Author: Liu Chenguang, Interface News Reporter
On June 5th, Ashley Alder, the Chief Executive Officer of the Hong Kong Securities and Futures Commission (referred to as the Hong Kong SFC), emphasized the importance of harnessing the power of technology and focusing on Distributed Ledger Technology (DLT) at the Greenwhich Economic Forum in Hong Kong.
Alder highlighted the application of DLT in the financial market, particularly in the realm of virtual assets. The resilience of Bitcoin over the past 15 years through multiple cycles of ups and downs serves as evidence of its ability to exist as an alternative asset. Furthermore, DLT, as the underlying technology of Bitcoin, is poised 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 adopted in the world of physical assets, leading to the tokenization of these assets. The potential benefits of this tokenization include financial inclusivity, increased transparency and privacy for both parties in transactions, improved settlement efficiency, cost reduction, and the possibility of achieving atomic settlement, as well as transferability.
Alder believes that the financial services sector can also benefit from these potential advantages and efficiency gains, 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. This represents the future vision of the financial industry.
“While some markets are moving towards T+1 or even T+0 settlement cycles, most existing financial infrastructures and cross-border payment system processes still operate on a T+2 basis, making the blockchain model particularly appealing. This remains a vision that requires a lot of work and a long way to go,” Alder said.
In Alder’s view, Hong Kong is gradually establishing a Web3 ecosystem. Building on the success of last year’s issuance of the world’s first digital government green bonds, 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 a 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 broad participation from institutional investors worldwide.
Furthermore, to promote the development of the exchange-traded fund (ETF) ecosystem in Hong Kong, the SFC approved the trading of the first batch of virtual asset spot ETFs in Asia for retail investors. These six ETFs commenced trading at the end of April and have maintained orderly transactions since then. As of May 31st, the total market value of these ETFs reached USD 301 million, with a daily turnover of USD 5.8 million.
Alder pointed out that the Hong Kong SFC adopts a technology-neutral stance and adheres to the principle of “same business, same risks, same rules.” Investor protection is a top priority in their work.
She emphasized that the support of the Hong Kong SFC for the Web3 ecosystem in Hong Kong does not equate to an endorsement of virtual assets as an asset class. Given the current situation, virtual assets are evidently highly speculative with prices fluctuating significantly. Therefore, while meeting investor demand, the Hong Kong SFC has ensured the implementation of a wide range of investor protection measures. In the case of 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 these assets must be held in custody by these platforms or banks that meet relevant standards. The SFC also requires fund management companies to warn investors of the risks and advises investors to be mindful of the volatile nature of this asset class.
Last June, the regulatory regime for central trading platforms in Hong Kong officially came into effect. Given that over-the-counter virtual asset trading easily involves 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 expanded 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 proposed regulations, including requiring issuers to ensure that stablecoins are fully backed by high-quality and highly liquid reserve assets,” Alder 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,” Alder admitted, suggesting that market participants interested in exploring these possibilities should actively test relevant use cases. The responsibility of the Hong Kong 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.
