Analysis of the Regulatory Framework and Practices for Digital Assets in Hong Kong

Introduction

Hong Kong is building a "trustworthy and innovation-focused digital asset ecosystem" and will continue to strengthen its leading position in the global digital asset field, promoting Hong Kong as a global innovation center. The digital asset regulatory framework established in Hong Kong and its pioneering sandbox use case practices clearly demonstrate the specific path for innovation to achieve robust development within a compliance framework.

Development History of Digital Assets in Hong Kong

1.1 Prelude: The "Pause Button" of the Mainland and the "Fast Forward Button" of the World (2017-2022)

In 2017, mainland China implemented a comprehensive halt policy on the virtual asset market, pressing the "pause button" on the development of digital assets. This strict "blockade" inadvertently became a "catalyst" for the global cryptocurrency industry, triggering a wave of talent, capital, and projects "going overseas."

During the same period, Hong Kong adopted a prudent approach, serving both as a "firewall" to prevent risk spillover and as an "observation post" to monitor the global development of Web3. Hong Kong launched a fintech regulatory sandbox, allowing companies to test fintech innovation projects in a controlled environment.

1.2 The Key to the Game: Hong Kong's "Move" and Strategic Intent (2023-2025)

At the end of 2022 to 2023, Hong Kong's regulatory policies on digital assets have undergone a landmark shift. The Hong Kong SAR government issued a policy declaration, clearly stating the intention to "actively promote" the development of the virtual asset ecosystem. Subsequently, Hong Kong established a mandatory licensing system for Virtual Asset Service Providers (VASP), allowing licensed platforms to provide services to retail investors.

Choosing to "open the door" at this time can be interpreted as a high-level strategic choice at the national level. Hong Kong, as a "bridgehead," enters the market in a "compliant" and "controllable" manner, gathering global digital asset resources and competing for the discourse power of the next generation of financial technology. Hong Kong's "pilot and trial" policy has also received active linkage and response from mainland cities.

Hong Kong Digital Asset "Twin Peaks Regulation" Framework

Hong Kong's digital asset regulatory system is characterized by a "twin peaks" regulatory model, with the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) collaborating in their respective roles. The SFC focuses on the "investment" attributes of virtual assets, while the HKMA concentrates on their "payment" functions.

Core Analysis of VASP License and Stablecoin Issuance Regulation

3.1 VASP Licensing System: Defining Boundaries for Trading Platforms

The VASP licensing system requires all centralized virtual asset trading platforms operating in Hong Kong or serving Hong Kong investors to be licensed. The main regulatory focuses include investor protection, client asset security and financial soundness, anti-money laundering/anti-terrorist financing, token listing and trading scope, etc.

3.2 Stablecoin Regulatory Framework: Establishing Rules for "Quasi-Currency"

The regulatory framework for stablecoins focuses on "designated stablecoins" that are pegged to fiat currencies. Core requirements include 1:1 full reserves, transparency and trustworthiness, and robust operations. The HKMA adopts a prudent approach, expecting to issue only a small number of licenses and establishing a "sandbox" mechanism that allows institutions to test their business models in a controlled environment.

A Comprehensive View of the Regulatory Sandbox Process from the Applicant's Perspective

Hong Kong's "regulatory sandbox" is a "dialogue mechanism between regulation and innovation" and a "testing ground for risk isolation". The entire process embodies rigor, interactivity, and transparency, and is divided into three stages: preparation, testing, and evaluation.

Regulatory Sandbox - A Typical Case on the Path to Compliance

5.1 Stablecoin Regulatory Sandbox: Pragmatism First, Addressing Pain Points

The first batch of participants entering the sandbox includes JD Coin Chain Technology (Hong Kong), Circle Technology, and a consortium formed by Standard Chartered Bank (Hong Kong), Anni Group, and Hong Kong Telecommunications. The Monetary Authority's considerations for stablecoin issuers include real application scenarios, financial risk management capabilities, and controlling the overall number of licenses issued.

5.2 Ensemble Sandbox: Innovative Financial Market Infrastructure to Promote Tokenized Applications

The Ensemble project aims to promote the settlement of interbank tokenized deposits using wholesale central bank digital currency (wCBDC) and the trading of tokenized assets using tokenized currencies. Key use cases include green and sustainable finance, trade and supply chain financing, fixed income and investment funds, liquidity management, and more.

Future Outlook

With the formal implementation of the "Stablecoin Regulation", Hong Kong has provided a more solid institutional foundation to promote stablecoin application scenarios and expand the variety of tokenized products. Relying on its deep roots as a traditional international financial center, the first-mover advantage of a systematic regulatory framework in the digital asset field, and its natural hub position connecting the mainland and the global digital asset market, Hong Kong is expected to rise as a key node in the global digital asset landscape and the core hub for the tokenization of real-world assets.