Hong Kong's Virtual Asset Regulatory Revolution! Traditional finance and cryptocurrencies meet in a historic convergence.

Tokenized Securities: A Regulatory Breakthrough in Real Asset Uploading
The Hong Kong Securities and Futures Commission (SFC) issued two key circulars in November 2023 to set out a clear framework for tokenized securities. Tokenized securities are essentially traditional securities (e.g. bonds, funds) packaged using blockchain technology. The legal regulation of these securities is still subject to the existing securities regulations, but with the addition of two major challenges, namely "ownership risk" and "technology risk".

  • Ownership Risks: the need to ensure the accuracy of records of asset transfers in the chain
  • Technology Risks: Protecting Against Blockchain Forks, Network Outages and Hacking Attacks
    The SFC has also lifted a major restriction: trading in tokenized securities is no longer mandatory for professional investors only and is open to the public as long as the underlying traditional securities are not complex products. This paves the way for real assets, such as real estate and art, to be tokenized!

Virtual Asset ETFs: Retail Compliance Access Officially Opened
After the approval of Bitcoin spot ETFs in the US in January 2024, Hong Kong quickly followed suit. The HKMA and SFC jointly issued a new circular in December 2023 announcing the acceptance of applications for virtual asset spot ETFs and setting stringent operational standards:

  • The Iron Law of CustodyPrivate keys must be stored in Hong Kong, cold wallets store more than 90% of assets.
  • Redemption Mechanism: Open dual system of "cash" and "in-kind", in-kind transfer is subject to upgrading of the No. 1 branded brokerage firms
  • Underlying Asset Restrictions: Only for investment in retail compliant tokens of licensed exchanges in Hong Kong
    This framework allows retail investors to hold virtual assets indirectly through securities accounts, significantly lowering the technical hurdles and security risks.

Stable Currency Legislation: The Coming of the Regulatory Sandbox for Hong Kong Dollar-Linked Tokens
Hong Kong is launching a legislative consultation in December 2023 on stablecoin, the "fixed star of the crypto market", with core provisions that address the key risks:

  • Licensing threshold: Issuance of Hong Kong dollar-linked stabilized currencies requires a licence from the HKMA
  • Reserve Shackles: the value of the reserve assets is required to cover the nominal value of the outstanding tokens 24/7 and interest payments are prohibited
  • Redemption Protection: Redeemable at par at any time by the holder without hidden charges
    The key breakthrough: licensed exchanges, banks and compliant issuers are allowed to sell stablecoins to retail investors, while the rest are restricted to professional investors only.

2024 Regulatory Explosion: Three Arrows Reshape the Financial Landscape
Hong Kong is moving ahead at full speed under the principle of "same activity, same risk, same regulation":

  1. Countdown to VASP Transition: Virtual asset platforms must submit license applications by February 29, 2024
  2. Stabilized Currency Consultation Wraps Up: Simultaneous closing of public consultation on legislative proposals on February 29
  3. OTC regulatory remedies: The Financial Services and the Treasury Bureau has launched a consultation on the licensing regime for over-the-counter service providers.
    The HKMA has also announced that it will launch a stabilized currency sandbox to test practical scenarios!

The Hong Kong government embraces innovation in a "technology-neutral" manner: from the tokenized green bonds, to the digital Hong Kong dollar trial, to the release of virtual asset ETFs, every step of the way is closely aligned with the essence of financial innovation, which is to "enhance efficiency and reduce costs". As the boundaries between traditional securities and on-chain tokens dissolve, Hong Kong is writing a new page in its financial history - there is no dichotomy between the virtual and the real here, only an ever-evolving revolution in value exchange.

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