Hong Kong Financial Secretary Paul Chan: Steadily and prudently advancing the development of virtual assets in Hong Kong
"Only with proper and appropriate regulation and compliance requirements, especially in areas such as corporate governance, financial and operational disclosures, as well as investor and user protection, can the long-term development of the virtual asset industry be beneficial, which is also the latest consensus internationally."Written by: Chan Mo-po, Financial Secretary of Hong Kong
Original link: Hong Kong Financial Secretary's Official Website
The HKSAR Government published the "Policy Declaration on the Development of Virtual Assets in Hong Kong" at the end of last month, outlining our vision and policy for the virtual asset industry, related innovative technologies and applications, and the development of its ecosystem. We strive to create robust and favorable development conditions for the industry through policies that facilitate innovation, a comprehensive and balanced regulatory framework, and a "risk-based" regulatory approach. We also pragmatically propose several pilot programs to test and enhance the level and applicability of relevant technologies.
It can be said that this policy declaration demonstrates our determination and commitment to exploring financial innovation together with the industry. It clearly states our position: while actively embracing innovation, we must have corresponding and timely regulatory support to properly manage risks and create prerequisites for the orderly and vigorous development of the market. This declaration has received widespread recognition and support from the virtual asset industry, and we have received many positive responses. Many related companies are also actively considering expanding their operations in Hong Kong or relocating their businesses back to Hong Kong for development.
Since the middle of this year, there have been successive cryptocurrency collapses or bankruptcies of related companies internationally. Last week, a large virtual currency trading platform also filed for bankruptcy protection, leading the market to describe it as a "crypto winter." This has further convinced the industry that operations must be conducted transparently, along with appropriate regulatory and compliance requirements, especially in areas such as corporate governance, financial and operational disclosures, and investor and user protection, to benefit the long-term development of the virtual asset industry. This is also the latest consensus internationally. Our recently published policy declaration is conducive to building such an environment, making the industry full of expectations for the development of Hong Kong's virtual asset market.
Whenever we talk about virtual assets, we often think of virtual currencies and speculative trading. In fact, virtual assets or digital assets involve various innovative technologies and cover a wide range, such as:
"Fungible Tokens," like Bitcoin or Ethereum, which are characterized by each token having the same value and function, allowing them to be freely divided into smaller units for trading. Their characteristics eliminate geographical, systemic, registration, or time restrictions on trading. The total market value of the once-booming virtual currency market was estimated to have reached nearly $30 trillion in the past few years.
"Non-Fungible Tokens" (NFTs), where each token is indivisible or irreplaceable (having a unique digital identity), allows digital images, audio, or videos to have specific information encrypted and placed on the blockchain, enabling the transfer of digital objects. Many on-chain native assets are also exchanged in the form of non-fungible tokens. This tokenization function can even be linked to traditional financial instruments as "tokens" for more convenient and efficient trading, and can even become smart contracts in commercial transactions.
Whether fungible or not, this "token" can exist in a unique, non-replicable digital form, supported by "Distributed Ledger Technology" (DLT), which records information accumulated over time in blocks and stores copies through internet sharing, making its digital labels and transaction histories difficult to alter or delete.
Although there are unique digital labels and publicly transparent transaction records, the content they carry is encrypted, providing sufficient information security. In other words, the encryption provided by blockchain technology ensures information security; distributed ledger technology prevents transaction records from being tampered with and eliminates the need for central registration procedures, providing efficient, secure, transparent, and low-cost trading conditions. Therefore, many financial institutions are exploring how to tokenize financial assets to address long-standing pain points in clearing, settlement, and payment.
Many analyses also point out that the application of blockchain creates a decentralized network world, known as web 3.0, which is the foundational technology driving the metaverse, allowing institutions or individuals to utilize the token functions of NFTs for peer-to-peer direct transactions. How this characteristic can be applied to different financial services, commercial transactions, or even enterprise services is still in the exploratory stage, but the industry's consensus is that there is enormous potential for application development here.
In the policy declaration on the development of virtual assets, we proposed several pilot programs, including issuing a new batch of green bonds for institutional investors in a tokenized manner, expected to be launched by the end of the year, which will become one of the world's first tokenized government green bonds. The Monetary Authority is also studying the digital Hong Kong dollar, which can serve as the "backbone" and pillar connecting fiat currency and virtual assets, providing the necessary support for promoting more innovations. Additionally, the Monetary Authority has previously conducted consultations to explore how to regulate stablecoins used for payment purposes, and will announce the next steps shortly.
The Securities and Futures Commission (SFC) also embraces innovation while adhering to the principle of protecting investors, closely monitoring technological innovations, application changes, and necessary regulations related to virtual assets. Under the regulatory principle of "same business, same risks, same rules," the SFC has licensed two virtual asset exchanges, with regulatory requirements similar to traditional securities exchanges, including the necessity to store client assets in independent accounts, comply with financial resource requirements, maintain at least 12 months of actual operating expenses, and avoid conflicts of interest (not participating in proprietary trading activities). The SFC has also issued licenses to eight virtual asset fund management companies and approved two brokerage firms to conduct virtual asset trading for their clients under a consolidated account arrangement. We are currently working on launching a licensing system for virtual asset service providers, ensuring that the regulatory requirements they face are similar to those of traditional financial institutions, including compliance with anti-money laundering and terrorist financing regulations and investor protection.
This policy declaration also indicates that the SFC is conducting public consultations on additional protective regulations necessary for retail investors to trade virtual assets under the new licensing system. The government holds a welcoming attitude towards the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong.
The waves of technological innovation in the past have led to leapfrog development in the economy and industries. Although the development process inevitably encounters setbacks, the long-term benefits and inspirations for future generations are still commendable. The bursting of the dot-com bubble in 2000 made many wary of technological development, but technology has continued to follow its own path, developing platform economies and network economies in mobile and internet environments. The bubbles and turmoil in the virtual asset market in recent years have disrupted the investment market, but the development of financial innovation has not stopped, with the industry continuously improving and evolving in technology and applications.
Therefore, the entire policy declaration aims to construct a comprehensive regulatory framework for the virtual asset industry, actively encouraging technological innovation and application while ensuring appropriate and effective risk management. We must fully utilize the potential brought by innovative technologies while carefully guarding against possible fluctuations and potential risks, and avoid these risks and impacts from transmitting to the real economy. The repeated collapses of virtual currencies or related trading platforms filing for bankruptcy protection reflect that transparent operations and appropriate regulatory measures are essential for the industry to maintain stability and sustainable development.
Under the premise of ensuring safety and appropriate risk management, embracing innovation will undoubtedly bring new strength to economic and industrial development. The realization of its potential and the innovation of applications require the development of relevant technologies and the entire ecosystem, including virtual currencies, virtual asset exchanges, metaverse development, and innovative applications for securities issuance and trade finance in a "tokenized" manner. When considering the overall development direction, one core aspect is that if finance serves the real economy, technological innovation should similarly play a role in serving the real economy.
I hope that friends in the innovative technology ecosystem can work with us to promote more efficient, convenient, and controllable risk innovative applications, bringing more new development opportunities to traditional industries and enterprises, allowing the innovative technology industry to thrive while enabling the entire economy to enter a new growth phase.
