Hong Kong Tightens Rules on Investments in Virtual Assets
In Short
The Situation: Hong Kong's regulatory framework for virtual assets has been evolving rapidly, with stablecoins already subject to a dedicated regime under the Stablecoins Ordinance. Non-stablecoin virtual assets ("VAs")—where price volatility, liquidity gaps, and custody risks are more acute—are not subject to a similar regime, but they remain under close scrutiny.
The Development: Hong Kong's regulators have imposed a new 10% net asset value ("NAV") threshold on VA investments by certain publicly offered funds. At the same time, the regulators have prohibited such funds from using fund-level leverage to make VA investments, and confined "crypto staking" within narrow parameters. In addition, the rules on custodian arrangements for VAs have been tightened, with "cold-wallet" storage and onshore key custody in Hong Kong now mandatory.
Looking Ahead: Managers of publicly offered funds authorized by Hong Kong's Securities and Futures Commission ("SFC") should promptly review their VA activities and custodian arrangements, monitor holdings against the 10% NAV threshold, and assess whether investor approvals or amendments to constitutive documents are needed, as Hong Kong continues to tighten risk controls in response to the growth of VA exposure in publicly offered funds.
On May 27, 2026, the SFC issued new requirements for certain funds investing in virtual assets. In Hong Kong, virtual assets are defined by reference to section 53ZRA of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), and can broadly be placed into two categories: stablecoins (whose values are linked to a fiat currency) and non-stablecoins, or VAs. In Hong Kong, stablecoins issued pursuant to the recently enacted Stablecoins Ordinance (Cap. 656) are already subject to a robust regulatory regime. The regulatory spotlight has therefore been trained on VAs, where price swings, liquidity gaps, and custody risks are more acute.
Against this backdrop, the SFC has put in place a number of new rules, a few of which are particularly noteworthy.
10% NAV Threshold
Publicly offered funds with more than 10% of their NAV in VA holdings must now obtain SFC approval. In general, this applies to all funds that can be accessed by the Hong Kong public, including a VA-focused ETF or a generic fund that invests in many asset classes. This 10% threshold covers both direct exposure (e.g., by holding spot VAs) and indirect exposure (e.g., through VA futures and other derivatives). As noted earlier, the 10% threshold does not apply to stablecoins issued under the Stablecoins Ordinance or to tokenized deposits, as these are already separately regulated.
As a fund's NAV fluctuates with market movements, the 10% threshold could inadvertently be crossed due to a decline in a fund's non-VA portfolio, or a rise in the fund's VA portfolio. The SFC has not detailed any "passive breach" mechanism, but it is likely that fund managers will be expected to monitor the 10% threshold closely and escalate early if necessary. If the 10% threshold is expected to be (or has been) exceeded—whether by investment decision or market movement—fund managers would do well to consult with the SFC promptly to assess whether rebalancing, disclosure, or other action is required. While each case is fact dependent, rebalancing within a "reasonable period of time" would appear to be in line with current regulatory expectations of SFC-authorized investment funds under the Code on Unit Trusts and Mutual Funds. However, it remains to be seen whether the unique risk profile of VAs may cause the SFC to take a stricter view.
Fund Leverage/Staking
The SFC has ruled on two specific yield-enhancement strategies involving VAs: leverage and "staking." On leverage, the SFC has now prohibited "fund level" leveraged exposure to VAs. While the SFC's new requirements are silent on leveraged exposure at a different level (e.g., through a "GP" or hybrid debt facility), fund managers should be wary of using debt financing to amplify VA exposure. On staking, while the SFC has not prohibited this activity, it is viewed as a "sandbox" item—i.e., staking can only be done within the framework of SFC-licensed virtual asset trading platforms ("VATPs") or eligible authorized institutions, and only where staking is consistent with the fund's strategy and subject to appropriate due diligence, disclosure, and reporting arrangements.
Custodian Functions
The SFC has refined its requirements on custodian arrangements for VAs, making clear that funds can use only VA custodians who are (and can only delegate to) specific entities: SFC-licensed VATPs, eligible authorized institutions regulated by the Hong Kong Monetary Authority ("HKMA") (or subsidiaries of locally incorporated authorized institutions) that meet the HKMA's standards for VA custody, or other entities specifically approved by the SFC in writing. In line with prior guidance, the SFC has again emphasized the need for VA custodians to have robust VA segregation protocols, and has made it mandatory for VAs to be kept in "cold" wallets unless transfers or redemptions are necessary. In addition, the SFC now requires seeds and private keys to be securely stored in Hong Kong only, and subject to multiple safeguards (e.g., key sharding), robust disaster recovery plans, and backups.
Summary
In light of the SFC's newly issued requirements, managers of SFC-authorized funds should review their VA activities and custodian arrangements. In particular, they should take care to monitor their VA holdings against the 10% NAV threshold, and assess whether investor approval or amendments to constitutive documents are required. The SFC continues to tighten risk controls and respond to real-world operational issues arising from the growth of VA exposure in public funds.
Three Key Takeaways
- Managers of SFC-authorized publicly offered funds must now obtain prior approval if they intend to invest or hold more than 10% of their fund's NAV in VAs. The 10% NAV threshold casts a wide net, covering both direct holdings of VAs and indirect exposure through derivatives. Because market movements can inadvertently push the value of VAs across the 10% threshold, managers should implement ongoing monitoring and be prepared to engage the SFC early on rebalancing or disclosure steps.
- Leverage is out; staking is conditional. The SFC has prohibited fund-level leveraged exposure to VAs, and while it has not banned staking outright, it requires this to be conducted through SFC-licensed virtual asset trading platforms or eligible authorized institutions, subject to appropriate due diligence, disclosure, and reporting. Fund managers considering debt financing structures to amplify VA exposure at other levels should proceed with caution.
- VA custodian requirements have been significantly tightened. Funds may use only VA custodians that are SFC-licensed VATPs, HKMA-regulated authorized institutions meeting VA custody standards, or entities specifically approved by the SFC in writing. In particular, there is an emphasis on "cold" wallets and secure key custody within Hong Kong.
