Hong Kong’s Digital Asset Regulatory Landscape: The Current State, What’s Next and How to Prepare

Hong Kong’s approach to digital asset regulation has consistently advanced, turning policy into mandatory regulation.

Hong Kong’s regulatory framework is moving from foundational rules to expanded oversight and innovation enablement. Here’s what’s on the horizon:

• Expanded Virtual Asset Dealing Regime (2025)
  Expect broader licensing requirements for OTC brokers, custodians, and firms offering VA-fiat conversions, block trades, and underwriting. Marketing will be restricted to licensed entities only.
• Dedicated Virtual Asset Custodian License
  Custody is expected to become one of the most scrutinized areas of compliance. Firms safeguarding client assets will face stringent cybersecurity, governance, and independent infrastructure assessments.
• Stablecoin Regulation in Practice
  With the Stablecoins Ordinance now in force in Hong Kong, issuers must maintain 100% reserve backing and operate within a closed loop of regulated entities. This opens opportunities for institutional-grade stablecoin products.
• Retail Access Expansion
  The SFC is signalling greater retail participation under strict investor protection measures—creating new distribution channels for compliant platforms.

Regulation in Hong Kong isn’t just about compliance—it’s a competitive advantage. Here’s how firms can leverage the new landscape to enable institutional participation:

• Institutional Trust
  Licensed platforms gain credibility with global investors, enabling partnerships and cross-border flows.
• Product Innovation
  The lifting of track record requirements for certain virtual assets will accelerate tokenization and stablecoin offerings, reducing product launch uncertainty.
• First-Mover Advantage
  Early compliance positions firms to capture market share as retail access and institutional adoption grow.

To thrive in Hong Kong’s regulated digital asset market, firms should:

• Map Your Business Model against SFO, AMLO, and MSO requirements
• Identify Required Licenses (VATP, VA Dealing, Custodian, MSO)
• Invest in Governance & Cybersecurity frameworks
• Implement AML/CFT Infrastructure including on-chain analytics
• Prepare for Stablecoin Integration with HKMA standards
• Engage Regulators Early for clarity and faster approvals

• Underestimating Transition Timelines – Transitional windows are strictly enforced in Hong Kong. Grace periods are short; delays can mean loss of market access.
• Ignoring Retail Investor Rules – Missteps in disclosure and risk safeguards can lead to enforcement actions.
• Weak Custody Controls – Non-compliance with wallet segregation and cold storage requirements is a major enforcement risk.

Alongside SFC oversight on virtual asset trading, firms engaged in crypto-fiat conversion or cross-border remittance may fall under the Money Service Operator (MSO) regime, regulated by the Customs and Excise Department (C&ED).

What is an MSO License?

A MSO license is a regulatory authorisation for firms that provide fiat-related financial services, including money changing, cross-border remittance, or crypto-fiat conversion. This licensing ensures that all fiat-linked or cross-border elements of digital finance operate within Hong Kong’s legal and regulatory standards, complementing the SFC’s oversight of virtual asset activities.

When is an MSO License Required?

An MSO license is typically required for:

• Money changing between fiat and stablecoin/crypto assets
• Cross-border remittance services involving transfer of funds or equivalent value
• On/off-ramp services between banking systems and virtual assets

Key MSO Compliance Obligations

• Fit-and-proper management structure
• Comprehensive AML/CFT framework
• Transaction monitoring and reporting systems
• Regular internal reviews and compliance audits

Why It Matters:

This framework complements SFC supervision, ensuring all fiat-linked or cross-border elements of digital finance meet equivalent AML/CFT standards. For firms offering on/off-ramp services, MSO licensing is not optional—it’s essential for legal operation and client trust.

• Tokenization of Real-World Assets – Expect regulatory clarity on tokenized securities and funds.
• Interoperability with Global Markets – Hong Kong’s frameworks may become a model for cross-border VA trading.
• AI-Driven Compliance – Automated transaction monitoring and risk scoring will become standard.

Situation

A leading global remittance provider sought to expand its offerings to Hong Kong by introducing digital token payment services alongside its traditional money transfer operations. This required obtaining an additional license and meeting stringent regulatory expectations for virtual asset service providers.

The firm needed to:

• Integrate digital asset compliance into its existing high-volume cross-border framework.
• Adapt AML/KYC processes for virtual assets.
• Develop policies and operational controls to satisfy regulatory scrutiny.
• Respond effectively to regulator queries to secure timely licensing.

Activities Performed

Waystone provided end-to-end regulatory compliance support, including:

1. AML/KYC & EWRA Integration

• Customized KYC and AML procedures for virtual assets (source of funds/wealth checks).
• Integrated the client’s existing Enterprise-Wide Risk Assessment (EWRA) into the digital token framework, ensuring consistent enterprise-level risk management across both traditional and virtual asset operations.

2. Cross-Service Travel Rule Adaption

• Designed a bespoke Travel Rule Compliance Framework (TRCF) to enable automated data transmission between traditional remittance and digital token transactions.
• Ensured originator and beneficiary information met cross-service regulatory standards.

3. Policy Drafting & Regulatory Liaison

• Developed comprehensive policies for cold storage, operational resilience, market surveillance, and cybersecurity aligned with SFC licensing requirements.
• Updated compliance manuals, AML/KYC policy, technology risk policy, risk management framework, and business continuity plan.
• Managed regulator engagement, addressing detailed queries and clarifying compliance intent.

4. Ad Hoc Regulatory Advisory

• Reviewed applicable rules and guidance notes to interpret regulatory expectations.
• Strengthened client responses to the Authority, contextualizing data and recommending additional evidence or controls.

Results of Adding Digital Token Payment Services

• Delivered comprehensive policies and procedures, which enabled the firm to quickly and effectively address regulatory queries, leading to the timely issuance of a conditional license.
• Delivered a robust compliance framework that integrated traditional and digital asset operations.
• Positioned the client as a trusted provider in the evolving digital payments space, enabling faster market entry and competitive advantage.