Katherine Ross

The Hong Kong Monetary Authority has launched phase two of its e-HKD pilot program.



According to a post on the central bank’s website Thursday, the next phase of the program will see where an e-HKD — Hong Kong’s potential future central bank digital currency — adds value through programmability, atomic settlement and even tokenization.&nbsp;



The second phase will also “explore new use cases that have not been covered in the previous phase.”



“An enhanced e-HKD sandbox, leveraged on the wholesale central bank digital currency (wCBDC) sandbox to be built under Project Ensemble, will support Phase 2 of the e-HKD Pilot Programme to accelerate the prototyping, development and testing of use cases by pilot participants, as well as facilitate the study of interoperability and interbank settlement between e-HKD and other forms of tokenised money,” the central bank <a href="https://www.hkma.gov.hk/eng/news-and-media/press-releases/2024/03/20240314-4/#:~:text=The%20HKMA%20completed%20Phase%201,tokenised%20assets%2C%20and%20offline%20payments">said</a>.



Read more: <a href="https://blockworks.co/news/hong-kong-stablecoin-regulation-2">Hong Kong official plots rules for stablecoins, crypto OTC services</a>



However, it’s still unclear if the HKMA will move forward with a <a href="https://blockworks.co/tag/cbdc">CBDC</a>.&nbsp;



The research, the HKMA said, will continue so that the central bank can see how CBDCs would interact in a “future digital money landscape.”



Organizations can apply to participate in the second phase until mid-May.&nbsp;



“The HKMA will also continue to engage local and international stakeholders regarding the latest development of CBDCs,” the release said.



Last week, Hong Kong <a href="https://www.hkma.gov.hk/eng/news-and-media/press-releases/2024/03/20240307-5/">unveiled</a> Project Ensemble, which seeks to utilize a sandbox to test out <a href="https://blockworks.co/tag/tokenization">tokenization</a> use cases which could include testing out real-world use cases from carbon credits to treasury management.&nbsp;



Read more: <a href="https://blockworks.co/news/hong-kong-regulator-tokenization">Tokenization top of mind for Hong Kong’s securities regulator</a>



At the end of October last year, the <a href="https://blockworks.co/news/hong-kong-cbdc-pilot">HKMA wrapped up phase one of its CBDC pilot</a>. At the time, the project found that the CBDC could “improve customer protections and promote trust” between both businesses and consumers through smart contracts.&nbsp;



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CBDC

Hong Kong’s central bank begins new phase of its CBDC pilot

Casey Wagner

As investors in the US continue to speculate on the timeline for bitcoin ETF approval, Hong Kong is moving ahead with a regulatory framework for these investment vehicles.



The Hong Kong Securities and Futures Commission (SFC) issued a joint circular with the city’s Monetary Authority earlier this month. This release detailed the requirements under which the securities regulator would greenlight ETFs with more than 10% of holdings in crypto.&nbsp;



The regulators noted in the <a href="https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=23EC65">circular</a> that globally, the digital asset investment vehicle “landscape has been evolving rapidly,” and demand for such products has increased in Hong Kong.&nbsp;



Spot crypto investment products should meet the same requirements Hong Kong regulators have for mutual funds and other structured investment products, the circular stated.&nbsp;



Product issuers should also have a “good track record of regulatory compliance,” the SFC added, and employ “at least one competent staff member with relevant experience in the management of [virtual assets] or related products.” The regulators will also establish a list of permitted tokens that funds are allowed to hold, which are also available for spot trading on Hong Kong-approved crypto exchanges.



Products are not permitted to have leveraged exposure and issuers must work with approved exchanges to trade and purchase assets, the SFC said.&nbsp;&nbsp;



The requirements come as Hong Kong <a href="https://blockworks.co/news/hong-kong-crypto-oversight">continues to increase its regulatory presence over the crypto industry</a>. In October 2022, the SFC started reviewing applications for futures crypto ETFs, which the US Securities and Exchange Commission first approved the year prior.&nbsp;



Hong Kong launched its licensing program for crypto exchanges in June 2023, “enabling Hong Kong investors to directly access large-cap spot [virtual assets.],” the regulator said.&nbsp;



The product guidelines also come months after the SFC and the Hong Kong Monetary Authority <a href="https://blockworks.co/news/hong-kong-crypto-oversight">upped their regulatory requirements</a> to make some virtual currency offerings only available to professional investors. The requirements made overseas crypto exchange-traded funds inaccessible to typical retail investors. 



The changes were part of an attempt by authorities <a href="https://blockworks.co/news/hong-kong-regulation-jpex">to address the fallout</a> from Hong Kong-based crypto exchange JPEX, which was embroiled in a $200 million scandal after luring investors with promises of returns as high as 20%. The platform ceased withdrawals amid regulatory warnings, leaving many, including those who invested life savings, in dire straits.



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ETFs

Hong Kong releases crypto ETF requirements ahead of US approval

The Hong Kong Monetary Authority issued a warning against crypto firms using the word “bank.”



On Friday, the <a href="https://blockworks.co/tag/hong-kong-monetary-authority">HKMA</a> warned that certain crypto firms are inappropriately using the term &#8220;bank&#8221; to describe their service offerings. The regulator said that by presenting themselves as banks without the necessary authorization, these firms are misleading the public into thinking they are regulated by the HKMA, which is not accurate.



“Under the Banking Ordinance, only licensed banks, restricted license banks and deposit-taking companies, which have been granted a license by the HKMA can carry out banking or deposit-taking business in Hong Kong,” the regulator <a href="https://www.hkma.gov.hk/eng/news-and-media/press-releases/2023/09/20230915-5/">said</a>.



Additionally, crypto firms cannot describe their services as being akin to banking services or say that customers can open “banking accounts” or describe their products as “deposits.”



The warning comes after the Hong Kong Securities and Futures Commission (SFC) called out a virtual asset trading platform (VATP) called JPEX for appearing to have “arrangements involving virtual assets such as virtual asset ‘deposits,’ ‘savings’ or ‘earnings’ which are not allowed under the SFC&#8217;s regulatory regime for VATPs.”



Additionally, the SFC <a href="https://www.sfc.hk/en/News-and-announcements/Policy-statements-and-announcements/Warning-statement-on-unregulated-virtual-asset-trading-platform">called</a> JPEX out for promoting itself as a licensed entity when it has not applied for or been formerly licensed as a VATP.&nbsp;



In August, the <a href="https://blockworks.co/news/hong-kong-regulator-warning-unlicensed-platforms">SFC issued a warning focused on unlicensed crypto platforms</a> engaging in “improper practices.”



VATPs claiming that they applied for licenses “may not be in compliance with the legal and regulatory requirements under the new regime,” the SFC warned.



Similar to calling a firm a bank when it is not authorized to do so, it is a crime for crypto platforms to market themselves as licensed when it’s not.



Hong Kong <a href="https://blockworks.co/news/hong-kong-cozy-crypto">opened the doors for crypto companies</a> earlier this year as it took multiple steps to be more crypto-friendly, including launching a CBDC trial.



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Banking

Hong Kong regulator issues warning against crypto firms parading as ‘banks’

Shalini Nagarajan

Hong Kong, determined to reclaim its fintech crown and rival Singapore, is poised to become a thriving crypto hub by considering the inclusion of retail investors in cryptocurrency trading.



The city-state is reportedly giving a nudge to major banks, urging them to hop on the bandwagon and embrace crypto exchanges as clients after announcing a clear regulatory framework that aims to encourage innovation.



The <a href="https://www.ft.com/content/da31d2d6-e547-43b0-821d-a235097ef9c9" target="_blank" rel="noreferrer noopener">Financial Times</a> reported on Thursday that the lenders include HSBC, Standard Chartered and Bank of China.



In a recent meeting, the Hong Kong Monetary Authority, the city&#8217;s banking regulator, questioned lenders about their hesitancy in accepting crypto exchanges as clients, the report said.



In a <a href="https://www.hkma.gov.hk/media/chi/doc/key-information/guidelines-and-circular/2023/20230427c1.pdf" target="_blank" rel="noreferrer noopener">letter</a> to the banks, the HKMA advised them that conducting due diligence on prospective customers should not place excessive burdens, especially for those establishing offices in the city to explore opportunities.



An HKMA spokesperson confirmed to Blockworks that it has provided guidance to banks on provision of banking services to corporate customers, including virtual asset service providers.



Standard Chartered reacted to the report by saying it has regular dialogue with regulators on different subjects. HSBC and Bank of China didn’t return Blockworks’ request for comment by press time.



Bloomberg <a href="https://www.bloomberg.com/news/articles/2023-03-02/uk-banks-ramp-up-crypto-restrictions-with-new-retail-limits?" target="_blank" rel="noreferrer noopener">reported</a> earlier this year that HSBC banned customers from buying crypto with credit cards due to risks, as warned by UK authorities.



<h2 class="wp-block-heading">US Government&#8217;s ongoing crusade vs. Hong Kong’s welcome</h2>



Meanwhile, in the US, the Securities and Exchange Commission’s <a href="https://blockworks.co/news/coinbase-binance-suits-different">back-to-back lawsuits</a> against Binance and Coinbase last week signify a fresh stage in the US government&#8217;s ongoing efforts to control the industry.&nbsp;



Some analysts suggest the crackdown will have minimal immediate impact on crypto investors.



A person familiar with the HKMA’s discussion told the FT that the regulator encouraged banks to overcome their fears, highlighting that the traditional banking mindset and resistance from senior executives are factors behind the hesitancy in adopting crypto



And Hong Kong legislator Johnny Ng went as far as <a href="https://blockworks.co/news/coinbase-hong-kong-invite">encouraging Coinbase and other exchanges</a> to establish official operations in the city.



<h2 class="wp-block-heading">Hong Kong&#8217;s initiatives attract crypto players</h2>



Ahmed Ismail, CEO of AI-driven crypto liquidity aggregator FLUID, told Blockworks that Hong Kong is actively implementing multiple initiatives to facilitate expansion in the local market, making it an enticing hub for companies seeking to broaden their crypto operations.



He pointed to companies like Gate Group and Huobi <a href="https://blockworks.co/news/crypto-exchanges-hong-kong">announcing plans to establish operations</a> in the region, saying that “this can help bring liquidity and trading volume to the crypto sector.”



State-owned China Pacific Insurance also recently <a href="https://www.insurancebusinessmag.com/asia/news/breaking-news/chinese-stateowned-insurer-opens-two-crypto-funds-in-hk-442383.aspx#:~:text=According%20to%20a%20report%20from,%2Dof%2Dstake%20digital%20assets." target="_blank" rel="noreferrer noopener">introduced two crypto funds</a> in Hong Kong. And according to Ismail, the Chinese government may use these to invest in crypto indirectly.



“This way, not only can China maintain its influence in Hong Kong, but it could also help gain from the region&#8217;s crypto activities,” he said.



“To put it succinctly, if Hong Kong&#8217;s crypto market manages to gain significant traction, it can potentially be the thing that kick-starts the next bull run.”



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Hong Kong urges major banks to embrace crypto exchanges as clients

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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algorithmic stablecoin

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

Hong Kong Mulls Lifting Retail Crypto Ban

<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.