In the high-rise offices of Hong Kong’s financial district, a standard “Type 9” license is the golden ticket that allows managers to handle other people’s money. For years, this paperwork had a small, quiet loophole built into it—a ten percent buffer that let traditional investors dip a toe into digital assets without bringing the full weight of the regulatory hammer down on their heads. But on Tuesday, a submission from the city’s securities professionals landed on desks with a sharp warning: that buffer is about to vanish, and the cost of buying a single Bitcoin for a client portfolio might suddenly become too high to bear.
- Type 9 license allows asset management in Hong Kong.
- Current rules allow a 10% crypto investment buffer.
- HKSFPA warned regulators about the proposed rule change.
The group raising the alarm is the Hong Kong Securities and Futures Professionals Association (HKSFPA). That is a mouthful of a name, but their job is simple: they represent the people who manage wealth in one of the world’s busiest financial centers. They are pushing back against a new set of rules that could make it incredibly difficult for regular asset managers to touch cryptocurrency.
To understand why they are worried, we have to look at how the rules work right now versus how the government wants them to work tomorrow.
The Ten Percent Safety Valve
Currently, financial firms in Hong Kong operate under specific licenses. The “Type 9” license is the standard driver’s license for asset management. It lets a firm manage a portfolio of stocks, bonds, and cash for their clients.
Under the existing rules, there is a concept lawyers call de minimis. This is Latin for “about minimal things,” but in legal terms, it usually means “too small to worry about.”
Right now, if a traditional money manager wants to buy some cryptocurrency for their fund, they are allowed to do so, provided the crypto makes up less than 10% of the total value of the fund. It is a bit like a restaurant with a liquor license being allowed to sell a few bags of chips without needing a full food service permit. As long as the crypto portion stays small, the regulators are happy to let the standard license cover it.
This buffer has been crucial. It allows traditional finance firms to experiment. They can buy a little Bitcoin or Ethereum to see how it fits into a broader portfolio without having to overhaul their entire legal structure.
The “All-or-Nothing” Problem
The new proposal from Hong Kong’s regulators wants to delete this 10% allowance. The HKSFPA warns that this change would create an “all-or-nothing” environment.
If the rule goes through, a manager who wants to hold even 1% of a fund in Bitcoin would need to apply for a full “Virtual Asset” license uplift. This is not just a matter of filling out a form. Getting a specialized crypto license is expensive, time-consuming, and requires hiring new compliance staff and setting up complex new systems.
Imagine if you wanted to sell a single used bicycle from your front yard, but the city told you that to do so, you had to acquire the same commercial dealership license as a Ford showroom. You would probably just decide not to sell the bike. That is exactly what the industry group fears will happen here.
In their submission, the HKSFPA called this approach “disproportionate.” They argue that the risk of holding a tiny amount of crypto does not justify the massive cost of the new license. If the cost is too high, traditional managers will simply ignore the asset class entirely, leaving crypto isolated from the broader financial world.
The Custody Trap
The dispute goes deeper than just licenses. It also touches on “custody,” which is the fancy financial term for safekeeping. In the world of paper money, custody is simple: a bank holds the cash in a vault. In crypto, custody means guarding the private keys—the digital passwords that control the funds.
Think of a private key like the combination to a safe. If you lose it, the money is gone forever. If someone steals it, they can empty the safe instantly. Because this is risky, regulators want strict rules on who holds the keys.
The proposed rules would require asset managers to keep their digital assets with specific, locally licensed custodians. On the surface, this sounds sensible. It is like insisting that if you run a gold fund, you must store the gold in a certified bank vault, not under your mattress.
However, there is a technical snag. The HKSFPA points out that locally licensed custodians in Hong Kong are generally quite conservative. They usually only support the biggest, most famous cryptocurrencies, like Bitcoin and Ethereum.
This creates a major problem for Venture Capital (VC) funds. VCs are the risk-takers who invest in early-stage startups. In the crypto world, investing in a startup often means buying a brand-new, experimental token that was created yesterday. These small, new tokens are rarely supported by the big, licensed custodians.
If the rule says “you must use a local custodian,” but the local custodian says “we don’t support that token,” then the VC fund effectively cannot invest in the startup. The industry group warned that this could prevent Hong Kong managers from running funds focused on Web3—the next generation of internet technologies.
A Clash of Ambitions
This regulatory tug-of-war is happening at an awkward time. Hong Kong has spent the last two years loudly declaring that it wants to be a global hub for digital assets. The government has rolled out red carpets for crypto firms, trying to attract business that might be fleeing stricter rules in the United States.
However, there is a difference between inviting people to a party and setting the house rules. The regulators—specifically the Financial Services and the Treasury Bureau and the Securities and Futures Commission—are trying to make the market safe. They want to prevent fraud and blowups.
Lawyers at JunHe LLP, a law firm analyzing the situation, noted that the proposal marks a “material shift.” They pointed out that some managers who currently invest 100% in crypto do not hold the Type 9 license at all, because their work technically didn’t fit the old definition of managing securities. The new rules would capture them, too, forcing everyone under the same strict umbrella.
The HKSFPA did offer some praise. They support the idea of allowing “self-custody” in certain cases—where the fund manages its own security—and using qualified custodians outside of Hong Kong for professional investors. This would act as a pressure release valve, allowing funds to access tokens that local banks can’t handle.
The situation is now a waiting game. The regulators have received the feedback. They must decide whether to stick to their strict “no exceptions” plan or keep the door open for traditional finance to dabble in the digital world. For now, the managers in those high-rise offices are watching closely, wondering if their small crypto experiments are about to become illegal.
