Author: Reporter Liu Chenguang from Jiemian News
On June 5th, the Chief Executive of the Hong Kong Securities and Futures Commission (hereinafter referred to as the Hong Kong SFC), Leung Fung-yi, highlighted the importance of harnessing technology to focus on Distributed Ledger Technology (DLT) at the Greenwich Economic Forum in Hong Kong.
Leung Fung-yi pointed out that DLT is being utilized in the financial markets with virtual assets. The resilience of Bitcoin over the past 15 years, through various cycles of ups and downs, demonstrates its ability to survive as an alternative asset. Furthermore, as 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 reducing costs.
She emphasized that while the NFT craze may have faded, the technology is gradually being applied in the physical asset world, where physical assets are being tokenized, offering several potential benefits. Firstly, financial inclusion; secondly, both parties can enjoy higher transparency and privacy; thirdly, improved settlement efficiency and reduced costs, with tokenization possibly facilitating atomic settlements; and fourthly, transferability.
Leung Fung-yi believes that the financial services sector can also benefit from the potential advantages and efficiency gains mentioned above, such as the initial issuance, secondary market trading, custody, and collateralization of traditional assets like bonds and money market funds, all of which can be completed on the blockchain, shaping the future vision of the financial industry.
“While some markets are moving towards T+1 or even T+0 settlement cycles, most existing financial infrastructure and cross-border payment system processes still operate on a T+2 basis, making blockchain models particularly attractive. Today, this remains a vision that requires considerable effort,” Leung Fung-yi stated.
In Leung Fung-yi’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 took it a step further in February this year by issuing a second batch of bonds on a private blockchain. The issuance, trading settlement, interest payments, and maturity redemption of these bonds were all carried out on a private blockchain. With the support of the legal and regulatory framework in Hong Kong, the issuance of green bonds worth a total of HK$6.8 billion was highly successful, attracting a wide range of institutional investors globally.
Furthermore, to promote the development of the exchange-traded fund (ETF) ecosystem in Hong Kong, the SFC has approved the first batch of virtual asset spot ETFs in Asia for retail investors. These six ETFs began trading at the end of April, maintaining orderly transactions to date. As of May 31st, the total market value of these ETFs reached $301 million, with a daily turnover of $5.8 million.
Leung Fung-yi pointed out that with a stance of technological neutrality, the Hong Kong SFC adheres to the principle of “same business, same risks, same rules.” Investor protection is a top priority in its work.
She particularly emphasized that the SFC’s support for the Hong Kong Web3 ecosystem does not equate to endorsing the asset class of virtual assets. She noted that currently, virtual assets are highly speculative, with prices fluctuating significantly. Therefore, while meeting investor needs, the SFC has ensured a wide range of investor protection measures. Regarding virtual asset spot ETFs, the SFC requires that related virtual asset transactions must be conducted on virtual asset trading platforms licensed by the SFC, and the virtual assets must be held by these platforms or banks that meet relevant standards. The SFC also requires fund management companies to alert investors to risks and advise them to be wary of the volatile nature of this asset class.
In June last year, the regulatory regime for central trading platforms was officially implemented by the Hong Kong SFC. Given that off-exchange virtual asset trading is prone to fraud and money laundering risks, the Hong Kong SAR government consulted the public earlier this year on the licensing of off-exchange 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 further extended to stablecoins, with a new regulatory framework for regulating fiat-backed stablecoins currently being prepared.
“As we all know, stablecoins are generally issued by non-bank entities 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 requiring issuers to ensure that stablecoins are fully backed by high-quality and highly liquid reserve assets,” Leung Fung-yi stated.
“Will traditional financial services provided on traditional infrastructure one day be replaced by smart contracts and DLT? And when will this happen? These questions are still unknown,” Leung Fung-yi admitted, urging market participants interested in testing relevant use cases to do so actively, while emphasizing that the SFC’s responsibility as a regulator is to provide a clear, certain, and consistent regulatory framework to promote market expansion in a secure environment for investors.
