This Financial Services and the Treasury Bureau, issued by the Treasury, sets out the government’s policy stance and guidelines on the development of a vibrant virtual asset industry and ecosystem in Hong Kong.
Vision and Policy
2. Hong Kong is an international financial centre with an open and inclusive attitude towards innovators in the global virtual asset business. We appreciate the work these innovators are doing in the area of distributed ledger technology (“DLT”) and in developing new, more cost-effective, inclusive, flexible and epoch-making financial solutions for Sunac. The appeal of virtual assets to global investors and the growing recognition in financial Sunac, coupled with the arrival of virtual assets on the Web 3. 0 and the meta-universe, we believe that virtual assets have become indispensable in the market. The government is working with the financial regulators to create an environment conducive to the sustainable and responsible development of Hong Kong’s virtual asset industry. Given the evolving nature and innovative model of virtual assets, we will work with our legal and regulatory systems to provide a conducive environment.
3. We agree with DLT and Web 3. 0 has the potential to be a future trend in finance and commerce, and with proper regulation, these technologies will be able to increase efficiency and transparency, thereby reducing or even solving current problems in areas such as settlement and payments. Hong Kong has a thriving virtual asset ecosystem, which can be seen through the heterogeneous issuance of tokens (“NFT”) in our market, the development of the meta-universe, and the adoption of DLT activities in trade finance. If we look beyond the wider uses of virtual assets, such as the trade in art and collectibles, the substitution of antiques, or from the perspective of Financial Sunac, there is bound to be greater opportunity in making different types of products, such as debt securities, coinage.
Four. Drawing on other technological developments and applications in the past, this vision can not be achieved in one step if new areas are to be developed organically. We will adopt the principle of“Same business, same risks, same rules” and draw up the necessary restrictions in a timely manner so that on the one hand, virtual asset innovation can flourish in Hong Kong in a sustainable manner, on the other hand, it ensures that actual and potential risks to financial stability, consumer protection and combating money-laundering and terrorist financing can be mitigated and managed in accordance with international standards. Hong Kong is an international financial centre and virtual assets can not go far. We also need to monitor closely the evolving and evolving international regulatory developments and take them into account when developing our regulatory regime.
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Regulation
5. Over the past few years, governments and regulators have developed a comprehensive regulatory framework for virtual assets based on the principle of“Same business, same risks, same rules”. We have introduced a regulatory regime for the licensing of virtual asset exchanges on an”Opt-in” basis. On asset management, the regulator issued guidelines on the management of virtual asset funds and discretionary accounts. In addition, the regulator provides guidance to banks and financial institutions on the distribution of virtual asset-related products, conducting virtual asset transactions or providing advice on virtual assets. The regulatory regime is also widely supported by the industry. We believe that a coherent, clear and well-defined regulatory framework will help lay a solid foundation for the Financial Sunac and technological developments brought about by the global surge in virtual assets.
6. To further implement the comprehensive regulatory framework mentioned above, we have recently been working towards the establishment of a licensing regime for virtual asset service providers. Under the new regime, virtual asset exchanges will be subject to the same requirements as existing traditional financial institutions in combating money laundering and terrorist financing and protecting investors, this will help establish the status and credibility of the licensed exchange and enable it to reach out to more investors in the Hong Kong market. Another advantage is that financial intermediaries and banks will be able to work with their licensed counterparts from the virtual assets sector to provide virtual asset trading services to their customers, subject to the relevant regulatory requirements. From a virtual asset exchange perspective, the licensing regime allows them to explore new distribution channels in Hong Kong to take advantage of the value of Hong Kong exceeding 4.5% . A huge $5,000 bn asset and wealth management market. While we are stepping up preparations for the new licensing regime, we are also ready to reach out to the global virtual assets industry and invite the exchanges concerned to explore business opportunities in Hong Kong.
The exposure of investors to virtual assets
Seven. We note a growing acceptance among global investors, both institutional and retail, that virtual assets are an asset for investment allocation. The Securities and Futures Commission (SFC) will launch a public consultation on the appropriateness of allowing retail investors to buy and sell virtual assets under the new licensing regime. We also note that retail investors in other markets can access virtual assets through virtual asset-related products such as exchange-traded products. The government welcomes the possible introduction of virtual asset Exchange-traded fund (“Etfs”) and the SFC will soon issue a circular letter on the subject. In addition, the launch of these products in Hong Kong will provide a link between the virtual assets industry and traditional financial institutions to provide well-designed products for investors, thereby facilitating the overall development of the industry in the Hong Kong market. Nevertheless, we will remain cautious and prudent about the risks of retail investors, step up investor education and ensure that appropriate regulatory arrangements are in place.
The property rights of a monetized asset
8. We note that there are different characteristics between virtual assets and traditional assets, and these characteristics may not be fully applicable to the existing types or definitions of private property in Hong Kong. To promote the adoption of virtual assets and enhance investor protection, the government has an open mind on the future review of the legality of property rights and smart contracts for the use of virtual assets, in order to provide a sound legal basis for the property rights of the monetized assets.
Stable money
9. Stablecoins are another focus for us. Given that stablecoins are said to be able to maintain value stability and their increasing use, for example as a medium of exchange for cryptocurrencies and legal tender, it also has the potential to link up with traditional financial markets, such as payment systems. Having learned from the experience brought about by the recent crisis in the virtual asset market (the cryptographic winter) , there is an international consensus that, there is a need for appropriate regulation of the various aspects of stablecoin, including governance, stability and redemption mechanisms. In this connection, the Hong Kong monetary authority (“Hkma”) issued a discussion paper on the subject early this year, to invite interested parties to develop a risk-based, proportionate and flexible regulatory regime for the regulation of payment-related STABLECOIN activities. The outcome of the consultation and further work will be published later.
Pilot scheme
Ten. The government and regulators are exploring the launch of the following pilot schemes to test the technological benefits of virtual assets and to further apply the technology to financial markets. These pilot projects demonstrate our determination to work with the global virtual asset industry to explore the road to financial Sunac.
(a) NFT.CN for Hong Kong Fintech Week 2022. Our proof-of-concept project for interacting with fintech and Web3 communities;
(b) Green Bond monetization:. To monetize the issuance of government green bonds for subscription by institutional investors; and
(c) Digital Hong Kong dollar. Can serve as a“Backbone” and pillar between fiat money and virtual assets, providing the confidence needed to drive more innovation.
Details of the pilot scheme are set out in the annex.
Summary and outlook
Eleven. Hong Kong has a world-class financial infrastructure, legal and regulatory regime. We are committed to promoting the sustainable development of financial services throughout the virtual asset value chain, it covers virtual asset issuance, monetization, trading and payment platforms, financial and asset management, and depository management. The government is ready to embrace the future development of finance and commerce, and to support the technological development and social and economic benefits behind virtual assets. We welcome the convergence of fintech and virtual asset communities and talents in Hong Kong. We will implement the vision set out in the policy declaration through a policy of convenience, holistic and balanced regulation, risk-based limits and pilot schemes. The government cordially invites the global virtual asset industry to join hands with us in complying with best international standards and practices, building on Hong Kong’s status as an international financial centre, to realise the potential of financial Sunac in a regulatory environment that is clear, flexible and convenient.
Thirty-one October 2022
The government of the Hong Kong Special Administrative Region
Financial Services and the Treasury Bureau
Appendix: A Pilot Program to test the technical benefits of virtual assets and their further application to financial markets
Non-homogeneous issue of tokens
1. Non-homogenous tokens (“NFT”) are a new form of digital asset ownership. Artists and companies around the world are building communities through NFT and connecting with communities with similar ideas and goals. In 2022, the fstb, together with the Invest Hong Kong responsible for investment promotion, launched a pilot programme to promote the use of NFT during the annual flagship fintech week.
2. The NFT will be used as proof of attendance and participants will receive digital badges and souvenirs through blockchain technology. This NF T release is easy to get started even for beginners. Users can store NFT directly in their crypto-wallets, while those who are new to the virtual asset and do not yet own a crypto-wallets can temporarily store NFT at their email addresses for conversion to NFT at a later date. During fintech week, we will provide NFT owners with a unique experience, allowing them to create their own virtual avatars in the augmented reality world and take a journey through the metacarporeal experience.
3. The government regards the NFT launch as a proof-of-concept project to engage the fintech community and the WEB3 community and to demonstrate our commitment to financial Sunac. We will also offer discounts to NF t holders, including giving them a discount to buy tickets for next year’s fintech week and giving them early notice, they are invited to participate in other fintech activities (such as sharing sessions of the fintech proof-of-concept testing funding scheme, fintech training courses, and other Fast Track and incubation programmes) .
Green-bond monetization
Four. It helps to enhance the efficiency of bond issuance and settlement, reduce costs and attract more investors to the market. Following the earlier completion of Project Genesis by the Innovation Hub established in Hong Kong by the HKMA and the bank for International Settlements (Bis) , which developed two prototype projects using the licensed platform and the open blockchain respectively to provide a proof-of-concept for streamlining the green retail bond issuance process using distributed ledger technology, the HKMA is now launching a pilot programme to issue government-denominated green bonds for subscription by institutional investors. The purpose of the scheme, to test the suitability of Hong Kong’s financial infrastructure and legal and regulatory environment to handle the entire debt issuance cycle (including issuance, settlement, asset services, secondary market trading and redemption) using distributed ledger technology, and provide guidance for market participants to issue similar bonds in future. More details will be announced later to brief the industry and the public on the progress of the scheme.
Hong Kong dollar
5. Virtual assets and cryptocurrencies are products of technological innovation. However, they are not legally recognised as legal means of payment and can not be fully and effectively used for payment purposes. Hence, they can not become legal tender in Hong Kong. Although, as mentioned above, we expect that virtual assets and cryptocurrencies will facilitate a wide range of financial developments in Sunac, however, both the government and the regulators consider it necessary for Hong Kong to explore the possibility of introducing a central bank digital currency, the“Digital Hong Kong dollar”.
6. The HKMA has previously consulted the market and found that the respondents supported the introduction of the“Cyberport dollar” and believed that it would enhance payment efficiency and contribute to the development of the digital economy in Hong Kong. To prepare for the possible launch of a“Digital Hong Kong dollar” in the future, the HKMA will adopt a“Three-track approach” and explore in phases the following issues related to the“Digital Hong Kong dollar”. 1) technical and legal basis; 2) usage and design; and 3) the launch schedule of the“Cyberport dollar”. We believe that for the global virtual asset community, the significance of the “Cyberport” lies in its role as the “Backbone” and pillar linking the legal tender and the virtual asset, and therefore in price stability and confidence. With these two elements in place, the financial Sunac can promote the issuance of more securities-based tokens across different asset classes.
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