Liang Fengyi: Virtual assets are speculative, SFC has established investor protection measures

Author: Interface News reporter Liu Chenguang

On June 5, Hong Kong Securities and Futures Commission (hereinafter referred to as the Hong Kong Securities and Futures Commission) Chief Executive Officer Leung Fung-yee pointed out at the Greenwich Economic Forum (Hong Kong) that it is important to make good use of the power of technology and focus on distributed ledger technology (DLT).

Leung Fung-yee pointed out that DLT is applied to virtual assets in the financial market. Bitcoin has experienced multiple cycles of rise and fall in the past 15 years, which proves its ability to survive as an alternative asset. What is more certain is that as the underlying technology of Bitcoin, DLT will stand the test of time. The potential advantages of DLT are obvious. This technology can improve the efficiency of physical assets in distribution, clearing, settlement and custody while reducing costs.

She emphasized that the NFT craze may have receded, but the technology is gradually being used by the physical asset world, and physical assets are gradually being tokenized. The potential benefits include several aspects.

The first is financial inclusion; the second is that both parties to the transaction can enjoy higher transparency and privacy at the same time; the third is to improve settlement efficiency and reduce costs, and tokenization may indeed help achieve atomic settlement; the fourth is transferability.

Leung Fung-yee believes that the financial services sector can also benefit from the above potential benefits and efficiency gains. For example, the initial issuance, secondary market trading, custody and mortgage of traditional assets such as bonds and money market funds can all be completed on the blockchain, which is the future vision of the financial industry.

"Although some markets are moving towards a settlement cycle of T+1 or even T+0, most existing financial infrastructure and cross-border payment system processes still use T+2, so the blockchain model is particularly attractive. To this day, this is still a vision, and there is still a long way to go." Leung Fung-yee said.

In Leung Fung-yee's view, Hong Kong is gradually building a Web3 ecosystem. After issuing the world's first batch of digital government green bonds last year, the SAR government continued its efforts in February this year and issued the second batch of bonds on a private blockchain. The initial issuance, transaction settlement, coupon payment and redemption on maturity of the bonds were all carried out on a private blockchain. Supported by Hong Kong's legal and regulatory framework, the issuance of green bonds with a total value of HK$6.8 billion was very successful, attracting subscriptions from a wide range of institutional investors around the world.

In addition, in order to promote the development of the exchange-traded fund (ETF) ecosystem in Hong Kong, the Hong Kong Securities and Futures Commission approved the first batch of virtual asset spot ETFs in Asia for retail investment. The six ETFs began trading at the end of April and have been trading in an orderly manner since then. As of May 31, the total market value of these ETFs reached US$301 million, and the average daily trading volume reached US$5.8 million.

Leung Fung-yee pointed out that adhering to the technological neutrality, the Hong Kong Securities and Futures Commission adopts the principle of "same business, same risks, same rules". Investor protection is the top priority of its work.

She particularly emphasized that the Hong Kong Securities and Futures Commission's support for Hong Kong's Web3 ecosystem does not mean an endorsement of the asset class of virtual assets. She said that as things stand, virtual assets are obviously highly speculative and their prices fluctuate greatly. Therefore, the Hong Kong Securities and Futures Commission has ensured that there are extensive investor protection measures while meeting investor needs. In terms of virtual asset spot ETFs, the Hong Kong Securities and Futures Commission requires that relevant virtual asset transactions must be conducted on virtual asset trading platforms licensed by the Securities and Futures Commission, and the relevant virtual assets must be kept by these platforms or banks that meet relevant standards. The Hong Kong Securities and Futures Commission also requires fund management companies to warn investors of risks. At the same time, investors are reminded to pay attention to the sharp fluctuations in this asset class.

Last June, the Hong Kong Securities and Futures Commission's regulatory system for central trading platforms officially came into effect. In view of the fact that over-the-counter virtual asset transactions are prone to fraud and money laundering risks, the Hong Kong SAR government has consulted the public on the licensing system for over-the-counter service providers earlier this year. The relevant measures will cooperate with the work of creating a robust and transparent regulatory environment for virtual asset transactions. The scope of virtual asset supervision will also be further extended to stablecoins, and a new system for regulating fiat stablecoins is being prepared.

"As we all know, stablecoins are generally issued by non-bank institutions and may be used for payment. Therefore, regulating the issuers of stablecoins will help protect their holders. The Hong Kong Monetary Authority (HKMA) recently completed a consultation on the proposed system, which includes requiring issuers to ensure that stablecoins are fully backed by high-quality and highly liquid reserve assets." said Leung Fung-yee.

"Will the provision of traditional financial services on traditional infrastructure be replaced by smart contracts and DLT one day? And when will it happen? These are still unknown." Leung Fung-yee admitted that market participants who are interested in trying should actively test relevant use cases, and the Hong Kong Securities and Futures Commission's responsibility as a regulator is to provide a clear, certain and consistent regulatory framework to promote the market to expand use cases in an environment that protects investors.