Hong Kong Fintech Regulatory Update: From “A Leap of Faith” to “A Vote of Confidence” Part III: Unlimited Opportunities (Fintech Hub)

What has Hong Kong got to offer? From the perspective of a(n)…

Intermediary

1. Establishing a presence in Hong Kong¹: Hong Kong is undoubtedly one of the jurisdictions among key financial centers with a relatively low tax rate, fewer heads of tax and also an attuned government focused on establishing Hong Kong as an international fintech hub.
   
   
2. Financing through acquisition²: Adopting technology innovation can translate into a hefty investment that may only materialize in the future. Therefore, it would be attractive to reap the upside through financing/acquiring a strategic stake in licensed corporations during the transformation phase. We have already witnessed heightened interests in investing into licensed corporations to explore investing into the VA asset class within a regulated environment.
   
   
3. Upgrading through removal of licence conditions: Licensed corporations have a head start if they are willing to venture into the VA space given that the regulatory framework is in place with a robust regulator to take the reins. As a matter of principle, the SFC will likely oversee existing intermediaries, newly licensed VA service providers or any introduction to new product suites in line with its long-standing regulatory principles. Therefore, taking the initiative and seeking to uplift existing licensing conditions would accelerate licensed corporations’ interests in getting onto the Fintech bandwagon and taking the lead globally.

Product Development

1. Tokenised bond: The Hong Kong government has showcased to the world that Hong Kong is the venue for deploying distributed ledge technology to real capital markets transactions through the use of Hong Kong’s existing legal framework through the launch of tokenized green bonds. This government initiative is a breakthrough moment for Hong Kong and demonstrates Hong Kong’s great potential as the optimal venue for structuring Tokenized Securities. There is surely nothing better than building a track record evidenced by a real case study.
   
   
2. Secondary trading SFC-authorized investment products: Hong Kong engages in the sales of investment products (including SFC Authorized Products), and in 2022 alone, by statistical count, the aggregate transaction amount reached HK$884 billion³. Therefore, with the SFC’s blessing to distributors, including licensed asset managers, to distribute SFC Authorized Products in accordance with the Tokenized Products Circular, Hong Kong licensed intermediaries and Product Providers will have an edge in extending its SFC Authorized Product reach to global investors through VATPs if secondary trading risks are mitigated.
   
   
3. Digital Securities: As highlighted, the SFC has made a distinction between Tokenized Securities and Digital Securities. For the latter, there is yet comprehensive and prescriptive guidance issued by the SFC. Therefore, given the complimentary remarks showered on the SFC during Hong Kong’s Fintech Week commending on the Regulators’ open dialogue and exchanges with the VA market participants, Hong Kong stands out as the next contender to guiding the global market on the interplay between technology and non-Tokenised Securities on the one hand and Digital Securities on the other hand.

Technology Adoption

The sky is the limit in Hong Kong for technology providers to leverage the Hong Kong government’s initiative in building an ecosystem for technology innovators to domicile in Hong Kong. The Hong Kong government has made available various grant schemes to international applicants to nurture the development and sustainability of Hong Kong’s fintech ecosystem.

As an aside, the Hong Kong government is aware that the impact of technology transcends different industry sectors and may take the form of Regtech, Wealthtech, Insurtech, Greentech, Suptech, DLT and Artificial Intelligence, especially data infrastructure⁴. Therefore, even technology providers/innovators should seriously consider exploring the possibility of establishing a presence in Hong Kong.

Finally, Hong Kong has more to offer, with the HKMA as its banking regulator, alluding to additional regulatory guidance in improving value exchange through technology adoption. As announced in the HKMA’s press release on 2 November 2023⁵, Hong Kong continues to be the “space to watch” with great strides expected in 2025 with respect to the following:

1. Stablecoins⁶: The HKMA is formulating the regulatory regime for stablecoin issuers and will release a public consultation paper inviting feedback on the proposed regulatory approach and parameters.
   
   
2. Cross-Border payment: As of 4 December, Hong Kong’s Faster Payment System and Thailand’s PromptPay system will jointly launch a new service called “FPS X PromptPay QR”. This cross border payment service will allow visitors to make prompt payments to local merchants by merely scanning a code using their mobile phones. The potential to making payment at the touch of your fingertips across bilateral or even multilateral arrangements across borders is already burgeoning⁷.
   
   
3. CBDCs and e-HKD: With the Minimum Viable Product development phase in view, the HKMA’s future proof of wholesale Central Bank Digital Currencies (CBDCs) is expected to further develop a production-ready system in 2025. Additionally, in 2025, it is foreseeable that Phase 2 of the e-HKD Pilot Program will explore additional uses of e-HKD.

There is no better place to be in Hong Kong with Fintech evolution on the horizon.

Sidley offers its clients extraordinary fintech experience. Our multidisciplinary team of lawyers advises a broad range of clients about the many legal issues that arise during the development and implementation of financial technology. In our fintech practice, we combine strategic regulatory advice, transactional counseling and a deep knowledge of the financial services industry. Our record is strong with established financial institutions and start-up companies alike, as they have acquired, invested in, developed, implemented and brought to market new financial technologies, platforms, products and services. Sidley was named as leading firm in Fintech by Chambers Fintech Guide 2023, and recognized as “MVP” in FinTech by Law360.

Please click here to see Part I: Expanding Clientele (Retail Access).
Please click here to see Part II: Exploring Technology (Tokenisation)

¹ As reported by the South China Morning Post (SCMP) on 18 November 2023, a US crypto VC firm plans to expand in Asia after Hong Kong recently implemented a regulatory framework for virtual assets. Additionally, the world’s third largest cryptocurrency exchange by 24-hour trading volume through its Hong Kong branch has also applied for a licence as a VATP operator with the SFC, as reported by the SCMP on 22 November 2023.
² https://www.sidley.com/en/newslanding/newsannouncements/2023/11/sidley-advises-bgx-in-strategic-investment-in-bc-technology-to-propel-its-digital-asset-innovation
³ Paragraph 12 of III. Key Findings at page 5 of the SFC-HKMA Joint Survey on the Sale of Non-exchange Traded Investment Products 2022: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.sfc.hk/-/media/EN/files/COM/Reports-and-surveys/2022-SFC-HKMA-Joint-Product-Survey-Report_Eng.pdf?rev=8a941c509d414c0d8c3c29f1342e414e&hash=2CBB0D559E7823A1AF387888AEA73A7D
⁴ As officially announced by the HKMA on 22 November 2023, it has signed a Memorandum of Understanding with the Financial Services Regulatory Authority of the Abu Dhabi Global Market to deepen the ongoing partnership on fintech between the two authorities: Therefore, in view of the raising significance of Islamic finance, Hong Kong is well positioned to promote inclusive and innovative use of fintech and data in financial services in both markets: https://www.hkma.gov.hk/eng/news-and-media/press-releases/2023/11/20231122-3/
⁵ https://www.hkma.gov.hk/eng/news-and-media/press-releases/2023/11/20231102-4/
⁶ Parent company of RD Wallet Technologies, a fintech company founded by Hong Kong’s former central banker Norman Chan, plans to launch a Hong Kong dollar-pegged stablecoin in the coming months, SCMP reported on 16 November 2023: https://www.scmp.com/business/article/3241668/hong-kong-see-launch-multicurrency-e-wallets-cross-border-payments-thursday-hkd-stablecoin-follow
⁷ The Digital Currency Institute of the People’s Bank of China (PBOC) and the HKMA are carrying out the second phase of technical testing on the use of digital yuan in cross-boundary payments. The testing will involve more banks in Hong Kong and the use of the Fast Payment System to top up digital yuan wallets, Global Times reported on 16 November 2023: https://www.globaltimes.cn/page/202311/1301889.shtml. Further, on 17 November 2023, Bank Indonesia and Monetary Authority of Singapore (MAS) have similarly also launched the cross-border quick response payment linkage between Indonesia and Singapore, as published by the MAS.