LCQ4: Promoting development of virtual assets market
Recently, the Government has issued a Policy Statement on Development of Virtual Assets in Hong Kong, setting out the Government's policy stance and approach towards developing a vibrant sector and ecosystem for virtual assets (VA) in Hong Kong. In this connection, will the Government inform this Council:
(1) given that the Government will set up a Hong Kong Investment Corporation Limited (HKIC) to further optimise the use of fiscal reserves for promoting the development of industries and the economy, whether the Government will instruct HKIC to make more investments relating to Web 3.0-based VA technologies, so as to attract more related enterprises to come to Hong Kong and enhance the development of Hong Kong's VA market;
(2) given that VA markets are subject to higher volatility, and from time to time there is news of cryptocurrencies crashing or related enterprises going bankrupt, whether the Government will examine and develop a more comprehensive regulatory framework and sounder risk management, as well as put forward as soon as possible specific regulatory policies, so as to better protect the interests of investors while actively developing the VA market; and
(3) given that quite a number of regions (including Singapore) have embarked on a race to develop their VA markets and Web 3.0-related services, whether the Government has put in place a short-term development roadmap and timetable for catching up with the lag and accelerating the development of Hong Kong's VA market?
My reply to the three parts of Dr the Hon Johnny Ng's question is as follows:
The Government attaches importance to the development of financial technology and virtual assets (VA). In October this year, we issued the Policy Statement on Development of Virtual Assets in Hong Kong (Policy Statement), setting out the vision and policy direction of the Government. The Government and the financial regulators are committed to establishing a facilitating environment, with timely and necessary guardrails to mitigate actual and potential risks put in place in accordance with international standards, so as to promote the sustainable and responsible development of the VA sector in Hong Kong.
(1) The Hong Kong Investment Corporation (HKIC) will consolidate the management of the investment activities of the Hong Kong Growth Portfolio, the GBA Investment Fund, the Strategic Tech Fund, and the Co-Investment Fund. By identifying investment opportunities and strategically promoting the development of target industries, the HKIC seeks to enhance the long-term competitiveness and economic vitality of Hong Kong while generating investment return. The Government is at the stage of formulating the institutional arrangements and governance structure of the HKIC, and will announce the details in due course.
(2) and (3) We consider that a comprehensive and balanced regulatory system can protect investor interests and promote industry development. Under the principle of "same business, same risk, same rules", the Securities and Futures Commission (SFC) has since 2018 established a holistic regulatory framework for VA, covering the provision of VA-related services by traditional financial service intermediaries (such as VA fund management and distribution of VA-related products) and transactions conducted by centralised VA exchanges. The SFC and Hong Kong Monetary Authority further issued a joint circular earlier this year to provide guidelines for intermediaries intending to engage in VA-related services.
I share Dr the Hon Johnny Ng's view that investor protection is of utmost importance. To enhance the above regulatory framework, the Government introduced to the Legislative Council in July this year legislative proposals to establish a licensing regime for VA service providers. Any person intending to operate the VA exchange business must apply for a licence from the SFC. Under the proposed licensing regime, licensed exchanges must comply with the anti-money laundering and counter-terrorist financing requirements as well as the regulatory requirements on investor protection.
As mentioned in the second part of Dr the Hon Johnny Ng's question, the recent operational crisis of a VA exchange has clearly shown the importance of a comprehensive regulation of VA exchanges to investor protection. In fact, we have already taken preventive measures in the current and future regulatory frameworks to address the risks of any similar incidents, including requirements that a licensed VA exchange must ensure proper asset custody (e.g. holding client assets in a segregated account under a wholly owned subsidiary established by the licensed exchange for the purpose of proper segregation of client assets and assets of the exchange), ensure financial soundness (e.g. complying with the financial resources requirements and maintaining at least 12 months of actual operating expenses), and avoid conflicts of interest (e.g. no participation in proprietary market-making activities). In addition, a licensed VA exchange is required to regularly submit to the SFC its audited accounts and financial statements and those of its wholly owned subsidiaries. The SFC will also have powers to enter the business premises of a licensed VA exchange, conduct inspection and investigate (e.g. to request the exchange to provide business records), as well as intervening powers (e.g. to request the exchange to operate in a specified manner).
The Government and the SFC welcome quality VA service providers' participation in the VA market in Hong Kong, which helps promote effective and healthy market competition. Hong Kong is a pioneer to implement a comprehensive regulatory regime, which can increase investor confidence in VA service providers regulated in Hong Kong.
We have been monitoring the latest development of VA, and examine from time to time whether there is a need to provide necessary guidelines on the regulatory requirements. In October this year, the SFC issued a circular on exchange traded funds (ETFs) with VA futures as underlying, providing details on the authorisation of VA futures ETFs for public offering in Hong Kong. This in turn gives recognition to ETFs which provide exposure to mainstream VAs with comprehensive investor protection guardrails. In addition, the SFC notes that more traditional financial instruments intend to tokenise traditional financial instruments. As such tokens have similar terms, features and risks as traditional securities, the SFC plans to issue a circular to update its policy on security token offering.
The Government will continue to seize opportunities to promote the development of the VA industry in Hong Kong under a holistic regulatory system, for facilitating a sustainable and sound establishment of the VA ecosystem in Hong Kong.
Thank you, President.
Ends/Wednesday, November 30, 2022
Issued at HKT 14:50
Issued at HKT 14:50