In the evolving landscape of APAC virtual asset regulation, Hong Kong is positioning itself as a key player. While the city adopts a stricter regulatory approach compared to its regional counterparts, such as Singapore, it’s also very supportive and proactive in engaging with the web3 industry as it strives to build a regulatory framework that encourages innovation while balancing consumer protection [1].
The choice of jurisdiction to incorporate a digital asset business in the Asia Pacific region largely depends on the specific goals and services of the business. While Hong Kong started its reform agenda later than its regional counterparts, it has quickly proven to be an attractive base for a digital asset business for a number of reasons, including the progressive regulatory approach.
In fact in 2023, This ranking is based on factors like crypto infrastructure presence, accessibility, legality, overall reach, and the density of cryptocurrency ATMs per square foot, underscoring Hong Kong’s comprehensive approach to cryptocurrency adoption [2].
Hong Kong is working closely with industry stakeholders to develop its regulatory policies, strategically positioning itself as a global center for tokenization and web3 more broadly [3]. This framework involves key financial regulatory bodies, the Securities and Futures Commission (SFC), and the Hong Kong Monetary Authority (HKMA) [4]. This collaboration is aimed at understanding practical implementation issues and developing a regulatory environment that is conducive to growth while ensuring robust consumer protections and risk management. This approach indicates Hong Kong’s commitment to being a leading hub for virtual asset businesses and innovation within the region [5].
Setting the Regulatory Stage
Thanks to the coordinated efforts of the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), Hong Kong has emerged as a significant hub in the global tokenized asset landscape. Their collaboration is grounded in a shared commitment to creating a secure, innovative, and dynamic environment for virtual asset activities. This has led to a series of key regulatory developments, shaping Hong Kong’s progressive stance in the digital asset arena.
These developments range from the issuance of policy statements and legislative amendments to the conclusion of vital discussions and consultations. Each step taken by the HKMA and SFC has been crucial in establishing a comprehensive regulatory framework that not only addresses the current needs of the digital asset market but also anticipates its future evolution. This demonstrates Hong Kong’s proactive approach in adapting to the challenges and opportunities presented by the rapidly evolving tokenized asset sector, positioning it as a prominent player on the global stage.
- November 3, 2020 – Public Consultation on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong: The Financial Services and the Treasury Bureau (“FSTB”) published a consultation paper seeking views on legislative proposals to enhance anti-money laundering and counter-terrorist financing (“AML/CTF”) regulation in Hong Kong through the introduction of a licensing regime for virtual asset services providers (“VASPs”) [6].
- May 24, 2021 – Consultation Conclusions on the Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong: The FSTB published consultation conclusions setting out the new AML/CTF requirements for the VASP sector. In the conclusions, the FSTB said it will adopt the proposal to restrict virtual asset (“VA”) trading to professional investors “at least for the initial stage of the licensing regime” [7].
- January 12, 2022 – HKMA Discussion Paper on Crypto-assets and Stablecoins: The HKMA published a discussion paper on crypto-assets and stablecoins, outlining the regulatory approach for crypto-assets, particularly payment-related stablecoins [8].
- February 7, 2022 – Legislative Proposal for the VASP Licensing Regime: The Hong Kong Legislative Council (“LegCo”) Panel on Financial Affairs published the legislative proposal for a VASP licensing regime, proposing amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), which retains the requirement that licensed VASPs provide services to professional investors only [9].
- October 31, 2022 – Policy Statement on Virtual Assets: The FSTB issued a policy statement outlining the vision and approach towards developing a vibrant sector for VAs in Hong Kong in conjunction with the financial regulators. The statement emphasized Hong Kong’s openness and inclusivity towards VA businesses and the need for a comprehensive regulatory framework to promote sustainable development in this sector. It also highlighted that the Hong Kong Securities and Futures Commission (“SFC”) will be conducting a public consultation on how retail investors may be given a suitable degree of access to VA’s, and that Hong Kong will be open to the possibility of having Exchange Traded Funds (“ETFs”) on VAs, and that consultation outcomes and next steps will also be announced in due course by the Hong Kong Monetary Authority on the regulatory regime for stablecoins.It also highlighted ongoing pilot projects like NFT issuance, green bond tokenization, and e-HKD [10].
- December 07, 2022 – Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 passed: The LegCo passed and gazetted the Amendment Bill, setting the foundation for a new licensing regime and statutory framework for VASPs. This regime, effective from June 1, 2023, initially applies to anyone operating a VASP in Hong Kong or actively marketing such services to the Hong Kong public [11].
- January 31, 2023 – Conclusion of Discussion Paper on Crypto-assets and Stablecoins: The HKMA issued a consultation conclusion on the discussion paper regarding crypto-assets and stablecoins. This conclusion summarized feedback from various stakeholders and outlined HKMA’s proposals to regulate certain activities related to stablecoins. The HKMA emphasized a risk-based and agile approach to regulation, considering the latest market developments and international regulatory discussions. This move indicates HKMA’s commitment to a well-rounded approach for virtual asset regulation [12].
- February 20, 2023 – SFC’s Consultation Paper on Regulatory Requirements for VASPs: The SFCpublished a Consultation Paper to gather market input on its proposed regulatory framework for VASPs. This consultation followed earlier discussions with key stakeholders and industry participants conducted in October and November 2022 [13].
- February 22, 2023 – 2023-2024 Budget includes measures to develop the Web3 and crypto sector: Hong Kong’s Financial Secretary Paul Chan presented the 2023-2024 Budget, which includes measures to develop the Web3 and crypto sector. Following from the last policy statement on crypto, the Hong Kong government plans to establish a task force on development for the sector, with members including policymakers, financial regulators, and market participants. The task force will provide recommendations on the sustainable and responsible development of the sector [14].
- May 23, 2023 – SFC’s Consultation Conclusions to the Consultation Paper: The SFC published its Consultation Conclusions, reflecting the input from over 150 responses from various stakeholders. These included intended VASP applicants, crypto-native firms, and industry bodies, providing a comprehensive view of the market’s perspective on the proposed regulatory framework [15].
- May 31, 2023 – SFC Circulars on Licensing Regime and Transitional Arrangements: The SFC published two circulars outlining implementation of the new licensing regime for VASPs and the related transitional arrangements [16].
- October 20, 2023 – SFC and HKMA Joint Circular on Intermediaries’ VA-related Activities – The SFC and HKMA published a joint circular on intermediaries’ virtual asset-related activities, updating guidance that has been effective from January 2022 [17].
- November 2, 2023 – SFC’s Circulars on Tokenisation Issued: During the 2023 Hong Kong FinTech Week, the SFC issued two highly anticipated circulars on tokenization. These circulars provided conduct-related guidance for intermediaries engaging in tokenized securities-related activities and addressed the tokenization of SFC-authorized investment products [18].
- December 22, 2023 – SFC and HKMA Joint Circular on Intermediaries’ VA-related Activities: The SFC and HKMA published a joint circular on intermediaries’ virtual asset-related activities, superseding the circular from October 2023 [19].
- December 22, 2023 – SFC Circular on Funds with Exposure to VAs: The SFC also published a separate circular outlining the requirements under which it would consider authorizing investment funds with exposure to VAs of more than 10% of their net asset value for retail offering in Hong Kong [20].
- December 27, 2023 – FSTB and HKMA Consultation on the Legislative Proposal for Stablecoins: The FSTB and HKMA issued a joint public consultation on the legislative proposal for implementing the regulatory regime for stablecoin issuers in Hong Kong. This joint consultation follows on from the HKMA discussion paper on crypto-assets and stablecoins published in January 2022 and the consultation conclusions published in January 2023. Under the proposed regime in Hong Kong, an issuer will require a license from the HKMA if it issues a stablecoin that references the value of one or more fiat currencies in Hong Kong, referred to as a “fiat-referenced stablecoin” or FRS [21].
These regulatory milestones represent significant steps in Hong Kong’s efforts to create a regulated, efficient, and secure environment for tokenized assets, reflecting a proactive and inclusive approach to developing this rapidly evolving sector.
Embracing Blockchain and Virtual Asset Innovations
The city is embracing the transformative world of tokenized assets, positioning itself as a key player in the global arena of blockchain technology. Notable developments include:
- Uplift to Retail Crypto Licenses: In a significant move towards establishing itself as a global digital asset hub, Hong Kong permitted specific existing virtual asset exchanges to upgrade their existing Type I and Type 7 licenses through a simplified process to serve professional and retail investors. This pivotal step signals the city’s commitment to embracing digital finance while ensuring a robust licensing regime and regulatory requirements that balance innovation with security – positioning Hong Kong as a key player and investor in the crypto space [22].
- Formation of a Task Force for Web3 Development: In June 2023, the Hong Kong government announced the creation of a task force dedicated to promoting Web3 development, further demonstrating its commitment to the tokenized assets industry. This initiative follows the HKMA’s collaboration with the Central Bank of the United Arab Emirates to coordinate cryptocurrency regulations, potentially laying the groundwork for common standards in digital asset regulation [23].
- Participation in International Crypto Ventures: In early June 2023, the Bank of China’s investment arm, BOCI, partnered with UBS to issue $28 million in tokenized notes on the Ethereum blockchain in Hong Kong. This marked the first effort by a Chinese financial institution to issue a tokenized, regulated security in Hong Kong [24].
- Project mBridge and e-HKD CBDC Pilot: The HKMA’s landmark Project mBridge demonstrated Hong Kong’s capabilities in cross-border payments and foreign exchange transactions using a Central Bank Digital Currency (CBDC). In mid-May 2023, the HKMA also unveiled a CBDC pilot program for the e-HKD [25]. A novel use-case emerging from this pilot involved tokenized commercial bank deposits, enabling increased interoperability between banks and intermediaries by settling tokenized deposit payments with a CBDC [26].
Conclusion: A Balanced Approach
Hong Kong’s approach to regulating virtual assets is characterized by a balanced integration of investor protection, financial stability, and innovation support. By closely collaborating with industry stakeholders, intermediaries and investors, and aligning with international regulatory requirements and standards, Hong Kong is poised to become a leading global hub for virtual assets. The HKMA and SFC’s coordinated efforts reflect a commitment to fostering a secure and dynamic environment for virtual asset activities, paving the way for Hong Kong’s future as a prominent player in the global tokenized asset arena.
