The financial landscape in Hong Kong is undergoing a transformative shift with the rapid evolution of virtual assets and blockchain technology. On October 20, 2023, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) jointly issued the Joint Circular on Virtual Asset-Related Activities of Intermediaries (the "New Circular"), replacing the previous guidance from January 28, 2022. This update marks a pivotal moment in Hong Kong’s regulatory framework, reflecting a strategic move toward embracing innovation while maintaining investor protection and market integrity.
The New Circular provides comprehensive guidance for intermediaries holding Type 1 (dealing in securities), Type 4 (advising on securities), and Type 9 (asset management) licenses, particularly regarding their involvement in virtual asset-related products, trading services, advisory roles, and fund management. It also introduces updated conditions in Appendices 6 and 7, specifying additional requirements for firms offering virtual asset services compared to traditional securities activities.
Notably, the revised framework aligns closely with the SFC’s earlier Guidelines for Virtual Asset Trading Platform Operators, highlighting a consistent regulatory approach across platforms and intermediaries. Furthermore, the New Circular emphasizes compliance for tokenized securities—a growing segment that bridges traditional finance with blockchain innovation—indicating the SFC’s intent to support the development of secure and transparent digital markets.
This article explores the key updates introduced by the New Circular, focusing on how financial institutions can navigate the evolving regulatory environment for virtual assets in Hong Kong.
Distribution of Virtual Asset-Related Products
The SFC continues to classify most virtual asset-related products as complex financial instruments. As such, intermediaries distributing these products must comply with the Code of Conduct for Persons Licensed by or Registered with the SFC and the Guideline on Online Distribution and Investment Advisory Platforms, particularly concerning the sale of complex products.
The New Circular further categorizes these products and outlines specific obligations:
(1) Non-Derivative Complex Products
Intermediaries must:
- Provide reasonable and suitable recommendations (regardless of solicitation),
- Disclose product information,
- Issue risk warnings.
These products remain restricted to professional investors only.
(2) Derivative Products (Excluding Specified Exchange-Traded Instruments)
In addition to the above, distributors must:
- Classify investors based on derivatives knowledge,
- Ensure clients understand risks and have sufficient net assets to bear potential losses.
Sales are limited to professional investors.
(3) Exchange-Traded Virtual Asset Derivatives
Products listed on recognized exchanges (e.g., HKEX or 12 other jurisdictions where retail access is permitted) may be sold to retail investors, provided:
- Investor classification and risk understanding requirements are met,
- Reasonable advice is given if solicitation occurs.
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(4) Additional Requirements for All Distributors
Unless dealing with institutional or qualified corporate professional investors, intermediaries must also:
- Conduct virtual asset knowledge assessments before executing trades. Past transaction history (even five or more trades in three years) does not automatically qualify a client.
- Ensure clients have adequate net assets.
- Perform thorough due diligence—especially for unapproved virtual asset funds (see Appendix 4).
- Deliver clear, understandable product disclosures and risk statements.
- Provide enhanced risk disclosures, including legal uncertainty around virtual assets being recognized as “property” and challenges in verifying ownership (Appendix 5).
Providing Virtual Asset Trading Services
Type 1 intermediaries may now offer virtual asset trading services to retail investors, a significant expansion from prior restrictions. However, strict conditions apply:
- Assess retail investors’ knowledge and risk tolerance.
- Set individual exposure limits based on financial circumstances.
- Fully disclose risks associated with virtual asset trading.
- Only facilitate trades through SFC-licensed platforms (holding Type 1, 7, or VASP licenses) via integrated accounts.
- Implement monitoring systems to ensure clients trade only qualified large-cap virtual assets, defined as those included in at least two accepted indices by different providers (e.g., Bitcoin, Ethereum).
Additional universal rules include:
- No provision of financial leverage.
- If soliciting or advising, ensure recommendations involve only qualified large-cap assets available to retail investors.
- Prohibition on using client assets for staking, lending, or yield-generating arrangements.
- Clients may now deposit and withdraw virtual assets, but only through segregated accounts held at SFC-licensed platforms or HKMA-approved financial institutions, with transactions conducted via the client’s wallet address.
- When referring clients directly to a platform, intermediaries must not forward trade instructions or hold client assets.
Asset Management Services Involving Virtual Assets
Type 9 licensed firms managing portfolios with 10% or more exposure to virtual assets must adhere to the Standard Terms and Conditions for Licensed Corporations Managing Portfolios Investing in Virtual Assets (Appendix 7). The New Circular clarifies that Type 1 firms offering discretionary trading as an ancillary service should limit virtual asset exposure to less than 10% of a client’s portfolio.
Retail investors may now access virtual asset management services under two conditions:
- Their understanding and risk capacity must be assessed.
- Investments are restricted to qualified large-cap virtual assets available on SFC-licensed platforms for retail trading.
Providing Advice on Virtual Assets
Both Type 1 (as an ancillary service) and Type 4 intermediaries may advise existing clients on virtual assets. For retail investors, advice is permitted only if:
- The investor’s knowledge and risk profile are evaluated.
- Advice pertains solely to qualified large-cap virtual assets available on licensed platforms.
Tokenized Securities: A New Frontier
The New Circular explicitly addresses tokenized securities, requiring intermediaries to comply with existing securities regulations and any future conduct standards issued by the SFC. This signals regulatory recognition of tokenized real-world assets (RWA) and security token offerings (STO) as legitimate financial instruments within Hong Kong’s ecosystem.
While detailed rules are pending, this provision lays the groundwork for a structured, compliant market—potentially unlocking trillions in digitized asset value.
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Ongoing Reporting Obligations
Intermediaries must:
Notify the SFC (and HKMA, if applicable) in advance of:
- Engaging in activities involving virtual assets or tokenized securities,
- Changing client categories or service scope.
- Report any actual or suspected material breaches promptly.
Transition Period and Implementation
Firms currently serving non-institutional professional investors have a three-month transition period to align systems and controls with the new requirements. Those planning to expand services—including offering retail access—must ensure full compliance before launch.
Frequently Asked Questions (FAQ)
Q: Can retail investors now trade virtual assets through licensed intermediaries?
A: Yes, under strict conditions including knowledge assessment, risk disclosure, exposure limits, and use of SFC-licensed platforms offering qualified large-cap assets like Bitcoin and Ethereum.
Q: What are “qualified large-cap virtual assets”?
A: These are high-liquidity digital assets included in at least two accepted indices by different providers. Bitcoin and Ethereum currently meet this criterion.
Q: Are intermediaries allowed to hold client virtual assets?
A: No direct custody. Clients may deposit/withdraw via segregated accounts at licensed platforms or approved financial institutions, accessed through their own wallet addresses.
Q: What changes apply to asset managers investing in virtual assets?
A: Firms allocating 10% or more of a portfolio to virtual assets must follow enhanced SFC terms. Retail access is allowed only for qualified large-cap assets.
Q: How does the regulation treat tokenized securities?
A: They are subject to existing securities laws plus forthcoming SFC guidelines, positioning Hong Kong as a leader in regulated digital securities markets.
Q: Is there a deadline for compliance?
A: A three-month transition period applies for existing providers; new entrants must be fully compliant before launching services.
Conclusion
Hong Kong’s updated regulatory framework reflects a balanced approach—fostering innovation while safeguarding market integrity. By allowing retail access under controlled conditions and signaling support for tokenized securities, the SFC is paving the way for Hong Kong to become a global hub for digital finance.
As the ecosystem evolves, institutions must stay ahead of compliance requirements, leverage secure infrastructure, and prepare for deeper integration between traditional finance and blockchain-based services.