Article Author: Chen Zhihua, President of the Hong Kong Securities and Futures Professionals Association
Source: Orange News
Hong Kong, as a prestigious international financial center, has long attracted global funds and investors due to its open and diverse market environment. In December 2023, the Hong Kong Securities and Futures Commission and the Monetary Authority jointly issued a (joint circular regarding virtual asset-related activities of intermediaries). However, with strict restrictions on mainland residents' participation in virtual asset activities, this policy has sparked widespread controversy.
As more virtual asset exchange licenses will be granted, given the current market size in Hong Kong, newly added virtual asset exchanges will likely find it difficult to survive, which is unfavorable for market development.
The impact of these restrictive policies on Hong Kong can be mainly seen in several aspects:
1. Capital Outflow and Declining Competitiveness
Firstly, due to the exclusivity of the policy, large capital reserves and potential investors from the mainland may be excluded from the Hong Kong market, and these funds may flow to more open markets. Particularly, during the campaign of former President Trump in the United States in 2024, his attitude towards cryptocurrencies shifted from hostility to friendliness, indicating a push to reduce regulation, significantly enhancing the competitiveness of the U.S. in the virtual asset trading sector. This policy shift may attract more international and mainland funds to the U.S. market, further undermining Hong Kong's international financial status.
2. Missed Market Opportunities
The influence of virtual assets in the global financial market is increasing, and if Hong Kong does not timely adjust its policies to adapt to market changes, it will struggle to gain a leading position in this emerging market. In contrast, other financial centers such as New York, London, and Singapore, due to their relatively open market regulatory policies, will attract more investments and innovative enterprises, further consolidating their positions in the global financial market. In fact, many virtual asset platforms founded in Hong Kong years ago have already relocated their headquarters to Singapore.
3. Regulatory Challenges and Insufficient Innovation
Although Hong Kong's current regulatory framework for virtual assets aims to ensure market stability and investor protection, its reliance on traditional financial regulatory thinking seems out of place and inadequate in the face of the rapid innovations and changes in the emerging virtual asset industry. The world's top ten virtual asset exchanges have had to withdraw their applications for exchange licenses in Hong Kong because they cannot adapt to the excessively strict regulatory requirements, reflecting Hong Kong's shortcomings in supporting innovation and adapting to market changes.
4. Multi-layered Regulation and Compliance Burdens
Moreover, Hong Kong's multi-layered regulatory landscape further increases the compliance burden and operational costs for the industry. The regulation of different virtual asset businesses involves multiple agencies, including the Securities and Futures Commission, the Monetary Authority, and Customs, among others. There needs to be good coordination and unified regulatory standards among these agencies; otherwise, companies will face increased costs and difficulties in complying with various regulations.
To enhance Hong Kong's competitiveness in the virtual asset sector and ensure its status as an international financial center, Hong Kong should consider adopting the following measures:
1. Relaxing Participation Restrictions for Mainland Residents
Allowing more mainland residents to participate in Hong Kong's virtual asset market will introduce significant capital and technology, enhance market vitality and liquidity, and expand Hong Kong's influence as a financial center. Recently, there was a ruling case from the People's Court of Songjiang District, Shanghai, where the court determined that individual possession of virtual currencies is not illegal. Considering this direction, and based on foreign exchange controls, the practice of 'Stock Connect' could be referenced to allow domestic funds to invest in Hong Kong's virtual asset-related products through a closed-loop manner, starting with ETFs.
Under 'One Country, Two Systems', Hong Kong should complement the mainland market and meet investors' legitimate investment needs. On November 20, 2024, the Shanghai Higher People's Court clearly stated in a case concerning a virtual currency issuance financing service contract dispute that virtual currency, as a commodity, has property value, and simple personal possession is not illegal, but commercial entities cannot participate in virtual currency investment or token issuance without authorization. In other words, mainland investors should be allowed to invest in and hold cryptocurrencies at licensed virtual asset exchanges in Hong Kong.
2. Improving the Regulatory System
There is a need to assess and adjust the regulatory framework to better adapt to the unique operational models and rapidly changing characteristics of the virtual asset industry. This could include introducing more flexible and innovative regulatory approaches, reducing unnecessary compliance burdens while maintaining high levels of risk control.
3. Simplifying the Licensing Process
Accelerate the approval process for virtual asset platform licenses by providing clear timelines, requirements that meet industry norms, clearer guidelines, and transparent application processes to attract more international participants. This can be achieved by introducing an electronic application system and increasing the number of competent approving personnel.
4. Establishing a Unified Regulatory Body
Consider establishing a unified virtual asset regulatory committee responsible for coordinating the work of different regulatory bodies, ensuring consistency and effectiveness of regulatory standards, reducing compliance costs for enterprises and improving regulatory efficiency.
5. Strengthening Cooperation with the Mainland
The SAR government should work closely with relevant regulatory bodies in the mainland to explore a collaborative mechanism for virtual asset regulation, promoting interconnectivity of markets and bidirectional flow of funds between the two regions.
6. Introducing More Expertise and Industry Experience
Introduce more expertise and industry experience in the regulatory process by hiring industry experts to participate in regulation and approval work, ensuring that the regulatory process is both rigorous and efficient, and that the regulatory framework and requirements do not deviate from industry norms. At the same time, more new products should be developed, such as Real World Assets (RWA). To align with the announced establishment of gold warehouses and related trading facilities in the (Policy Address), gold RWA could be developed as one of the virtual assets.
Through these measures, Hong Kong can overcome current challenges and maintain its competitiveness in the global virtual asset market. The government and industry need to work together to ensure Hong Kong's leading position in the international financial arena and promote the sustainable development of the virtual asset industry, enhancing Hong Kong's market attractiveness and consolidating its status as an international financial center, as well as a bridgehead for the country to connect with global virtual asset development.
