Crypto Lending and Borrowing in Hong Kong: Legal Considerations

What Is Crypto Lending and Borrowing?

Crypto lending involves one party (the lender) providing cryptocurrency or fiat currency to another party (the borrower) in exchange for interest payments, with the loan typically secured by cryptocurrency collateral. Crypto borrowing platforms facilitate this process, matching lenders and borrowers or acting as the counterparty to lending transactions.

The market for crypto lending has grown substantially, operating in both centralised (CeFi) and decentralised (DeFi) formats. The collapse of major CeFi lending platforms globally in 2022 (including Celsius, BlockFi, and Voyager) highlighted the systemic risks inherent in unregulated or under-regulated crypto lending, and has prompted regulators worldwide, including Hong Kong's Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA), to pay closer attention to these activities.

Regulatory Characterisation: Is Crypto Lending a Regulated Activity?

Whether crypto lending is a regulated activity in Hong Kong depends on the nature of the assets involved and the structure of the lending arrangement.

Where the assets lent are virtual assets that constitute securities under the Securities and Futures Ordinance (SFO) — such as security tokens or tokenised collective investment scheme interests — lending those assets would engage SFC-regulated activities including dealing in securities. The platform facilitating such lending would require an SFC licence.

Where the assets are non-security virtual assets (such as Bitcoin or Ether), crypto lending is not directly regulated under the SFO. However, platforms providing custody of these assets to facilitate lending may require a Virtual Asset Trading Platform (VATP) licence, depending on the scope of their services.

The HKMA has separately indicated that banks and authorised institutions wishing to engage in crypto lending activities will be subject to heightened scrutiny and must comply with applicable prudential and conduct requirements.

Lending Using Fiat Currency Against Crypto Collateral

Lending fiat currency to borrowers who provide cryptocurrency as collateral is a common form of crypto-secured lending. From a regulatory perspective, this activity may engage the Money Lenders Ordinance (Cap. 163), which regulates lending money at interest in Hong Kong. A money lender's licence is required by any person who lends money at interest as a business in Hong Kong, unless an exemption applies.

Key exemptions from money lender licensing include banks, authorised institutions, and certain regulated entities. Fintech companies and crypto platforms that engage in fiat lending against crypto collateral without holding an appropriate exemption risk breaching the Money Lenders Ordinance, which carries criminal penalties.

Key Legal Risks in Crypto Lending

Counterparty and Credit Risk: The value of crypto collateral is highly volatile. A rapid decline in collateral value can result in undercollateralised loans, triggering margin calls or liquidation events. Lending agreements must include robust provisions for collateral top-ups, liquidation thresholds, and priority of recourse.

Custody and Safekeeping: Where the lending platform holds cryptocurrency on behalf of lenders or borrowers, it takes on custody responsibilities. Custody of client assets in Hong Kong is regulated under the SFC's Guidelines for Reducing and Mitigating Hacks of Virtual Asset Exchanges, and custodians must maintain adequate security infrastructure and insurance.

Rehypothecation: Some platforms rehypothecate collateral — that is, they use collateral posted by one borrower to fund loans to other parties or to generate returns. Rehypothecation amplifies counterparty risk and must be disclosed clearly to borrowers.

Insolvency Risk: If a crypto lending platform becomes insolvent, lenders and depositors may not have priority claims over the platform's assets. The treatment of crypto assets in Hong Kong insolvency proceedings is an evolving area of law, and lenders should consider the structural protections available to them in the event of platform insolvency.

Consumer Protection Considerations

Retail investors using crypto lending platforms are entitled to clear disclosure of risks, including the risks of volatility, counterparty default, and platform insolvency. Licensed VATPs under the SFC's virtual asset licensing regime are required to comply with conduct of business standards that include risk disclosure obligations. Retail access to crypto borrowing and leveraged products is restricted under SFC guidelines.

Smart Contracts and Legal Enforceability

DeFi lending protocols operate through smart contracts that automatically execute loan disbursements, collateral lockups, and liquidations based on code. While smart contracts are efficient and transparent, questions arise about their legal enforceability as binding contracts under Hong Kong law. The Legal Modernisation Review being conducted by the Hong Kong Law Reform Commission includes consideration of the legal status of smart contracts and digital assets in financial transactions.

How Alan Wong LLP Can Help

Alan Wong LLP advises fintech companies, virtual asset businesses, and financial institutions on the legal and regulatory framework for crypto lending and borrowing in Hong Kong. We assist with regulatory licensing analysis, lending agreement drafting, collateral documentation, consumer protection compliance, and insolvency planning for crypto-native businesses. Contact us to discuss how to structure your crypto lending operations in compliance with Hong Kong law.