Hong Kong’s Financial Secretary unleashes virtual asset policy stance to strengthen Asia’s status as a fintech hub

On October 31, the Financial Secretary of Hong Kong issued a policy declaration on the development of virtual assets in Hong Kong (hereinafter referred to as the “Declaration”), clarifying the government’s policy stance and guidelines for the development of a vibrant virtual asset industry and ecosystem in Hong Kong.

The declaration stated that Hong Kong, China, as an international financial center, holds an open and inclusive attitude towards innovators engaged in virtual asset business around the world. The government is now working with financial regulators to create a convenient environment to promote the sustainable and responsible development of the virtual asset industry in Hong Kong. Constraints, mitigate actual and potential risks in accordance with international standards, and enable virtual asset innovation to flourish in Hong Kong in a sustainable manner.

In terms of regulation, the declaration stated that the government believes that through a consistent, clear and clear overall regulatory framework, it will help lay a solid foundation to meet the financial innovation and technological development brought about by the rapid development of global virtual assets. While stepping up preparations for a new licensing system for virtual asset service providers, it is also willing to contact the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong.

At the same time, the Securities and Futures Commission will launch a public consultation on the appropriate extent to which retail investors can trade virtual assets under the new licensing regime. The government welcomes the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong.

According to the declaration, in the past few years, the Hong Kong government and regulators have formulated an overall virtual asset regulatory framework based on the principle of “same business, same risk, same rules”. At the same time, a regulatory system has also been introduced to issue licenses for virtual asset exchanges in a “choose-to-participate” manner. In terms of asset management, regulators have issued guidelines on the management of virtual asset funds and discretionary accounts.

In addition, Hong Kong regulators provide guidance to banks and financial institutions on distributing virtual asset-related products, conducting virtual asset transactions, or providing advice on virtual assets.

According to the declaration, the government is open to reviewing the legality of property rights and smart contracts of tokenized assets in the future to facilitate its development in Hong Kong.

“We have now clearly expressed our policy stance on virtual assets to the global market, demonstrating our commitment and determination to explore financial innovation together with the global virtual asset industry.” Hong Kong Financial Secretary Chen Maobo said that the policy declaration explained in detail the vision and strategy, Regulatory system, attitude towards opening up investors’ access to virtual assets, and pilot plans to capture the technological advantages brought by virtual assets.

Stablecoins are another focus of this manifesto. The manifesto stated that stablecoins also have the potential to be interconnected with traditional financial markets such as payment systems, given their purported ability to maintain value stability and their increasing use, such as as a medium of exchange for cryptocurrencies and fiat currencies. Drawing on the experience brought about by the recent crisis in the virtual asset market (crypto winter), there has been an international consensus that appropriate regulations must be formulated for different categories of stablecoins, including governance, stability and redemption mechanisms.

In this regard, the Hong Kong Monetary Authority will release the consultation results and next steps on the regulatory system of stablecoins later.

At present, the Hong Kong government and regulatory agencies are studying and launching the following pilot schemes to test the technical benefits brought by virtual assets and try to further apply the relevant technologies to the financial market. These pilot programs include the issuance of non-fungible tokens (NFTs), green bond tokenization and Crypto Hong Kong dollars for Hong Kong FinTech Week 2022.

According to the declaration, the tokenization of bonds will help improve the efficiency of bond issuance and settlement, reduce costs, and attract more investors to the market. The use of distributed ledger technology to streamline green retail bond issuance follows the earlier completion of Project Genesis, an innovation hub in Hong Kong set up by the Hong Kong Monetary Authority and the Bank for International Settlements, which develops two prototype projects using a permissioned platform and an open blockchain respectively. The Hong Kong Monetary Authority is now launching a pilot program to issue government tokenized green bonds for institutional investors to subscribe.

The purpose of this initiative is to test the suitability of Hong Kong’s financial infrastructure and legal and regulatory environment to use distributed ledger technology to handle the entire bond issuance cycle (including issuance, settlement, asset servicing, secondary market trading and redemption), and provide market support. Provides guidance for participants to issue similar bonds in the future. The government will announce more details later to inform the industry and the public about the progress of the project.

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