Dealing services: Key proposals

The VA Dealing Consultation Paper expands on a 2024 consultation focused on over-the-counter (OTC) VA trading. The newly proposed regime anticipates a broader licensing regime for VA dealing services. Key elements include:

• Scope of regulation: The regime captures any person conducting a business in Hong Kong that involves making, offering, or inducing agreements for acquiring, disposing of, subscribing for, or underwriting VAs, or securing profits based on VA yields or price fluctuations. This includes spot trading services (e.g., OTC trading, physical location-based trading, and digital platforms) and complex services such as trade settlements and asset management activities.
• Licensing requirements: Entities providing VA dealing services must obtain an SFC licence or, for banks and SVF licensees, register with the SFC. The SFC will oversee compliance with standards. This will include robust governance, risk management, and anti-money laundering (AML) measures; segregation of client assets to prevent misuse; and transparent disclosure of risks and fees to clients.
• Extraterritorial application: The regime applies to activities targeting Hong Kong investors, even when conducted offshore, in order to prevent regulatory arbitrage.
• Transitional arrangements: The consultation seeks feedback on providing a grace period for existing VA dealers to comply with the new regime, with specific proposals to be developed post-consultation.

VA custody services: Key proposals

The VA Custody Consultation Paper proposes a standalone licensing regime for VA custody services, aimed at addressing the current lack of specific regulations for custodial arrangements. Key proposals include:

• Scope of regulation: The regime covers entities providing custody services for VAs, defined as safeguarding and administering client VAs or private keys. This includes standalone custody providers, custody services integrated with VA dealing, or other financial services.
• Licensing requirements: Custodian service providers must obtain an SFC licence, with banks and SVF licensees required to register with the SFC. Key requirements include secure storage solutions (e.g., cold storage or multi-signature wallets); strict segregation of client assets from the custodian’s own assets; robust cybersecurity measures and regular audits; and insurance or equivalent risk mitigation for client assets.
• SFC oversight: The SFC will set standards for custody operations, including operational resilience, conflict-of-interest management, and client asset protection. The HKMA will supervise banks and SVF licensees.
• Exemptions: The consultation proposes limited exemptions for entities holding VAs wholly incidental to other regulated activities (e.g., licensed VA trading platforms and stablecoin issuers), subject to SFC approval.

Objectives

The proposed regimes aim to protect investors by imposing stringent licensing, AML, and client asset protection requirements, as the SFC and HKMA seek to safeguard investors from fraud, mismanagement, and operational risks. It also seeks to promote market integrity through unified oversight by the SFC, minimising regulatory gaps and ensuring consistent standards across VA service providers. Furthermore, it supports innovation through frameworks that balance investor protection with the flexibility to encourage new market entrants and diverse service offerings, such as tokenised products and VA payment solutions.

For businesses, the proposals signal a more structured environment for VA operations in Hong Kong. Licensed entities will benefit from enhanced market credibility, but compliance costs may increase due to stringent governance, cybersecurity, and reporting obligations. Non-compliance risks enforcement action, including fines, licence revocation, or criminal penalties.

Following the consultation’s closure on 29 August 2025, the FSTB and SFC are expected to review feedback and finalise the legislative proposals in late 2025 or early 2026. The government has indicated that arrangements will be put in place to allow existing market participants to transition to the new regimes.

Recommendations

Anyone who offers VA custody or OTC VA trading should assess current operations. Specifically, they should review whether their business activities fall within the scope of VA dealing or custody services, including offshore activities targeting Hong Kong clients. Proactive engagement with regulators is encouraged. Although the consultation period has closed, many other avenues are available, including industry associations, conferences, and similar forums. If you need a licence, you should start building compliance and operational infrastructure, including strong corporate governance structures, robust AML controls, effective cybersecurity measures, and a client asset segregation framework, to align with the proposed SFC standards.

If you decide to remain outside the licensing regimes, you may need to exit the Hong Kong market and establish robust protocols to prevent non-compliance. The proposed penalties are severe, including multimillion-dollar fines and imprisonment.

The proposed VA dealing and custody licensing regimes reflect Hong Kong’s commitment to fostering a trusted and innovative digital asset ecosystem. By addressing regulatory gaps and aligning with global standards, these frameworks aim to bolster investor confidence and attract reputable market participants. Clients operating in or planning to enter the VA space should proactively prepare for the new requirements to capitalise on Hong Kong’s ambition to become a leading digital asset hub.

For further details, or for assistance with compliance strategies, licensing (or exit) plans, or establishing controls and procedures, please contact your Reed Smith relationship partner or our Hong Kong office.

Client Alert 2025-240