Hong Kong continues to establish itself as a prominent player in the blockchain market, leveraging its robust financial infrastructure and regulatory framework. The region has witnessed significant growth in blockchain applications, particularly in finance, real estate, supply chain management and certain non-financial sectors (such as artworks). The government of Hong Kong SAR has actively encouraged innovation, providing support through initiatives like the Fintech Supervisory Sandbox (see further details on various forms of regulatory sandbox in 4.3 Regulatory Sandbox) and facilitating partnerships between public and private sectors to enhance blockchain adoption.

A notable development in the blockchain space involves legislative advancements aimed at attracting blockchain companies and fostering a more innovation-friendly environment. The Securities and Futures Commission (SFC) has been proactive in introducing guidelines to regulate virtual asset trading platforms (see further details in 4.1.1 Regulatory Overview), ensuring investor protection while promoting growth in the sector.

Looking ahead to the next 12 months, several critical issues are poised to impact the blockchain market in Hong Kong. Regulatory changes, both domestically and internationally, will be pivotal as authorities continue to refine policies to balance innovation with security and investor protection concerns. Additionally, the global economic landscape and developments in digital currency adoption by central banks will influence market dynamics. Ensuring cybersecurity and addressing concerns related to data privacy will remain essential.

The fallout from the bankruptcies of FTX and similar high-profile incidents has reverberated across jurisdictions, including Hong Kong. These events have heightened scrutiny of cryptocurrency exchanges and prompted calls for more stringent regulatory measures to safeguard against fraud and financial mismanagement. In response, Hong Kong regulatory bodies are expected to make intensified efforts to ensure that crypto exchanges, whether licensed or over the counter (OTC), adhere to robust compliance and transparency standards, thereby reinforcing investor confidence and market integrity.

In Hong Kong, both businesses and individuals are increasingly leveraging blockchain technology across various sectors, reflecting the city’s strategic position as an international financial hub and its conducive environment for innovation. Here are some key areas where blockchain usage is prominent, based on market observations.

• Cryptocurrencies and digital assets – Cryptocurrencies, such as bitcoin and Ethereum, continue to be widely used both for investment and transactional purposes. The city hosts numerous cryptocurrency exchanges that facilitate these transactions, supporting both retail and business users.
• Non-fungible tokens (NFTs) – NFTs have gained traction in Hong Kong, especially in the art and entertainment industries. NFTs provide a digital means for artists and creators to sell unique digital content directly to consumers. Prominent platforms in Hong Kong are exploring NFTs for everything from digital art to game assets.
• Tokenised traditional financial products – Financial institutions in Hong Kong are exploring tokenisation of traditional financial products, like bonds, money market funds and real estate, creating digital representations of assets that are tradable on chain, which provides increased efficiency and liquidity.
• Decentralised finance (DeFi) – Hong Kong’s financial sector is engaging with DeFi applications, experimenting with lending, borrowing and trading platforms that operate without traditional financial intermediaries. This area is particularly appealing for its potential to offer more accessible financial services.
• Distributed ledger technology (DLT) use cases – Besides cryptocurrencies, DLT is being applied in supply chain management, enhancing transparency and traceability in logistics. Other use cases include application of DLT in tracking real-time asset performance in the green energy sector, such as electric vehicle charging stations. Companies are using permissioned networks to capture industrial and operational data more efficiently, fostering trust and security among stakeholders.
• Crypto-derivatives and funds – There is growing interest in structured financial products with crypto exposure, such as crypto-derivatives, including a variety of bitcoin exchange-traded funds (ETFs). These products allow investors to hedge against volatility or speculate on future price movements, catering to relatively sophisticated retail investors and institutional clients.
• Permissioned versus permissionless networks – Businesses are selectively using permissioned blockchain networks for business-to-business (B2B) applications demanding privacy and security, such as interbank settlements and cross-border trade finance. Conversely, permissionless networks are prominent in consumer-focused applications, where transparency and decentralisation are prioritised needs.

Overall, Hong Kong’s dynamic regulatory approach, combined with its financial prowess and innovative spirit, fosters a fertile environment for blockchain advancements. The city remains attuned to balancing regulatory oversight with the need to nurture technological innovation and growth, thus ensuring a vibrant ecosystem for both retail consumers and business enterprises engaging with blockchain technologies.

Ownership of a digital asset on a blockchain is typically determined by the possession and control of a private cryptographic key associated with that asset. This key allows the owner to generate a digital signature authorising any transfer of the asset. The blockchain network verifies and records these transactions, thereby updating the ownership status.

The finality of a digital asset transfer on a blockchain is generally achieved when the transaction is confirmed and included in a block that is subsequently added to the blockchain. On most networks, transactions are considered confirmed after a new block is mined and appended to the chain, signifying that the network has reached consensus on the transaction’s validity and order. However, such finality may vary depending on the specific type and network of the blockchain protocol.

In Hong Kong, the categorisation of digital assets is guided by the regulatory framework established by the Financial Services and the Treasury Bureau of Hong Kong (FSTB), the Hong Kong Monetary Authority (HKMA), the SFC and other relevant regulatory authorities. The appropriate characterisation of a specific type of digital asset may be varied, subject to a number of factors, such as way of its construct, economic features and functions.

• Security tokens – These are digital assets that exhibit characteristics similar to traditional securities. If a token involves an investment contract, represents equity, debt or a stake in the issuer’s business, it is likely considered a security. The SFC may treat such tokens under the same regulatory regime as traditional securities, requiring compliance with Hong Kong securities laws and regulations.
• Utility tokens – Utility tokens provide users with access to a product or service on a blockchain platform. They are generally not considered securities if they do not function as an investment. However, their classification can depend on the specific rights or uses they offer, which must be carefully assessed.
• Exchange tokens – Often synonymous with cryptocurrencies like bitcoin, these are primarily used as a means of exchange or value transfer. Such tokens typically do not fall under the SFC’s securities regulations unless they exhibit features of other categories of digital assets.
• Stablecoins – Stablecoins are digital assets pegged to a stable asset like a fiat currency. Classification may vary depending on their structure and use, particularly if they raise issues similar to those concerning securities or payment systems.

The process for market participants to determine the appropriate categorisation and regulatory status of digital assets involves analysing specific features and functions of the asset in question. While the relevant regulatory authorities provide certain guidance and clarifications to facilitate the market’s understanding about the appropriate categorisation of digital assets, advisories and consultations with regulatory and legal experts also can help with navigating the complexities of digital asset classification in Hong Kong’s regulatory environment.

In Hong Kong, the legal and regulatory characterisation of tokenised securities (ie traditional securities that have been digitised using blockchain technology) falls under the purview of the SFC and other regulatory authorities. Tokenised securities are defined similarly to traditional securities, which include digital representations of stocks, bonds or other equity interests.

The issuers of tokenised securities may be required to comply with the Securities and Futures Ordinance (SFO) and adhere to the same regulations as traditional securities, including necessary disclosures, licensing and compliance obligations. While specific BSI standards for security tokens may apply in the UK, Hong Kong looks to similar global best practices but tailors its regulations to align with local legal frameworks. The SFC does not directly adopt standards such as BSI, but instead ensures compliance through its stringent regulatory process. The implementation of tokenised securities under Hong Kong law reflects an intent to integrate innovative financial technology within a secure regulatory environment. Any person offering, managing or advising on investments in tokenised securities in Hong Kong is required to obtain the appropriate SFC licences, ensuring that they meet fitness and proprietary standards.

In Hong Kong, digital assets designed to maintain a stable value by being pegged to another asset, such as fiat currency or another digital asset, are commonly referred to as “stablecoins”. The regulatory approach to these assets is shaped by their underlying mechanics and the way they achieve price stability, reflecting increasing scrutiny and planned legislative advancements.

Characterisation and Types

• Traditional asset-backed stablecoins – These stablecoins are typically backed by reserves of fiat currencies or other traditional assets. In Hong Kong, the HKMA ensures these stablecoins are backed, audited and transparent, mitigating risks of insolvency or mismanagement.
• Algorithmic stablecoins – Utilising complex algorithms and smart contracts, these stablecoins maintain their peg without physical reserves. Regulatory considerations in Hong Kong focus on the transparency and robustness of these algorithms.

Regulatory Considerations and Proposed Licensing Regime

The Stablecoins Bill was passed by the Legislative Council on 21 May 2025 to establish a licensing regime for fiat-referenced stablecoin (FRS) issuers in Hong Kong, to further enhance Hong Kong’s regulatory framework on virtual asset (VA) activities, thereby fostering financial stability and encouraging financial innovation. Please refer to 4.1.1 Regulatory Overview and the Trends and Developments chapter of this guide for more details.

To facilitate operational testing, the HKMA introduced a stablecoin issuer sandbox in March 2024, which had three participants as of July 2024, pursuant to an announcement regarding stablecoin issuer sandbox participants published on 18 July 2024 (see more details in 4.3 Regulatory Sandbox).

In Hong Kong, the legal characterisation of NFTs is evolving as the market for these assets expands. NFTs are unique digital assets authenticated using blockchain technology, primarily representing ownership of a specific item or piece of content, such as digital art, music or collectibles.

Legal Characterisation of NFTs

• Nature of NFTs – Unlike fungible tokens or cryptocurrencies, NFTs are unique and indivisible. Their value is often derived from the uniqueness and scarcity of the digital or physical asset they represent.
• Property and ownership – NFTs may be treated as property under Hong Kong law similar to other digital assets. However, the rights conferred by an NFT can vary depending on the specific terms coded into the smart contract, including rights of reproduction, display or resale.
• Regulatory considerations – While NFTs themselves may not constitute securities, if they are structured in a certain way that triggers regulatory attention, the SFC may classify them under securities law. This would require additional compliance with Hong Kong’s financial regulations. For example, as noted in a warning issued by the SFC, where an NFT is a genuine digital representation of a collectible, the activities related to it do not fall within the SFC’s regulatory remit. However, where an NFT constitutes an interest in a “collective investment scheme” (CIS), marketing or distributing it may constitute a “regulated activity”. Parties carrying on a regulated activity, whether in Hong Kong or targeting Hong Kong investors, require a licence from the SFC unless an exemption applies. Furthermore, where an arrangement in relation to an NFT involves an offer to the Hong Kong public to participate in a CIS, authorisation requirements under the SFO also may be triggered.

As NFTs become more prevalent, Hong Kong’s regulatory bodies are expected to release further guidance to address these complexities and ensure the market functions with clarity and security. This includes potentially addressing how NFTs are taxed, their treatment under anti-money laundering laws, and how disputes over ownership and rights are resolved.

Hong Kong regulatory authorities have consistently maintained that cryptocurrencies, such as bitcoin, do not constitute legal tender or currency. According to an October 2022 policy statement from the FSTB, virtual assets and cryptocurrencies are not recognised by law as valid means for fulfilling payment obligations.

In a March 2019 circular, the HKMA affirmed the Basel Committee on Banking Supervision’s guidelines on crypto-assets. It recommended that authorised institutions adhere to prudential expectations concerning banks’ exposure to crypto-assets and related services. Additionally, the HKMA emphasised that institutions intending to undertake virtual asset-related activities should first consult with the authority to demonstrate the implementation of adequate systems and controls for risk management. The HKMA further noted that crypto-assets lack the reliability necessary to perform standard monetary functions and should not be considered a safe medium of exchange or store of value.

Pursuant to the regulatory roadmap for Hong Kong’s virtual asset market published by the SFC, the SFC mentions that “to promote the integration of margin trading into the virtual asset space, the SFC will examine how to align margin financing requirements with the established risk management protocols present in the traditional securities market such as initial and variable margin requirements and volatility-adjusted haircuts for collateral”. In addition, “the SFC will also consider allowing borrowing and lending activities for professional investors, again under robust risk management measures. This will involve delving into how collateral is handled and how the relevant risks are assessed and mitigated”.

Along with the challenges and considerations laid out in the SFC’s regulatory roadmap, the potential use of digital assets in collateral arrangements in Hong Kong also is subject to a range of legal and regulatory considerations, reflecting the unique nature of these assets and the evolving regulatory landscape.

• Classification as property – For digital assets to be used as collateral, they must be generally recognised as property under Hong Kong law. Please refer to 5.1 Judicial Decisions and Litigation for more details on case law in this regard.
• Perfection of security interests – When using digital assets as collateral, securing a legal interest in the asset typically requires clearly defined legal and contractual frameworks. Ensuring the perfection of security interests – making them enforceable against third parties – can be complex due to the intangible nature of digital assets and the technical aspects of blockchain technology.
• Valuation and volatility – The inherent volatility of digital assets presents challenges in valuation for the purposes of collateral. Lenders need robust risk management and valuation methodologies to account for potential fluctuations in the value of crypto-assets used as collateral.
• Regulatory compliance – Participants in collateral arrangements involving digital assets must adhere to regulatory requirements, including anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. This involves conducting due diligence on the origins and legitimacy of the digital assets involved.
• Legal framework for enforcement – The legal framework concerning the enforcement of security interests against digital assets continues to develop. This includes clarity on the rights and processes for seizing and liquidating such assets in case of default.

As market players are exploring the potential use of digital assets in collateral arrangements, Hong Kong’s regulatory bodies may issue further guidance to address these complexities, ensuring that the development of collateral arrangements involving digital assets is both innovative and secure.

In Hong Kong, the legal enforceability of smart contracts, defined in the HKMA’s second DLT White Paper as arrangements where autonomous software on a distributed ledger technology (DLT) platform automatically exchanges assets, remains an evolving area of interest. The input from the technology committee of the Law Society of Hong Kong underscores the multifaceted nature of smart contracts and their potential legal implications.

The classification of smart contracts as legal contracts is still a matter of debate. The HKMA’s second DLT White Paper articulates that smart contracts should not be perceived merely as digital forms of traditional contracts. While they typically encompass mechanisms for execution, performance and enforcement, they may not include all legally requisite terms. Relying on smart contracts without comprehensive contractual terms risks uncertainty, particularly in unforeseen disputes or outcomes.

Smart contracts can be legally significant, with rights emerging from other contractual or statutory bases, like securities trading agreements or within the structure of decentralised autonomous organisations (DAOs). Moreover, common law doctrines, such as negligence, unjust enrichment and breach of fiduciary duties, can play a role. For instance, in the event of a smart contract breach, claims of unjust enrichment may enable the restitution of gains that were unjustly obtained, providing a legal means to address any inequitable outcomes.

The White Paper references historical incidents, such as the 2016 DAO Ethereum hack, illustrating the vulnerabilities of smart contracts to errors in programming or modelling, which may misalign with the creators’ intentions. It advocates for pre-established governance frameworks and contractual scaffolding to manage adverse outcomes, emphasising the utility of “escape hatches”. These are predefined mechanisms allowing modifications or reversals under stringent conditions without undermining the contract’s immutability.

Given these complexities and risks, the Law Society of Hong Kong advises the cautious adoption of smart contracts, stressing adherence to international best practices and standards. Smart contracts should include provisions such as escape mechanisms, and parties contemplating their use should conduct thorough evaluations of the associated risks. Adopting a rigorous, informed approach will be pivotal in ensuring that smart contracts are a viable, secure component of contractual engagements in the digital age.

Providing VA services without being licensed by the SFC could lead to a fine of HKD5 million and imprisonment of seven years, and continuing offence will be subject to recurring fines on a daily basis. The SFC also has extensive power to initiate disciplinary actions and impose sanctions against licensed VATP operators, their officers and other VA service providers.

Further, under the AMLO regime, with respect to VAs that are non-securities: (i) fraudulently or recklessly inducing others to invest in VAs is an offence, which is subject to a maximum fine of HKD1 million and imprisonment for seven years; and (ii) employing devices to defraud or deceive in a VA-related transaction also is an offence, which is subject to a maximum fine of HKD10 million and imprisonment for 10 years. There are comparable offences and penalties under the SFO with respect to VAs that are securities.

Additionally, any person (including a VA custodian) who carries on a trust or company service business in Hong Kong without a TSCP licence commits an offence and is liable on conviction to a fine of up to HKD100,000 and imprisonment for up to six months.

The SFC Sandbox

In Hong Kong, the SFC launched its sandbox on 19 September 2017 to provide a confined regulatory environment for qualified firms to operate before advanced financial technology is used on a fuller scale. The SFC expects VATP operators to enter the sandbox and be closely monitored and supervised by the SFC upon being licensed. The regulator also expressly stated that the SFC Sandbox is not a means to circumvent applicable laws and regulations, and it will not compromise regulatory requirements which are key to investor protection.

The HKMA Sandbox

• FSS – The HKMA launched its Fintech Supervisory Sandbox (FSS) in September 2016, allowing banks and their partnering technology firms to conduct pilot trials of fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA’s supervisory requirements.
• Stablecoin issuer sandbox – Launched in March 2024, the HKMA allows institutions with plans to issue stablecoin in Hong Kong to conduct testing on their operational plans and facilitates two-way communications on proposed regulatory requirements, with a view to formulating a fit-for-purpose and risk-based regulatory regime.
• Project Ensemble Sandbox – On 28 August 2024, the HKMA launched Project Ensemble Sandbox, an initiative co-led by the SFC for the asset management industry to build and scale a tokenisation market in Hong Kong. This pilot programme calls for close collaboration among regulators and key industry players in structuring, testing and implementing a regulatory framework for the full tokenisation product cycle, including on-chain primary issuance, secondary market trading, custody and hypothecation.

The Insurance Authority (IA) Sandbox

The IA launched an Insurtech Sandbox in 2017 to facilitate a pilot run of innovative insurtech applications by certain authorised insurers if they are uncertain about the compliance of initiatives that apply innovative technologies, including DLT. The IA expanded the participant scope to include licensed insurance broker companies in 2021.

In an October 2022 policy statement on development of virtual assets in Hong Kong, the FSTB stated its vision of mitigating and managing the risks on financial stability and consumer protection, as well as money laundering and terrorist financing in line with international standards.

Hong Kong has been a member of the Financial Action Task Force (FATF) since 1991, and FATF compliance was the primary driving force behind Hong Kong’s newly implemented AML regulatory regime. Since the new AMLO regime came into effect on 1 June 2023, Hong Kong is now in compliance with certain requirements of the FATF. For example, currently the AMLO’s definition of “virtual assets” is consistent with what has been adopted by the FATF. However, it is also worth noting that Hong Kong’s VATP regime only targets centralised crypto exchanges and does not include stand-alone crypto payment and crypto custodian businesses, which is narrower in scope than FATF’s recommendations.

The SFC and HKMA are the primary regulatory bodies overseeing the blockchain and digital assets landscape in Hong Kong.

• SFC – The SFC is an independent statutory body set up in 1989 to regulate Hong Kong’s securities and futures markets. The SFC’s investigative, remedial and disciplinary powers are derived from the SFO and subsidiary legislation. The SFC provides detailed guidance, requirements and recommendations through various codes, guidelines and frequently asked questions (FAQs), including its guidelines for VATP operators, released in June 2023.
• HKMA – As Hong Kong’s central banking institution, the HKMA regulates financial institutions and conducts monetary policy operations. The powers, functions and responsibilities of the HKMA are set forth in the Exchange Fund Ordinance and a series of other relevant ordinances.

The SFC and HKMA are two of the four financial regulators in Hong Kong (the other two are the Insurance Authority and the Mandatory Provident Fund Schemes Authority). The regulators co-operate with one another to ensure proper conduct in the markets and are proactively adapting existing regulatory regimes to meet the new market reality, with the vision of Hong Kong becoming the world’s benchmark for regulating the Web3 and digital assets industry.

As of publication of this guide (12 June 2025), no self-regulatory organisation (SRO) or trade group serving regulatory or quasi-regulatory roles in the blockchain industry has been established in Hong Kong. The Hong Kong Securities & Futures Professionals Association (HKSFPA) in a policy advocacy letter addressed to the FSTB of the government of Hong Kong SAR, dated 22 April 2024, proposed the establishment of an independent SRO. The HKSFPA recommended that the SFC maintain its authority over market conduct regulation, such as prohibiting insider trading, fraud and market manipulation, while delegating the licensing authority to an SRO composed exclusively of entities from the securities, futures, asset management and virtual asset industries.

On 19 February 2025, the SFC released a regulatory roadmap, deploying a five-pillar framework called “A-S-P-I-Re” (Access, Safeguards, Products, Infrastructure and Relationships), designed to future-proof Hong Kong’s virtual asset ecosystem. Such roadmap contains 12 initiatives, including streamlined market access, adaptive compliance and product frameworks, and infrastructure upgrades to bridge traditional finance reliability with blockchain efficiency. This “A-S-P-I-Re” roadmap represents the SFC’s forward-looking commitment to addressing the most pressing challenges in the Hong Kong blockchain and digital assets ecosystem.

The HKMA began the research on DLT in 2016 and has published White Papers and reports to deliver the results to the public. In March 2025, the HKMA, in collaboration with the three other financial regulators in Hong Kong, released a research paper titled, Distributed Ledger Technology in the Financial Sector: A Study on the Opportunities and Challenges. Such paper provides an overview of the role of DLT in Hong Kong’s financial sector, including potential use cases, benefits and challenges. It also contains details of practical guidance and strategies for financial institutions to consider when implementing DLT solutions.

The HKMA also operates a Supervisory Incubator for DLT (the “DLT Incubator”). Launched in January 2025, the DLT Incubator is a new supervisory arrangement designed to help banks maximise the potential benefits of DLT adoption by effectively managing the associated risks. Through this programme, banks in Hong Kong have access to a dedicated HKMA team for supervisory feedback and may opt to conduct live trials to validate and refine specific aspects of their risk management implementation.

In Hong Kong, as a common law jurisdiction, the judicial system plays a crucial role in interpreting and shaping the legal framework applicable to innovative technologies, such as blockchain. While comprehensive statutory regulation specifically for blockchain is still developing, several judicial decisions have contributed to establishing legal principles relevant to its use.

• Re Gatecoin Limited [2023] HKCFI 91 – This notable case involved a cryptocurrency exchange and provided significant insights into the legal treatment of cryptocurrencies. The court recognised cryptocurrencies as “property,” allowing them to be held in trust, which has implications for how digital assets are treated in insolvency proceedings and highlights their status as a form of legal property. This decision brings Hong Kong’s jurisprudence in line with major common law jurisdictions in the rest of the world. Another logical implication is that, following the recognition of cryptocurrency as property, property law must give effect to the property rights of rightful owners of cryptocurrency.
• Mantra Dao Inc and Another v John Patrick Mullin and Others [2024] HKCFI 2099 – The court issued an order requiring the disclosure of financial records and books pertaining to a decentralised autonomous organisation (DAO) operating within the cryptocurrency industry. This ruling underscores the essential importance of financial transparency in the administration of cryptocurrency platforms. Moreover, it signals that novel legal entities, such as DAOs, remain subject to judicial oversight to safeguard the legitimate interests of stakeholders.
• Nico Constantijn Antonius Samara v Stive Jean-Paul Dan [2022] HKCFI 1254 – The court established that cryptocurrencies can be subject to proprietary injunctive relief.
• Worldwide A-Plus Investments Ltd v A-Plus Meta Technology Ltd [HCA2417/2024] – The court granted leave for the plaintiff to mint the world’s first blockchain-native tokenised injunction order, deploying a freezing order issued by the High Court directly onto the Tron blockchain. The result was a successful freeze of the virtual asset in question, which remains in place to date. A court order has been tokenised, with its terms embedded into metadata and deployed on the blockchain, linked to the suspect wallets. Unlike traditional injunctions, which are typically communicated in paper form and remain discreet – only shared with the involved parties and banks – this tokenised order openly broadcasts its presence and legal implications across the entire blockchain ecosystem. This innovative approach ensures that the order’s impact is visible to all participants within the blockchain, enhancing transparency and enforceability. The FSTB hailed this case as a benchmark for Web3 litigation, showcasing Hong Kong’s leadership in judicial innovation.

While specific current cases that could have significant impacts on the blockchain sector have not been disclosed in detail, the legal community is vigilant regarding any litigation that might address unresolved issues, such as smart contract enforcement, blockchain data privacy and the regulatory status of various digital assets. Continued litigation and judicial decisions in Hong Kong will likely further clarify the application of existing laws to blockchain technology. Each decision contributes to a more robust understanding of how both existing legal principles and new interpretations can be harmoniously applied to accommodate the technologies underpinning digital assets and blockchain applications.

In Hong Kong, the SFC has been assertive in regulating cryptocurrency exchanges and issuers, thereby establishing clearer regulatory boundaries for digital asset activities. Recent enforcement actions highlight the SFC’s commitment to safeguarding market integrity and ensuring investor protection against fraudulent practices.

Significant Enforcement Actions and Developments

• JPEX warnings – In September 2023, the SFC issued warnings regarding JPEX, a cryptocurrency exchange, emphasising that no entity within the JPEX group holds a licence or has applied for a licence to operate a VATP in Hong Kong. Due to suspicious operational features, the case has been referred to the police on suspicion of fraudulent activities. The SFC has concurrently published comprehensive lists of VATPs on its website to enhance transparency and public awareness.
• Misleading claims by unlicensed VATPs – In August 2023 and June 2024, the SFC addressed misleading claims by certain unlicensed VATPs, falsely asserting that they had submitted licence applications. The SFC identified activities that would be impermissible under the new licensing regime and highlighted suspected fraudulent behaviour within the virtual asset sector.
• Binance and unauthorised trading services – In July 2021, the SFC warned that Binance was offering unauthorised trading services in stock tokens. The SFC clarified that no entity within Binance was licensed to conduct regulated activities in Hong Kong, affirming its commitment to taking enforcement action against unlicensed platforms.

Broader Enforcement Landscape

Other authorities have actively addressed offences related to virtual assets. In February 2019, the Hong Kong Police Force (HKPF) arrested Wong Ching-Kit, known as “Coin Young Master”, for defrauding investors through cryptocurrency mining machines linked to Filecoin. Moreover, in July 2021, the Customs and Excise Department initiated an investigation into a suspected money laundering operation involving virtual currencies.

Rising Incidents and Preventative Measures

By 2023, financial losses from virtual asset-related scams swelled to HKD4.4 billion, a stark increase from HKD1.7 billion in 2022, with a 46% rise in cases. The 2022 Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report underscores the HKPF’s proactive approach in combating VA-related crimes, supported by a dedicated task force monitoring industry trends.

These enforcement actions underscore Hong Kong’s dedication to establishing a secure regulatory environment for digital assets. The initiatives by the SFC and other authorities serve as critical deterrents to illicit activities and offer essential guidance for market participants, emphasising the importance of adherence to regulatory standards.

The evolving tax landscape in Hong Kong is addressing the complexities introduced by the use of digital assets, with guidance provided by the Inland Revenue Department’s (IRD) revised Departmental Interpretation and Practice Notes No 39 (DIPN 39), issued in March 2020. This guidance reflects Hong Kong’s territorial tax principle, where only profits sourced within the region are taxed.

Key Tax Principles and Recent Changes

Hong Kong’s taxation system, known for its simplicity, imposes profits tax at 15% for unincorporated businesses and 16.5% for corporations. The absence of turnover taxes, capital gains tax, a general tax on dividend income, and withholding tax on dividends and interest distinguishes it. Certain types of offshore passive income, such as dividends, interest, disposal gains from shares or equity interests, and IP income, remain non-taxable provided specific conditions are met.

Taxation of Digital Assets

DIPN 39 offers insight into handling digital assets under the tax regime.

• Categorisation of digital assets – The tax treatment for digital assets (categorised into payment tokens, security tokens and utility tokens) depends largely on how they are used. For instance, proceeds from initial coin offerings (ICOs) are taxed based on the character of the issued tokens – security tokens are generally capital in nature, whereas utility tokens are taxable if sourced in Hong Kong.
• Long-term investments – Digital assets held for long-term investment purposes may be considered capital in nature. As such, any gains from their disposal would classify as capital gains, which are not taxable in Hong Kong. The “badges of trade” principles and the original intent at the acquisition determine whether assets are investments or trading stock.
• New cryptocurrencies from business activities – Cryptocurrencies received through business activities, like airdrops and blockchain forks, are treated as business receipts and taxed accordingly under profits tax.
• Employee remuneration – Cryptocurrencies received as remuneration should be valued at the market rate at the time of acquisition and are subject to salaries tax akin to cash remuneration.

Future Considerations

While DIPN 39 lays a foundation for the taxation of digital assets, it does not address newer developments, such as DeFi, staking and NFTs. As the IRD tends to take time in updating its practice notes, guidance on these subjects may eventually be provided through FAQs on the IRD’s website. This proactive adaptability will be crucial for maintaining clarity and compliance as the realm of digital assets continues to mature. While there is currently no tax guidance specifically applicable for DeFi, cryptocurrency transactions which are conducted through DeFi channels also would be caught by the provisions under DIPN 39.

In Hong Kong, the intersection of ESG (environmental, social and governance) criteria with digital assets is gaining attention, although specific requirements for digital assets in this context are still developing. As digital assets become increasingly integrated into the financial landscape, the focus is shifting towards understanding their environmental impact, particularly concerning the energy consumption associated with blockchain technologies.

ESG and Sustainable Finance Requirements

• Current ESG framework – The SFC and HKMA have been advancing the agenda of sustainable finance, issuing guidelines that emphasise climate-related disclosures and ESG reporting for financial institutions. However, these frameworks generally apply to traditional financial products and institutions rather than directly targeting digital assets.
• Voluntary ESG disclosures – While not mandatory, there is an ongoing dialogue about extending ESG principles to digital assets, encouraging issuers and service providers in the digital asset space to adopt voluntary disclosures concerning their environmental impacts.

Initiatives and Indicators

• Environmental impact studies – Some market participants and independent organisations are conducting studies to assess the energy footprints of blockchain technologies, particularly those using energy-intensive consensus mechanisms, like Proof of Work (PoW).
• Development of metrics – Efforts are being made to develop indicators and metrics that can estimate the environmental impact associated with the production and use of digital assets. This includes measures of energy consumption and emissions metrics tied to different consensus mechanisms.
• Green finance and innovation – The rise of green finance has sparked interest in how blockchain can be leveraged to enhance transparency and efficiency in funding sustainable projects. Pilot programmes and collaborations between financial institutions and technology companies are exploring blockchain’s potential for sustainable finance applications.

In Hong Kong, data privacy in the context of blockchain technology is governed by the Personal Data (Privacy) Ordinance (PDPO). Blockchain’s unique characteristics present specific challenges to data privacy, particularly concerning the “right to be forgotten”. The HKMA’s second DLT White Paper, reflecting input from the technology committee of the Law Society of Hong Kong, offers insights into how these challenges relate to the PDPO and suggests potential solutions.

Key Characteristics and Challenges

• Accessibility – One of the main concerns outlined in the second DLT White Paper is that certain DLT platforms provide equal access to all participating nodes, which may lead to unnecessary exposure of personal data. This unrestricted accessibility could potentially violate data minimisation principles, which require that only necessary personal data should be accessible.
• Immutability – The immutability of data on the blockchain directly conflicts with the “right to be forgotten”, as changes, amendments or deletions of stored data are not feasible once the data is recorded on the blockchain.
• Cross-border data storage – DLT’s inherently cross-border architecture means that personal data may be stored outside Hong Kong, raising concerns about compliance with local data protection laws and the complexities of international data transfers.

Recommendations and Compliance Strategies

The second DLT White Paper outlines a practical approach to address these privacy concerns. It recommends avoiding the direct storage of personal data on the blockchain ledger, and instead storing only hashes of personal data on the blockchain while keeping the actual data in conventional off-ledger databases to help manage compliance. This method not only preserves data integrity but also restricts access to personal data, aligning with privacy regulations.

Current Status and Uncertainties

While the storage of hashes on the blockchain and personal data off-ledger offers a theoretical solution, clarity on practical implementation remains a challenge. It is not yet clear which specific steps entities using blockchain technologies in Hong Kong are taking to address these privacy concerns effectively. As blockchain technology continues to integrate into various sectors in Hong Kong, ongoing regulatory guidance will be essential to bridge the gap between innovative blockchain applications and existing data privacy laws.