Author: Interface News reporter Liu Chenguang
On June 5th, the Chief Executive of the Securities and Futures Commission of Hong Kong (hereinafter referred to as the SFC), Leung Fung-yee, highlighted the importance of harnessing the power of technology and focusing on Distributed Ledger Technology (DLT) at the Greenwich Economic Forum (Hong Kong).
Leung Fung-yee pointed out that DLT is being applied to virtual assets in the financial market. The resilience of Bitcoin over the past 15 years through multiple 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 evident, as this technology can enhance the efficiency of physical assets in distribution, clearing, settlement, and custody, while also reducing costs.
She emphasized that although the hype surrounding NFTs may have subsided, the technology is gradually being adopted in the world of physical assets, with physical assets being tokenized, offering several potential benefits. These include increased financial inclusion, enhanced 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 example, the issuance of traditional assets such as bonds and money market funds, secondary market trading, custody, and collateralization can all be conducted on the blockchain, representing 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 systems still operate on a T+2 basis, making the blockchain model particularly attractive. Today, this remains a vision that requires much effort and a long way to go,” said Leung Fung-yee.
In her view, Hong Kong is gradually establishing a Web3 ecosystem. Following the issuance of the world’s first batch of digital government green bonds last year, the Special Administrative Region government continued its efforts in February this year by issuing a second batch of bonds on a private blockchain. The issuance, trading, settlement, interest 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 successful issuance of green bonds worth HK$6.8 billion attracted a wide range of institutional investors worldwide.
Furthermore, to promote the development of Hong Kong’s exchange-traded fund (ETF) ecosystem, the SFC has approved the first batch of virtual asset spot ETFs in Asia for retail investment. These six ETFs began trading at the end of April and have continued to maintain orderly trading. As of May 31st, the total market value of these ETFs reached USD 301 million, with a daily average trading volume of USD 5.8 million.
Leung Fung-yee emphasized that the SFC adopts a technology-neutral stance and follows the principle of “same business, same risks, same rules.” Investor protection is a top priority in their work.
She specifically pointed out 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 currently exhibit a high degree of speculation and price volatility. Therefore, while meeting investor needs, the SFC has ensured the implementation of extensive investor protection measures. Regarding virtual asset spot ETFs, the SFC requires that related virtual asset trading must be conducted on virtual asset trading platforms licensed by the SFC and that these platforms or banks meeting relevant standards must safeguard the virtual assets. The SFC also requires fund management companies to alert investors to the associated risks while cautioning investors to be aware of the significant fluctuations in this asset class.
In June last year, the SFC’s regulatory regime for central trading platforms officially came into effect. Given that over-the-counter virtual asset trading is susceptible to 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 robust and transparent regulatory environment for virtual asset trading. The scope of virtual asset regulation will also be expanded to stablecoins, with a new regulatory framework for regulating fiat stablecoins currently under preparation.
“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 (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-yee stated.
“Will traditional financial services provided on traditional infrastructure eventually be replaced by smart contracts and DLT? 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. The SFC’s responsibility as a regulator is to provide a clear, definitive, and consistent regulatory framework to facilitate the expansion of use cases in the market while safeguarding investors.