Hong Kong, as a world financial center, has the credentials to become a digital financial hub, industry experts say. But guidelines for the trading of virtual assets need to be strengthened to help the market develop and reduce risks for investors. Zeng Xinlan reports from Hong Kong.  

Hong Kong — home to more than 600 financial technology companies — has been gearing up for an invigorating cryptocurrency trend in recent years.

With its traditional reputation of being a financial services pivot, what can the city expect to gain from the digital currency vogue? Could cryptocurrencies be a game changer in the local financial landscape? Financial gurus are split in their expectations.

“A few years ago, people talked about cryptocurrencies as a kind of digital disruption to the financial institution. But I think that disruption is another term for financial inclusion,” said Wilson Tong, a professor at The Hong Kong Polytechnic University and director of the AMTD FinTech Centre at the university’s Faculty of Business.

“Hong Kong is still slightly behind in the cryptocurrency world,” he said, pointing to the city being a small and developed financial center. “Hong Kong is so small and people are always within walking distance of banks. So there is no urgent need for cryptocurrencies,” Tong told China Daily.

“However, if you want to keep Hong Kong’s status as a financial hub in this digital era, you have to go digital.”

Hong Kong has been acclaimed as a world financial center for decades for its institutional sophistication and unique geographical location as the gateway to the Chinese mainland. The city ranked fourth in the 29th edition of the Global Financial Centers Index report, and has been consistently held as one of the top international financial hubs in Asia since 2007, when the ratings were first published.

The mainland is very strong in regulating trading in digital currencies for good reasons. Because of this, Hong Kong could actually develop its crypto space as a bridge or sandbox to try out new development ideas and initiatives

Wilson Tong, professor at The Hong Kong Polytechnic University

The special administrative region’s financial decision-makers have adopted a cautious approach in harnessing the overheated virtual assets market to protect novice investors and promote its orderly development. Addressing concerns about speculative activities in the market, the Securities and Futures Commission — the city’s financial watchdog — issued a basket of crypto-related regulations in May, including making all virtual assets-trading platforms adhere to its rules and restricting investors to professionals.

Regulation dilemma

“Virtual assets are not legal tender and are not generally accepted as a means of payment in Hong Kong,” a spokesman for Financial Services and the Treasury Bureau said, adding that the bureau had repeatedly warned the public of the risks of trading in virtual assets. Hong Kong has been enforcing a robust anti-money laundering and counter-terrorist financing regime, he said.

Wang Shibin, co-founder of Hong Kong Digital Asset Ex Ltd, a digital asset exchange based in the city, said, “Hong Kong’s regulations governing digital currencies have become more systematic and foremost in the world.

“Our financial services regulator wants to find the essence of the blockchain-related concept among existing laws. They are not finding new ways, but just putting everything into the existing laws and framework to try to resolve the blockchain issues under the current legal framework,” Wang told China Daily.

He warned that traditional financial institutions and professional investors eyeing the market may suffer because of the complex guidelines. “If trading in virtual assets is seen as a form of security, they must be regulated by the SFC and abide by many guidelines on how to trade and what services a platform can provide,” Wang said.

“It’s still a good thing,” he added, saying that Hong Kong’s guiding role in trading virtual assets is self-evident although supervision has yet to be strengthened. “Through its policies, Hong Kong has become the world’s most mature and regulated virtual assets trading market,” he said.

“But it’s still inadequate. I think to create a concise and operable system in the early stages of the market’s development, we will have to clear up some rumors because people always think that virtual assets are an evil thing. Setting clearer guidelines will help dispel misunderstandings.”

Wang said that with more comprehensive rules, trading in digital assets, backed by blockchain technology, will be an inevitable trend. “In the long term, there will be more channels for trading in financial products, such as Grayscale Bitcoin Trust and PayPal, which will definitely lower the entry barriers for investors,” he said.

Tong agreed that digital assets will have good prospects in Hong Kong in the next five years despite its technical and environmental shortcomings. “The technical issue shouldn’t be a very important issue,” he said, referring to the notably slow verification period for cryptocurrencies, such as Bitcoin.

“People are working on this. It’s not a big problem as the theory is developing much faster,” Tong said, adding that making payments can be easier and faster by using cryptocurrencies. “Moving into the digital era, trading in cryptocurrencies is inevitable,” he said, adding it could help Hong Kong develop from a global financial center into a digital financial hub.

Hong Kong could also benefit from the spillover effect after regulators on the mainland clamped down on cryptocurrencies. “The mainland is very strong in regulating trading in digital currencies for good reasons,” Tong said. “Because of this, Hong Kong could actually develop its crypto space as a bridge or sandbox to try out new development ideas and initiatives.”

Different perspective

Some industry experts, however, remain skeptical about the prospects for cryptocurrency trading in Hong Kong. “I don’t necessarily see it as a sort of game changer in the long term,” said Muneeb Jan, an independent fintech analyst. He said the growing demand from investors came after speculation that both the private sector and retail investors would like to have a share of the market. “Apart from that, I don’t think there is much of an impact on Hong Kong’s industry.”

However, Jan said he believes that blockchain, which underlines the cryptocurrency trade, will become a “revolutionary player”.

“If you talk about blockchain technology and the whole wider ecosystem emerging from it, I think there is a fundamental impact on Hong Kong, which is at the center of these technologies.”

The digital trading trend has created one of its most noticeable financial concepts — security token offerings, or STOs — which are akin to initial public offerings in stocks trading. They provide companies a fundraising channel by using blockchain technology. STOs are regulated offerings of securities products in a blockchain environment. A token is a digital representation of ownership of illiquid or real-world assets, such as gold and real estate; or economic rights, like a share of revenue or intellectual property. STOs also allow flexibility in splitting illiquid assets into smaller tradable fractions in the form of tokens. Therefore, sellers might be able to raise money without selling their entire assets.

“If a company wants a faster and cheaper way to raise funds, an STO is very helpful,” said Tong. “Compared with traditional IPOs, it’s faster in the sense that you don’t need all the documents, such as a three-year earnings report, especially when you are starting up a platform. That is why you need crowdfunding.”

Under existing regulations of Hong Kong Exchanges and Clearing — the city’s bourse operator — a company’s listing on the main board requires a review of its financial track record for three years and fulfilling certain profit and market capitalization requirements, while a listing on the Growth Enterprise Market calls for similar requirements over two years.

Hong Kong was ranked as the world’s top IPO destination in seven of the past 12 years in terms of funds raised, according to the HKEX.

Regarding the complexity between innovation and regulations, companies in the public sector may need to take a cautious approach to strike a delicate balance between them. “One good approach is the ‘sandbox method’,” Tong said. The method allows for the pilot testing of new technologies or products by providing a simulated environment to innovators or companies. “If things work out, then you can apply it on a bigger scale.”

As for the possibility of including retail investors in virtual assets trading, Wang said comprehensive knowledge of the products and concepts is the prerequisite for investors to jump in. “If an investor has adequate knowledge and tools to realize or monitor the trading, or assess possible risks, I think digital assets with simple structure products can be tried out as a test,” he said.

“I think the government should take the lead in introducing regulations governing anti-money laundering and counter financing of terrorism and in creating industrywide standards on compliance and security,” Wang said.

He said regulators should exercise greater flexibility in allowing the type of assets that can be traded on the market. “For a trading platform like ours, if we can have more freedom in choosing what assets to be listed on our platform, it will be a very healthy signal to the market to encourage more enterprises in Hong Kong, on the mainland or elsewhere in Asia to test the water,” Wang said. 

Jan said he believes that decentralized finance platforms, which do not rely on brokerages, exchanges or bank to offer traditional financial instruments and instead use smart contracts on blockchains, and the logistics industry could have strong potential. “You can have the functions of an exchange geared to using blockchain,” he said.

“Given the number of handshakes involved in the global supply chain and global trade, decentralized finance platforms could provide a significant efficiency boost for total supply chains,” he added.

However, the decentralized finances market is still several years away from maturity, Jan said. 

“It’s really very much a green area, but you will see a lot of work, a lot of venture capital flowing into it. There is genuine enthusiasm there,” he said, adding that Hong Kong has an edge as a predominant financial hub with a talent pool in cultivating a blockchain ecosystem.

“It helps if you have a lot of human capital and an enthusiastic blockchain community. I think the government should encourage a vibrant community and a vibrant ecosystem around this.”

Contact the writer at xinlanzeng@chinadailyhk.com