Staking and Yield Products for Virtual Assets in Hong Kong: Regulatory Framework and Legal Considerations

Introduction

Staking and yield-generating products represent some of the most commercially significant — and legally complex — features of the virtual asset ecosystem. As Hong Kong has developed its comprehensive virtual asset regulatory framework, the treatment of staking services, yield farming arrangements, and virtual asset lending products has received increasing attention from the Securities and Futures Commission ("SFC") and the Hong Kong Monetary Authority ("HKMA").

This article examines the regulatory framework applicable to staking and yield products in Hong Kong, the SFC's published position on staking services offered by licensed Virtual Asset Trading Platforms ("VATPs"), and the legal risks and compliance obligations relevant to service providers and investors.

What Is Staking?

Staking refers to the process of locking up virtual assets in a proof-of-stake ("PoS") blockchain network to participate in the network's consensus mechanism and validate transactions. In return for locking up their assets, stakers receive staking rewards — typically newly minted tokens or a share of transaction fees — proportional to the amount staked and the duration of staking.

Staking can be performed in several ways:

• Solo staking: The token holder operates their own validator node, requiring technical infrastructure and a minimum token threshold (e.g., 32 ETH for Ethereum validators)
• Delegated staking: Token holders delegate their staking rights to a validator while retaining ownership of their assets
• Pooled staking: Multiple holders combine their assets in a staking pool, with rewards distributed pro-rata
• Exchange staking services: Centralised exchanges or VATPs offer staking products to clients, handling the technical aspects of staking on behalf of clients in exchange for a service fee

Regulatory Framework in Hong Kong

SFC's Position on Staking Services by Licensed VATPs

In a circular published in April 2024, the SFC set out its regulatory expectations for staking services offered by SFC-licensed VATPs. The SFC's position reflects a cautious but permissive approach to staking, subject to robust risk management and client protection measures.

Key points from the SFC's circular include:

• Permitted with conditions: Licensed VATPs may offer staking services to clients, provided they comply with the SFC's specified requirements
• Client asset protection: VATPs must ensure that client virtual assets are properly safeguarded when staked, including maintaining appropriate insurance or reserve arrangements to cover potential losses arising from slashing events or protocol failures
• Disclosure obligations: VATPs must clearly disclose to clients the risks associated with staking, including slashing risk (loss of staked assets due to validator misconduct), lock-up periods and liquidity constraints, smart contract risk, and reward variability
• Counterparty risk management: Where VATPs delegate staking to third-party validators or staking service providers, they must conduct thorough due diligence on those counterparties and maintain appropriate contractual protections
• No rehypothecation: Client virtual assets used in staking must not be rehypothecated or used for any purpose other than the staking services agreed with the client

Staking Rewards and Securities Law

An important question under Hong Kong law is whether staking services — particularly pooled staking arrangements — constitute a "collective investment scheme" ("CIS") under the Securities and Futures Ordinance (Cap. 571) ("SFO").

A CIS broadly covers arrangements under which investors contribute assets, the contributions are managed as a whole or in pools, and the participants do not have day-to-day control over the management of the scheme's property, with participants sharing in profits or income arising from the scheme's property. If a staking arrangement meets these criteria, it may require SFC authorisation as a CIS unless an exemption applies.

The SFC has not issued definitive guidance classifying all staking arrangements as CIS, and the analysis is fact-specific. Pooled staking arrangements that involve a large number of passive participants, managed collectively by an operator for the purpose of generating and distributing rewards, carry a higher risk of CIS characterisation than arrangements where the client directly controls their staked assets through an exchange interface.

Virtual Asset Lending Products

Virtual asset lending products — including centralised lending platforms and DeFi lending protocols — allow holders to lend their virtual assets to borrowers in exchange for interest payments. These products raise distinct regulatory questions under Hong Kong law.

Deposits and the Banking Ordinance

Centralised virtual asset lending arrangements where the platform accepts virtual assets from depositors and on-lends them to borrowers may be characterised as "taking deposits" under the Banking Ordinance (Cap. 155), which requires authorisation from the HKMA as a licensed bank, restricted licence bank, or deposit-taking company. The HKMA has not yet provided comprehensive guidance on the application of the Banking Ordinance to virtual asset lending, and service providers should seek legal advice on the applicable characterisation.

Collective Investment Scheme Risk

Virtual asset lending products that pool client assets, manage them collectively, and distribute returns pro-rata also carry risk of CIS characterisation under the SFO. Providers offering such products to Hong Kong investors should conduct a thorough regulatory analysis before launch.

Yield-Bearing Tokens and Stablecoins

Certain virtual assets are designed to generate yield for holders, including yield-bearing stablecoins, liquid staking tokens (such as stETH or rETH), and rebasing tokens. The regulatory treatment of these instruments depends on their specific economic and legal characteristics:

• Liquid staking tokens: Tokens that represent a claim to staked assets and accrued staking rewards may be characterised as securities (interests in a CIS) or as non-securities virtual assets, depending on the structure of the underlying staking arrangement
• Yield-bearing stablecoins: Stablecoins that pay interest or yield to holders may attract additional regulatory scrutiny from both the SFC (as potential securities) and the HKMA (under the forthcoming stablecoin licensing regime)
• Structured yield products: Tokenised structured products offering enhanced yields through combinations of staking, lending, or derivatives strategies will generally require SFC authorisation as securities or collective investment schemes

Compliance Obligations for Service Providers

Providers of staking and yield products in Hong Kong face a range of compliance obligations depending on the specific products offered and the regulatory characterisation that applies:

• VASP licensing: Virtual asset exchanges and platforms providing staking or yield products as ancillary services to their core trading offering must be licensed as VATPs and comply with the SFC's VATP requirements, including the staking circular
• SFC product authorisation: Where staking or yield products constitute CIS, SFC product authorisation (or a relevant exemption) is required before marketing to Hong Kong investors
• AML/CFT compliance: Staking and yield service providers subject to AMLO must implement appropriate AML/CFT policies and procedures, including customer due diligence, transaction monitoring, and suspicious transaction reporting
• Consumer disclosure: Adequate disclosure of risks, fees, lock-up terms, and redemption procedures is required regardless of the specific regulatory categorisation of the product

Risk Considerations for Investors

Investors in staking and yield products should be aware of the following key risks:

• Slashing risk: Validator misconduct or downtime can result in partial loss of staked assets in PoS networks with slashing penalties
• Protocol risk: Smart contract vulnerabilities, oracle manipulation, or protocol governance failures can result in loss of assets
• Liquidity risk: Staked assets may be subject to unbonding periods during which they cannot be withdrawn or traded
• Counterparty risk: Where staking or yield services are provided by a centralised platform, insolvency or operational failure of the platform poses risk to client assets
• Regulatory risk: Changes in Hong Kong's regulatory framework could restrict or prohibit the provision of staking or yield products, potentially affecting investors' ability to continue participation

How Alan Wong LLP Can Assist

Alan Wong LLP advises virtual asset businesses, fund managers, and investors on all regulatory and legal aspects of staking, yield products, and virtual asset lending in Hong Kong. Our services include regulatory analysis of staking and yield product structures, VATP licensing and compliance advisory, collective investment scheme characterisation analysis, AML/CFT policy development, and product documentation drafting.

We help clients navigate Hong Kong's evolving virtual asset regulatory landscape with practical, commercially-oriented legal advice. Our team monitors developments from the SFC and HKMA closely and advises clients on how new regulatory guidance affects their operations.

Contact us to discuss your virtual asset staking or yield product needs.