On 31 October 2022, the Financial Services and the Treasury Bureau (FSTB) of Hong Kong issued a statement on the Government’s policy stance and approach towards developing a vibrant sector and ecosystem for Virtual Assets in Hong Kong.
Virtual Assets (VA) have attracted attention of investors worldwide and are increasingly viewed as a channel for financial innovations. With the future opportunities that will be opened as VA moves into the areas of Web 3.0 and the Metaverse, the Hong Kong Government recognizes that VA is here to stay.
Hong Kong already shows signs of a vibrant VA ecosystem, demonstrated by:
There are more possible use cases and opportunities, such as trading arts and collectibles, tokenizing vintage goods or even tokenizing a spectrum of products such as debt securities.
To allow VA innovations to thrive in Hong Kong, timely and necessary guardrails will be put in place, so actual and potential risks on financial stability, consumer protection, as well as money laundering and terrorists financing can be mitigated and managed in line with international standards.
Together with financial regulators, the Government is working on providing a facilitating environment to promote the sustainable and responsible development of the VA sector in Hong Kong. As such, they are ready to calibrate the legal and regulatory regime currently in place. International regulatory developments will be monitored closely, to take into account in the development of the Hong Kong regulatory system.
The Hong Kong Government and regulators will continue to adopt the “same activity, same risks, same regulation” principle. On this basis, over the past few years they have launched the following:
To take the regulatory framework further forward, the latest effort is to put together a licensing regime for VA Service Providers. This new regime will align requirements for VA Exchanges with those applicable to traditional financial institutions, in terms of anti-money laundering, counter-terrorist financing (AML/CTF) and investor protection.
As a result, licensed VA Exchanges are offered the status and credibility to access a wider net of investors in the Hong Kong market. Additionally, financial intermediaries and banks will be able to partner with licensed VA Exchanges when offering clients VA dealing services (provided that relevant regulatory conditions are met).
Furthermore, a licensing status will offer VA Exchanges the potential to open new distribution channels in Hong Kong, tapping into the city’s sizable asset and wealth management market worth over US$4.5 trillion.
The Securities and Futures Commission (SFC) will be conducting a public consultation on how retail investors may be given a suitable degree of access to VA under the new licensing regime. In other markets, retail investors have exposure to VA via VA-related products, such as Exchange Traded Products. Hong Kong is therefore open to the possibility of having Exchange Traded Funds (ETFs) on VA in Hong Kong. The SFC will publish a circular on this soon.
The Government recognizes that VA have unique characteristics different from traditional assets. To facilitate adoption and enhance investor protection, the Government is open to future review on property rights for tokenized assets and the legality of smart contracts, to provide a solid legal foundation for their development.
Stablecoins have a purported certainty in terms of maintaining value stability and increasing use as a means of exchange between cryptocurrency and fiat currency. They are seen to have a growing potential for significant interconnectedness with the traditional financial markets. International consensus is to put in place appropriate regulations on aspects such as governance, stabilization and redemption mechanisms of stablecoins.
Lastly, the Government and regulators are exploring the following pilot projects to test the technological benefits brought by Virtual Assets and their applications in the financial market:
Hong Kong is prepared to embrace the future of finance and commerce, support the underlying technologies of VA and promote their benefits in the market. With a world-class financial infrastructure and legal and regulatory regime, Hong Kong is well-suited for sustainable development of financial services across the whole VA value chain.