Author: Liu Chenguang, Interface News Reporter
On June 5th, the CEO of the Hong Kong Securities and Futures Commission, Leung Fung Yee, emphasized the importance of utilizing technology and focusing on Distributed Ledger Technology (DLT) at the Greenwich Economic Forum in Hong Kong.
Leung highlighted the application of DLT in the financial markets, particularly in virtual assets. The resilience of Bitcoin over the past 15 years through various cycles of ups and downs serves as evidence of its ability to exist as an alternative asset. Furthermore, DLT, as the underlying technology of Bitcoin, 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 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 such assets with several potential benefits. These benefits include increased financial inclusion, enhanced transparency and privacy for both parties in transactions, improved settlement efficiency, and reduced costs, with tokenization potentially enabling atomic settlement and increased transferability.
Leung believes that the financial services sector can also benefit from these potential advantages and efficiency gains. Traditional assets such as bonds and money market funds could see their initial issuance, secondary market trading, custody, and collateral processes completed 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 infrastructure and cross-border payment systems still operate on T+2, making the blockchain model particularly attractive. Today, this remains a vision that requires much work to achieve,” Leung said.
In Leung’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, coupon payment, and redemption 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 HK$6.8 billion was highly successful, attracting a wide range of institutional investors globally.
Furthermore, to promote the development of Hong Kong’s exchange-traded fund (ETF) ecosystem, the Securities and Futures Commission of Hong Kong 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 trading. As of May 31st, the total market value of these ETFs reached $301 million, with a daily average trading volume of $5.8 million.
Leung emphasized that, adopting a stance of technological neutrality, the Securities and Futures Commission of Hong Kong adheres to the principle of “same business, same risks, same rules”. Investor protection is a top priority in their work.
She specifically noted that the support of the Securities and Futures Commission of Hong Kong for the Web3 ecosystem does not equate to an endorsement of virtual assets as an asset class. She stated that, given the current situation, virtual assets are highly speculative with volatile prices. Therefore, while meeting investor demand, the Securities and Futures Commission of Hong Kong has ensured a wide range of investor protection measures are in place. Regarding virtual asset spot ETFs, the Commission requires that related virtual asset trading must be conducted on licensed virtual asset trading platforms and that these platforms or banks meeting relevant standards must custody the virtual assets. The Commission also requires fund management companies to alert investors to the risks, while reminding investors to be cautious of the significant fluctuations in this asset class.
In June last year, the regulatory regime for central trading platforms by the Securities and Futures Commission of Hong Kong officially came into effect. Given that over-the-counter trading of virtual assets can easily involve fraud and money laundering risks, the Hong Kong SAR government consulted the public earlier this year on the licensing of over-the-counter service providers. These measures will complement efforts to create a stable and transparent regulatory environment for virtual asset trading. The scope of virtual asset regulation will also be expanded to stablecoins, with a new system being prepared to regulate fiat-pegged stablecoins.
“It is well known that 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 recently completed a consultation on proposed regulations, which include requiring issuers to ensure that stablecoins are fully backed by high-quality and highly liquid reserve assets,” Leung said.
“Will traditional financial services provided on traditional infrastructure one day be replaced by smart contracts and DLT? And when will this happen? These questions remain unknown,” Leung admitted, suggesting that market participants interested in exploring this should actively test relevant use cases, while the responsibility of the Securities and Futures Commission of Hong Kong as regulators is to provide a clear, definitive, and consistent regulatory framework to promote market expansion in an environment that protects investors.
