Regulators in Hong Kong unveiled plans to explore opening the crypto market to retail investors. The government said it is also open to the possibility of exchange-traded funds that track virtual assets.
The Securities and Futures Commission will launch a public consultation on potentially allowing retail investors to trade virtual assets (VA), with access to crypto through exchange-traded funds (ETFs) also on the table, a government announcement said this morning.
"We recognise the increasing acceptance of VA as a vehicle for investment allocation by global investors, be they institutional or individual," said the Financial Services and the Treasury Bureau, in a statement. "Having these products launched in Hong Kong will provide the connectivity between VA players and traditional financial institutions, offering investors with well-designed products, hence promoting the overall growth of the sector in our market."
The news comes as senior officials outlined plans, at the opening sessions of Hong Kong FinTech Week, to try to turn the city into a global center for the digital asset industry.
In a recorded video, finance secretary Paul Chan spoke of plans for Hong Kong to launch a Central Bank Digital Currency (CBDC).
"The HKMA has begun preparatory work to launch our very own CBDC," he said. "It is also working with the People’s Bank of China, the Bank of Thailand, the Central Bank of United Arab Emirates and the Bank of International Settlements Innovation Hub in Hong Kong on a multiple CBDC project enabling real time cross border foreign exchange payment versus payment transactions."
In a separate speech, Eddie Yue, chief executive of the Hong Kong Monetary Authority, touched on a wide range of crypto-related topics, including the use of the metaverse by financial institutions for brand-building; the benefits of "composability" in DeFi; and how tokenization could be used to foster innovation in everything from bond issuance to art ownership.
But Yue cautioned that "a radically open mind does not mean that financial stability will fall by the wayside," stressing the need for the "right guardrails."
Hong Kong has long positioned itself as the world's trading gateway into China and in recent weeks officials there had spoken of their goal to also become an international virtual assets center. At the fintech summit, which this year focused on Web3 and the metaverse, visitors were given proof of attendance protocol tokens issued as a non-fungible token.
The city was one of the first to introduce a regulatory licensing regime for fund managers and exchanges that traded digital assets, with other governments around the world trialling their own approaches to supervising crypto-related activities. Singapore last week proposed new rules for retail crypto investors, including that they should not trade with borrow funds. The south east Asian city-state at the same time also issued a consultation paper on the regulation of stablecoins. Also last week, UK lawmakers voted through amendments to a finance bill that will widen regulatory supervision of digital assets.
Hong Kong lawmakers are currently reviewing new rules on crypto regulation that seek to broaden a licensing regime for crypto exchanges and service providers. At present, only professional investors in Hong Kong, who have to prove a set minimum net worth, can trade on exchanges run by BC Group and Hashnet, the only two operators to have gained licenses so far under local rules.
To date, other exchange operators looking at applying for licenses have been hesitant to proceed because of rules restricting the services they can offer, including a ban on more lucrative areas like taking leverage positions and derivatives trading, as well as limitations on providing liquidity, said Urszula McCormack, partner at King & Wood Mallesons. Firms can only offer pure automated matching, meaning international exchanges could instead offer brokerage or pursue an offshore reverse inquiry model without the same hurdles. ''While many are asking why would you bother, a lot of exchanges do value licenses, they are valuable from a reputational standpoint,'' McCormack said.
The consultation on retail access marks a clear shift from recent comments to lawmakers scrutinising the new supervisory framework for digital asset service providers. It was prudent that only sophisticated investors be allowed to trade crypto, government officials told lawmakers in July at a hearing on the proposed rule changes. After lawmakers pushed back at the meeting, suggesting that if retail investors were unable to trade on locally licensed exchanges they would use unlicensed overseas ones, officials said the regulator would likely hold a public consultation on the issue.
Leung sheds light on how ETFs might look
In a separate session at the conference, Julia Leung, deputy chief executive officer and executive director, intermediaries at the SFC, said that bringing crypto into the regulatory fold “is the only pathway to innovation.”
“We could be on the cusp of the future of finance if we get it right, but that’s a big if,” she said.
Now is the “opportune time” to review Hong Kong’s professional investor requirement, Leung added, referencing the “substantial advancement” of the crypto ecosystem in the four years that have passed since its introduction.
On the ETF front, Leung said the SFC believes the risks of crypto exposure have become “manageable” with proper guardrails. Initially, the SFC would limit the underlying assets in such instruments to bitcoin and ether futures traded on the Chicago Mercantile Exchange (CME), she added.
On Security Token Offerings (STOs), Leung said the SFC “sees potential benefits in the use of DLT in securities issuing and trading.” The watchdog is also working on a circular that will outline a new regime for STOs.
This move was noted by crypto billionaire Sam Bankman-Fried as well. He said he deeply appreciates it when policymakers “engage constructively and optimistically with the people who matter the most for an industry’s direction: the customers.”