On October 31, at the start of this year’s Fintech Week in Hong Kong, the Financial Services and Treasury Bureau (“fstb“) problematic policy statement outlines his vision for the development of virtual assets (“v.a’) of the region and outlined a number of new initiatives to ‘promote sustainable and responsible development of the region’.
Earlier this year (please click here), the Hong Kong government laid the groundwork for a VA regulatory regime, beginning with the joint issuance by the SFC and the HKMA of a Guidance Circular on the Delivery of VA to all local intermediaries and the provision of services by Virtual Asset Service Providers.VASP“) in Hong Kong. Then in June, the government introduced new laws for compulsory licensing and a regulatory regime for all VASPs in Hong Kong.
Under this new rule, effective March 1, 2023, VAs that fall within Hong Kong’s legal definition of securities or futures contracts can only be traded on crypto exchanges operated by intermediaries, which the SFC designates as VASPs will. license granted. Intermediaries who sell, trade, or advise VA must also be licensed and comply with existing SFC regulations. And currently, licensed VASPs are only allowed to offer such services to professional investors.
The FTSB policy statement recognized the significant potential of the VA and proposed a number of new initiatives that the Hong Kong government hopes will strengthen Hong Kong’s position as an international cryptocurrency hub.
- First, the SFC will hold public consultations on changes that would allow retail investors to trade VA, possibly through a new class of exchange-traded funds. Without such changes, retail investors could only do so through overseas exchanges, which are beyond the scrutiny of Hong Kong regulators.
- Second, the Hong Kong government recognizes that Hong Kong’s obscure legal system does not yet recognize smart contracts or tokenized assets, and will review existing laws to amend them to properly regulate both. Smart contracts are simply programs stored on a blockchain that act algorithmically when predetermined conditions are met. They are viewed as a potential replacement for traditional contracts in certain business scenarios. Tokenized assets are digital tokens created on a blockchain that can represent digital or physical assets. They represent a new form of ownership that can increase both the accessibility and liquidity of asset ownership.
- Third, the HKMA will follow up on its January 2022 discussion paper and expand the regulatory framework to cover payment-related stablecoins (i.e., cryptocurrencies whose value is pegged to fiat currencies or other assets).
- Finally, in the coming months, the Hong Kong government plans to launch a pilot to explore a proof-of-concept for the possible launch of tokenized “green bonds” issued by the Hong Kong government and a similar e-HKD could become the digital yuan used in mainland China.
These are undeniably ambitious proposals that could go a long way in positioning Hong Kong ahead of Singapore as Asia’s premier cryptocurrency hub. Meanwhile, intermediaries offering regulated cryptocurrency services have until March 1, 2023 to make any necessary changes to ensure they are fully compliant when the new regulations come into effect.