Evolution of Virtual Asset Regulation in Hong Kong: From Risk Reminders to Opportunity-Oriented

In recent years, virtual assets have rapidly developed globally, presenting new challenges to the TradFi system and regulatory framework. Virtual assets are characterized by significant price fluctuations and high trading leverage, which pose numerous difficulties for regulatory authorities and trading platforms, such as cross-border capital flow regulation, customer identification, and systemic financial risk prevention. This indicates that the regulation of virtual assets requires collaboration among multiple parties.

Hong Kong, as the world's third-largest financial center, plays an important role in the regulation of virtual assets. On one hand, Hong Kong needs to promote the development of the global virtual asset market; on the other hand, it must ensure financial stability. Hong Kong must seek a balance between connecting international capital markets and maintaining financial security, and it is also an important window for China to explore emerging financial markets. Therefore, the regulatory path for virtual assets in Hong Kong is relatively complex, requiring constant reconciliation between globalization and localization, innovation and stability.

From 2017 to 2021, it was the initial phase of virtual asset regulation in Hong Kong. This stage was primarily focused on risk warnings and gradually introduced pilot regulatory measures. The regulatory attitude transitioned from cautious observation to orderly regulation. Key measures include:

• In September 2017, the Securities Regulatory Commission issued a statement indicating that some ICOs may constitute securities and need to be regulated.
• In December 2017, financial institutions were required to ensure that cryptocurrency-related products comply with existing regulations.
• In November 2018, it was proposed to include compliant virtual asset trading platforms in a regulatory sandbox.
• In March 2019, the definition of STO was established, specifying the responsibilities of intermediaries.
• In November 2019, proposed a licensing system for virtual asset trading platforms.
• In November 2020, there were plans to include virtual asset service providers in the licensing system.
• In May 2021, the introduction of the VASP licensing system was officially confirmed.

At this stage, Hong Kong is gradually shifting from indicating risks to specific regulations, starting to define the responsibilities of market participants. Regulatory agencies recognize that virtual assets will become an important component of the financial market, and their attitude is gradually turning towards positive management. However, the principle of "voluntary participation" still applies, and platforms can choose whether to apply for a license and accept regulation.

The introduction of the "regulatory sandbox" mechanism is noteworthy. This practice, originating from the UK, allows emerging fintech to be tested in a specific environment without fully meeting existing regulatory requirements. The sandbox mechanism helps provide development space for innovative projects and is a process of exploration shared by regulators and the market.

In contrast, mainland China has maintained a high-pressure stance on crypto assets, halting ICOs in 2017 and shutting down trading platforms, continuously strengthening regulations since then. Amid polarized regulatory directions, Hong Kong has chosen a prudent approach, neither aggressively allowing nor implementing a blanket ban. As a financial special zone under "one country, two systems," Hong Kong has not rushed to establish an independent path at this stage.

The year 2022 became a watershed for Hong Kong's virtual asset regulatory policy. On October 31, the Treasury Bureau released its first policy declaration, clearly stating that it would actively promote the development of the virtual asset ecosystem. This marks a shift in regulatory thinking from "risk-oriented" to "opportunity-oriented," establishing a strategic direction for subsequent institutional reforms.

This transformation is primarily based on two considerations: first, the intensification of international competition necessitates Hong Kong to maintain its status as a financial center; second, the demand from the market's longer parties has spawned a critical connecting role for Hong Kong. This is not only a response to the innovative financial market but also an active strategic choice for Hong Kong to uphold its status as a financial center in a complex international environment.

Since 2023, the regulation of virtual assets in Hong Kong has entered the "practical implementation" phase, with policies shifting from "declaration" to "execution." The main measures include:

• In February 2023, the first tokenized green bond was issued.
• In June 2023, the VASP licensing system was implemented, and the first two platforms were approved.
• In the same month, the "Anti-Money Laundering and Terrorist Financing (Amendment) Regulations" came into effect, requiring virtual asset trading platforms to operate with a license.
• In August 2023, the first licensed exchange open to retail investors was launched.
• In November 2023, a circular on activities related to tokenized securities will be issued.
• In December 2023, the sale of virtual asset-related ETFs will be allowed.
• In January 2024, the first issuance of tokenized securities subject to Hong Kong law.
• In March 2024, launch the "Ensemble Project" to explore the integration of tokenized assets and wCBDC.
• In July 2024, launch the stablecoin regulatory sandbox program.
• Multiple RWA projects will be implemented from August 2024 to March 2025.
• In February 2025, the second "Virtual Asset Policy Declaration" will be announced.
• In March 2025, the number of licensed exchanges increased to 10, and the SFC released the "A-S-P-I-Re" regulatory roadmap.

Hong Kong's regulation of virtual assets adopts a "stamp-style regulation" strategy based on the existing legal framework, providing "patchwork" regulation for digital assets through the issuance of guidelines or circulars. This approach is efficient, highly adaptable, and aligns with Hong Kong's positioning as an international financial center.

Hong Kong tends to view virtual assets as an extension of financial assets, incorporating them into a familiar regulatory framework. This not only reduces the costs of regulatory coordination but also builds a bridge between financial institutions and emerging technology companies, promoting the integration of institutional transformation and industrial development.