On October 31, at the start of this year’s FinTech Week in Hong Kong, the Financial Services and Treasury Bureau (“FSTB“) issued a policy statement Presentation of his vision for the development of the virtual assets (“v.a’), and outlined several new initiatives to ‘promote sustainable and responsible development of the sector’.
Earlier this year (please click here), the Hong Kong government laid extensive foundations for a VA regulatory regime, which began with the SFC and HKMA jointly issuing a Circular for all local intermediaries regarding the distribution of VA and the provision of services by Virtual Asset Service Providers (“VASPs“) in Hong Kong. Then, in June, the government introduced new legislation for a mandatory licensing and regulatory regime for all VASPs in Hong Kong.
Under this new rule, effective March 1, 2023, VAs that fall under Hong Kong’s statutory definition of securities or futures contracts can only be traded on crypto exchanges operated by intermediaries licensed by the SFC as VASPs became. Intermediaries who sell, trade or advise VAs must also be licensed and comply with existing SFC regulations. And for now, licensed VASPs are only allowed to offer such services to professional investors.
The FTSB policy statement recognizes the significant potential of VAs and proposes several new initiatives that the Hong Kong government hopes will solidify Hong Kong’s status as an international cryptocurrency hub.
- First, the SFC will hold public consultations on changes that would allow retail investors to trade VA, potentially through a new class of exchange-traded funds. Without such changes, retail investors can only do so through overseas exchanges outside of the oversight of Hong Kong regulators.
- Second, recognizing that Hong Kong’s narrow legal system does not recognize either smart contracts or tokenized assets, the Hong Kong government will undertake a review of existing laws to amend them so that both can be properly regulated. Smart contracts are simply programs stored on a blockchain that work like an algorithm when given conditions are met. They are seen as possible replacements for traditional contracts in specific business scenarios. Tokenized assets are digital tokens created on a blockchain that can represent either digital or physical assets. They represent a new form of ownership that can enhance both the accessibility and liquidity of real estate ownership.
- Third, the HKMA will follow up on its January 2022 discussion paper on expanding the regulatory framework to include payment-related stablecoins (i.e., cryptocurrencies whose value is pegged to fiat currency or another asset).
- Finally, the Hong Kong government is planning to launch pilot projects in the coming months to provide the proof-of-concept for the possible launch of tokenized “green bonds” that could be issued by the Hong Kong government and an e-HKD similar to digital examine Yuan is used in mainland China.
These are undoubtedly ambitious proposals that can go a long way in elevating Hong Kong ahead of Singapore as the pre-eminent cryptocurrency hub of Asia. Meanwhile, intermediaries offering regulated cryptocurrency services will have until March 1, 2023 to make any necessary changes to ensure they are fully compliant when the new regulations come into effect.