Hong Kong Virtual Asset Policy Overview | NFT, Digital Hong Kong Dollar Pilot Program Underway, Open to Tokenized Assets, Stablecoins

The Hong Kong government today announced its policy statement on virtual assets, expressing a fairly open attitude towards virtual asset ETFs, tokenized assets, and stablecoins. It is currently also conducting experimental projects involving NFTs, tokenization of bonds, and a digital Hong Kong dollar.

Vision and Policy on Virtual Assets

According to the declaration, the Hong Kong government stated that as an international financial center, it maintains an "open" and "compatible" attitude towards innovation in virtual asset businesses, acknowledging the potential of Distributed Ledger Technology (DLT) and Web 3.0 to become trends in the future development of finance and commerce under proper regulation. These technologies not only enhance efficiency and transparency but also reduce or resolve issues in settlement and payments.

"If we look beyond the current uses of virtual assets, such as in the trading of art and collectibles, tokenization of antiques, or from a financial innovation perspective, tokenizing different products like debt securities will undoubtedly bring about greater opportunities."

However, new domains inevitably come with new risks. Before the vision can be realized, the Hong Kong government will establish necessary regulations based on the principle of "same business, same risks, same rules."

Regulatory Measures

In addition to existing systems, to further implement regulatory frameworks, the Hong Kong government announced the introduction of a licensing regime for virtual asset service providers. Under the new system, virtual asset exchanges will be required to comply with regulations similar to traditional financial institutions in combating money laundering, terrorist financing, and protecting investors.

Compliance with these regulations will help exchanges establish credibility and engage with more industry players. Furthermore, financial intermediaries and banks can collaborate with licensed counterparts in the virtual asset space to provide virtual asset trading services to clients, subject to regulatory conditions.

Views on ETFs, Tokenized Assets, and Stablecoins

1. ETFs

The Hong Kong government is quite open to ETFs and stated, "The government welcomes the introduction of Exchange-Traded Funds (ETFs) trading virtual assets in Hong Kong." To launch such products in Hong Kong, industry players can collaborate with traditional financial institutions to promote the overall development of ETFs in the Hong Kong market through well-designed products.

2. Tokenized Assets and Smart Contracts

Due to the distinct characteristics of virtual assets compared to traditional assets, which may not align completely with Hong Kong's current private property legislation categories or definitions, the government expressed its intention to review the ownership of tokenized assets and the legality of smart contracts in the future, while maintaining an open stance.

3. Stablecoins

Recognizing the increasing use of stablecoins for maintaining value stability, the Hong Kong Monetary Authority issued a discussion paper earlier this year on the subject, inviting stakeholders to develop a risk-based, proportionate, and flexible regulatory framework for stablecoin activities used in payments. The government plans to release consultation results and next steps in the future.

Virtual Asset Pilot Programs

To test the technological benefits of virtual assets and explore further applications in financial markets, the Hong Kong government is currently promoting three pilot programs:

1. 2022 Hong Kong Fintech Week NFT: NFTs issued will serve as proof of attendance for participants, serving as a conceptual validation project for interaction with the fintech and Web3 community.

2. Green Bond Tokenization: Tokenizing government green bonds for institutional investors to subscribe to. This helps enhance efficiency in bond issuance and settlement, reducing costs.

3. Digital Hong Kong Dollar: Serving as the "backbone" bridging legal tender and virtual assets, providing the necessary confidence to drive further innovation. However, the government clarified that while virtual assets and cryptocurrencies are technological innovations, they are not legally recognized as a legitimate form of payment in Hong Kong.

The above highlights the key points of the policy declaration on virtual assets, showcasing the government's determination to embrace emerging industries and attract talent domestically and internationally. Secretary for Financial Services and the Treasury Christopher Hui stated, "We welcome the convergence of the fintech and virtual asset industries and talents in Hong Kong. We are committed to promoting the sustainable development of financial services across the entire virtual asset value chain."