At the opening of Hong Kong Fintech Week, several conferences covered the topics of stablecoins, cryptocurrency and tokenization. Although Treasury has primarily focused on AI, it has also covered the planned regulatory agenda for crypto, including tax incentives. Hong Kong Monetary Authority (HKMA) head Eddie Yue has spent a lot of time talking about tokenization, and the Securities and Futures Commission (SFC) has focused on crypto.
Anticipated regulations
The Treasury outlined the planned regulatory agenda which includes regulations on stablecoins to be released this year, a second consultation on custody of digital assets next year, as well as a review of the regulation of trading platforms. virtual assets (crypto) over-the-counter (OTC) in 2025. .
Tax incentives
Regarding tax incentives, there are two sets of general tax exemptions in Hong Kong for funds offered by the private sector under the Unified Funds Scheme and for Family Investment Holding Vehicles (FIHVs) for family offices. However, so far only limited asset classes benefit from tax breaks. There are plans to extend these tax breaks to private credit and virtual assets, among others.
SFC Director Dr. Eric Yip noted that the average age of people trading stocks is over 40, while crypto traders are mostly in their 20s. This is one of the driving forces behind the adoption of virtual assets. In 2024, Hong Kong saw the highest growth in virtual asset trading volumes.
New crypto exchange license
There are now three regulated virtual asset trading platforms (VATPs), following the approval of the Hong Kong Virtual Asset Exchange earlier this month.
Fourteen VATP applications are pending, including eleven existing sites that were considered candidates under the June rules. The SFC conducted on-site inspections and provided feedback on expected changes. Each VATP must accept these modification requests and work on their implementation, after which the SFC will grant the license, but within a restricted operational scope. The SFC plans to license a few reputable applicants this year. To obtain an unrestricted license, the VATP must go through another third-party review process.
Although he emphasized the “same risks, same rules” approach to regulating crypto, Dr. Yip also stressed the need for the regulator to remain on guard. “If virtual asset liquidity still resides in unregulated venues after all our efforts and regulated entities cannot operate a sustainable business model, then we need to think about why investors are not choosing our industry-leading regulatory framework ” said Doctor Yip.
Ensemble and tokenization project
Dr. Yip spoke about Project Together, the HKMA’s tokenization initiative, but Eddie Yue, CEO of the HKMA, discussed it in depth. In addition to tokenizing investments and other financial assets, Project Ensemble also provides wholesale CBDC to support interbank settlement of tokenized deposits. Mr. Yue covered some of the use cases announced during the Ensemble Project sandbox launch, including the tokenization of electronic bills of lading (eBL). The Global Shipping Business Network (GSBN) has partnered with Ant to tokenize some of the eBLs hosted on its blockchain network. Below is an excerpt from Mr. Yue’s speech on tokenization, which he says will be a key part of his 2030 agenda that he has yet to reveal.
Mr. Yue’s speech on tokenization
The first area is tokenization, including the idea of Finternet invented by the BIS. If you don’t know what Finternet is, check out the BIS Annual Report, Chapter Three. There (this) explains what it is, but first let’s clarify that tokenization is not the same thing as crypto assets. There has been some confusion simply because both use blockchain technology, but don’t mix them up. They are not the same.
Crypto assets are inherently more speculative and our position is to let them grow and develop while putting guardrails around them to protect investors. Tokenization, on the other hand, is an innovative way to record the value and ownership of money and assets in digital form on a programmable ledger, which will allow individuals, businesses and financial institutions to evaluate and trade these assets much more easily, thereby creating a greater number of transactions. a more inclusive ecosystem that benefits everyone, whoever and wherever they are.
We believe tokenization has the potential to create hyperconnectivity between users, data and services, which is essential to drive economic progress and requires visionary change to align with constant advancements in technology. The BIS also recently introduced the Finternet concept that I’m talking about and which envisions a network of interoperable Internet-like financial ecosystems that puts individuals and businesses at the heart of financial interactions, which is very important.
Many ideas and concepts from Finternet actually resonate very closely with the HKMA tokenization project. We envision a future where tokenization seamlessly integrates with financial and real-world assets, enabling operations and transactions otherwise impossible with current technology.
Now you may be wondering how something as virtual as tokenization or blockchain can connect to tangible assets in the real world. Take the example of trade finance. If you are an SME importing goods from abroad, you are traditionally faced with a mountain of paper documents, such as bills of lading or invoices. But with tokenized electronic bills of lading, you can now very easily transfer that digital asset to a financial institution via blockchain in exchange for funding.
Unlike a simple PDF copy of bills of lading, this approach allows you to track the status of the shipment in real time on the blockchain, eliminates all paper documents and also reduces the risk of verification. And importantly for banks, it reduces the risk of fraud and we are actively exploring this through our Sandbox Ensemble to resolve friction in trade finance.
If this is successful, you can imagine that tokenization can really bring many SMEs to regional and global trade.
Tokenization is also linked to green and sustainable finance, as it can open up new business models and opportunities for businesses and investors. For example, tokenized carbon credits traded on blockchain can provide greater transparency and credibility of carbon data, helping us solve the double counting problem that hampers carbon trading today.
Another example can be found in the infrastructure for the electric vehicle industry that Ant is pioneering. By leveraging real-time data from electric vehicle charging stations, we can transform the energy generated into a tokenized revenue stream that can be sold to institutional investors. We are studying this model closely as it has the potential to be replicated in various contexts, which will help mobilize funds to support the transition to a low-carbon economy.
