The Hong Kong Monetary Authority (HKMA) issued a consultation paper on September 8, 2025, proposing a new crypto asset classification system with significant capital requirements for banks, potentially limiting unbacked crypto involvement.

Deconstruction of Financial Mechanics

The Hong Kong Monetary Authority (HKMA), on September 8, 2025, issued a consultation paper (SPM CRP-1) detailing a new classification system for crypto assets applicable to the local banking sector. This initiative aims to align Hong Kong's regulatory guidance with the Basel Committee on Banking Supervision (BCBS) crypto asset standards, slated for implementation in early 2026.

The proposed framework categorizes crypto assets into two primary groups, each with subgroups:

  • Group 1a: Tokenized traditional assets that maintain the same credit and market risk as their non-tokenized counterparts. These include digital representations of traditional assets using cryptography and Distributed Ledger Technology (DLT).
  • Group 1b: Stablecoins equipped with effective stabilization mechanisms, linking their value to one or more traditional assets. To qualify for Group 1a or Group 1b, crypto assets must continuously satisfy specific classification conditions.

Crypto assets not meeting the Group 1 criteria are assigned to Group 2, which encompasses unbacked crypto assets such as Bitcoin and Ethereum, along with algorithmic stablecoins and other non-compliant assets. Group 2 is further divided into Group 2a (with limited hedging recognition) and Group 2b (no hedging recognition). Under the proposed rules, unbacked crypto assets on public chains, particularly those in Group 2b, could face a substantial 1250% risk weighting. This implies that banks would need to hold 12.5 times the capital for these assets compared to typical assets, mirroring approaches seen from the European Banking Authority (EBA) which also mandates a 1250% risk weight for unbacked crypto holdings. Banks' total exposure to Group 2 assets is restricted to a 2% limit of Tier 1 capital, generally expected to be lower than 1%.

Business Strategy and Market Positioning

This regulatory proposal by the HKMA signifies a strategic pivot in Hong Kong's financial landscape, positioning it as a leader in institutional-grade tokenized Real World Asset (RWA) markets while deterring speculative exposure to volatile, unbacked digital assets. The stringent capital requirements for Group 2b assets effectively make it economically unviable for banks to hold significant amounts of unbacked cryptocurrencies like Bitcoin and Ethereum. This approach is consistent with the broader Basel framework, which seeks to protect the financial system from market volatility observed in recent crypto events.

Conversely, the framework encourages the development and adoption of regulated stablecoins and tokenized traditional assets. Hong Kong has already launched its comprehensive stablecoin regulatory regime on August 1, 2025, which mandates licensing and regulatory requirements for domestic stablecoin issuers, including a requirement for 100% reserve backing by high-quality liquid assets and minimum financial resources like HK$25 million paid-up share capital. This emphasis on regulated, reserved assets ensures a more defined and compliant regulatory environment for institutional participation.

Furthermore, the framework's focus on asset segregation—requiring client-held crypto to be isolated from bank balance sheets—ensures custodial services remain capital-light. This structure incentivizes banks to act as compliant gatekeepers for institutional investors, enabling them to earn custody fees without bearing direct market risk.

Broader Market Implications

The HKMA's proposed regulations are poised to significantly reshape institutional involvement in the crypto space within Hong Kong and potentially influence global standards. The increased capital burden for banks dealing with unbacked crypto assets may limit their direct engagement with these more volatile assets, thereby shifting institutional capital towards regulated stablecoins and tokenized RWAs. This aligns with a projected growth in the RWA market from an estimated $25 billion in 2025 to $600 billion by 2030, indicating a structural reallocation of institutional funds.

While this framework aims to foster financial stability and institutional adoption within a regulated environment, it has also prompted concerns from financial industry associations globally. These groups, including the Global Financial Markets Association and the Institute of International Finance, have urged the Basel Committee to reconsider its upcoming crypto regulations, arguing that such "punitive capital treatments" could effectively bar banks from participating meaningfully in the digital asset market and potentially push operations into less regulated spaces. However, Hong Kong's move sets a clear precedent for how a major financial hub intends to integrate digital assets into its banking framework under the principle of "same activity, same risk, same regulation," advocating for growth in parallel with robust risk mitigation. This could accelerate the trend towards regulated and compliant Web3 ecosystems and influence how other jurisdictions approach corporate adoption of digital assets.