Interpretation of the New Regulations on Virtual Asset Regulation in Hong Kong: OTC Trading is Coming! The OTC merchant business of virtual assets needs to be officially certified! Not only trading platforms, but also the entire virtual currency asset business chain, from over-the-counter exchange, investment advice to asset management, must be subject to unified supervision. Is this paving the way for large capital to enter? Recently, the new regulations on virtual asset regulation jointly released by the Securities and Futures Commission (SFC) and the Financial Services and the Treasury Bureau (FSTB) in Hong Kong have attracted widespread attention in the industry. The most significant change is that the previous practice of mainly regulating trading platforms is expanding to the entire business chain - from over-the-counter trading, investment advice, to asset management, all of which are now included in a unified licensing system. Many people's first reaction to this is' another round of approval ', but upon closer reading of the documents, it can be found that the regulatory authorities' intention is not to set up barriers, but to establish a clear, stable, and predictable system of rules. This system not only improves the previous VATP system, but also sends a deterministic signal to institutional funds and long-term capital. In other words, Hong Kong is not shrinking, but paving the way for larger scale compliance capital to enter. For institutions that truly want to develop here in the long term, it's not about anxiety about whether or not to hold a license, but about thinking about how to make good use of this set of rules. 1、 How to get OTC cards? How high is the threshold? In the past, over-the-counter (OTC) trading of virtual assets has long been in a regulatory gray area. Many institutions believe that as long as the exchange is not directly operated to the public, there is no need to apply for a license. However, this perception will be completely shattered by the end of 2025- the Hong Kong Securities and Futures Commission and the Financial Services and the Treasury Bureau jointly announced the official launch of the legislative process for the licensing system for over-the-counter virtual asset traders. The new regulations clearly state that any entity that provides high-value fiat currency and virtual asset exchange services to customers in the form of business, regardless of whether it is profitable, whether it claims to be a "technology platform" or a "matching intermediary", constitutes regulated activities and must apply for a license. This means that OTC business has officially entered the era of "legal licensing" from "self regulatory exploration". （1） Who needs a license? Which entities are covered by regulation? The core criterion for regulatory judgment is not subjective intention or revenue model, but whether the relevant activities are carried out in the form of business. Accordingly, the following types of institutions will be included in the scope of licensing: 1. Professional OTC market maker: provides large buying and selling quotes for mainstream assets such as Bitcoin and Ethereum for institutional clients, family offices, or high net worth individuals; 2. Off exchange department of the trading platform: Even if the main platform already holds a Virtual Asset Trading Platform (VATP) license, if its bulk trading or fiat currency channel operates as an independent business line, it still needs to apply for an OTC license separately; 3. Financial technology companies that provide fiat currency deposit and withdrawal services: if they essentially provide two-way exchange services between virtual assets and fiat currency, and have sustainable and commercial characteristics; 4. Cross border payment or exchange service providers: If virtual assets are used as intermediaries to complete cross-border fund transfers, it may also trigger licensing requirements. It is worth noting that even non-profit or ancillary services, as long as they are repetitive and organized, may be recognized as regulated activities. For example, if a private equity fund regularly provides BTC/USD exchange services to its limited partners (LPs) as value-added services, even without separate fees, it may be considered engaged in OTC business. （2） Licensing threshold: not just "submitting materials", but also building systematic compliance capabilities The proposed OTC license will be designed based on the framework of traditional securities Class 1 (securities trading) license, but higher and more specific compliance requirements have been proposed for the special risks of virtual assets 1. Capital adequacy: The applicant must maintain a minimum paid in capital (expected to be no less than HKD 5 million) and have liquidity reserves to cope with market fluctuations and counterparty defaults; 2. Anti money laundering and KYC system: A customer due diligence process that complies with FATF international standards must be established, and strengthened scrutiny must be implemented for large transactions (such as single transactions exceeding HKD 800000); 3. Transaction monitoring and reporting mechanism: All transactions must be traceable and auditable, and suspicious activities must be reported to SFC in accordance with regulatory requirements; 4. Fund settlement security: Cash delivery is strictly prohibited. Licensed OTC must complete fiat currency settlement through regulated banking channels; If physical delivery is necessary, it must be carried out in a designated safe deposit box or an approved secure location; 5. Technical risk control capability: Encourage the use of 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 in the December 2025 "billion yuan cash robbery case". （3） 'Unintentional violation' is not a reason for exemption: the exemption space has basically disappeared A crucial detail in the new regulations is that whether it constitutes regulated activity depends on whether the behavior itself belongs to the "business form", rather than whether it intends to engage in financial business or profit from it. Similar logic also applies to other virtual asset businesses. For example, if a research institution regularly sends market weekly reports containing specific token buying recommendations to paying subscribers, even if it does not charge a separate "investment advisory fee", as long as the service is part of its regular business, it may be deemed to engage in Class 4 regulated activities (providing advice on virtual assets). Similarly, even if only 3% of Bitcoin is included in the investment portfolio configured by the family office for clients, it can no longer rely on the ambiguous zone of "exemption for small holdings" in the past. The new regulations explicitly cancel such proportional exemptions, sending a clear signal that risks will not disappear due to small scale, and responsibilities will not be exempted due to "unintentional violations". No platform or institution can evade compliance obligations under the pretext of 'we have no intention of doing financial business'. 2、 The seemingly tightened custody requirements actually open up institutional funding channels It is worth noting that the new regulations explicitly state that there will be no arrangements for existing service providers to be deemed licensed. This means that regardless of whether you already have users or have been operating for many years, as long as you have not completed the formal application when the regulations come into effect, you must stop the relevant business. This is in stark contrast to the 'grandfathering' practice in some markets. Hong Kong has chosen a stricter but fairer path: all participants stand on the same starting line and apply according to the same set of standards. For institutions, this means that they can no longer wait for 'policy clarity before taking action'. 3、 There is no 'transitional dividend', only the 'advantage of early preparation' Another controversial point is that client assets must be entrusted to a custodian recognized by SFC for safekeeping. Some practitioners are concerned that this may limit operational flexibility, especially for teams accustomed to using self hosted or multi signature solutions. But from a different perspective, this requirement precisely addresses the biggest concern of institutional investors - asset safety. One of the core obstacles for pension funds, sovereign funds, and large asset management companies to enter the virtual asset field on a large scale is the lack of custody solutions that meet regulatory standards. The mandatory use of compliant custody by licensed platforms in Hong Kong sends a signal to global capital that customer assets and platform owned assets are strictly isolated here, with independent auditing, regulatory supervision, and accountability mechanisms. This institutional arrangement can dispel the doubts of traditional funds more effectively than technological "decentralization". The regulatory upgrade in Hong Kong is in line with this trend. It does not negate innovation, but rather puts innovation into the container of the system. For practitioners, the real opportunity lies not in taking advantage of loopholes or playing around the edges, but in who can take the lead in transforming compliance capabilities into service advantages - such as showcasing 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. ——Xiao Sa