Listed companies' digital asset treasury business: move left or move right?

Author: Zhang Feng

According to media reports on October 30, the chairman of the Hong Kong Securities and Futures Commission, Huang Youcheng, stated that there are currently no regulations governing listed companies' investments in cryptocurrencies in Hong Kong. He mentioned that the situation in the market will be monitored, and research will be conducted to provide relevant guidelines for the market.

In the face of the emerging field of crypto assets, listed companies are confronted with unprecedented opportunities as well as numerous unknown risks and challenges. Should they choose to adopt a conservative wait-and-see approach, or actively position themselves? Should they go left or right? This could be a strategic choice issue for both listed companies and regulatory bodies.

1. What is the digital asset treasury business of listed companies?

The digital asset treasury business of publicly listed companies refers to the series of business activities where a publicly listed company establishes a specialized digital asset management system to incorporate various digital assets such as cryptocurrencies, tokenized assets, and central bank digital currencies (CBDC) into the scope of corporate treasury management. This enables asset allocation, liquidity management, risk control, and value appreciation. This business model is not only a product of technological advancement but also a profound transformation of financial management concepts.

The digital asset treasury business has three notable characteristics: First, digital assets as the management object differ from traditional financial assets such as cash and deposits. Digital assets are based on distributed ledger technology (DLT) and possess characteristics such as programmability, divisibility, ease of circulation, and high transparency. These features give digital assets unique advantages in liquidity, cross-border circulation, and smart contract applications. Second, the intelligence of management methods. Through technological innovations such as smart contracts, algorithmic trading, and artificial intelligence, companies can achieve automation, precision, and real-time treasury management, significantly enhancing capital operation efficiency. Third, the disruptive nature of management thinking. Digital asset treasury breaks the time and space constraints of traditional treasury management, enabling real-time operations globally 24/7, and promotes the transformation of corporate financial management from static conservatism to dynamic proactivity.

From the perspective of specific business models, the digital asset treasury business covers multiple dimensions: in asset allocation, companies can convert part of their cash reserves into mainstream cryptocurrencies like Bitcoin and Ethereum to hedge against inflation risks and pursue higher returns; in liquidity management, using stablecoins for cross-border payment settlements can significantly reduce transaction fees and shorten the time to receive funds; in risk management, derivatives tools like futures and options can be used to hedge against the price volatility of digital assets; in strategic investment, actively participating in emerging fields such as decentralized finance (DeFi), non-fungible tokens (NFTs), and the metaverse to explore new growth points and strengthen technological layout.

2. Is it a gray area or a clear prohibition zone?

Currently, there is no unified regulatory framework for digital assets globally, and there are significant differences in the legal attitudes of various jurisdictions towards listed companies operating digital asset treasury business, which leaves this area to some extent still in a “gray area.”

Taking Hong Kong as an example, the Hong Kong Securities and Futures Commission has issued a series of regulatory documents such as the “Guidelines for Virtual Asset Trading Platforms”, providing a legal channel for professional investors to participate in virtual asset trading, but there are currently no specific regulatory rules targeting the treasury business of listed companies.

Under the current legal framework in Hong Kong, there are no specific prohibitive regulations against listed companies participating in digital asset treasury operations. However, related activities must be governed by the existing financial regulatory system. Firstly, listed companies must comply with the Securities and Futures Ordinance. If the digital assets involved fall under the definition of “securities” (such as having equity or debt characteristics), their trading and management must meet licensing requirements; otherwise, it would be illegal. Secondly, the director's responsibility provisions under the Companies Ordinance require management to act in the overall interest of the company and manage risks prudently. Allocating company funds to highly volatile digital assets obligates the board to demonstrate that its decisions meet standards of diligence and care. Additionally, the Hong Kong Stock Exchange's Listing Rules explicitly require listed companies to disclose significant information in a timely manner. Establishing a digital asset treasury may trigger disclosure obligations, especially when there are significant fluctuations in asset value. It is worth noting that Hong Kong is gradually establishing a licensing system for Virtual Asset Service Providers (VASP). If listed companies engage in related businesses, they may need to assess whether an appropriate license is required.

At the international level, regulatory attitudes are showing a trend of diversification. The U.S. Securities and Exchange Commission (SEC) tends to classify most digital assets as securities, subjecting them to securities law regulation, with very strict disclosure requirements for digital asset trading and investor protection measures; the Monetary Authority of Singapore (MAS) adopts a relatively open stance, issuing licenses to digital asset service providers through the Payment Services Act and launching a “regulatory sandbox” to encourage innovation; the European Union's Markets in Crypto-Assets Regulation (MiCA) establishes a relatively comprehensive regulatory framework that covers all aspects of asset issuance, trading, and custody, providing clear legal expectations for the market.

Overall, there is currently no jurisdiction that explicitly prohibits listed companies from engaging in digital asset treasury operations. However, they are generally required to comply with existing securities laws, corporate laws, anti-money laundering laws, and other regulations, and to fulfill higher standards of obligations in areas such as information disclosure, risk management, and corporate governance. When listed companies venture into this field, they must remain highly sensitive to the regulatory dynamics of the relevant jurisdictions and establish corresponding compliance mechanisms.

3. What practical operations are likely to involve violations and crimes

In practice, if a listed company has not established a sound compliance system, it is very easy to cross legal red lines.

Violation of Information Disclosure. If a listed company fails to disclose its holdings in digital assets, trading situations, and related risks in accordance with regulations, it may constitute false statements or significant omissions. For example, a certain U.S. listed company was investigated and heavily fined by the SEC for failing to timely disclose its substantial Bitcoin investment situation. The high volatility of digital assets means that their value can significantly impact the company's financial condition; therefore, timely, accurate, and complete information disclosure is crucial.

Insider Trading. The digital asset market operates 24/7, and the speed of information dissemination poses new challenges for defining and preventing insider information. If internal personnel of a listed company trade for profit using undisclosed information related to digital assets, it constitutes insider trading and faces serious legal consequences.

Market Manipulation. The act of influencing the prices of digital assets through false transactions, wash trading, pump and dump schemes, etc., is more covert in the digital asset market, which features strong anonymity and convenient cross-border flows, but it is becoming a key focus for regulatory authorities in various countries.

Money laundering and terrorist financing. The anonymity and cross-border liquidity of digital assets make them susceptible to illegal fund transfers. If a listed company fails to fulfill anti-money laundering obligations such as customer identity verification (KYC), transaction record-keeping, and reporting suspicious transactions, it may face severe penalties. A certain Hong Kong-listed company was investigated for cross-border fund transfers using digital assets, highlighting the importance of anti-money laundering compliance.

Tax Violations. The tax treatment rules for digital assets are still unclear, which can lead to disputes. If a listed company fails to accurately calculate and pay capital gains tax and other taxes arising from digital asset transactions, it may face tax audits and penalties. Tax authorities in various countries are gradually strengthening the regulation of digital asset transactions, and companies need to closely monitor the evolution of relevant policies.

In addition, the risks associated with technical security cannot be ignored. Events such as the loss of private keys, hacking attacks, and vulnerabilities in smart contracts can lead to permanent loss of assets, while the determination of related responsibilities still has legal gaps. Listed companies need to establish a strict technical security system and emergency plans to prevent such risks.

4. What is the appeal of the business?

Despite the numerous risks, the digital asset treasury business still holds significant strategic value for listed companies.

Financial Management Innovation. Digital assets enable near real-time clearing and settlement, significantly improving capital utilization efficiency; through the programmable nature of smart contracts, enterprises can achieve precise cash flow management, automated dividend payments, and condition-triggered financing; using stablecoins for cross-border payments can significantly reduce transaction fees, shorten settlement times, and optimize global fund allocation.

Diversification of Asset Allocation. Against the backdrop of declining yields on traditional assets and increasing inflationary pressures, digital assets provide listed companies with new investment options, helping to diversify investment risks and enhance overall returns. Companies like MicroStrategy have achieved significant financial returns by allocating Bitcoin, attracting many enterprises to follow suit.

Deepening the integration of industry and finance. For technology-related listed companies, the digital asset treasury business can create synergies with the main business, promoting the application of blockchain technology in scenarios such as supply chain finance, digital identity, and IoT data transactions, thereby facilitating the digital upgrade of the industrial ecosystem.

Enhancement of Brand Value. Actively embracing digital assets helps shape an innovative and forward-looking corporate image, attracting young investors and top talents, and enhancing market valuation. In the era of digital economy, a company's technological sensitivity and innovation capacity have become important indicators of competitive strength.

Five, Governance Dilemmas Under the Collision of Old and New Paradigms

Publicly listed companies participating in digital asset treasury operations have presented unprecedented challenges to regulatory agencies.

Regulatory arbitrage risk. The cross-border flow characteristics of digital assets may allow listed companies to evade stricter regulations through structural design, leading to regulatory competition and even the phenomenon of “race to the bottom,” threatening global financial stability.

Understanding the Technology Gap. Regulatory agencies' understanding of new technologies such as blockchain, smart contracts, and zero-knowledge proofs lags behind market innovation, making it difficult to formulate targeted and high-operability regulatory rules, resulting in regulatory gaps or excessive regulation.

Risk transmission intensifies. The high volatility and high correlation of the digital asset market may transmit to the broader capital market through the balance sheets of listed companies, amplifying systemic risk. Especially in extreme market conditions, digital asset treasury may become a node for risk contagion.

Investor protection dilemma. Ordinary investors find it difficult to understand the complex risks, valuation logic, and technical principles of digital assets, and the issue of information asymmetry is even more pronounced. Once a risk event occurs, investors may face significant losses and it can impact market confidence.

Regulatory jurisdiction conflicts. Innovative models such as decentralized finance (DeFi) pose challenges to traditional regulatory jurisdictions, and the cross-border regulatory cooperation mechanisms are still underdeveloped, leading to difficulties in enforcement and regulatory loopholes.

6. Strategic Choices for Building Hong Kong as an International Digital Finance Centre

In light of the development trend of digital asset treasury business, Hong Kong, as an international financial center, should seize historical opportunities and lead industry development through the following measures, while adhering to the bottom line of risk.

Tighten the stance on the digital asset policy statement. The Hong Kong government should integrate the previously released series of digital asset policy statements and explore how to embody the principle of “same business, same risk, same regulation” in the regulation of digital asset treasury operations, aiming to prevent risks while avoiding excessive regulation that stifles innovation.

Promote regulatory innovation and improve investor protection mechanisms. Actively develop regulatory technology (RegTech), utilizing blockchain, big data, artificial intelligence, and other technologies to enhance regulatory efficiency, achieve real-time monitoring, risk warnings, and intelligent law enforcement. The Hong Kong Securities and Futures Commission may consider establishing a regulatory sandbox for digital assets to provide a testing space for innovative businesses, and support companies in exploring new models under the premise of controllable risks. Introduce a qualified investor system, setting suitability requirements for individual investors participating in digital asset investments; establish a digital asset dispute resolution mechanism, set up dedicated arbitration and mediation platforms to protect the legal rights and interests of investors.

Learn from international experience to improve the regulatory framework. Referencing international best practices such as Singapore's licensing management system and the EU's MiCA framework, establish a regulatory system that covers the entire chain of digital asset issuance, trading, and custody. It is particularly important to clarify the specific requirements for information disclosure, asset valuation, risk control, and audit verification for listed companies' digital asset treasury operations, providing clear operational guidelines for enterprises.

Leveraging the advantages of “One Country, Two Systems” and under the premise of maintaining financial security, establish a regulatory information sharing and law enforcement cooperation mechanism with the Mainland and other jurisdictions to jointly address cross-border regulatory challenges. In particular, deepen cooperation in areas such as anti-money laundering, counter-terrorist financing, and market manipulation.

The digital asset treasury business is an inevitable product of the digital economy era, and it is something that listed companies cannot avoid and regulatory agencies cannot ignore. For Hong Kong, properly addressing the regulatory issues of listed companies' digital asset treasury business is crucial; on one hand, it must maintain financial market stability, and on the other hand, it must also focus on consolidating and enhancing its status as an international financial center. We are at a historical crossroads; if we choose the left path, adhering to old practices, we may miss development opportunities; if we choose the right path, blindly rushing forward, we may trigger significant risks. Only by seeking a balance between innovation and regulation, and maintaining clarity between opportunities and risks, can we navigate this digital financial transformation smoothly and sustainably.