The rapidly evolving virtual assets space is an exciting field that many believe will have a transformative impact on the world of finance, along with complementary technologies such as distributed ledger technology, also known as blockchain, and Web 3.0.

Virtual assets are digital representations of value that can be traded online, transferred, or used to make a payment – cryptocurrencies, gaming tokens and non-fungible tokens (NFT) are just some prominent examples of virtual assets.

A comprehensive policy framework

Hong Kong is positioning itself to become a world leader in the development of virtual assets. In late October, the Hong Kong government issued a policy statement, setting out its stance towards developing a vibrant sector and ecosystem for virtual assets in the city.

"We recognise the potential of distributed ledger technology and Web 3.0 to become the future of finance and commerce, and under proper regulation they are expected to enhance efficiency and transparency,” said Christopher Hui, Secretary for Financial Services and the Treasury.¹

“The government is prepared to embrace this future, and we welcome the clustering of FinTech and virtual asset community and talents in Hong Kong, and we will promote the sustainable development of financial services across the whole virtual asset value chain."

The policy statement’s vision is to make Hong Kong an open and inclusive place for the global community of innovators engaging in the virtual assets business. The government will work with local financial regulators to create a facilitating environment that facilitates the sustainable and responsible development of the virtual asset sector, while putting in place the necessary guardrails to mitigate actual and potential risks, in line with international standards.

From a regulatory perspective, there will need to be a comprehensive set of rules governing the virtual asset space. For example, there is preparatory work on a new licensing regime for virtual asset service providers, while the Securities and Futures Commission will conduct a public consultation on how retail investors can be given access to the asset class, possibly via exchange traded funds (ETFs). The government is also open to a future review on property rights for tokenised assets and the legality of smart contracts.

There will also be a number of pilot projects to test the technological benefits of virtual assets, and their application in financial markets. These include a NFT issuance for Hong Kong FinTech Week 2022, green bond tokenisation, and the e-HKD.

Real-life applications

The future landscape of virtual assets and blockchain was the subject of a panel discussion at Hong Kong FinTech Week. Moderated by the Financial Services Development Council Executive Director King Au, the panel assembled experts that are actively involved in the development of this space.

On the policy statement, there was general agreement among the panellists that the announcement was a positive for Hong Kong.

“The policy framework shows an open mindedness in the government towards virtual assets, as well as attracting talent and knowhow to Hong Kong,” said Evan Auyang, Group President, Animoca Brands – a Hong Kong company that specialises in Web 3.0 and is a pioneer in virtual assets. He said that although it is a challenging time for cryptocurrency sector, strong talent has continued entering into the virtual assets space, especially the builders of Web 3.0 applications.

In addition, the government’s focus on the ownership of virtual assets, and the potential legalisation of smart contracts could have a broad impact on Hong Kong’s small and medium-size businesses, said David Chang, Founding Partner of MindWorks Capital.

“We think that the next wave of opportunity will be on the payment side for SMEs in Hong Kong, because a lot of smaller business don’t want to accept credit cards, while crypto payments are very low cost and fast in comparison,” he said.

There are also opportunities in Mainland China. Treelion is a green digital finance platform that is working with the Chinese government to create a blockchain that incorporates green finance and carbon management into one system. In effect, making carbon credits into a digital assets in an ecosystem that connects regulators, buyers and producers.

“Everyone will be able to work together in a very transparent environment, with authenticity and data consistency to ensure that carbon credits are real and can be traded,” said Plato Yip, Treelion’s CEO.

Going forward, technological progress will be driven by improvements to the three key elements of blockchain: security, decentralisation and performance. “What tech trends will be able to advance each of these areas?” asked Duncan Wong, Founder and CEO, CryptoBLK Limited.

He pointed to potential solutions that include everything from security measures strong enough to resist attacks from quantum computers to multichain technologies that increase scalability. With a comprehensive policy framework now in place, there is a greater chance that the next generation of improvements to virtual assets and blockchain technology will be developed in Hong Kong.

¹Hong Kong SAR govt, press release