Author: Interface News Reporter Liu Chenguang
On June 5th, the Chief Executive Officer of the Hong Kong Securities and Futures Commission (referred to as the Hong Kong SFC), Ashley Alder, pointed out at the Greenwich Economic Forum (Hong Kong) that harnessing the power of technology is crucial, focusing on Distributed Ledger Technology (DLT).
Alder emphasized the application of DLT in the financial market for virtual assets. The volatility of Bitcoin over the past 15 years has proven its resilience 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 evident, as this technology can enhance the efficiency of physical assets in distribution, clearing, settlement, and custody, while reducing costs.
She stressed that although the hype around NFTs may have subsided, the technology is gradually being utilized in the world of physical assets, with assets becoming tokenized, offering several potential benefits. These benefits include financial inclusivity, increased transparency and privacy for both parties in transactions, improved settlement efficiency, and cost reduction, with tokenization potentially facilitating atomic settlements, as well as transferability.
Alder 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 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, the majority of existing financial infrastructures and cross-border payment systems still operate on T+2, making blockchain models particularly appealing. This remains a vision today, but there is still a long way to go,” Alder said.
In Alder’s view, Hong Kong is gradually establishing a Web3 ecosystem. Following the successful issuance of the world’s first batch of 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 a total of HK$6.8 billion was highly successful, attracting subscriptions from a wide range of institutional investors globally.
Moreover, to promote the development of Hong Kong’s exchange-traded fund (ETF) ecosystem, the Hong Kong 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 maintained orderly trading to date. As of May 31st, the total market value of these ETFs reached $301 million, with a daily average turnover of $5.8 million.
Alder 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 their work.
She specifically emphasized that the Hong Kong SFC’s support for Hong Kong’s Web3 ecosystem does not equate to an endorsement of virtual assets as an asset class. As things stand, virtual assets are clearly highly speculative, with prices fluctuating significantly. Therefore, while meeting investor demand, the Hong Kong SFC has ensured the implementation of extensive investor protection measures. Regarding virtual asset spot ETFs, the Hong Kong SFC requires that related virtual asset transactions must be conducted on virtual asset trading platforms licensed by the SFC, with the assets being held in custody by these platforms or banks that meet relevant standards. The Hong Kong SFC also requires fund management companies to alert investors to risks and caution investors to be aware of the significant volatility of this asset class.
In June last year, the regulatory regime for central trading platforms under the Hong Kong SFC officially came into effect. Given the ease with which over-the-counter virtual asset trading can 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 extended to stablecoins, with a new system regulating fiat-backed stablecoins currently being prepared.
“It is well known that stablecoins are generally issued by non-banking 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 proposals for a regulatory regime, which includes requiring issuers to ensure that stablecoins are fully backed by high-quality and highly liquid reserve assets,” Alder said.
“Will traditional financial services provided on traditional infrastructure one day be replaced by smart contracts and DLT? And when will this happen? These are still unknowns,” Alder acknowledged, suggesting that market participants interested in exploring these opportunities should actively test relevant use cases, while the Hong Kong SFC’s role as a regulator is to provide a clear, certain, and consistent regulatory framework to facilitate the expansion of use cases in the market while safeguarding investors.