Sebastian Sinclair

The Hong Kong Monetary Authority (HKMA) has announced the launch of a pivotal trial run for a digital version of the region’s local currency.



Dubbed the e-HKD or &#8220;Cyber Hong Kong Dollar,&#8221; its trial run marks another step towards digitizing financial transactions, the regulator, who also doubles as the region’s central bank, said in a statement on Thursday.



The launch of the e-HKD pilot arrives at a crucial juncture when digital wallet usage is expected to <a href="https://www.scmp.com/tech/tech-trends/article/3170392/hong-kongs-use-digital-wallets-online-payments-overtake-credit" target="_blank" rel="noreferrer noopener">surpass credit cards</a> in Hong Kong by 2025, reflecting the trend of increasingly digitized lifestyles.



Around 16 handpicked banks and payment companies, including industry heavyweights HSBC and Standard Chartered Bank, will undertake tests involving six potential use cases for the digital asset, according to reporting from <a href="https://www.scmp.com/business/banking-finance/article/3221011/hong-kong-launches-e-hkd-pilot-programme-16-companies-test-digital-currency-public-use-shops" target="_blank" rel="noreferrer noopener">local media</a>.



The test run, operating within a controlled sandbox environment, is designed to explore multiple applications ranging from online and offline payments, tokenized deposits, programmable payments and Web3 transaction settlement to tokenized asset settlement.&nbsp;



“By promoting cooperation between the government, industry and academia, we hope that research and development work can keep pace with the times,” Eddie Yue Wai-man, CEO of the HKMA, said in the statement.



Encompassing HKMA&#8217;s Fintech 2025 strategy, the trial is part of a three-track approach and a broader effort to fortify Hong Kong&#8217;s financial technology prowess, <a href="https://www.hkma.gov.hk/chi/news-and-media/press-releases/2022/09/20220920-4/" target="_blank" rel="noreferrer noopener">first laid out</a> in September 2020.



The HKMA&#8217;s three-tier strategy for launching its <a href="https://blockworks.co/tag/cbdc" target="_blank" rel="noreferrer noopener">CBDC</a> includes establishing a technical and legal foundation, studying use cases and conducting trials, and consolidating those insights to devise a plan and timeline for an official launch.



Hong Kong’s regulator also plans to create a CBDC expert group, partnering with academia to probe into complex policy and technical issues of CBDC, such as privacy protection, cybersecurity, and connectivity.



In its capacity as a regulatory body, the HKMA is tasked with supervising banks and entities that accept deposits while implementing and enforcing regulations to uphold the reliability of its banking system.&nbsp;



It also plays a large role in furthering <a href="https://blockworks.co/news/hong-kong-pushes-web3-adoption">Hong Kong&#8217;s reputation</a> as a leading international finance and Web3 hub.



The HKMA has not yet decided on an official live roll-out of the e-HKD, with the results of the trial reportedly set to be published sometime in November.



Regulation on CBDCs has been moving forward in a number of jurisdictions globally, such as <a href="https://blockworks.co/news/canada-digital-dollar-conversation">Canada</a>, <a href="https://blockworks.co/news/the-bank-of-england-is-looking-to-build-a-digital-pound">England</a>, and <a href="https://blockworks.co/news/samsung-bank-of-korea-cbdc">South Korea</a>.



In the US, the notion of a federally controlled digital dollar has faced pushback in some states, including <a href="https://blockworks.co/news/florida-approves-cbdc-ban">Florida</a> and <a href="https://blockworks.co/news/north-carolina-cbdc-bill">North Carolina</a>. Its development, meanwhile, has taken a backseat to the Federal Reserve’s upcoming <a href="https://blockworks.co/news/fednow-cbdc-save-us">Fed Now</a> launch.



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Digital Hong Kong Dollar Trial Underscores Web3 Hub Ambitions

Hong Kong’s Monetary Authority is weighing whether to implement or amend existing legislation that would effectively ban algorithmic stablecoins within the special administrative region.



The regulatory framework will focus on several key principles, including comprehensive regulation in areas such as ownership, governance and asset management.



Stablecoins that derive their value based on arbitrage or an algorithm will not be accepted into the region’s proposed licensing regime, the central bank said in a conclusion to a previously issued <a href="https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2023/20230131e9a1.pdf" target="_blank" rel="noreferrer noopener">discussion paper</a> on Monday.



The collapse of the Terra ecosystem in May 2022, after infamous algorithmic stablecoin Terra USD (UST) lost its US dollar peg, drew the ire of regulators worldwide. It’s that type of “financial stability risks” the central bank is hoping to contain, it said.



Financial resources requirements, risk management, anti-money laundering, counter-terrorist financing, user protection, regular audits and disclosure requirements are also being considered.



It comes after a discussion paper was issued on the subject in January of last year, which received 58 submissions from stakeholders.&nbsp;



The new law would apply to all entities operating within the jurisdiction, including those conducting a regulated activity and those actively marketing such activity to the public.&nbsp;



Stablecoins targeting the value of the Hong Kong dollar would also fall under the law’s purview.



The value of reserve assets will be required to meet the value of the outstanding stablecoins at all times, and those assets will be required to possess “high quality and high liquidity.”



“Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period,” the regulator said.



Further detailed consultations with more precise information about the regime will be conducted sometime this year or early next year, according to the discussion paper.



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Hong Kong Contemplates Ban on Algorithmic Stablecoins

<div id="highlights-block_635fc0c413dbc" class="highlights">
 <ul>
 <li>Hong Kong issued guidance in May of last year limiting crypto trading to professional investors</li>
 <li>Stablecoin regulation and a number of pilot projects are being weighed for the benefit of financial innovation, Hong Kong Financial Secretary says</li>
 </ul>
 
</div>



Hong Kong officials have confirmed interest in lifting a ban on retail crypto trading amid plans to bolster economic growth via the digital asset sector.



The Financial Services and the Treasury Bureau of Hong Kong <a href="https://gia.info.gov.hk/general/202210/31/P2022103000454_404805_1_1667173469522.pdf" target="_blank" rel="noreferrer noopener">said</a> Sunday that local securities regulators will conduct a public consultation on restoring “suitable” crypto access for retail investors. It could also introduce ETFs for digital assets to its market.



“We recognize the increasing acceptance of [digital assets] as a vehicle for investment allocation by global investors, be they institutional or individual,” per the statement that did not provide a definitive timeline on when the consultation period would conclude.&nbsp;



The financial agency said it would take a “careful” and “cautious” approach regarding the risks digital assets present to retail investors and would enhance investor education while ensuring it has suitable regulatory arrangements in place.



In May of last year, Hong Kong issued <a href="https://www.reuters.com/technology/hong-kong-restrict-crypto-exchanges-professional-investors-2021-05-21/" target="_blank" rel="noreferrer noopener">guidance</a> mandating that exchanges operating in the city would require licensure and would only be able to service professional investors — those with a portfolio of 8 million Hong Kong dollars ($1.01 million). That licensing scheme is set to come into effect in March 2023. 



Earlier this year, <a href="https://www.lexology.com/library/detail.aspx?g=c173f03e-4520-4b1b-bf5f-894e12bfa1f2" target="_blank" rel="noreferrer noopener">lawyers relayed belief</a> that the framework could eventually expand to local retail investors, leading up to Bloomberg <a href="https://www.bloomberg.com/news/articles/2022-10-31/hong-kong-moves-toward-legalizing-retail-investor-crypto-trading" target="_blank" rel="noreferrer noopener">reporting</a> last Thursday that Hong Kong regulators were moving toward lifting the retail ban altogether as the VASP licenses come into effect.



Blockworks reached out to Hong Kong&#8217;s Financial Services and the Treasury Bureau but did not receive a reply by press time.



<h3 class="wp-block-heading">Some major crypto players once called Hong Kong home</h3>



In their recent policy statement, Hong Kong regulators also noted that it would undertake future reviews on property rights for tokenized assets, alongside analyzing the technical legality of smart contracts.



“We recognize [digital assets] have unique characteristics different from traditional assets and their features may not fit squarely into the current private property law categories or definitions in Hong Kong.”



Further consultations on a regulatory regime for stablecoins are expected to be announced “in due course” by the Hong Kong Monetary Authority (HKMA) — the region’s central bank — per the statement.



Following lessons learned from the <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">industry&#8217;s turmoil earlier this year</a>, stablecoin regulation will focus on governance, stabilization and redemption mechanisms, the agency said.



A number of pilot projects are also being explored in a bid to test the feasibility of digital assets as they apply to financial markets including NFT issuance during Hong Kong’s Fintech Week, bond tokenization and the region’s central bank digital currency — the e-HKD.



While further information on the proof-of-concept NFT project was not provided, the government said it was doing so as a part of its efforts to engage the fintech and Web3 communities.



Speaking at Hong Kong FinTech Week 2022, Hong Kong Financial Secretary <a href="https://www.youtube.com/watch?v=QPApxYBjjBY&amp;ab_channel=HongKongFinTechWeek" target="_blank" rel="noreferrer noopener">Paul Chen</a> said Sunday the city’s decision was based on fostering economic growth.



Hong Kong has historically played host to a number of high-profile operators, including Bitfinex/Tether, Crypto.com, FTX and OKCoin, although some have relocated to more accommodating jurisdictions over the years.



“We want to make our policy stance clear to global markets, to demonstrate our determination to explore financial innovation together with the global virtual assets community,” Chen said.



David Canellis contributed reporting.



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Hong Kong Mulls Lifting Retail Crypto Ban

Shalini Nagarajan

<div id="highlights-block_62a31e89db559" class="highlights">
 <ul>
 <li>Licensed crypto exchanges in Hong Kong are allowed to service professionals only</li>
 <li>Virtual assets are complex products that are likely not understood by retail investors, regulator says</li>
 </ul>
 
</div>



A partnership between two digital asset brokerages enables a new route for professional investors in Hong Kong to dabble in cryptoassets.



OSL, a Securities and Futures Commission (SFC)-regulated digital asset platform, has agreed to provide Interactive Brokers a platform to offer virtual asset services to its professional clients, according to an <a href="https://bc.group/press-release/osl-digital-securities-and-interactive-brokers-sign-agreement-osl-to-provide-exclusive-virtual-asset-services-for-interactive-brokers-in-hong-kong/" target="_blank" rel="noreferrer noopener">announcement</a> on Thursday.&nbsp;



In late 2020, OSL became the first firm <a href="https://www.prnewswire.com/news-releases/osl-receives-license-from-hong-kong-regulator-becomes-worlds-first-sfc-licensed-listed-insured--big-4-audited-digital-asset-trading-platform-301193081.html" target="_blank" rel="noreferrer noopener">to receive permission</a> from Hong Kong’s regulatory authority to provide a digital asset trading platform for institutions. It managed to get licensed after undergoing vetting requirements. Interactive Brokers’ partnership with the exchange highlights its weight in the market.



“Investors worldwide are rallying to digital asset markets, and the collaboration with OSL comes at a key moment in the development of the regulated digital asset ecosystem in Hong Kong,” David Friesland, head of Asia Pacific at Interactive Brokers, said in a statement.



In January this year, the Hong Kong Monetary Authority said only SFC-licensed financial institutions will be allowed to conduct the business. In a <a href="https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2022/20220128e3.pdf" target="_blank" rel="noreferrer noopener">notice</a>, the regulator said virtual assets should be considered complex products that are not likely to be understood by retail investors. And so, they must be <a href="https://cms.blockworks.co/hong-kong-restricts-trading-of-crypto-etfs-to-professional-investors-only/" target="_blank" rel="noreferrer noopener">restricted to professionals</a>.



“Hong Kong has one of the world’s highest concentrations of institutional and professional investors, as well as a clear regulatory regime around digital assets,” Wayne Trench, OSL’s chief executive, said in a statement.



Hong Kong was a hotbed for some of today’s most well-known blockchain and crypto businesses including Crypto.com, BitMEX and Bitfinex. Popular stablecoin Tether too was <a href="https://messari.io/asset/tether/profile" target="_blank" rel="noreferrer noopener">launched</a> there in 2014. But strict regulations, including the rule that restricts services to professional investors, led some companies to jump to other markets.



The SFC recently <a href="https://cms.blockworks.co/hong-kong-securities-and-futures-commission-calls-for-regulation-of-nfts/" target="_blank" rel="noreferrer noopener">took aim</a> at non-fungible tokens, warning that if investors “cannot fully understand them and bear the potential losses, they should not invest in NFTs.&#8221; China’s <a href="https://cms.blockworks.co/no-china-didnt-ban-crypto-its-just-pushing-exchanges-offshore/" target="_blank" rel="noreferrer noopener">caveats</a> on cryptocurrencies have also muddled Hong Kong’s role as a hub for fintech innovations. 



Many crypto exchanges have applied to Hong Kong’s licensing agreement, but OSL has been the only successful one so far.