A quick review of Hong Kong’s digital asset development policy statement

The Financial Services and the Treasury Bureau of the Hong Kong Special Administrative Region officially released the "Policy Statement on the Development of Virtual Assets in Hong Kong" today (October 31), clarifying the government's policy stance and guidelines on the development of the booming virtual asset industry and ecosystem in Hong Kong.

After carefully reading the full text of the Declaration, I noticed the following details:

1. The Declaration uses the term "virtual assets" and avoids using the term "cryptocurrency". Although the meaning of virtual assets is not clearly defined, it is very clear that there are certain differences with the industry's understanding, which will be discussed later.

Second, the Declaration uses the term distributed ledger technology (“DLT”) and avoids using the word decentralization.

3. Virtual assets only include the following three categories (that is, the following three types of assets will be legalized):

1. NFT. This means that the issuance of NFT in Hong Kong will be legalized in the future and will be subject to government supervision (KYC and anti-money laundering, etc.).

2. Tokenized assets (i.e. asset-backed tokens). Asset-backed tokens represent the ownership of physical assets off-chain (such as gold or oil), and the value of the token is determined by its underlying assets. Previously, timeshare property tokens appeared in Thailand, as well as gold, oil, carbon emission quotas that many Hong Kong startups are exploring, as well as artworks, collectibles, and antiques. The "green bond tokenization" launched by the Hong Kong government this time is also a type of tokenized asset, and the value of the token is determined by the green bond.

3. Stablecoins and digital Hong Kong dollars. Stablecoins are issued by financial institutions, and digital Hong Kong dollars may be issued by the government. We can wait and see on which public chains the Hong Kong government will issue digital Hong Kong dollars, or will the Hong Kong government take the lead in launching a separate public chain?

4. Virtual assets do not include the following categories (that is, they will not be explicitly legalized):

1. Utility tokens issued by blockchain projects;

2. Security tokens (STO) issued by blockchain projects, but the green bond tokenization included in the pilot can also be regarded as a type of security token. Although green bond tokens are issued by the government, its pilot can also be optimistically regarded as opening a path for the legalization of security tokens in Hong Kong.

3. Any virtual currency other than stablecoins and digital Hong Kong dollars is not within the scope of legalization, which may be affected by the mainland's regulatory thinking.

5. The trading varieties of virtual asset exchanges will not include functional tokens, security tokens and other virtual currencies. It seems that only NFTs and tokenized assets can be traded, and compliant stablecoins and digital Hong Kong dollars are used as counterpart currencies.

6. Protection of retail investors: Compared with Singapore's approach to protecting retail investors (retail investors), Singapore strictly restricts the sale of tokens to retail investors , while Hong Kong restricts trading varieties . Since only the above three virtual assets can be traded in Hong Kong, their price volatility is much lower than that of ordinary virtual currencies or tokens, which in turn prevents retail investors from investing in virtual currencies.

In short, Hong Kong’s new policy is still relatively conservative and prudent, but it leaves some room for future innovation in the industry, especially in terms of security tokens.