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Hong Kong set to relaunch itself as digital asset hub with revamped policies

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Hong Kong will kick off its flagship finance event, FinTech Week 2022, on Monday, setting the stage for what is expected to be a series of policy statements on cryptocurrencies as the city attempts to remodel itself as a hub for digital assets and investment.

Hong Kong Financial Secretary Paul Chan flagged what may be coming in an October blog post about the event, which runs through Nov. 4 under the title “Pushing Boundaries, Reaping Benefits.”

Chan teased on the “pushing boundaries” theme in his post: “The policy statement will make our policy stance on virtual assets clear to the global markets. It will also demonstrate our commitment and determination to explore financial innovations together with the global virtual assets community.”

Beside Chan, other officials in Hong Kong have been preparing the ground for a possible shift on crypto trading, which at present in Hong Kong is limited to so-called professional investors or those with proven assets of HK$8 million, or about US$1 million.

Elizabeth Wong, the director of licensing and head of the fintech unit of the Securities and Futures Commission (SFC), told investors last week that Hong Kong will chart its own course on digital asset policies. It won’t just follow the mainland’s ban on crypto, she said, even invoking the “one country, two systems” under which China governs Hong Kong. 

“Hong Kong has one country, two systems principle. It’s a constitutional principle that forms the basic foundation to Hong Kong’s financial markets,” Wong said at a conference for Hong Kong investment promotion week.

The shifts in tone come as the city’s Hang Seng Index has fallen nearly 35% year to date amid a surge in global inflation, rising interest rates, and capital flight from the extended Covid-19 lockdown policies in Hong Kong. The city’s tougher policies on crypto trading and suspicion China would impose an outright ban on the city also saw exchanges like FTX, run by billionaire Sam Bankman-Fried, pull out of Hong Kong. Some moved to rival Singapore. 

“I think it’s also very clear that the language has changed between 2017, 2018, when the official language, not only from the regulator, was a broader cautionary, highlighting risks to investors,” said Donald Day, who formerly worked at the SFC on virtual asset policy, at the Crypto Fraud and Asset Recovery Network meeting on Oct. 21.

While the capitalization of the cryptocurrency market has fallen 56% in 2022, more financial institutions are showing interest in the asset class. 

BlackRock, the world’s largest asset manager with roughly $8.5 trillion under management, said in August it was starting a spot bitcoin trust for institutional clients in the US. British banking giant Barclays invested in cryptocurrency custody firm Copper in July, and Fidelity Investments, one of the largest providers of U.S. 401(k) retirement plans, started allowing customers to invest a portion of their portfolios in bitcoin in April. Fidelity started offering Ethereum trading to institutional investors from Friday.

Here’s some of the issues on the table at Hong Kong’s FinTech Week:

Licensing regime for virtual asset, stablecoins, and more

The Anti-Money Laundering (AML) Ordinance amendment, which aims to introduce a licensing regime for virtual asset service providers (VASP), has been submitted to the Hong Kong Legislation Council for scrutiny. It is set to pass in the first quarter of 2023, said the head of fintech at Invest Hong Kong, King Leung, in an October interview.

The bill will require any company conducting virtual asset business in Hong Kong to obtain a license, said Political Assistant to the Secretary for Hong Kong Financial Service and the Treasury Julian Ip in a panel at “Hong Kong Investment Promotion Week” last week.

Meanwhile, Hong Kong regulators are taking notes on stablecoins. Regulations for stablecoins could be “another puzzle,” said Ip, noting stablecoins are an efficient lending protocol in decentralized finance, despite some attendant risk.

“You can actually draw on some of these traditional regulatory regimes and these high-end projects that will work for stablecoins,” said Ip, “this will be our focus and to consider how we could also establish a real regulatory regime for Stablecoin, just like VASP,” Ip added.

“We’ll look into different aspects of the broad virtual asset sector and see how we could come up with creative and facilitated regulations to have this active role,” said Ip. “The policy statement will actually cover all these areas.”

Let retail investors in?

Hong Kong may open up investments in cryptocurrency ETFs to retail investors, with authorities likely to launch a public consultation on the matter later this year, the SFC’s Wong said at a conference in mid-October.

ETF is a type of pooled investment security that tracks a particular index, sector, commodity, or other assets, which can be purchased or sold on a stock exchange the same way that a regular stock can.

“So in that public consultation, we will also look at whether we can actually relax the professional investor requirement to see if we can actually enable retail investors to directly invest into virtual assets, ” said Wong,

Central Bank Digital Currencies

In addition to seeking re-emergence as a crypto hub, Hong Kong is also rising as one of the hubs of central bank digital currencies (CBDCs).

The city’s cross-border CBDC interoperability project mBridge includes the Hong Kong Monetary Authority (HKMA) and the central banks of Thailand, China, and the United Arab Emirates. It has completed its 2nd phase pilot that included 20 commercial banks from those four regions in 160 cross-border payments through the mBridge in transactions worth more than US$22 million in total.

See related article: Shenzhen leads China in cross-border CBDC transactions: report 

The HKMA said it aims to improve and expand the functions of mBridge and more details are expected to be announced during FinTech Week.

The Bank for International Settlements (BIS) innovation hub Hong Kong has completed research to examine the feasibility of CBDC-backed stablecoins, according to a report released last Friday. 

“Bringing CBDC-backed stablecoins to life has never been done before and we therefore felt that doing so may supplement the growing body of research on private sector stablecoins,” the BIS wrote in the report.

In June last year, the HKMA said they may connect mainland China’s CBDC to the city’s Faster Payment System. While there has been no update, the Head of China’s central bank’s CBDC division Mu Changchun will be speaking on Nov. 1 at FinTech Week.



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