Full text of the speech by Ye Zhiheng of the Hong Kong Securities and Futures Commission at the Hong Kong Fintech Week: Developing a regulatory roadmap for the Hong Kong virtual asset market

Speaker: Ye Zhiheng, Executive Director of the Intermediaries Department of the Hong Kong Securities Regulatory Commission

Good morning, distinguished guests . I am honored to attend FinTech Week and share with you .

Although I have only been with the Securities and Futures Commission (SFC) for five months, I have attended quite a few regulatory events . Virtual assets are a frequent topic at these events . Virtual assets are now high on the agenda of the SFC and major financial regulators. There is a considerable volume of virtual assets in the market that cannot be ignored, which also means that a large number of investors are in urgent need of protection through regulation and education. At the same time, the momentum of technological innovation is also obvious to all , and the huge potential of distributed ledger technology is yet to be explored . Today, FinTech Week is a good opportunity for me to share with you the SFC’s virtual asset journey and some of its future plans.

Overview of the development of Hong Kong’s virtual asset market

So what is driving the development of the virtual asset market? Let me summarize it into three main factors .

First , the industry is full of talented people , which has led to the rise of the industry.

Second , the industry has achieved huge economic benefits .

Third , support from young people . Research shows that the average age of stock traders is over 40, while cryptocurrency traders are much younger, mostly in their 20s.

We are trying to regulate this emerging market, but it is not easy because this is an existing large market with advanced technology, borderless and under-regulated . We have seen widespread use and volatility of virtual assets , as well as many cases of fraud and business failures .

We do see two trends evolving that are working in our favor.

First , as revenues rise and the size of investors grows , virtual asset practitioners are facing increasing scrutiny from law enforcement agencies and regulators around the world. Many jurisdictions have taken tougher legal action, some even filing lawsuits frequently, imposing fines and even jail terms in serious cases . Many market participants who once benefited from lax regulation are now taking a step back because they either have to run a sustainable and legitimate business or become fugitives , trying to evade the law all day long .

The second trend that is beneficial to us is the gradual integration between traditional finance and Web 3. The increasing participation of traditional finance in the field of virtual assets has brought many valuable compliance concepts, such as combating money laundering , conflicts of interest, customer suitability and secure asset custody.

The SFC firmly believes that the future of virtual assets is built on a regulated market that can strike a balance between development and investor protection . The SFC’s experience in securities regulation provides a solid foundation, so there is no need to make too many new attempts in this regard. The core principle behind our virtual asset regulation is “same business, same risks, same rules”, which is the backbone of maintaining the resilience of financial markets .

At the same time, as I recently shared at a major regulatory forum, as regulators , we need to remain vigilant . If , after all our efforts, virtual assets are still only circulated on unregulated platforms and regulated entities are still unable to operate with a sustainable business model , then we need to reflect on why our most advanced regulatory frameworks are not popular with investors. In short , we must listen to the voice of the market and strike a balance between a perfect regulatory system and market development .

Measures to promote the development of virtual assets in Hong Kong

Hong Kong’s regulatory work is off to a good start. Not only are we at the forefront of global virtual asset regulation, but virtual asset trading volumes recorded their largest year-on-year growth ever in 2024 compared to 2023. This is perhaps one of the reasons why we have received a lot of inquiries from local and overseas industries about our licensing regime for virtual asset trading platforms . Now let me talk about one of our most common questions : What is the current status of licensing for virtual asset trading platforms?

Speedy licensing process

In short, I think the progress is good. There are currently three licensed virtual asset trading platforms , and we are processing applications from another 14 platforms. The regulatory focus this year is on those applicants who are "deemed to be licensed" under the new licensing system from June 1 , 2024. There are 11 so-called "deemed to be licensed" applicants who already have relevant businesses in Hong Kong , and we are adopting a speedy process to approve their applications . Instead of using a document-based approval process, we conducted risk-based on-site inspections of all 11 applicants to assess key areas such as the safekeeping of customers' virtual assets, cybersecurity and their anti-money laundering and know- your-customer processes.

In just five months, we have completed all on-site inspections and provided feedback to the applicants . During the inspections, we were able to get a first-hand understanding of the compliance status of these companies and interview their relevant personnel, and more importantly, their ultimate controllers, to let them understand our expectations. The applicants and their controllers have generally accepted our feedback and are willing to invest resources to correct the concerns and develop their businesses in a regulated environment with a long-term perspective . This strengthens our confidence in the long-term success of the market .

We are currently taking a “three-step” approach to processing license applications. Step 1: After receiving feedback from the Commission’s on-site inspection, applicants must agree with the Commission on a series of improvement actions. Step 2: After the improvements, the Commission will issue licenses to these applicants and allow them to operate within a limited scope. Based on the current situation , we are expected to issue licenses to several “deemed licensed ” applicants before the end of the year, allowing them to start business soon. Step 3: We will work with licensed virtual asset trading platforms to enhance the robustness of the platforms through external reviews conducted by third parties. After the review is completed, the business restrictions of the platforms will be lifted .

Virtual Asset Trading Platform Advisory Group

However, licensing is only the starting point of our work, not the end , because as there will be more regulated platforms in Hong Kong, we must consider building a sustainable business environment and balance it with our regulatory priorities . Therefore, the Commission will set up a formal advisory group for all licensed platforms in early 2025 , and each licensed institution will appoint its senior staff as representatives. In this way, we will be able to fully listen to and consider their views. This will enable us to brainstorm and systematically prioritize development matters based on investor protection .

We are confident that the advisory group will increase participants ’ awareness of collaboration, transparency, and shared responsibility. We anticipate that the group’s discussions will lead to the publication of a comprehensive white paper on virtual assets outlining a roadmap for product and service development, as well as potential improvements in compliance and risk management .

Further regulatory measures for virtual assets

Next, let me talk about how to complete the puzzle of the regulatory system . To establish a comprehensive framework for virtual asset-related activities, we need to refer to how trading, settlement and custody in the securities market operate . The purpose is to promote liquidity aggregation to effectively form prices and transfer risks in an orderly manner .

The SFC has been actively engaging with the virtual asset industry to understand the business models of asset managers, market makers, brokers and dealers , as well as the efficient and anti-money laundering compliant deposit and withdrawal operations . Our goal is to understand how the market structure can be enhanced to encourage more diversified trading activities . It is also important to understand how third-party custodians can better support the virtual asset industry in terms of safe protection of assets and compliant on-chain transfers .

We are doing everything possible to leverage the strengths of the existing regulatory framework , while also providing support to the Hong Kong Government to determine further legislative frameworks applicable to virtual asset trading and custody, and will conduct necessary public consultations to introduce a new licensing system. The Chief Executive has mentioned some of these measures in the 2024 Policy Address . There is no doubt that the Government and relevant regulators will highly coordinate these initiatives to ensure the integrity and consistency of Hong Kong's regulatory system, prevent potential regulatory arbitrage, and maintain Hong Kong's status as an international financial center.

Tokenization , Ensemble Project, and Stablecoins

Now, let me turn the topic from virtual assets to the tokenization of physical assets. Last year , we issued a circular on tokenization-related activities . Together with the Ensemble project launched earlier this year , the SFC’s efforts in tokenization have begun to bear fruit. As a core member of the HKMA ’s Ensemble project framework working group , the SFC is jointly leading the HKMA to promote tokenization measures in the asset management industry .

Project Ensemble is a major milestone in our tokenization journey, which will set a uniform standard for the settlement of tokenized asset transactions. Participating financial institutions have proposed a large number of innovative use cases to achieve scale and establish an interoperable architecture in the Hong Kong market. For example, a local bank successfully tested the use of tokenized deposits to subscribe and redeem tokenized money market funds for institutional clients within the Project Ensemble sandbox . I believe that this Fintech Week will bring more exciting news.

I look forward to the HKMA’s upcoming fiat stablecoin regime , with regulated stablecoins potentially available to the public as early as 2025. Equally important, we need to consider how virtual assets traded on virtual asset trading platforms can interact with regulated stablecoins to truly leverage their benefits in terms of settlement certainty and efficiency .

Investor Protection

Finally, I would like to talk about the CSRC’s core mission of protecting the interests of investors.

Given the borderless nature of virtual assets and their appeal to the younger generation, investors may face new forms of harm. Therefore , the Commission must upgrade its skills in cybersecurity, cryptography and wallet tracing solutions. In addition, as the way of communicating with the investing public becomes increasingly digital , we must be aware of the power of social media today. In response to these changes, we have adopted a more effective and proactive warning system to strengthen investor protection . These efforts are based on the establishment of a sound monitoring and supervision mechanism. At the same time, we have continuously strengthened cooperation with various law enforcement agencies.