Keeping up with Hong Kong: a fragrant harbour for financial innovation

Financial services represent one of Hong Kong’s most important sectors making up 23.4% of its GDP. The region has consistently ranked as one of the top international financial centres in Asia and its stock market is the seventh largest in the world by market capitalisation.

As the market for digital assets has grown, Hong Kong has become known as a global leader in financial innovation. While the origin of the name Hong Kong translates as ‘fragrant harbour’, when it comes to digital assets, the City’s pioneering efforts in the space are creating a safe and vibrant harbour where innovative ideas flow freely and digital assets can be securely anchored.

Like other leading jurisdictions globally, Hong Kong’s policymakers and regulators are laying the groundwork for greater efficiency, security, and accessibility across the digital asset industry. This includes the region’s approach to new forms of digital currency such as fiat-referenced stablecoins and Central Bank Digital Currencies (CBDCs). In this blog, we explore how its latest developments in approaches to stablecoins and CBDCs are paving the way forward and how 3 key trends in Hong Kong and the Asia Pacific region are impacting the global narrative on digital assets.

Trend One – Leading the Way in Stablecoin Licensing

Stablecoins are a significant contributor to the digital asset ecosystem and many regulators are reviewing policies around them, reflecting their growing systemic importance. In July, Hong Kong announced its intention to introduce a licensing regime for stablecoin issuers whose tokens reference the price of fiat currencies. Under the proposed regime, issuers will need to obtain a license from the Hong Kong Monetary Authority (HKMA). To ensure that stablecoins are fully backed by reserve assets in the reference currency, issuers must publish monthly attestations conducted by an independent auditor.

Ensuring that stablecoin issuers are well-regulated and that these assets can become more transparent and trusted is vital, but the region is also keen to go further and see how stablecoins and CBDCs will be used in practice. The launch of its new sandbox reflects the region’s wider interest in exploring use cases for digital currencies.

Trend Two – Testing the waters for real-world use of digital currency

Some of Hong Kong’s most innovative initiatives are the launch of its stablecoin issuer sandbox, which was announced in March, and Phase 2 of its e-HKD Pilot Programme, designed to explore innovative use cases for a Hong Kong CBDC.

Linked to the consultation on the legislative proposal for implementing the regulatory regime for stablecoin issuers, the regulator plans to use the sandbox “to communicate supervisory expectations to parties interested in issuing fiat-referenced stablecoins in Hong Kong, as well as to obtain feedback from participants on the proposed regulatory requirements”. As part of the project, Standard Chartered, along with Animoca Brands and the telecoms company HKT, have partnered in the sandbox to test a token project with regulatory oversight. Zodia Custody, as a subsidiary of Standard Chartered, will deliver the digital asset custody capabilities. This is an exciting opportunity to link together different counterparties in the ecosystem to see how these technologies can be used in practice, and where digital asset custody has an important role to play.

Trend Three – Pioneering Institutional Digital Assets across Asia Pacific

The history of Standard Chartered in Hong Kong goes back to 1859, when The Chartered Bank of India, Australia and China opened a branch there. The Bank started issuing banknotes of the Hong Kong dollar (HKD) in 1862 and still does so today. It is interesting to think that Standard Chartered could soon be leading Hong Kong into the next phase of the digital age, facilitating transactions using a digital version of the HKD. Certainly, if the HK government decides to introduce a CBDC and to strengthen its stablecoin regime, this is likely to accelerate adoption of digital assets and tokenisation by providing a digital means of settlement for the cash leg of tokenised asset transactions.

Hong Kong’s digital asset market is already diversifying fast with an annual growth rate of more than 14% and an expected value of US$243.9m by 2027. With the approval of spot Bitcoin ETFs – and potentially spot Ether ETFs – in the US, Hong Kong is competing hard for the institutional digital asset market. Its focus on regulatory clarity and building an ecosystem of institutional-grade players including exchanges and custodians ties into its wider global competitiveness. Zodia Custody is already an established and active player across Asia-Pacific with bases in Singapore, Australia and Japan (via a joint venture with SBI Holdings, Inc.), in addition to Hong Kong. Our bank-backed heritage provides us with a unique understanding of the needs of institutional investors and fits with the growth of a regulated digital asset market in the region.

Through Zodia Custody’s presence in Hong Kong, institutional investors can accelerate digital asset adoption via effective safeguarding and risk management services enabled by the latest technology, combined with institutional-grade compliance and governance. Since they provide such an important bridge between traditional and decentralised finance, implementing digital currencies is a key element in continuing to accelerate the digital asset market as a whole.

Jurisdictions around the world will likely be watching the effectiveness of this regime closely and vying to keep up with Hong Kong’s approach. In this region, innovation and safety go hand in hand.

 

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