Author: Interface News reporter Liu Chenguang
On June 5th, the Chief Executive of the Hong Kong Securities and Futures Commission (SFC), Leung Fung-yee, pointed out at the Greenwich Economic Forum (Hong Kong) the importance of harnessing the power of technology and focusing on Distributed Ledger Technology (DLT).
Leung Fung-yee highlighted the application of DLT in the financial markets for virtual assets. The resilience of Bitcoin over the past 15 years, despite experiencing multiple cycles of ups and downs, serves as evidence of its ability to exist as an alternative asset. Furthermore, the underlying technology of Bitcoin, DLT, is expected to withstand the test of time. The potential advantages of DLT are clear, as this technology can enhance the efficiency of physical assets in distribution, clearing, settlement, and custody, while simultaneously reducing costs.
She emphasized that although the hype around NFTs may have subsided, the technology is gradually being adopted in the world of physical assets, leading to the tokenization of these assets. The potential benefits include greater financial inclusivity, increased transparency and privacy for both parties in transactions, improved settlement efficiency and cost reduction, and the possibility of achieving atomic settlements through tokenization.
Leung Fung-yee believes that the financial services sector can also benefit from these potential advantages and efficiency gains. For instance, the issuance, secondary market trading, custody, and collateralization of traditional assets such as bonds and money market funds can be conducted on the blockchain, representing the future vision of the financial industry.
“While some markets are moving towards settlement cycles of T+1 or even T+0, most existing financial infrastructures and cross-border payment systems still operate on T+2, making blockchain models particularly attractive. Today, this remains a vision that requires significant effort to achieve,” Leung Fung-yee stated.
In Leung Fung-yee’s view, Hong Kong is gradually establishing a Web3 ecosystem. Following the successful issuance of the world’s first digital government green bonds last year, the Special Administrative Region issued a second batch of bonds on a private blockchain in February this year. The issuance, trading settlement, interest payment, and redemption date of these bonds were all conducted on the private blockchain. With the support of Hong Kong’s legal and regulatory framework, the issuance of green bonds worth 6.8 billion Hong Kong dollars was highly successful, attracting a wide range of institutional investors from around the world.
Furthermore, to promote the development of Hong Kong’s exchange-traded fund (ETF) ecosystem, the SFC approved the trading of the first batch of virtual asset spot ETFs in Asia for retail investors. These six ETFs began trading at the end of April and have since maintained orderly transactions. As of May 31st, the total market value of these ETFs reached $301 million, with a daily trading volume of $5.8 million.
Leung Fung-yee highlighted that the SFC, maintaining a neutral stance on technology, operates on the principle of “same business, same risks, same rules.” Investor protection is a top priority in their work.
She specifically emphasized that the SFC’s support for Hong Kong’s Web3 ecosystem does not equate to an endorsement of virtual assets as an asset class. She noted that virtual assets, at present, exhibit high levels of speculation and price volatility. Therefore, while meeting investor demand, the SFC has ensured the implementation of extensive investor protection measures. Regarding virtual asset spot ETFs, the SFC requires that related virtual asset transactions must be conducted on licensed virtual asset trading platforms and that these assets must be held in custody by these platforms or banks meeting relevant standards. The SFC also requires fund management companies to alert investors to the risks involved and advises investors to be mindful of the extreme fluctuations in this asset class.
Last June, the regulatory regime for central trading platforms introduced by the SFC officially took effect. Due to the ease of fraud and money laundering risks in over-the-counter virtual asset trading, the Hong Kong SAR government sought public consultation earlier this year on the licensing of over-the-counter service providers. These measures will complement efforts to create a robust and transparent regulatory environment for virtual asset trading. The regulatory scope for virtual assets will also be extended to stablecoins, with a new system for regulating fiat-backed stablecoins currently in the works.
“As is well known, stablecoins are generally issued by non-bank institutions and may be used for payments. Therefore, regulating the issuers of stablecoins will help protect their holders. The Hong Kong Monetary Authority (HKMA) recently completed a consultation on proposed regulations, which include requirements for issuers to ensure stablecoins are fully backed by high-quality and highly liquid reserve assets,” Leung Fung-yee explained.
“Will traditional financial services provided on traditional infrastructure be replaced by smart contracts and DLT one day? When will this happen? These are still unknowns,” Leung Fung-yee admitted, suggesting that market participants interested in exploring these possibilities should actively test relevant use cases. As a regulator, the SFC’s duty is to provide a clear, certain, and consistent regulatory framework to facilitate the expansion of use cases in the market while safeguarding investors.
