Author: Reporter Liu Chenguang from Jiemian News
On June 5th, the Chief Executive of the Hong Kong Securities and Futures Commission (SFC), Ashley Alder, highlighted the importance of harnessing the power of technology and focusing on Distributed Ledger Technology (DLT) at the Greenwich Economic Forum in Hong Kong.
Alder pointed out that DLT is being utilized in the financial markets for virtual assets. The resilience of Bitcoin over the past 15 years through numerous cycles of ups and downs proves its ability to exist as an alternative asset. Furthermore, 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 reducing costs.
She emphasized that although the hype surrounding NFTs may have waned, the technology is gradually being applied in the world of physical assets where assets are being tokenized, offering several potential benefits.
Firstly, there is financial inclusivity; secondly, both parties in a transaction can enjoy increased transparency and privacy; thirdly, it enhances settlement efficiency and reduces costs, with tokenization potentially aiding in achieving atomic settlement; and fourthly, there is transferability.
Alder believes that the financial services sector can also benefit from these potential advantages and efficiency gains, such as the issuance, secondary market trading, custody, and collateralization of traditional assets like bonds and money market funds, which can all be completed on the blockchain, representing the future vision of the finance 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 blockchain models particularly attractive. As of today, this still remains a vision, with much work to be done,” Alder said.
In Alder’s view, Hong Kong is gradually building 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, interest payment, and redemption of the bonds were all conducted on a 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 a wide range of institutional investors globally.
Furthermore, to promote the development of Hong Kong’s exchange-traded fund (ETF) ecosystem, the SFC approved the first batch of spot virtual asset ETFs in Asia for retail investors. These six ETFs began trading at the end of April and have maintained orderly trading ever since. As of May 31st, the total market value of these ETFs reached $301 million, with a daily average trading volume of $5.8 million.
Alder pointed out that, maintaining a position of technological neutrality, the SFC adheres to the principle of “same business, same risks, same rules”. Investor protection is a top priority in their work.
She particularly emphasized 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 stated that currently, virtual assets are clearly highly speculative, with prices fluctuating significantly. Therefore, while meeting investor demands, the SFC has ensured the implementation of extensive investor protection measures. Regarding spot virtual asset ETFs, the SFC requires that related virtual asset trading must be conducted on virtual asset trading platforms licensed by the SFC, and these assets must be held in custody by these platforms or by banks meeting relevant standards. The SFC also requires fund management companies to warn investors of risks, while reminding investors to be cautious of the volatile nature of 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 extended to stablecoins, with a new system for regulating fiat-backed stablecoins currently in the works.
“As widely known, 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 the proposed system, 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? When will this happen? These are still unknowns,” Alder admitted, suggesting that market participants interested in exploring these possibilities should actively test relevant use cases, while the role of the SFC 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.
