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Hong Kong Releases Policy Statement on Virtual Asset Development

Hong Kong Releases Policy Statement on Virtual Asset Development

        Source: ODAILY

The Government is working with financial regulators to create an enabling environment for the sustainable and responsible development of the virtual asset industry in Hong Kong.

This Declaration is issued by the Financial Services and the Treasury Bureau (“FSTB”) to set out the Government’s policy position and approach to the development of a vibrant virtual asset industry and ecosystem in Hong Kong.

  Vision and Approach

As an international financial center, Hong Kong has an open and inclusive attitude towards global innovators in the virtual asset business. We greatly appreciate these innovators in the field of Distributed Ledger Technology (“DLT”) and in developing new financial innovations that are more cost effective, inclusive, flexible and groundbreaking. Given the attractiveness of virtual assets to global investors and the growing acceptance of financial innovation, as well as the future opportunities presented by virtual assets as they enter the Web 3.0 and metaverse space, we believe virtual assets have become indispensable in the marketplace. The government is now working with financial regulators to create an enabling environment for the sustainable and responsible development of the virtual asset industry in Hong Kong. Given the evolving nature of virtual assets and innovative models, we will work with the legal and regulatory regimes to provide an enabling environment.

We agree that DLT and Web 3.0 have the potential to be the future of finance and commerce, and that with proper regulation, these technologies will be able to enhance efficiency and transparency, thereby reducing or even solving current problems in settlement and payments, etc. Hong Kong has a thriving virtual asset ecosystem, which can be seen through the non-homogenized token (“NFT”) issuance in our markets, meta-universe developers, and the adoption of DLT activities in trade finance. If we look beyond virtual assets to other uses, such as trading in art and collectibles, tokenizing antique objects, or, in terms of financial innovation, tokenizing different types of products (e.g., debt securities), there are bound to be greater opportunities.

Drawing on the experience of other technology developments and applications, the development of new areas is both organic and dangerous, and it is not possible to achieve this vision in one step. We will adopt the principle of “same business, same risk, same rules” and set out the necessary regulations in due course to enable virtual asset innovation to flourish sustainably in Hong Kong on the one hand, and to ensure that the actual and potential risks to financial stability, consumer protection and anti-money laundering and terrorist financing are mitigated and managed in accordance with international standards on the other. On the other hand, it ensures that the actual and potential risks associated with financial stability, consumer protection and combating money laundering and terrorist financing are mitigated and managed in accordance with international standards. As an international financial center, and with virtual assets being so far-reaching, we also need to closely monitor the evolving and new regulatory developments internationally and take them into account in the development of our regulatory regime.

  Regulation

Over the past few years, the government and regulators have developed a comprehensive regulatory framework for virtual assets based on the principle of “same business, same risk, same rules”. We have introduced a regulatory regime to license virtual asset exchanges on an “opt-in” basis. On the asset management side, the regulator has issued guidance on the management of virtual asset funds and discretionary accounts. In addition, the regulator has provided guidance to banks and financial institutions on the distribution of virtual asset-related products, the trading of virtual assets or the provision of advice on virtual assets. The regulatory regime is also widely supported by the industry. We believe that a coherent, clear and unambiguous regulatory framework will help lay a solid foundation for the financial innovation and technological development brought about by the rapid development of virtual assets worldwide.

To further implement this comprehensive regulatory framework, we have recently worked towards the establishment of a licensing regime for virtual asset service providers. Under the new regime, virtual asset exchanges will be subject to the same anti-money laundering and terrorist financing and investor protection requirements as existing traditional financial institutions, which will help build the status and credibility of licensed virtual asset exchanges and enable them to reach out to more investors in the Hong Kong market. Another benefit is that financial intermediaries and banks will be able to work with their licensed counterparts from the virtual asset sector and provide virtual asset trading services to their clients, subject to the relevant regulatory conditions. From the perspective of virtual asset exchanges, the licensing regime will allow them to develop new distribution channels in Hong Kong to tap into the vast asset and wealth management market in Hong Kong worth more than US$4.5 trillion. While we are stepping up our preparations for the new licensing regime, we are happy to reach out to the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong.

Investor exposure to virtual assets

We have seen an increasing acceptance of virtual assets as an asset for investment allocation purposes by global investors, both institutional and retail. The Securities and Futures Commission (“SFC”) will launch a public consultation on the appropriate level of access to virtual assets for retail investors under the new licensing regime. We also note that retail investors in other markets may also have access to virtual assets through virtual asset-related products such as exchange-traded products. The Government welcomes the possibility of introducing virtual asset exchange traded funds (“ETFs”) in Hong Kong and the SFC will soon issue a circular in this regard. In addition, the introduction of these products in Hong Kong will facilitate the overall development of the industry in the Hong Kong market by linking the virtual asset industry with traditional financial institutions and providing investors with well-designed products. Nevertheless, we will maintain a careful and prudent approach to the risks to retail investors, enhance investor education and ensure that appropriate regulatory arrangements are in place.

Property Rights of Tokenized Assets

We are mindful that virtual assets have different characteristics from traditional assets and that these characteristics may not be fully applicable to the existing categories or definitions of private property law in Hong Kong. In order to promote the adoption of virtual assets and enhance investor protection, the Government is open to reviewing the property rights of tokenized assets and the legality of smart contracts in the future, with a view to providing a sound legal basis for the property rights of tokenized assets.

Stable Coins

Stable coins are another area of focus for us. Given their purported ability to maintain value stability and their increasing use, for example as a medium of exchange for cryptocurrencies and fiat currencies, they also have the potential to be interconnected with traditional financial markets, such as payment systems. Drawing on the experience of the recent crisis in the virtual asset market (crypto winter), there is an international consensus on the need for appropriate regulation of the different aspects of stable coins, including governance, stability and redemption mechanisms. In this regard, the Hong Kong Monetary Authority (“HKMA”) issued a discussion paper on the subject earlier this year, inviting stakeholders to develop a risk-based, proportionate and flexible regulatory regime for the regulation of stablecoin activities involving payments, and will release the results of the consultation and the next steps in due course.

  Pilot schemes

The government and regulators are looking at launching the following pilot schemes to test the technological benefits of virtual assets and to try to further apply the technology to financial markets. These pilot schemes demonstrate our commitment to working with the global virtual asset industry to explore the path of financial innovation.

(a) NFT issuance for Hong Kong Fintech Week 2022, our proof-of-concept project to engage with the Fintech and Web3 communities.

(b) Green Bond Token, which allows government green bond issuance to be tokenized for subscription by institutional investors.

(c) The Digital Hong Kong Dollar, which could serve as the “backbone” and anchor between legal tender and virtual assets, providing the confidence needed to drive more innovation.

Appendix: Pilot program to test the technical benefits of virtual assets and their further application to financial markets

Non-Homogenized Token Offerings

Non-homogenized tokens (“NFTs”) are a type of digital asset ownership that has emerged in recent years. In 2022, the Treasury and Invest Hong Kong, the investment promotion agency responsible for investment promotion, will launch a pilot scheme to promote the use of NFTs during the annual flagship event “Fintech Week”.

The NFTs issued will be used as proof of attendance for participants, who will be sent digital badges and souvenirs through blockchain technology. This NFT issuance is easy to arrange and even beginners can easily get started. Users can store their NFTs directly in their cryptocurrency wallets or, for those who are new to virtual assets and do not yet have a cryptocurrency wallet, they can store them temporarily with an email address and convert them to NFTs at a later date. We will provide NFT holders with a unique experience during Financial Technology Week, allowing them to create their own avatars in the augmented reality world and embark on a journey through the metaverse experience.

The government sees this NFT launch as a proof-of-concept project to encourage participation and demonstrate our commitment to financial innovation to the fintech and Web3 communities. We will also provide NFT holders with special offers, including discounted admission to the coming year’s FinTech Week and early notification to invite them to other FinTech events (e.g. FinTech Proof of Concept Test Grant Program sharing sessions, FinTech training courses and other Fast Track and incubation programs).

Green Bond Tokenization

Bond tokenization can help improve the efficiency of bond issuance and settlement, reduce costs, and attract more investors to the market. With the earlier completion of Project Genesis (a project to develop two prototypes using a permission-based platform and public blockchain respectively for concept validation to streamline the green retail bond issuance process using distributed ledger technology) by the HKMA and the Bank for International Settlements’ Innovation Hub in Hong Kong, the HKMA is now launching a pilot programme to issue government tokenised green bonds for subscription by institutional investors. The purpose of the program is to test the use of distributed ledger technology to streamline the green retail bond issuance process. The objective of the program is to test the suitability of Hong Kong’s financial infrastructure and legal and regulatory environment to handle the entire bond issuance cycle (including issuance, settlement, asset servicing, secondary market trading and redemption) using distributed ledger technology, and to provide guidance to market participants for future issuance of similar bonds. The Government will announce more details later to inform the industry and the public of the progress of the programme.

Digital Hong Kong Dollar

Virtual assets and cryptocurrencies are products of technological innovation, but are not legally recognized as legal forms of payment and cannot be fully and effectively used for payment purposes, and therefore cannot be legal tender in Hong Kong. While we anticipate that virtual assets and cryptocurrencies will facilitate a variety of financial innovations, as noted above, the government and regulators believe that Hong Kong must also explore the possibility of introducing a central bank digital currency (i.e. “Digital Hong Kong Dollar”).

The HKMA has consulted the market earlier and the results show that respondents support the introduction of the Digital Hong Kong Dollar and believe that the Digital Hong Kong Dollar will enhance payment efficiency and contribute to the development of Hong Kong’s digital economy. In preparation for the possible launch of the Digital HK Dollar, the HKMA will adopt a “three-track approach” to explore in stages the following issues relating to the Digital HK Dollar: 1) technical and legal basis; 2) usage and design (2) usage and design; and (3) the timetable for the launch of the “digital Hong Kong dollar”. We believe that the significance of the Digital HK Dollar to the global virtual asset industry lies in its ability to serve as the “backbone” and backbone between legal tender and virtual assets, thus providing price stability and confidence, both of which would allow for the promotion of more security-based tokens by asset class. With these two elements, more financial innovations in security-based token offerings can be promoted by asset class.

  Summary and Outlook

With a world-class financial infrastructure, legal and regulatory regime, Hong Kong is committed to promoting the sustainable development of financial services across the entire virtual asset value chain, including virtual asset issuance, tokenization, trading and payment platforms, financial and asset management, and depository. The Government is ready to embrace the future of finance and commerce, and to support the technological development and social and economic benefits behind virtual assets, and we welcome the convergence of the fintech and virtual asset communities and talents in Hong Kong. We will implement the vision set out in this policy statement through a facilitative policy, comprehensive and balanced regulation, risk-based controls, and pilot schemes. The Government invites the global virtual asset industry to work with us to harness the potential of financial innovation in a clear, flexible and convenient regulatory environment, in line with Hong Kong’s position as an international financial center and in compliance with best international standards and practices.


Post time: Oct-31-2022