From Regulation to Reality: Hong Kong’s Virtual Asset Evolution

I had the opportunity to sit in on a closed-door regulatory panel on virtual assets. One of the key ideas is that Hong Kong isn’t merely experimenting with virtual asset regulation anymore. It’s building an ecosystem with structure, sequencing, and a long-term vision. And if you're working in compliance, risk, or anything adjacent to digital assets, that shift is going to matter very soon.

Let me share the takeaways that stayed with me the most.

Policy View on Hong Kong’s Ecosystem

One of the policy voices on the panel described Hong Kong’s strategy in a way I hadn’t quite heard before. Instead of racing to regulate everything at once, the city is layering the ecosystem step by step using a so-called “building-block approach”: trading platforms first, then stablecoins, then OTC dealers, custodians, and a widened perimeter for intermediaries.

What also became clear is that stablecoins are at the centre of this next phase, not some side issue for specialists to worry about. No matter what you care about: be it payments, custody, AML, sanctions, customer protection, or market integrity… stablecoins touch all of it, and the new framework will draw hard boundaries around who can issue, distribute, or offer them.

Another point that resonated: Hong Kong doesn’t operate in a vacuum. Global alignment is accelerating: Singapore is raising its bar, the UK and Europe are deep in consultation, and international bodies are benchmarking everyone’s progress. If you’re running a VASP or bank here, “following Hong Kong rules” is no longer enough. You need to follow Singapore, the UK, the US, and FATF developments with equal attentiveness.

And perhaps the most quietly important message: outsourcing technical understanding is no longer acceptable. Banks, VASPs, leadership teams and every other stakeholder are all expected to understand chain behaviour, custody mechanics, and VA-specific risks at a level that allows for informed decision-making. In other words, vendors can support you, but they can’t think for you.

A Reality Check from the Law Enforcement: Where the Risks Actually Are?

“Crypto risk isn’t theoretical. It’s happening every single day.” That’s the key idea from the law enforcement representative.

The stablecoin framework, for instance, is already reshaping the OTC market. Major players are stepping back from certain services, and the expectation is that unlicensed activity will go underground. When that happens, the risks shift — robberies, fraud rings, unprotected retail losses. The police are preparing accordingly, with dedicated channels for regulatory referrals and differentiated case-handling depending on whether the issue is fraud or licensing.

How about leveraging the vendor tools? Anyone who has worked with crypto analytics knows this pain: the same wallet can get wildly different scores depending on which vendor you use. One says “high risk.” Another says “normal.” There is no shared industry baseline yet, compared to decades of typologies like we have in TradFi.

The takeaway was blunt: you cannot run a compliance programme on vendor autopilot. Human judgment, multi-source validation, and contextual interpretation matter far more than whatever label a tool spits out. Otherwise you risk freezing the wrong customers, or missing the right ones.

The Industry View: Compliance Has to Evolve as Fast as the Technology

The industry representative on the panel put it in the most relatable terms: “TradFi playbooks don’t plug in cleanly here.” And he’s right. Virtual assets settle instantly. They move cross-chain. Customers show up from every jurisdiction imaginable. Identities can be spoofed.

He also spoke about the ripple effects of the new stablecoin regime. Retail access will tighten. OTC flows will change shape. Banks will start treating stablecoin flows as payments, not speculative trades. All of this impacts onboarding, source-of-funds, liquidity, transaction monitoring. The entire control framework.

And then came a line that got a laugh, but was actually quite insightful: “We don’t just need compliance. We need pre-crime compliance.” In other words, predictive controls, smart-contract screening, real-time wallet profiling, and tighter risk scoring before a transaction ever executes.

Still, despite all the talk about analytics and tooling, the panel kept coming back to governance. Segregation of duties, multi-sig, dual approvals, proper off-boarding all sound boring but are actually essential things that differentiate a resilient VASP from one incident away from failure.

The Risks Everyone Can See Coming

Three themes came up again and again, no matter the angle or the speaker background (policy, enforcement, industry).

Regulatory arbitrage is inevitable.
As different jurisdictions take different approaches, customers will “jurisdiction hop.” Firms need to recognise when flows don’t match geography.

VA, payments, and geopolitics are converging.
Stablecoins as cross-border rails. DeFi used for layered laundering. Actors in sanctioned jurisdictions experimenting with new pathways. You can’t treat AML, sanctions and payments separately anymore.

Identity risk is exploding.
Social engineering is becoming the biggest weak spot: deepfakes, impersonation on Telegram, forged investor documents, fake officers. AML, cyber and fraud teams no longer have the luxury of separate lanes.

What This Means for Us?

The following priorities come to mind:

• We need stronger cross-functional collaboration: AML + cyber + fraud + tech + legal speaking the same language.

• We need to reassess stablecoin policies, especially around distribution, retail access, and off-ramping.

• We need more sophisticated KYT model governance: dual vendors, human validation, and defensible rationale.

• We need broader blockchain literacy across teams, not just among analysts.

• And we need to revisit governance basics: permissions, off-boarding, key management, segregation of duties.

A Closing Thought

The more I learn about virtual assets, the more it reinforces a simple truth: financial crime isn’t siloed anymore. Payments touch geopolitics. Geopolitics touches sanctions. Sanctions touch AML. AML touches cyber. And identity risk cuts across all of it. Virtual assets merely make this convergence more visible, and more urgent.

As always, if you’re navigating these issues in your own organisation and want to compare approaches, I’m always happy to discuss. This space is moving quickly, and no one has all the answers. We’re learning this in real time, and the dialogue is half the work.

Thanks for reading,

Alexey