Full Text of Hong Kong's Virtual Asset Policy: Welcoming Fintech and Virtual Asset Talents to Converge in Hong Kong
TechFlow Selected TechFlow Selected
Full Text of Hong Kong's Virtual Asset Policy: Welcoming Fintech and Virtual Asset Talents to Converge in Hong Kong
Intensifying preparations for the new licensing regime for virtual asset service providers, launching public consultation on the appropriate extent to which retail investors may trade virtual assets, and remaining open to the introduction of virtual asset exchange-traded funds (ETFs) in Hong Kong.
Navigating Web3 tides with focused insightsThis statement is issued by the Financial Services and the Treasury Bureau ("FSTB") to set out the government's policy stance and direction regarding the development of a vibrant virtual asset industry and ecosystem in Hong Kong.
Vision and Approach
1. Hong Kong is an international financial centre that embraces innovators in the global virtual asset industry. We highly value their efforts in advancing distributed ledger technology ("DLT") and developing innovative financial solutions that are more cost-effective, inclusive, flexible and transformative. Given the growing appeal of virtual assets to global investors, increasing recognition of their role in financial innovation, and the future opportunities brought by the integration of virtual assets into Web 3.0 and the metaverse, we believe virtual assets have become indispensable in the market. The government is working with financial regulators to create an enabling environment that promotes sustainable and responsible growth of Hong Kong’s virtual asset industry. In view of the evolving nature and innovative models of virtual assets, we will adapt our legal and regulatory frameworks accordingly to provide a supportive environment.
2. We recognise that DLT and Web 3.0 have the potential to shape the future of finance and commerce. When properly regulated, these technologies can enhance efficiency and transparency, thereby reducing or even resolving existing issues in areas such as settlement and payments. Hong Kong already hosts a vibrant virtual asset ecosystem, evident from activities such as non-fungible token ("NFT") issuance, metaverse development, and the application of DLT in trade finance. Looking ahead, broader applications of virtual assets – such as in art and collectibles trading, tokenisation of antiques, or, from a financial innovation perspective, tokenisation of various products like debt securities – will unlock even greater opportunities.
3. Drawing lessons from past technological developments, exploring new frontiers involves both opportunities and risks, and achieving the above vision cannot happen overnight. We will adopt the principle of "same business, same risk, same rules" and introduce necessary regulations at appropriate times – supporting sustainable innovation in the virtual asset sector while ensuring that actual and potential risks relating to financial stability, investor protection, anti-money laundering and counter-terrorist financing are mitigated and managed in line with international standards. As an international financial centre and given the borderless nature of virtual assets, Hong Kong must closely monitor evolving regulatory developments around the world and take them into account when shaping our own regulatory regime.
Regulation
4. Over the past few years, the government and regulators have developed a comprehensive virtual asset regulatory framework based on the principle of "same business, same risk, same rules". We have implemented a licensing regime for virtual asset exchanges on a "voluntary opt-in" basis. In asset management, regulators have issued guidance on the management of virtual asset funds and discretionary accounts. Additionally, regulators have provided guidance to banks and financial institutions on distributing virtual asset-related products, conducting virtual asset transactions, or providing advice on virtual assets. This regulatory framework has received broad support from the industry. We believe that a consistent, clear and comprehensive regulatory framework will lay a solid foundation for embracing financial and technological innovation driven by rapid global developments in virtual assets.
5. To further implement this comprehensive regulatory framework, we have recently been working towards establishing a licensing regime for virtual asset service providers. Under the new regime, virtual asset exchanges will be subject to the same requirements as traditional financial institutions in areas such as anti-money laundering, counter-terrorist financing and investor protection. This will help licensed virtual asset exchanges build credibility and gain access to a wider pool of investors in the Hong Kong market. Another benefit is that financial intermediaries and banks will be able to collaborate with licensed peers from the virtual asset sector and, subject to relevant regulatory conditions, offer virtual asset trading services to clients. From the perspective of virtual asset exchanges, the licensing regime will enable them to develop new distribution channels in Hong Kong and tap into the city’s substantial asset and wealth management market, which exceeds USD 4.5 trillion in value. While preparing for the new licensing regime, we are also keen to engage with the global virtual asset industry and invite relevant exchanges to explore business opportunities in Hong Kong.
Investor Access to Virtual Assets
6. We have observed increasing acceptance among global investors – both institutional and retail – of virtual assets as an investable asset class. The Securities and Futures Commission ("SFC") will soon launch a public consultation on the appropriateness of allowing retail investors to trade virtual assets under the new licensing regime. We also note that retail investors in other markets are already able to access virtual assets through virtual asset-related products such as exchange-traded products. The government welcomes the potential introduction of virtual asset exchange-traded funds ("ETFs") in Hong Kong, and the SFC will shortly issue a circular on this matter. Introducing such products in Hong Kong would connect the virtual asset industry with traditional financial institutions, enabling the provision of well-designed investment products and promoting the overall development of the sector in the local market. Nevertheless, we remain cautious about risks to retail investors and will strengthen investor education and ensure appropriate regulatory safeguards are in place.
Property Rights of Tokenised Assets
7. We recognise that virtual assets possess characteristics different from traditional assets, which may not be fully accommodated within Hong Kong’s current private property law classifications or definitions. To promote adoption of virtual assets and strengthen investor protection, the government remains open to reviewing, in due course, the property rights of tokenised assets and the legal validity of smart contracts, so as to establish a robust legal foundation for ownership of tokenised assets.
Stablecoins
8. Stablecoins represent another area of focus. Given their purported ability to maintain price stability and their growing use – for example, as a medium of exchange between cryptocurrencies and fiat currencies – stablecoins also have the potential to interconnect with traditional financial markets (such as payment systems). Learning from recent crises in the virtual asset market (the "crypto winter"), there is now international consensus on the need for appropriate regulation across various aspects of stablecoins, including governance, stabilisation mechanisms and redemption arrangements. In this regard, the Hong Kong Monetary Authority ("HKMA") issued a discussion paper earlier this year, inviting views on establishing a risk-based, proportionate and flexible regulatory regime for stablecoins used for payment purposes. The HKMA will publish the consultation findings and outline next steps in due course.
Pilot Programmes
9. The government and regulators are exploring the following pilot programmes to test the technological benefits of virtual assets and assess their further application in financial markets. These initiatives demonstrate our commitment to collaborating with the global virtual asset industry in advancing financial innovation.
(a) NFT Issuance for Hong Kong FinTech Week 2022: A proof-of-concept project engaging the fintech and Web3 community;
(b) Green Bond Tokenisation: Tokenising the government’s green bond issuance for subscription by institutional investors; and
(c) Digital Hong Kong Dollar: Serving as a "backbone" linking fiat currency and virtual assets, providing confidence to drive further innovation. Details of the above pilot programmes are set out in the Annex.
Conclusion and Outlook
10. Hong Kong boasts world-class financial infrastructure, legal and regulatory systems. We are committed to promoting the sustainable development of financial services across the entire virtual asset value chain, covering issuance, tokenisation, trading and payment platforms, financial and asset management, and custody. The government is ready to embrace the future of finance and commerce, supporting the technological, social and economic benefits enabled by virtual asset technologies. We welcome fintech and virtual asset communities and talents to gather in Hong Kong. Through enabling policies, a comprehensive and balanced regulatory regime, risk-based controls, and pilot initiatives, we will realise the vision set out in this policy statement. The government invites the global virtual asset industry to join hands with us, leveraging Hong Kong’s status as an international financial centre, adhering to the highest international standards and practices, and unlocking the potential of financial innovation within a clear, flexible and supportive regulatory environment.
31 October 2022
The Government of the Hong Kong Special Administrative Region
Financial Services and the Treasury Bureau
Annex: Pilot Programmes to Test Technological Benefits of Virtual Assets and Their Further Application in Financial Markets
Non-Fungible Token Issuance
1. Non-fungible tokens ("NFTs") are a recently emerged form of digital asset ownership. Artists and companies around the world are using NFTs to build communities and engage with like-minded audiences. In 2022, the FSTB, together with the Investment Promotion Unit responsible for investment promotion, launched an NFT issuance pilot programme during its annual flagship event, "FinTech Week", to promote the use of NFTs.
2. The issued NFTs serve as proof of attendance, with digital badges and souvenirs delivered to participants via blockchain technology. The NFT issuance process is designed to be simple and accessible even to beginners. Users can store NFTs directly in cryptocurrency wallets; those new to virtual assets who do not yet have a wallet can temporarily hold them via email address and later convert them into full NFTs. During "FinTech Week", NFT holders will enjoy unique experiences, such as creating their own avatars in augmented reality and embarking on a metaverse journey.
3. The government views this NFT initiative as a proof-of-concept project to encourage participation from the fintech and Web3 communities and to demonstrate our commitment to advancing financial innovation. We will also offer incentives to NFT holders, including discounted tickets to next year’s "FinTech Week" and early invitations to other fintech events (such as sharing sessions on the FinTech Proof-of-Concept Subsidy Scheme, fintech training courses, and other Fast Track and incubation programmes).
Green Bond Tokenisation
4. Tokenising bonds can improve efficiency and reduce costs in bond issuance and settlement, while attracting more investors to the market. Following the successful completion of Project Genesis by the HKMA and the Bank for International Settlements’ Innovation Hub Centre in Hong Kong – which developed two prototypes (on permissioned platforms and public blockchains) to conduct proof-of-concept testing for streamlining green retail bond issuance using distributed ledger technology – the HKMA is now launching a pilot programme to issue tokenised green government bonds for subscription by institutional investors.
The objective of this initiative is to test whether Hong Kong’s financial infrastructure, legal and regulatory environment are suitable for handling the entire bond lifecycle – including issuance, settlement, asset servicing, secondary market trading and redemption – using distributed ledger technology, and to provide guidance for market participants planning to issue similar bonds in the future. The government will announce further details later to keep the industry and the public informed of progress.
Digital Hong Kong Dollar
5. Virtual assets and cryptocurrencies are technological innovations, but they are not legally recognised as valid means of payment and cannot be used comprehensively and effectively for payments. Therefore, they cannot serve as legal tender in Hong Kong. Nonetheless, as mentioned above, we anticipate that virtual assets and cryptocurrencies will drive various forms of financial innovation. The government and regulators believe it is important for Hong Kong to simultaneously explore the possibility of issuing a central bank digital currency (i.e., the "digital Hong Kong dollar").
6. The HKMA previously consulted the market, and respondents expressed support for launching a "digital Hong Kong dollar", recognising its potential to enhance payment efficiency and support the development of Hong Kong’s digital economy. To prepare for a possible future launch, the HKMA will adopt a "three-track approach" to progressively examine the following aspects related to the "digital Hong Kong dollar":
1) Technical and legal foundations;
2) Use cases and design;
3) Timeline for launching the "digital Hong Kong dollar".
We believe that for the global virtual asset industry, the "digital Hong Kong dollar" could serve as the "backbone" connecting fiat currency and virtual assets, providing price stability and confidence. With these two elements in place, it could catalyse further financial innovations such as security token offerings across different asset classes.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
