During Hong Kong Fintech Week in November, one of the topics that attracted heated discussions was on the policy statement on the development of virtual assets in Hong Kong released by the Hong Kong Special Administrative Region government. The statement declares that the Securities and Futures Commission will launch a public consultation on the trading of VAs by retail investors.
In one of the speeches at Fintech Week, Julia Leung, deputy CEO of the SFC, said that it was an opportune time to review the “professional investor only” requirement. Needless to say, this is a welcome glimmer of hope for the industry to promote the popularity and innovation of VAs.
For those readers who have followed my work in the Legislative Council, they know that I have always been an advocate of the opportunities presented by Web3. Just as Google, Amazon and Facebook have swept the world since the 2000s, Web3 represents a new stage in our digital era. As VAs are the main mediums of exchange and value storage in many Web3 applications, they become the fundamental “backbones” during the development process of Web3.
The classification of VAs consists of utility tokens, security tokens, asset-backed stablecoins and non-fungible tokens, etc, which have emerged for various purposes and uses. For example, although we have witnessed significant growth in global market capitalization, cryptocurrencies are only one part of the much broader digital asset taxonomy. Nevertheless, proactively exploring this new asset class and providing financial services as a test bed can be a possible new growth pillar for Hong Kong’s financial sector.
… the legislative process must be careful and keep pace with the times. On the one hand, the authorities need to encourage financial innovation, demonstrate the inclusiveness of new technologies and services, and maximize the value of the VA industry in pilot runs. On the other hand, they need to maintain overall financial stability and avoid excessive risk to investors
At the same time, neighboring regions are putting in their best efforts. The Monetary Authority of Singapore recently announced the country’s first decentralized finance industry pilot, under which DBS Bank and JPMorgan Chase completed a real-time cross-currency transaction involving tokenized Singapore and Japanese government bonds. MAS also said it is launching two other new pilots, including the issuance of trade finance tokens led by Standard Chartered, and the digital issuance of wealth management products by HSBC and United Overseas Bank.
It is therefore important for Hong Kong to catch up. In fact, Hong Kong has the potential to develop a vigorous VA ecosystem and become a Web3 international hub. At present, enterprises and talents leading the VA-related technologies (cryptography, distributed ledger, etc,) are mainly from Western countries. However, if Hong Kong can exploit these technologies at the application level, there is still plenty of room for growth.
In promoting the sustainable development of the VA industry, we need several success factors. Some of these are the inherent strengths of Hong Kong as the world’s premier international financial center, such as a stable banking system and currency, free movement of capital and mature financial infrastructure. Other success factors are Web3-specific, such as the establishment of specialized faculties in tertiary institutions to provide education in blockchain technology and VA management, in order to nurture talents and lay a solid foundation for the industry.
However, I believe that the most important success factor is the authorities’ recognition and legislative support for the development of our VA ecosystem. As VAs have to be connected to the real world at some point, such as converting cryptocurrencies into stablecoins or legal tender, they should be regulated by the real-world regulatory system as well. However, the legislative process must be careful and keep pace with the times. On the one hand, the authorities need to encourage financial innovation, demonstrate the inclusiveness of new technologies and services, and maximize the value of the VA industry in pilot runs. On the other hand, they need to maintain overall financial stability and avoid excessive risk to investors.
Over the past few months, some of the chaos involving VAs have reflected the need to revamp the law. For example, in view of the collapse of TerraUSD, LUNA and FTX, should we rely solely on the private sector to carry out VA’s issuance, trading clearing and settlement? Is it appropriate for the government to be directly involved in the VA business? Should we set up a third-party body to certify the quality of VAs? All these need to be further explored by society. Early this year, the Hong Kong Monetary Authority launched a consultation on the regulation of stablecoins for payment purposes. This is the right direction to go, and will give the market more confidence in the future regulatory framework.
I remember that the HKMA established the Fintech Facilitation Office in 2016 and announced several initiatives a year later, including the introduction of virtual banking and insurance services, and the Open Application Programming Interface Framework, which allows financial institutions to open their internal IT systems for third parties to facilitate information exchange. This has attracted a large number of startups. Many of today’s fintech unicorns, such as Amber, BitMEX, etc, were founded by talents who came to Hong Kong from overseas at that time. As of 2022, eight virtual banks, four virtual insurers, and two VA trading platforms have been authorized to operate. Therefore, it is clear that Hong Kong will be in an advantageous position once we launch encouraging policies.
As VAs continue to evolve rapidly around the world, I agree with the SFC’s decision to start the consultation as soon as possible and without excessive preconceptions and positions, so as to demonstrate openness toward financial innovation. I suggest that society should focus on the balance between the development of the VA industry and the risks for retail investors. Apart from enhancing investor education and establishing a licensing system for VA service providers, we may refer to overseas experience, such as limiting the investment amount based on retail investors’ income and assets or allowing them to access accredited products only.
There is still a long way before the outcome of the consultation or even the implementation of the legislation. By opening up opportunities for the new asset class, I hope that the authorities can enhance the depth and breadth of Hong Kong’s financial market. They should also improve the legal and regulatory frameworks to win the trust of the public and traditional financial institutions. As a LegCo member, I will actively cooperate with the consultation and reflect the views of the public and the industry to the government.
The author is a Legislative Council member representing the Technology and Innovation Functional Constituency, a non-official member of the Digital Economy Development Committee, a tech entrepreneur and a veteran tech investor.
The views do not necessarily reflect those of China Daily.