authority of Singapore (MAS) provides clearer guidance and transitional arrangements, allowing institutions to gradually adapt to digital asset regulatory requirements.

Dubai, as an emerging digital asset center, has taken a more open attitude. Dubai has established a dedicated Virtual Assets 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 benefits and streamlined licensing processes. These measures have given Dubai a unique advantage in the global competition for digital asset centers.

The European Union has established a unified digital asset regulatory framework through its Markets in Crypto-Assets Regulation (MiCA). MiCA adopts an activity-based regulatory approach, imposing corresponding requirements based on the specific activities in which institutions engage. For traditional asset management institutions, MiCA provides clear boundaries and exemption conditions, allowing institutions to plan their digital asset strategies more clearly.

Compared to international practices, Hong Kong's proposed "all or nothing" approach appears more rigid. The Hong Kong Securities and Futures Professional Association has suggested that regulatory authorities reconsider this approach and seek a more proportional regulatory solution. Industry groups have also called for the implementation of transitional arrangements to provide existing practitioners with time to adapt to the new regulations.

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

6. Future Regulatory and Industry Adaptation Directions

Looking ahead, there is still room for adjustment in the final form of Hong Kong's digital asset regulatory framework. The consultation process will end on January 23, after which regulatory authorities will evaluate feedback from all parties and may revise the proposals. The industry hopes that regulatory authorities will consider more refined solutions.

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

Another possibility is to introduce a "sandbox" or experimental arrangement. This would allow traditional asset management institutions to experiment with digital asset allocations within a limited scale and scope while being closely monitored by regulatory authorities. This arrangement provides institutions with exploration space while ensuring that risks are controlled.

As pilot programs succeed, regulatory requirements can be gradually increased, and allocation restrictions can be gradually relaxed. Industry groups have also proposed the possibility of exemptions for specific types of funds. For instance, private funds aimed solely at professional investors could be subject to more flexible regulatory requirements, as these investors are considered to have a higher capacity for risk recognition and tolerance. This differentiated regulation based on investor appropriateness is a common practice in many jurisdictions.

From a broader perspective, this regulatory controversy reflects the growing pains of the digital asset industry transitioning from the margins to the mainstream. As more traditional financial institutions enter this field, the regulatory framework needs to continuously evolve to adapt to new realities. Hong Kong's regulatory choices will not only impact the local market but also provide important references for global digital asset regulation.

For asset management institutions, regardless of how the final regulatory framework is determined, there is a need to reassess their digital asset strategies. Institutions should consider establishing dedicated digital asset compliance teams, investing in relevant technologies and systems, and enhancing training for personnel.

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

In the long run, the integration of digital assets and traditional finance is an irreversible trend. The improvement of the regulatory framework will provide a more stable and predictable environment for this integration. As reflected in Hong Kong's Policy Declaration 2.0, the shift in terminology from "virtual assets" to "digital assets" marks the gradual recognition and equal status of this asset class alongside traditional assets.

The controversy surrounding Hong Kong's new regulations for virtual asset management centers on the challenge of balancing regulation and efficiency in financial innovation. The industry's cost concerns regarding "1% allocation requiring 100% licensing" and the regulatory pursuit of comprehensive risk coverage together reveal the adjustments that must be faced in the process of mainstreaming digital assets.

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

In the first quarter of 2026, this controversy over the "10% exemption" will reach a critical juncture. The Hong Kong Legislative Council plans to review related bills within the year, while global financial institutions are closely monitoring every regulatory move of this Eastern financial center.

Regardless of the outcome, Hong Kong's choices will outline a compliance pathway, whether broad or narrow, for the integration of traditional finance and digital assets.

Some sources of information:

· "Hong Kong's Major Upgrade! 'Digital Assets' Officially Replace 'Virtual Assets,' Four Strategies Reshape the Global Financial New Order"

· "Hong Kong Industry Opposes Strengthening Regulation of Asset Management Virtual Asset Licenses, Fearing It Will Hinder Traditional Institutions from Entering"

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