Hong Kong Crypto‑Regulators Roundtable: When Regulatory Perfection Becomes a Liability - Closed Systems Limit Hong Kong's Link to Global Liquidity

This article draws from two sessions at the Finternet 2025 Asia Digital Finance Summit. The first session was titled “From Hong Kong to the Middle East: The Evolution of Digital Assets Regulation”. It was moderated by Rocky Tung (Director, Policy Research & Specialist Advisor, Financial Services Development Council, Hong Kong), with guests Elizabeth Wong (Director of Intermediaries & Head of FinTech, Securities and Futures Commission, Hong Kong) and Wai Lum Kwok (Senior Executive Director, Financial Services Regulatory Authority, Abu Dhabi Global Market).

The second session was titled “Hong Kong’s Breakthroughs, Innovation and Safeguarding”, moderated by Gary Tiu (Executive Director, Head of Regulatory Affairs, OSL Group), with guest Eric Yip (Executive Director, Intermediaries Department, SFC Hong Kong).

The Finternet 2025 summit took place on 4 November in Hong Kong under the theme “Connecting Dreams × Building the Future,” supported by more than ten institutions including OSL Group, Invest HK, the Financial Services Development Council and Hong Kong Cyberport.

On 3 November, the SFC issued a circular allowing licensed local Virtual Asset Trading Platforms to share order‑books with affiliated overseas platforms — meaning Hong Kong investors will soon be able to trade into the same liquidity pool as overseas markets, directly accessing deeper liquidity and closer to international pricing.

The audio transcription is done by GPT and may contain errors. To view the full recording on YouTube:

Part 1: From Hong Kong to the Middle East — The Evolution of Digital Assets Regulation

Hong Kong’s Evolving Approach to Digital Asset Regulation

Rocky: The Financial Services Development Council began focusing on cryptocurrency in 2021, although the Securities and Futures Commission (SFC) had already started addressing crypto-related issues as early as 2018. As an international financial hub, Hong Kong simply couldn’t afford to ignore this emerging — and potentially foundational — area of finance. In 2021, we made a conscious decision to move beyond restricting crypto access to just professional investors.

Given that context, Hong Kong’s regulatory approach to digital assets has continued to evolve, and the SFC has steadily broadened its oversight. Elizabeth, how would you describe the changes you’ve seen in the SFC’s approach to digital asset regulation?

Elizabeth: The SFC began regulating digital assets in 2018 with the goal of creating a secure and trustworthy ecosystem. We initially adopted a cautious and conservative strategy by building a closed-loop system centered on licensed virtual asset platforms. Over time, however, we realized this closed environment was limiting Hong Kong’s access to global liquidity.

To address that, we set out to give local investors access to international markets. Just recently, we issued two circulars — one of which allows licensed virtual asset trading platforms in Hong Kong to share a global order book with their overseas affiliates. This is a key step toward connecting Hong Kong to global liquidity pools.

It took time to issue these circulars because we prioritized close collaboration with the industry. We needed to fully understand the risks involved and provide clear guidance so platforms could operate confidently within a defined regulatory framework. Ultimately, the goal is to build a compliant, transparent market that earns the trust of all participants.

What we’re seeing now is a clear shift in the industry — firms are recognizing the value of regulation. They increasingly view licensing not as a hurdle, but as a badge of credibility that supports long-term growth and sustainability.

How Abu Dhabi’s Regulatory Framework Evolved

Rocky: When I visited ADGM about two years ago — Abu Dhabi’s international financial free zone — digital assets didn’t seem to be a major focus. But today, Abu Dhabi is doing exceptionally well in this space and has laid out a very forward‑looking roadmap. Can you confirm whether my impression from back then was accurate? And if so, what drove the shift?

Wai Lum: When you visited in 2021, it’s true that crypto wasn’t positioned as a top priority, even though we recognized its importance. We had already launched our framework in 2018, at a time when global discussions were dominated by AML and counter‑terrorist‑financing risks. We felt we needed to go beyond those concerns, so we engaged various institutions and looked at frameworks from the Japanese FSA and the New York Department of Financial Services. Ultimately, we chose to extend our traditional finance regulatory regime into the crypto space, treating crypto as simply another asset class.

The decision was driven by our belief that traditional finance and new finance would eventually converge. This set a high bar for tech firms entering the space, but we’re now seeing exactly the kind of convergence we anticipated. Today, a single licence can cover securities, digital‑asset brokerage, dealing and more — we’re asset‑class agnostic.

We’ve also watched market dynamics shift. Back in 2018, the first movers were mostly companies serving retail users — providing on‑ramps, off‑ramps and price discovery. After the FTX collapse, institutional demand surged around custody solutions. Once safe custody infrastructure was in place, interest expanded into staking, lending, and borrowing.

Now, ADGM has a growing ecosystem: broker‑dealers, exchanges, stablecoin issuers, lending platforms and staking providers. We’re also seeing both TradFi and DeFi institutions deploying their respective strategies here. It’s an exciting space with huge potential, and as regulators, staying closely engaged with the industry is absolutely essential.

Regulatory Challenges of Cross-Border Transactions and Capital Flows

Rocky: I see quite a few similarities between regulators in ADGM and Hong Kong. Both of us operate with an international outlook, yet we have our own distinct characteristics. We aim to build relationships across markets and stakeholders, but we want to move forward steadily — not by aggressively inviting everyone in, only to have them all flee when issues arise. That’s exactly what we want to avoid. With that in mind, I’d like to ask both of you the same question: what similarities and differences do you see between your markets? And how can a participant in one market leverage that to gain access to the other?

Wai Lum: I see many similarities, and over time, regulatory frameworks are increasingly converging. We generally view crypto through a traditional finance (TradFi) lens, with a focus on investor protection and systemic stability. From that perspective, markets like Hong Kong, Singapore, and the UAE are moving in the same direction. Many elements are becoming standardized — like asset segregation and market abuse prevention — which makes cross-border expansion easier for firms.

More companies in both Hong Kong and the UAE are now exploring global expansion, so having aligned regulatory frameworks becomes crucial. Of course, every market has its own starting point and priorities, which naturally creates differences. Hong Kong had the advantage of building its framework from scratch, allowing it to be more agile and adaptive. By contrast, mature international financial centers often have to modify their existing systems to accommodate digital assets. So yes, differences still exist — but they’re gradually narrowing over time.

Elizabeth: I agree. Global standard-setting bodies have also been pushing for harmonized regulatory approaches, and the general principle now is: “same activity, same risk, same regulation.” That’s exactly what we’re doing in Hong Kong, and what Wai Lum and his team are implementing in the UAE. We’re both building digital asset ecosystems under a TradFi framework.

I also agree with Wai Lum’s point that regulatory environments are becoming a key factor when companies decide where to set up their headquarters. A well-structured regime helps build trust with investors and clients, and that trust makes it easier for firms to scale globally.

Tokenized assets are another area where global regulators are increasingly aligned. We treat tokenized assets as securities — and if something qualifies as a security, it gets regulated under securities law. This approach is widely supported internationally, especially by fintech firms, who are generally well-equipped to handle such structures. Whether it’s in the crypto space or traditional finance, we’re seeing major firms pivot more deeply into the digital asset ecosystem.

Progress in Building Hong Kong’s Digital Asset Ecosystem

Rocky: It’s crucial that we build a robust ecosystem that bridges traditional finance and digital assets — while also connecting with other global markets. That’s not an easy task, and Hong Kong has faced some complex challenges along the way, particularly around issuing the first license to OSL. Why did that approval process take so long? And looking ahead, how do we ensure the ecosystem develops healthily without compromising regulatory compliance?

Elizabeth: We acknowledge that the licensing process for virtual asset trading platforms in Hong Kong has taken time. When we first started working with OSL, it was also our first real deep dive into the digital asset market from a regulatory perspective. We worked closely with them, spending a lot of time understanding their business model and the unique characteristics of digital assets.

One challenge was that many companies came in with a “crypto-native” mindset — seeing themselves as separate from traditional finance. It takes time for them to understand and adapt to the regulatory expectations of a TradFi framework.

Right now, we’re working closely with the government and have issued two public consultation papers aimed at strengthening the digital asset ecosystem in Hong Kong. We’re considering licensing regimes for virtual asset brokers and custodians to ensure all critical segments of the market are properly regulated. We believe this kind of structured, compliant environment is essential for building a sustainable market here.

We’ve also received suggestions to broaden the scope to include advisory services and fund management for virtual assets. That’s something we’re actively exploring with the government. Once the full ecosystem is in place, we expect more overseas firms to enter the Hong Kong market, bringing greater global liquidity and driving further growth.

How ADGM Ensures Secure, Transparent, and Traceable Cross-Border Transactions

Rocky: How does ADGM ensure smooth cross-border transactions and capital flows? More specifically, how do you enhance efficiency while making sure those transactions are secure, transparent, and traceable?

Wai Lum: Being a first mover is always challenging — but we believe transformation in this space is inevitable. That’s why we’ve chosen to stay ahead of the curve by proactively engaging with the industry, even without a clear blueprint to follow. We’ve essentially applied a traditional financial regulatory framework to this new financial frontier, aiming to address issues like interoperability and efficiency.

In my view, staying adaptable for the future means maintaining a close, ongoing dialogue with the industry. In many ways, we learn together with market participants, who often serve as a bridge between us and other jurisdictions. When companies approach us with new products or business models, we work hand in hand to understand their needs and tailor regulatory frameworks accordingly. That’s how we’ve gradually built out our stablecoin, tokenized asset, and lending platform frameworks.

Most of these firms are already committed to compliance and are willing to work within the rules. They also help us by flagging implementation challenges in other jurisdictions, which in turn helps us shape more thoughtful and resilient frameworks.

Future-proofing our regulations requires that we stay aligned with international standards and the evolving needs of the industry. Straying too far from the global consensus could make it difficult for local firms to scale internationally. That’s why as regulators, it’s critical for us to stay connected to the industry and be active participants in global conversations. We regularly take part in forums like the Financial Stability Board (FSB) and stablecoin working groups — this helps us stay current with market developments and regulatory best practices.

Tokenization: Real-World Applications and Market Response

Rocky: Engaging with industry stakeholders is absolutely critical. As regulators, we can’t afford to be outliers — we need to stay in dialogue with our peers globally to ensure that regulatory development remains sustainable across jurisdictions. Tokenization has become a hot topic lately. Are there any successful real-world cases in Hong Kong you can share?

Elizabeth: To be honest, progress has been rather slow. We issued a circular on tokenization back in 2023, but even now in 2025, we’re still discussing whether there are truly viable use cases. Our main role so far has been to provide regulatory clarity — spelling out how tokenized securities fall under securities laws and what that means for compliance.

We’re also involved in the Hong Kong Monetary Authority’s “Project Ensemble,” where we co-lead the asset management stream and serve as a core member of the architecture community. Our role is to offer guidance — helping firms understand how to structure tokenized securities, what licenses they need, and when they’ll need formal approval for public offerings.

Our experience with tokenization has mirrored what we’ve seen in the broader digital asset market. We’ve put out consultation papers asking for detailed feedback, such as which types of derivative contracts participants hope to see on licensed platforms — but the response has been underwhelming.

That’s why we’re now thinking about how to accelerate the process and encourage more market-driven innovation. Over the coming months, we plan to roll out an accelerator initiative aimed at catalyzing real-world use cases — not just for tokenized assets, but for digital assets more broadly.

Managing Cross-Border Interoperability and Regulatory Challenges

Rocky: Cross-border interoperability is a major challenge for both market participants and regulators. How do you ensure this challenge is addressed effectively so that cross-border transactions can be executed seamlessly?

Wai Lum: Interoperability operates at several levels — between governments, across industries, and between technology and regulation. Each of these layers presents different challenges.

On the government-to-government level, the most effective approach is ongoing dialogue. Digital assets are inherently cross-border, and more companies are operating across multiple jurisdictions. We need consistent engagement to ensure regulatory alignment, especially when explaining our position to peer regulators. Every jurisdiction has its own priorities and regulatory sensitivities. That’s why we’re selective about industry players we work with — we prioritize those aligned with our vision and committed to long-term collaboration.

On the industry side, the landscape is highly fragmented. Some firms are building on specific blockchains, while others are creating their own Layer 1 networks. As regulators, we focus not only on jurisdictional coordination but also on interoperability between regulation and industry, and between regulation and technology.

That’s where RegTech and SupTech come in — regulatory and supervisory technologies that are now central to our strategy. Given the digitally native nature of crypto, we can leverage tools for real-time monitoring and automated oversight. For example, within our fiat-referenced token and stablecoin framework, we can track on-chain circulation in real time, and use APIs to interface with reserve accounts, verifying that the backing assets match what’s on-chain. That’s how we bridge regulatory and industry systems.

We’re also encoding our rules into machine-readable formats so that in the future, smart contracts can interact directly with regulatory frameworks — reading, interpreting, and responding to rule changes in real time.

Elizabeth: In February this year, we published our Digital Asset Development Roadmap, which covers issues like virtual asset derivatives and lending. We’re also looking at how to deepen our dialogue with the industry to stay aligned with emerging trends and craft better-targeted policies.

At the same time, we’re exploring how to improve market oversight — especially as we bring more regulatory regimes and participants into the ecosystem. We want to ensure we maintain clear visibility and control over market activity.

These are the kinds of initiatives the market can look forward to. While we can’t deliver all of it overnight, we’re actively pushing things forward.

Part 2: Hong Kong’s Breakthroughs, Innovation & Safeguarding

How Hong Kong’s Crypto Policy Stays Aligned with Market Needs

Gary: As a policymaker at the SFC, how do you ensure that regulations remain relevant over time and don’t fall out of step with the evolving market?

Eric: Honestly, chasing perfection doesn’t always lead to the best outcomes. I once told a colleague, “Sometimes you get a raise by not asking for one.” The same idea applies to regulation — if you aim for perfection, you might actually get it wrong.

In practice, we use a combination of ordinances, rules, and guidance to build our regulatory framework. Hong Kong’s system is fairly mature now, and we’ve been building it step by step since 2018. Compared to places like the U.S., where the crypto market moves fast, regulation still takes time to catch up. The core objective of our crypto legislation is to target unlicensed activities — not to get bogged down in rigid, static laws.

We also rely on public consultations, regulatory circulars, and ongoing market engagement to maintain flexibility. The market often says it wants principles-based regulation — but once those principles are in place, it usually demands more specific rules. My view is that in the early stages of market development, rule-based regulation is necessary. As the market matures, we should gradually shift toward more flexible, principles-based supervision. That’s how we can remain adaptable and keep up with change.

Hong Kong is transitioning toward a higher-quality market, and that’s the direction we should continue moving in.

How Banking and Regulation Approach Principles vs. Rules

Gary: Having worked both in banking and now as a regulator, have you noticed any differences in mindset between the two when it comes to policymaking in the digital asset space? For example, how do you approach the balance between principles-based and rules-based regulation?

Eric: I wouldn’t even describe myself strictly as a banker — I actually started out studying piano. Later, I managed equities at a stock exchange, then worked in private equity, moved into banking, and finally became a regulator. My career has involved a lot of tough transitions.

That said, being a regulator is actually the most relaxed phase of my professional life. But I’ve always maintained one consistent belief: no matter what you do, it needs to be structured, intentional, and built over time. You can’t skip steps. You can’t just wake up and expect to perform the “Moonlight Sonata” — even Mozart couldn’t do that. You need a plan, you need to study, and you need to grow into it.

The same applies to digital assets. A lot of what we’ve achieved comes down to the dedication of our market participants and colleagues at the SFC. We’ve been on this journey since 2018. We’re not the most aggressive regulators in the crypto space, but we’ve stayed committed — and that commitment helped us steer clear of major industry disasters like the collapse of FTX.

Accelerating Innovation and Implementing “Fast Failures” in Hong Kong

Gary: I really appreciate your approach to self-assessment. At our firm, we do a full retrospective every three months — the last one was three weeks ago, and we’re still recovering from it. What stood out to me, though, were your comments about accelerating innovation and licensing. There’s a lot of appetite for faster innovation in Hong Kong, more agility, and a quicker path to commercialization. The idea of “iteration” is well-embedded in the crypto industry — we innovate through trial and error.

My question is: in Hong Kong, we’ve already seen examples of “failing fast,” especially in the context of licensing. If a project doesn’t meet the bar, it simply doesn’t get through the door — that’s one kind of fast failure. Another approach is to allow projects into the market more quickly, and if they fail to comply later, they naturally phase out. Do you think we should see more of this second kind of fast failure in Hong Kong — where projects are allowed in earlier, and if they can’t deliver, they exit on their own?

Eric: That idea definitely fits into our broader acceleration plan. We’re hoping to adopt a “small steps, quick iterations” model. Personally, I’m not the Executive Director for digital assets — I lead the Intermediaries Division, so my responsibilities are much broader. While digital assets take up a big portion of my time, I also need to look after the other 95% of the market, which is equally important.

From a regulatory standpoint, digital assets require us to strike a balance between risk and reward. Commercially, if you have more capital, you can afford to experiment more. But if you have limited resources, you need to be more cautious.

Gary: So has trial and error become harder to apply in digital asset policymaking?

Eric: Actually, I don’t find it particularly difficult. The key is not to chase perfection. In my view, practicality always beats perfection. My team has worked incredibly hard, and we continue to improve step by step. That’s what drives progress.

Striking the Right Balance Between Consistency and Flexibility in Hong Kong

Gary: What would you like to see from Hong Kong’s crypto market? What kinds of products do you want to emerge? And if we’re measuring in months, when should we expect these innovations to materialize?

Eric: Doing your homework is key! I’m someone who holds firm beliefs, but I’m also flexible within reason. If you look at our objectives, there’s a clear product roadmap in place. We want to see growth in areas like derivatives, modular financing, and staking and lending. In fact, just yesterday I was discussing capital requirements for virtual asset derivatives trading with my team — we’re working on it intensively. So yes, I’ve laid out those goals quite explicitly.

Gary: And what about the timeline? When can we expect to see these innovations hit the market?

Eric: That really depends on how quickly the market can adapt. While I’m fully committed to pushing these changes forward, we have to be realistic — Hong Kong’s market still needs time to absorb and adjust to these developments. Our regulatory framework is principles-based, which means the maturity and professionalism of market participants are crucial. We can advance policy, but the market needs to evolve alongside us.

In some areas, it’s true — we’ve moved faster than the market itself. That’s why our job now is to work closely with the industry and help it grow in tandem with the framework we’ve put in place.

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