Virtual asset policy: The “eastern wind” for Hong Kong fintech

December 21, 2022 09:50

In the Chinese novel “Romance of the Three Kingdoms”, military strategist Zhuge Liang prays for the “eastern wind” as the final missing element to feed the fires that would rage across the ships and the armies of warlord Cao Cao. Just like the novel, Hong Kong’s fintech fires are primed and the recent policy announcements by regulators at the recent Hong Kong Fintech Week 2022 are set to fan the flames of fintech success.

This is no hyperbole. Conditions and circumstances have never been better for the city’s fintech ambitions. “Hong Kong takes on Singapore for Asia's crypto crown” as reported by the Financial Times, while multiple media noted the significance of the policies that seek to establish Hong Kong as a virtual asset financial centre and pave the way for a flourishing digital asset and Web3 marketplace. Just a few weeks ago, Hong Kong’s home-grown Web3 pioneer, Animoca Brands, announced a huge US$2 billion investment fund to ride on the growing metaverse buzz and potential in the region.

What changed?

First the mindset has shifted significantly. In the past, the development of fintech in terms of digital assets and cryptocurrencies specifically, has been supported but noticeably applied with the handbrake on. The recent government announcement of a new HK$30 billion (US$3.82 billion) co-investment fund, under the new Hong Kong Investment Corporation (HKIC) will inject greater impetus into the high tech, finance, and innovation landscape, signalling new intent and aggression in pushing technology and fintech. The SCMP reported financial secretary Paul Chan stating that: “This time we break free of traditional thinking as we will have active planning and be aggressive to take our best shot to push for industry development.”

Second, progressive virtual asset regulations are set to send a very strong signal to the market and open up new opportunities for all stakeholders. Retail investors are finally getting close to gaining access to virtual assets locally, dependent on the public consultation to be held in Q1 2023. The Hong Kong Securities and Futures Commission (SFC) will now also accept applications for virtual asset futures ETFs to be made available to retail investors.

The SFC also announced a coming circular on security token offerings (STOs) signaling the strategic importance placed on this digital asset segment. The SFC has often emphasised its principle of “same business, same risks, same rules” and on numerous occasions, and the SFC representatives have explained to the private sector stakeholders that a digital “tokenised wrapper” on traditional securities does not make them “complex products”. One emerging opportunity here for markets is the capital-raising potential in sectors like property. Many commentators have noted how STOs could “revolutionise” how developers raise capital to fund their projects, which would significantly boost the Hong Kong and the Greater Bay Area property sectors.

Pilots to seed market adoption

Other developments include the embracing of NFTs which were tested at the Hong Kong Fintech Week as proof of attendance for attendees of the main conference of the Hong Kong FinTech Week. Event participants were offered a digital badge and souvenir using blockchain technology to commemorate their participation.
The Hong Kong Monetary Authority (HKMA) announced a pilot project to tokenise Government Green bond issuance for subscription by institutional investors. The goal is to showcase the commercial readiness of the city’s financial, legal and regulatory infrastructure to use blockchain and distributed ledger technology in the provision of bonds and related services. The findings of this pilot could determine new ways to simplify and lower the cost of bond issuance and create even more investor opportunities and market liquidity.
More details are expected across a number of proposed policy changes. But the signal is clear in that the Hong Kong government and the regulators are committed to digital assets becoming a big part of the city’s future financial services roadmap.

Investor protection rules in fintech development race

Ironically, another major factor that makes the recent policy shifts even more compelling for Hong Kong fintech is the prolonged downturn and headline failures in the crypto market. Investor protection has never been more necessary and the moves by the SFC and HKMA to proactively embrace digital assets in a more open and transparent manner can only provide greater investor trust. Globally the call for more regulation has never been louder.

The key focus here is that digital assets can and will impact the real economy. There is no turning back and the SFC to its credit has been steadfast and clear all along about protecting investors with the consistent approach of 100% ring-fencing customer assets, unlike other authorities that have been “moving the goalposts”.

The SFC has clearly indicated a willingness to listen to the industry and find optimal solutions that balance accelerating development and investor protection. The vision is that as more digital asset platforms and service providers are licensed, where a more clearly regulated environment can give the investors an extra level of confidence to increase their exposure in this new asset class.

Bigger opportunities lie within tokenisation of assets

Too often the discussion is focused only on crypto like Bitcoin or Ethereum, but these constitute a market of around US$1 trillion at today’s valuation. With the policy announcements on 31 Oct 2022 in support of virtual assets, the Hong Kong government leaders see a much larger opportunity in tokenising the hundreds of trillions of dollars-worth of "traditional" assets. A report by Boston Consulting Group and digital securities platform ADDX predicts a 50-fold increase in the value between 2022 and 2030, from US$310 billion to US$16.1 trillion, making up 10% of global GDP by the end of the decade.

Even HSBC has talked up this huge growth opportunity with its “10x potential of Tokenisation” report which highlights how democratising assets through digitalisation and tokenisation will be a huge multiplying force on global asset values.

From bonds to real estate, to private equity and beyond, the real prize in the battle for fintech leadership is how these evolving elements and applications around digital assets will fuel an even bigger multiplier effect on the broader real economy. With this end goal in mind, Hong Kong must seize this moment while the winds are favourable.

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Head of FinTech at InvestHK