Detailed explanation of Hong Kong's Web3 policy since the "Declaration" was released

Author: Mr. Wu Wenqian (Gilbert Ng)

Source: Techub Info

Over the past 10 months, the global development of Web 3.0 and virtual assets, especially in the Chinese community, has focused on Hong Kong.

Hong Kong has always been the base of many well-known Web3.0 organizations, such as bitfinex, crypto.com, and even FTX originally used Hong Kong as its base. The development of Web 3.0 in Hong Kong in the past 10 months has been faster and more urgent than in the past 10 years. The main reason is that the Hong Kong government has changed its policy on virtual assets and Web 3.0 by 180 degrees, leading this industry to flourish in Hong Kong.

The story of Hong Kong’s Web 3.0 policy development should start in 2018. On November 1, 2018, the Hong Kong Securities Regulatory Commission issued a statement explaining the new virtual asset regulatory guidelines. At that time, the statement also announced the regulatory sandbox of the Securities Regulatory Commission, inviting exchanges to accept the supervision of the Securities Regulatory Commission, and letting the Securities Regulatory Commission understand the virtual asset trading platform. operate. Hashkey and OSL, which were approved by the China Securities Regulatory Commission for upgrading their licenses last week, were also sandbox applicants at the time, and they applied for and were granted licenses after the sandbox period ended.

Due to various reasons, the CSRC’s regulatory policy statement did not have the same great repercussions as this wave. At least it did not make overseas virtual asset institutions want to settle in Hong Kong, nor did it make traditional institutions want to enter the virtual asset industry. At that time, the China Securities Regulatory Commission did not accept the applicants for the top exchange to become a sandbox.

The biggest difference between the policy in 2018 and today’s policy is that at that time it was only regulators who were trying to promote the policy. In the past 10 months, the entire industry has felt that different departments of the Hong Kong government have different regulations and different institutions, including the Securities Regulatory Commission and the Hong Kong Monetary Authority. , Innovation and Technology Bureau, Invest Hong Kong, Cyberport, Science Park, and even members of the Legislative Council are all pushing different policies for Web 3.0.

The Hong Kong government has promoted in many ways

Hong Kong’s recent Web 3.0 policies will begin with the “Policy Declaration on the Development of Virtual Assets in Hong Kong” (“Policy Declaration”) issued by the Financial Services Bureau on October 31, 2022 last year. The policy declaration expresses the Hong Kong government’s policy stance and guidelines on Web 3.0, and uses legal and regulatory systems to coordinate with market development and promote Hong Kong as a global Web 3.0 center. The policy declaration also sets the direction of future policy development, such as the policy of stable currency and tokenized assets (R WA).

However, the policy declaration did not have a big response in the market after it was published. The market generally believes that this declaration is similar to the wave in 2018, and only heard the sound of stairs. Many people in the currency circle also have doubts about the sustainability of the policy, and believe that the policy is likely to disappear or change in the short-term future.

On December 8 of the same year, the Legislative Council officially passed the new regulations on virtual assets. Hong Kong officially supervised virtual assets and had a clear definition of virtual assets. The entry into force of this Ordinance is actually a very important milestone in the development of virtual asset policy in Hong Kong. However, like the policy declaration just released in October, the currency industry has not responded much. I remember that most of the media in the currency circle did not report it at that time, and only one or two English-language media reported it.

The market has a relatively large response to Hong Kong’s Web3.0 policy. It should be that the Hong Kong Stock Exchange officially launched Asia’s first Bitcoin and Ethereum ETF on December 16 last year. The Bitcoin ETF was approved two months after the policy declaration was issued. This speed is different from the previous Hong Kong government’s practice of implementing policies from months to years, which proves the Hong Kong government’s executive power and determination to Web 3.0 policies .

The event that best proves that this Web 3.0 policy is promoted by the entire Hong Kong government rather than by individual supervision is that in April this year, the Hong Kong Monetary Authority took the initiative to hold meetings with various local banks and virtual asset institutions to assist local virtual assets. The relevant institutions can open bank accounts with local banks. It is reported that at the meeting, the Monetary Authority directly questioned the bank why it rejected the institution’s account opening request for virtual assets. In June, the Hong Kong Monetary Authority held another meeting with the bank, and hoped that the bank would allow licensed virtual currency service providers to open accounts as soon as possible.

Before the current government took office, the HKMA has always adopted an attitude of supervision and has never allowed banks to open accounts with virtual asset service providers, and whether to open an account is a commercial decision of the bank. It is an unprecedented practice in the world that regulators take the initiative to require bank account opening, which shows the Hong Kong government’s determination to make Hong Kong a global Web 3.0 center.

In addition, the Financial Secretary allocated funds to develop the Web 3.0 ecosystem, Cyberport established a Web3 base, established a Web3.0 development task force chaired by the Financial Secretary, and the Hong Kong Monetary Authority launched the “Cyber Hong Kong Dollar” Pilot Project, etc. It is all promoted by the Hong Kong government.

VASP License

What really ignited the entire Hong Kong Web 3.0 market is actually the consultation paper on virtual asset trading platforms published by the Securities Regulatory Commission in February this year. Like all other overseas regulators, the Hong Kong Securities Regulatory Commission also takes the supervision of centralized exchanges as a first step. There are three reasons that really make the whole market hot:

The speed of policy implementation. The consultation document was published in February, the consultation period ended in March, and the new licensing system came into effect on June 1. The entire process took less than four months, a speed unprecedented in the history of policy development and licensing. For example, in January 2022, the Monetary Authority has issued a consultation paper on stablecoins, but the conclusion of the consultation paper was not released until one year later, on January 31 this year.

Arrangements for the transition period. The SFC has allowed exchanges already operating in Hong Kong before June 1 to continue operating for an additional year, giving them a transitional period to apply for a license. Whether intentional or unintentional, this arrangement has indeed prevented many operators from landing in Hong Kong before June 1, setting up an operating point to operate the exchange, in order to enjoy this transitional arrangement. Let more exchanges settle in Hong Kong.

retail investors. Before the announcement of this consultation, the SFC has always taken the position that retail investors are not allowed to trade virtual assets in Hong Kong. The reason is that the volatility of virtual assets is too large and the protection for investors is insufficient, so it is considered that retail investors are not suitable for investing in virtual assets. Allowing retail investors to invest this time proves that the Hong Kong government believes that virtual assets will have a long-term development in Hong Kong, and once again proves the continuity of the policy. Until last week, the China Securities Regulatory Commission officially approved the upgrade application of the two exchanges and allowed retail investors to trade. It also proves that the Hong Kong government is not taking a prudent attitude towards virtual assets, but is very aggressive in making Hong Kong a Web 3.0 center as soon as possible.

Although there are still many restrictions on the VASP license, such as retail investors are not allowed to trade stable coins, derivative products (including staking), strict requirements for listing, etc., but other policies in the future, such as stable coin licenses, derivative products related policies, etc. After the introduction, the market will have more opportunities. It is worth mentioning that the Hong Kong government has also stated in different public occasions that the OTC market for virtual asset derivatives may be allowed in the future.

Stablecoins

Stable currency has always been an important bridge between the traditional market and the currency circle, and it is also an important role in the entire virtual asset ecosystem. The Hong Kong Monetary Authority also knows that the risks and potential of stablecoins can disrupt traditional financial markets, especially the liquidity of the Hong Kong dollar fiat currency. Therefore, the Hong Kong Monetary Authority has published a consultation document to the currency and financial circles as early as January last year. Consultation: 1. Whether stablecoins should be regulated and 2. From which direction to regulate.

The conclusion of the consultation published in January this year also expressed the position of the HKMA. The licensing of stablecoins is imperative, and the licensing system will be established as early as next year. The financial technology department of the Hong Kong Monetary Authority has also stated on many public occasions that it will also issue a second consultation document before the end of this year, hoping to establish a licensing system next year.

There are many institutions in the market who want to issue Hong Kong dollar stablecoins in Hong Kong, even before the stablecoin policy comes out, to seize market share first. At present, stablecoins are not clearly regulated by laws, and there is a high chance that they are not securities currencies. It is possible to issue them before the license comes out. But in general, the Monetary Authority stated that there will be a regulatory framework, and the China Securities Regulatory Commission also stated that retail investors are not allowed to trade stablecoins on VASPs. Stablecoins issued before the clear stablecoin bill may be subject to regulatory suppression.

Asset Tokenization

The Hong Kong government stated early in the policy declaration that asset tokenization (RWA) is an important category for Hong Kong as a global Web 3.0 center.

On February 16 this year, the Hong Kong government took the lead in selling 800 million Hong Kong dollars of tokens to issue green bonds, which is the first batch of tokens issued by the government to issue green bonds in the world. In June this year, BOCI also successfully issued 200 million yuan of digital structured notes, becoming the first Chinese-funded financial institution to issue digital securities.

Although these two cases of asset tokenization rely heavily on traditional financial transaction and settlement methods, and the application of blockchain focuses on the on-chain record, but this The two cases are enough to prove that the Hong Kong government and traditional and even Chinese-funded financial institutions are also interested in developing on virtual assets and Web 3.0. Similarly, the Hong Kong government has also mentioned in public that RWA can subdivide traditional financial products, bring more liquidity and trading volume, and allow some relatively small investment institutions and even retail investors to participate.

Before the publication of the policy statement, the China Securities Regulatory Commission has always believed that security tokens are a complex structured product and only allow professional investors to invest. The China Securities Regulatory Commission will soon issue an updated circular to change its views on security token offerings (STO) 4 years ago (2019). STO or RWA will not be defined as complex products and have the opportunity to be opened to retail investors. The licensing agency (No. 1 license) that issues STO or RWA may not need to upgrade its license in the future, and may only need to report to the regulator according to the situation. This could spark a new wave of RWA releases.

In the future, if the regulatory framework for stablecoins and derivatives OTC comes out, together with the issuance of RWA, VASP and No. 1, 7 exchanges, the entire Web 3.0 virtual asset and traditional financial ecosystem in Hong Kong will initially take shape.

As of today, the policies in the policy declaration have been realized one by one. In the past 10 months, various regulatory and other departments have slowly implemented the policy. Following the financial center, Hong Kong may soon become the center of the global Web 3.0 in the future.

Hong Kong Web3.0 Policy Review