Full text: Policy declaration on the development of virtual assets in Hong Kong

Source: Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region

On October 31, the Hong Kong Financial Secretary (Financial Services and the Treasury Bureau) officially released the "Policy Declaration on the Development of Virtual Assets in Hong Kong," clarifying the government's policy stance and guidelines regarding the thriving virtual asset industry and ecosystem in Hong Kong.

The declaration states that while preparing for the new licensing regime for virtual asset service providers, the government is also willing to connect with the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong. The Securities and Futures Commission will conduct public consultations on the appropriate extent to which retail investors can buy and sell virtual assets under the new licensing regime. The government holds a welcoming attitude towards the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong. The government is open to reviewing the legality of ownership of tokenized assets and smart contracts in the future to facilitate their development in Hong Kong.

In addition, the government has launched three experimental projects, namely issuing NFTs as attendance certificates during the 2022 Hong Kong FinTech Week; tokenizing government green bond issuances for institutional investors; and the digital Hong Kong dollar, which can serve as a "backbone" and pillar connecting fiat currency and virtual assets, providing the necessary confidence to promote more innovation.

The original text of the declaration is as follows:

Vision and Guidelines

Hong Kong is an international financial center that maintains an open and inclusive attitude towards global innovators engaged in virtual asset business. We greatly appreciate these innovators working in the field of distributed ledger technology (DLT) and developing new financial innovation solutions that are more cost-effective, inclusive, flexible, and groundbreaking. Given the increasing appeal of virtual assets to global investors and the recognition gained in financial innovation, coupled with the future opportunities brought by the entry of virtual assets into the Web 3.0 and metaverse domains, we believe that virtual assets have become indispensable in the market. The government is currently working with financial regulatory bodies to create a conducive environment for the sustainable and responsible development of Hong Kong's virtual asset industry. Considering the evolving nature and innovative models of virtual assets, we will align our legal and regulatory frameworks to provide a facilitative environment.

We recognize that DLT and Web 3.0 have the potential to become trends in the future development of finance and commerce. With proper regulation, these technologies can enhance efficiency and transparency, thereby reducing or even solving current issues in settlement and payment. Hong Kong has a thriving virtual asset ecosystem, which is reflected in the issuance of non-fungible tokens (NFTs) in our market, the development of metaverse creators, and the adoption of DLT in trade finance activities. If we broaden our perspective to consider more uses of virtual assets, such as trading in artworks and collectibles, tokenization of antiques, or tokenizing different types of products (such as debt securities) from a financial innovation perspective, we will undoubtedly encounter greater opportunities.

Drawing lessons from past technological developments and applications, developing new areas is both organic and risky, and achieving the above vision cannot be done overnight. We will adopt the principle of "same business, same risks, same rules" and set necessary regulations in a timely manner, allowing virtual asset innovation to thrive sustainably in Hong Kong while ensuring that actual and potential risks to financial stability, consumer protection, and the fight against money laundering and terrorist financing are mitigated and managed according to international standards. As an international financial center, with virtual assets having no boundaries, we also need to closely monitor the evolving regulatory developments internationally and take them into account when formulating our regulatory framework.

Regulation

In recent years, the government and regulatory bodies have established a comprehensive regulatory framework for virtual assets based on the principle of "same business, same risks, same rules." We have launched a regulatory system that licenses virtual asset exchanges on a "choose to participate" basis. In asset management, regulatory bodies have issued guidelines on the management of virtual asset funds and discretionary accounts. Additionally, regulatory bodies have provided guidance to banks and financial institutions regarding the distribution of virtual asset-related products, conducting virtual asset transactions, or providing advice on virtual assets. This regulatory system has also received broad support from the industry. We believe that a consistent, clear, and comprehensive regulatory framework will help lay a solid foundation to embrace the financial innovations and technological developments brought about by the rapid evolution of global virtual assets.

To further implement the aforementioned comprehensive regulatory framework, we are currently working on establishing a licensing regime for virtual asset service providers. Under the new regime, virtual asset exchanges will be required to comply with regulations on anti-money laundering and counter-terrorist financing and investor protection, similar to traditional financial institutions. This will help licensed virtual asset exchanges establish their status and credibility, enabling them to reach more investors in the Hong Kong market. Another benefit is that financial intermediaries and banks will be able to collaborate with licensed counterparts from the virtual asset sector and provide virtual asset trading services to clients, subject to relevant regulatory conditions. From the perspective of virtual asset exchanges, the licensing regime will allow them to explore new distribution channels in Hong Kong to tap into the vast asset and wealth management market valued at over HKD 45 trillion. While preparing for the new licensing regime, we are also willing to connect with the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong.

Investor Access to Virtual Assets

We have noticed that global investors (both institutional and retail) are increasingly accepting virtual assets as an asset class for investment allocation. The Securities and Futures Commission (SFC) will conduct public consultations on the appropriate extent to which retail investors can buy and sell virtual assets under the new licensing regime. We have also observed that retail investors in other markets can access virtual assets through virtual asset-related products, such as exchange-traded products. The government holds a welcoming attitude towards the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong, and the SFC will soon issue a circular on this matter. Moreover, launching these products in Hong Kong can connect the virtual asset industry with traditional financial institutions, providing well-designed products for investors and promoting the overall development of the industry in the Hong Kong market. Nevertheless, we will maintain a cautious approach towards the risks faced by retail investors, enhancing investor education and ensuring that appropriate regulatory arrangements are in place.

Ownership of Tokenized Assets

We have noted that virtual assets possess different characteristics from traditional assets, and these characteristics may not fully apply to the current categories or definitions of private property laws in Hong Kong. To promote the adoption of virtual assets and enhance investor protection, the government is open to reviewing the ownership of tokenized assets and the legality of smart contracts in the future, in order to provide a robust legal foundation for the ownership of tokenized assets.

Stablecoins

Stablecoins are another focus for us. Given that stablecoins are said to maintain value stability and their usage is increasing, such as serving as a medium of exchange between cryptocurrencies and fiat currencies, they also have the potential to establish connections with traditional financial markets (such as payment systems). Drawing from the experiences of recent crises in the virtual asset market (crypto winter), there is international consensus on the need to establish appropriate regulations for different categories of stablecoins, including governance, stability, and redemption mechanisms. In this regard, the Hong Kong Monetary Authority (HKMA) issued a discussion paper earlier this year on this topic, inviting stakeholders to develop a risk-based, proportionate, and flexible regulatory framework for stablecoins used for payment purposes, and will later publish the consultation results and next steps.

Experimental Programs

The government and regulatory bodies are studying the launch of the following experimental programs to test the technological benefits brought by virtual assets and to explore further applications of the relevant technologies in the financial market. These experimental programs demonstrate our determination to collaborate with the global virtual asset industry in exploring financial innovation.

(a) Issuing NFTs for the 2022 Hong Kong FinTech Week, a proof-of-concept project engaging with the fintech and Web3 communities;

(b) Tokenization of green bonds, allowing the government to issue tokenized green bonds for institutional investors;

(c) Digital Hong Kong dollar, which can serve as a "backbone" and pillar connecting fiat currency and virtual assets, providing the necessary confidence to promote more innovation.

Summary and Outlook

Hong Kong has world-class financial infrastructure, legal, and regulatory systems. We are committed to promoting the sustainable development of various financial services across the entire virtual asset value chain, covering virtual asset issuance, tokenization, trading and payment platforms, financial and asset management, as well as custody. The government is prepared to embrace the future development of finance and commerce, supporting the technological development behind virtual assets and their social and economic benefits. We welcome the fintech and virtual asset communities and talents to gather in Hong Kong. We will implement the vision contained in this policy declaration through facilitative policies, comprehensive and balanced regulations, risk-based restrictions, and various experimental programs. The government sincerely invites the global virtual asset industry to collaborate with us, leveraging Hong Kong's status as an international financial center, adhering to the best international standards and practices, and unleashing the potential for financial innovation in a clear, flexible, and facilitative regulatory environment.

Experimental Programs

Appendix: Testing the technological benefits brought by virtual assets and further applications in financial markets

Non-Fungible Token Issuance

Non-fungible tokens (NFTs) are a newly emerging digital asset ownership form. Artists and companies around the world use NFTs to build communities and connect with like-minded individuals. In 2022, the Financial Services and the Treasury Bureau, together with the Invest Hong Kong agency responsible for investment promotion, launched an NFT issuance experimental program during the annual flagship event "FinTech Week" to promote the use of NFTs.

The issued NFTs will serve as attendance certificates for participants, who will receive digital badges and memorabilia via blockchain technology. This NFT issuance arrangement is straightforward, making it easy for beginners to engage. Users can store NFTs directly in cryptocurrency wallets; if they are new to virtual assets and do not yet have a cryptocurrency wallet, they can temporarily store them using their email addresses until they later convert them into NFTs. We will provide unique experiences for NFT holders during "FinTech Week," allowing them to create their virtual avatars in augmented reality and embark on a metaverse experience journey.

The government views this NFT issuance activity as a proof-of-concept project to encourage participation from the fintech and Web3 communities and demonstrate our commitment to promoting financial innovation. We will also offer benefits to NFT holders, including discounted tickets for next year's "FinTech Week" and early notifications inviting them to participate in other fintech activities (such as sharing sessions on fintech proof-of-concept funding programs, fintech training courses, and other Fast Track and incubation programs).

Green Bond Tokenization

Bond tokenization helps enhance the efficiency of bond issuance and settlement, reduce costs, and attract more investors to the market. Following the completion of Project Genesis by the HKMA and the Bank for International Settlements, which developed two prototype projects using a permissioned platform and a public blockchain to streamline the green retail bond issuance process through distributed ledger technology, the HKMA is now launching an experimental program to issue tokenized government green bonds for institutional investors. The purpose of this program is to test whether Hong Kong's financial infrastructure and legal and regulatory environment are suitable for handling the entire bond issuance cycle (including issuance, settlement, asset servicing, secondary market trading, and redemption) using distributed ledger technology, and to provide guidance for market participants in issuing similar bonds in the future. The government will announce more details later to inform the industry and the public about the progress of the program.

Digital Hong Kong Dollar

Virtual assets and cryptocurrencies are products of technological innovation but are not legally recognized as legal tender and cannot be fully and effectively used for payment purposes, thus cannot become the legal currency of Hong Kong. Nevertheless, as mentioned above, we anticipate that virtual assets and cryptocurrencies can drive various financial innovations, but the government and regulatory bodies believe that Hong Kong must also explore the possibility of introducing a central bank digital currency (i.e., "Digital Hong Kong Dollar").

The HKMA previously consulted the market, and the results showed that respondents supported the introduction of the "Digital Hong Kong Dollar," believing it could enhance payment efficiency and contribute to the development of Hong Kong's digital economy. To prepare for the potential launch of the "Digital Hong Kong Dollar," the HKMA will adopt a "three-track approach" to explore the following aspects involved in the "Digital Hong Kong Dollar" in phases: 1) technical and legal foundations; 2) usage and design; and 3) the timeline for the launch of the "Digital Hong Kong Dollar." We believe that for the global virtual asset industry, the significance of the "Digital Hong Kong Dollar" lies in its ability to serve as a "backbone" and pillar connecting fiat currency and virtual assets, thereby stabilizing prices and instilling confidence. With these two elements, it can promote more financial innovations in the issuance of securities-type tokens across different asset classes.