Clear, flexible regulation needed for virtual asset development

Dr. Winnie Tang October 31, 2022 08:39

In the coming Hong Kong FinTech Week, the highlight is the government's stance and policy statement for the development of virtual assets in Hong Kong which is expected to clear the regulatory uncertainty.

Many countries have moved steadily to embrace this emerging trend with a prudent attitude. One of them is Singapore of which the head of the Monetary Authority of Singapore (MAS) explained explicitly the authority’s wish to become a crypto asset hub. The MAS said that it welcomes digital asset innovation though license is required for service providers, and at the same time “strongly discourages and seeks to restrict” cryptocurrencies speculation. With the authority clearly drawing the bottom line, it makes businesses easier to decide whether to make a move.

Cryptocurrency has become a mega trend. A World Bank blog in April this year pointed out that the total crypto-assets on-chain volume over the past two years surged to a total of US$2.8 trillion in the first half of 2021 alone. Compared with Bitcoin (24%), the share of Ether (40%) and Stablecoin (24%) is gradually increasing with the geographical distribution of crypto-assets activity being global. The article concludes that crypto-assets and underlying technology (such as blockchain) hold promise for financial innovation, inclusion, efficiency and transparency, though they may also pose risks to global financial stability.

On the other hand, though the mainland announced a ban on cryptocurrency trading last year, China returned to the top ten of the 2022 Global Crypto Adoption Index published by a financial data analysis company Chainalysis in September, showing that there are still lots of activities.

As for Hong Kong, the dilemma faced by the local government is whether we should incline to the spirit of "one country" or that of "two systems", as an article of Hong Kong Economic Journal pointed out.

Nowadays, crypto assets are becoming more connected to the traditional financial system, the former Citigroup CEO believed every major financial institution will be considering trading crypto “in one to three years”; Bloomberg reported that JPMorgan Chase, Bank of America and other investment banks were hiring these talents, reflecting the accelerated adoption of crypto assets by institutional investors. Goldman Sachs has also started offering cryptocurrency futures trading.

In addition, many ASEAN countries with close commercial and trade relations with Hong Kong have developed internet and virtual currency rapidly in recent years. The World Economic Forum states that ASEAN is the fastest growing internet market in the world, with 125,000 new users every day. It is expected that the ASEAN digital economy will bring US$1 trillion to the region’s GDP over the next 10 years. According to the 2022 Global Crypto Adoption Index, among the 154 countries, four ASEAN countries rank in the top 20, including Vietnam (1st), the Philippines (2nd), Thailand (8th), and Indonesia (20th). Therefore, to grasp the huge opportunity of the ASEAN market in Fintech and smart city services, it is essential for Hong Kong to develop virtual assets.

Furthermore, to help attract local and overseas companies to carry out related business here, we need clear and flexible regulation. What’s more, when the mainland cannot fully regulate cryptocurrencies in the short term, Hong Kong can take the lead to serve as a model for other cities in the Greater Bay Area. This is also conducive to the creation of new jobs and new types of work. Therefore, the authorities should gear up as soon as possible to attract and train these talents.

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Dr. Winnie Tang

Adjunct Professor, Department of Computer Science, Faculty of Engineering; Department of Geography, Faculty of Social Sciences; and Faculty of Architecture, The University of Hong Kong