Global Perspectives
Deep-dive into global regulatory approaches to Web3 to help you learn more about global policies, opportunities, and cross-border synergies.
Read part 2 about the definition of Virtual Assets
Read part 3 about the e-HKD, Hong Kong’s Central Bank Digital Currency
Over the past few years, Hong Kong, a Special Administrative Region (SAR) of the People’s Republic of China, has seen a rapid yet carefully regulated development of its Web3 landscape. As the unique regulatory sandbox of Mainland China — where cryptocurrency policies have not yet seen any relaxation since 2021 — Hong Kong represents a major financial hub internationally as well as the world’s largest offshore RMB business hub. As of today, Hong Kong is an open market with an advanced infrastructure and an internationally-aligned regulatory regime to champion free trade and free flow of capital.
Thanks to the recent policies and capital injected by the city government into the private and public sector, the city aims to outgrow itself and its role as an Asian regional crypto hub to become an ‘international virtual assets center’, as already announced during the Hong Kong Fintech Week 2022, one of the key events in the city. Every year, the event serves as the platform to announce key policy developments, together with new projects, collaborations, and other programs. A pivotal event for finance and technology enthusiasts in the region, the Hong Kong Fintech Week (HKFW) just concluded its eighth edition on 5 November (we were there).
To explore the recent announcements and better understand the future development of Web3, we will explore the regulatory environment that fosters the thriving of business and partnerships between traditional and innovative sectors as well as some of the key takeaways from the event. Specifically, we will explore some of the most relevant projects and some of the key trends in CBDCs, tokenization, and artificial intelligence.
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Hong Kong, an international hub for technology and finance
In his opening keynote at HKFW 2023, the Chief Executive of HKSAR John Lee announced that Hong Kong saw a flow of US$4T in assets managed in 2022, two thirds of which came from international investors. Handling 75% of offshore RMB payments, the Fragrant Harbour is one of the key markets at a global level. And it is not slowing down. How did he become such a pivotal player in the global arena?
As we all know, Rome wasn’t built in a day. And Hong Kong hasn’t become an international financial and technological hub overnight. After the first Opium War (1839–1842), Hong Kong was ceded to Britain and forced to fully open up for trade with the British Empire, together with five other treaty ports in China. Yet even before then, Hong Kong was one of the key harbors allowed to perform selected cross-border trading and exchange.
After a few turbulent decades, in 1997 Hong Kong was re-absorbed by the recently established People’s Republic of China, joining the ‘one country, two systems’ framework promoted by Beijing. Since then, the ‘Gateway to China’ has sped up its development — aligned with Beijing’s goals and regulatory environment — whilst becoming Beijing’s sandbox for a number of policies, Web3 and crypto being one of them.
Mainland China has started curbing cryptocurrency on its mainland territories in 2017, culminating in the final full-blown ban that marked all cryptocurrency transactions as illegal in 2021. But as Beijing shut its doors to crypto, Hong Kong opened up to more innovative projects, technologies, collaborations between the financial sector and Web3 under a carefully crafted regulatory framework, administered and supervised by some key institutions and authoritative voices, including but not limited to:
- Securities and Futures Commission (SFC), in charge of the regulation of the securities and futures markets;
- Hong Kong Monetary Authority (HKMA), providing guidance to authorized institutions (including licensed banks) on the regulatory approaches regarding the engagement with crypto-assets and crypto-asset service providers;
- Financial Services and the Treasury Bureau (FSTB) is responsible for developing and executing government policy on finance and treasury.
The Web3 regulatory landscape in Hong Kong
In June 2023, the Financial Secretary announced the establishment of the Task Force on Promoting Web3 Development. The Task Force aims to “provide recommendations on the sustainable and responsible development of Web3 in Hong Kong.” Whilst of considerable significance, its establishment may not have come as a surprise to some observers given HKSAR’s long-lasting commitment to the Web3 sector.
The Hong Kong Fintech Week 2022 marked the official ambitions of Hong Kong to grow into a global crypto hub from the central role it already plays in the Asian region in terms of investments, infrastructure, and innovation — yet still fiercely competing with Singapore. During last year’s HKFW, the city displayed its firm commitment to integrating Web3 into the real world as organizers distributed 2000 limited-edition NFTs which granted holders several discounts — including to the 2023 HKFW edition. At the same time, token holders could take advantage of the 3D scanners available on premises to create their own augmented reality avatar.
Since 2018, the city has invested considerably in the convergence of traditional industries — first and foremost the financial sector — with innovative technologies, to explore and make the most of new tech such as blockchain and crypto. Introduced five years ago by the SFC, the compulsory licensing regime for the management of portfolios of Virtual Assets (VAs) represents one of the most relevant steps towards the integration of VAs into traditional finance. According to this regime, managers already licensed for traditional securities management can include VAs in their portfolio in excess of 10% or more of the gross value of their assets under management.
But what are Virtual Assets (VAs)? VAs encompass digital tokens (including utility tokens, stablecoins, or security- or asset-backed tokens) as well as other virtual commodities and crypto assets. Cryptocurrencies are VAs, thus they are not legal tender regulated by the HKMA, and they do not qualify as money. At the same time, virtual assets can be categorized as Security Tokens and Non-security Tokens, depending on whether they qualify as securities or not. Most stablecoins and cryptocurrencies (e.g. Bitcoin and Ether) are not regarded as securities.
Virtual Assets can be categorized as Security Tokens or Non-Security Tokens. Cryptocurrencies are virtual assets, and they are considered Security Tokens only if they fall under the definition of “securities’. Most stablecoins and cryptocurrencies are not regarded as securities.
Recent developments for professional and retail investors
In October 2022, the FSTB issued the Policy Statement to promote the sustainable development of virtual assets, and in December of the same year, a Mandatory licensing regime for Virtual Asset Service Providers (VASPs) — which are allowed to offer services only to professional investors — was introduced to bring the trading of non-security tokens under the SFC. It stated that VA exchanges operating in Hong Kong or targeting the Hong Kong market are required to be SFC-licensed, regardless of whether they offer security or non-security tokens.
VASPs are only allowed to serve Professional Investors, and may offer Professional Investors’ security tokens. On the other hand, licensed Virtual Asset Trading Platforms (VATPs) can serve retail consumers only with non-security tokens, starting 1 June 2023.
For what concerns Virtual Asset Trading Platforms (VATPs), the SFC recently introduced a mandatory licensing regime for the VATPs operating in Hong Kong (or marketing their services to Hong Kong investors). It took effect on 1 June 2023 — still allowing some flexibility for pre-existing, non-licensed VATPs looking to apply for a license — with the goal of regulating non-security crypto asset trading.
At the same time, the SFC also published the Guidelines for VATPs, which includes rules allowing licensed VATPs to be accessed by retail customers for the trading of non-security VAs. In a nutshell, since 1 June 2023, Hong Kong retail investors (and not only Professional Investors) can access non-security token services provided by regulated authorities — one of the greatest milestones in the history of Hong Kong’s Web3 sector.
Want to know more about it?
Stay tuned for Part 2 with more takeaways from the Hong Kong Fintech Week, including partnerships, future developments, and pilot program insights shared at the event.
This article is only intended to provide a summary of the key regulations and other practices carried out in the region at issue. It is not intended to cover all the legal or regulatory issues that may be involved in– or risks that may arise from–the engagement with virtual assets and any other asset or activities mentioned, and it does not intend to provide any kind of advice or suggestion to individuals and/or corporates.
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