Hong Kong Industry Pushes to Soften CARF Compliance Burden

The implementation of the OECD’s Crypto Asset Reporting Framework (CARF) is moving forward, with a target rollout by 2028, but Hong Kong’s financial services sector is advocating to soften certain regulatory requirements that could create significant operational challenges. The Securities & Futures Professionals Association (HKSFPA) recently released a comprehensive advocacy paper outlining concerns about specific aspects of the framework, arguing that a one-size-fits-all approach could expose market participants to excessive legal and compliance risks.

Rather than opposing CARF outright, HKSFPA’s strategy demonstrates industry maturity: backing the broader policy objectives while seeking pragmatic adjustments to implementation details. This balanced approach reflects the sector’s recognition that crypto asset transparency is necessary, but the execution matters greatly for firms operating in Hong Kong’s competitive financial hub.

The Dissolution Problem: When Compliance Never Ends

One of the most contentious issues raised concerns record-keeping obligations for dissolved companies. While HKSFPA broadly agrees with the proposed six-year retention period—aligning with existing Inland Revenue Department and Common Reporting Standard (CRS) benchmarks—the association expressed deep concerns about indefinite post-dissolution responsibilities.

The core problem is straightforward: if directors and principal officers remain personally liable for recordkeeping after a company officially ceases operations, they face open-ended legal exposure with no clear endpoint. This creates a perverse incentive structure where compliance becomes a career-long burden rather than a time-bound obligation. HKSFPA proposed a solution that mirrors best practices in liquidation: appointing independent third-party custodians—such as licensed liquidators or corporate service providers—to assume record-keeping duties after company dissolution.

This recommendation echoes concerns previously raised by PwC and Hong Kong’s Financial Services Treasury Bureau, suggesting that industry consensus exists around this particular friction point. By shifting responsibilities to professional custodians rather than individuals, firms could mitigate their indefinite liability while maintaining compliance with reporting requirements.

One Size Doesn’t Fit All: The Registration Dilemma

HKSFPA also challenged the mandatory registration requirement for Reporting Crypto Asset Service Providers (RCASPs) operating or connected to Hong Kong, particularly regarding firms that consistently file nil returns. While acknowledging that universal registration aids regulatory oversight and prevents unregulated operators from undercutting compliant firms, the association argued that this blanket approach imposes unnecessary administrative burden on entities with minimal reporting obligations.

The proposed compromise: implement tiered registration pathways. For RCASPs anticipating nil returns, a simplified annual declaration process or “lite registration” would satisfy regulatory requirements while reducing administrative costs. HKSFPA also suggested that entities already registered under CARF or holding business registration numbers should activate CRS status through straightforward portal selection rather than repetitive bureaucratic procedures.

Private investment entities, many of which fall into the nil-return category, represent a significant portion of this constituency. Under the current proposal, they would face unnecessary compliance layers without corresponding regulatory benefit—a classic case of regulatory efficiency concerns that sophisticated authorities should soften through targeted exemptions.

The Penalty Paradox: Proportionality vs. Automation

Another flashpoint involves enforcement mechanisms. HKSFPA supported administrative penalties over criminal prosecution—a sensible compromise that allows regulators to address non-compliance while reducing legal costs for both authorities and industry participants. However, the association flagged a critical concern with the proposed “per account/user” penalty structure of $1,000 per account.

This approach mirrors United Kingdom rules but could produce disproportionate outcomes in practice. A single software glitch affecting thousands of user records could theoretically trigger massive fines despite zero intent to evade taxes. HKSFPA advocated for a “reasonable excuse” defense framework: penalties should be mitigated for RFIs (Reporting Financial Institutions) that relied on valid self-certifications later discovered to be false, provided standard due diligence was performed.

This distinction between intentional violations and technical failures matters enormously for institutional compliance culture. Systems will fail occasionally; holding firms strictly liable regardless of intent discourages investment in compliance infrastructure rather than encouraging it.

Electronic Filing: Why Automation Matters

On technical infrastructure, HKSFPA expressed enthusiasm for electronic CARF submission systems but emphasized that government systems must evolve beyond manual upload capabilities. The association recommended prioritizing Application Programming Interface (API) connectivity and XML-based filing formats, particularly for large institutions managing complex transaction volumes.

Manual portal uploads create genuine friction: they’re error-prone, inefficient, and ill-suited for high-transaction-volume firms. Direct API integration would enable automated reporting processes, dramatically reducing filing errors and improving data consistency across submissions. HKSFPA stressed that both API and XML options must receive full technical support, with detailed specifications and testing environments available at least a year before system launch.

This infrastructure requirement represents less a luxury request than a practical necessity for Hong Kong’s ambitions as a global fintech hub. Competitors offering streamlined compliance pathways will attract sophisticated market participants; clunky manual systems repel them.

Finding the Balance: Why Soften Means Smarter

HKSFPA’s advocacy ultimately reflects mature regulatory thinking: the association isn’t seeking to gut CARF or block crypto asset transparency. Rather, it’s pushing Hong Kong regulators to soften rules where they create disproportionate burden relative to actual regulatory benefit. By distinguishing between core policy objectives (asset transparency, tax compliance) and implementation mechanisms (record-keeping timelines, registration tiers, filing processes), the sector has identified points where flexibility strengthens rather than weakens regulatory outcomes.

As the 2028 implementation deadline approaches, Hong Kong authorities face a choice: adopt rigid rules that may drive compliant firms elsewhere, or remain pragmatic about design details while maintaining substantive reporting standards. The HKSFPA’s detailed recommendations suggest a third path exists—one that maintains CARF’s integrity while accommodating operational realities facing legitimate market participants.