The trade-off between competitiveness and compliance in Hong Kong's CARF adoption

Hong Kong’s push to develop a global digital-asset hub is entering a new phase as international tax authorities move to require greater reporting and information sharing in crypto markets.

The city is moving toward adopting the OECD’s Crypto Asset Reporting Framework, or CARF, a global tax transparency regime that would require centralized crypto exchanges to collect and share transaction data with tax authorities.

Crypto assets could fall under the same rigorous reporting system that already governs traditional offshore bank accounts.

For Hong Kong authorities, CARF requires a delicate balance of enforcing tougher oversight without undermining its appeal as a digital asset industry hub.

A crypto reality check

“Crypto trading is no longer considered a fringe activity. It’s a permanent feature of global markets,” said Calix Liu, founder of Hong Kong-based crypto and tax consulting firm FinTax.

“Once regulators accepted that reality, the lack of reporting rules from the early years became a serious problem.”

Liu said the regulatory vacuum before 2018 paved the way for large sums of money to move without clear disclosure requirements.

“The anonymous nature of crypto transactions made it easier for people to hide taxable income, which was also made easier by the lack of a reporting framework,” he said.

The proposal comes as governments worldwide step up efforts to close tax gaps created by digital assets. More than 70 jurisdictions have committed to adopting CARF, with the OECD and G20 aiming to roll out global crypto reporting between 2027 and 2028.

Crypto is booming in Hong Kong

Hong Kong has been praised as one of the most crypto friendly cities in the world. The Crypto Friendly Cities Index awarded the city second place after Ljubljana, Slovenia in 2025. Meanwhile, the city’s blockchain application sector grew by a staggering 250% between 2022 and 2024.

Over the same period, the number of digital asset and crypto firms increased by almost 30%, according to industry data.

Hong Kong’s international business appeal also puts pressure on authorities to modernize tax and reporting systems around decentralized finance. The OECD has warned that the rapid expansion of crypto trading has outpaced existing global tax reporting rules and risks eroding “recent gains in global tax transparency.”

Hong Kong is holding a public consultation on CARF adoption until early 2026.

But rules are outdated

Hong Kong’s existing tax rules were never built with crypto in mind. It currently relies on the OECD’s Common Reporting Standard, or CRS, which struggles to trace digital assets, said Stefano Passarello, chief value officer at Monx Team, a tax accounting firm in Hong Kong.

“The existing CRS was never designed for wallets, exchanges, or decentralized platforms, which has left blind spots where wealth could move without touching a reportable bank account,” said Passarello.

It’s a system that has come under international scrutiny. During an OECD peer review, Hong Kong’s CRS penalties were criticized as being “relatively mild” and insufficiently proportionate to the scale of non-compliance.

The penalty structure reduced incentives for banks to invest heavily in compliance. Passarello explained that a bank that failed to report a handful of overseas accounts would face the same penalties as one that failed to report thousands.

Credibility at stake

Noam Noked, associate professor of law at the Chinese University of Hong Kong, said the new tax rules are a matter of maintaining Hong Kong’s international reputation.

“Hong Kong always aims to be fully compliant with international tax standards and anti-money laundering standards. It’s an international finance and trade center and it wants to make sure it isn’t at risk of being blacklisted by other countries or international organizations.”

Passarello also believes that Hong Kong’s interest in CARF is closely tied to protecting its reputation with global standard setters.

“Hong Kong is basically signing up to CARF to stay in the good books of the OECD and keep its image as a clean, serious financial centre,” Passarello said. “With licensed exchanges, ETFs and large volumes now part of the core market, ignoring tax transparency on crypto flows would be a bad look.”

But mandatory registration would also mean more companies that previously sat in a gray area would need to conduct proper due diligence and set up exchange workflows.

“Smaller businesses will feel the cost and administrative burden the most, from fixing old client data to building systems that were never designed for CRS or CARF,” said Passarello.

According to Noked, CARF obligations may extend beyond traditional crypto exchanges to other crypto projects that facilitate altcoin transactions as part of their business.

“These players will need to assess the implications for their business,” he said. “If exchange transactions form only one component of a broader crypto project, businesses need to consider whether they want to pursue that and whether to separate it from the project’s non‑exchange‑related activities.”

Enforcement is the real test

Some experts caution that CARF’s effectiveness depends less on design and more on how effectively it’s enforced.

Noked warns that even robust reporting rules could simply push activity away from centralized exchanges and toward peer-to-peer systems like self-custodied wallets that are harder to monitor.

CARF marks a shift from promoting innovation to proving enforcement credibility. Hong Kong’s crypto strategy is not simply whether it adopts CARF but how it tackles the trade off between competitiveness and compliance.

Claim your free seat in an exclusive crypto trading community - limited to 1,000 members.