Hong Kong Treasury Department responds mildly to the prospect of including cryptocurrency in fiscal reserves

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Hong Kong Special Administrative Region Government Press Release

At yesterday's (December 11) meeting of the Hong Kong Legislative Council, Member Wu Jiezhuang suggested to the Acting Secretary for Financial Services and the Treasury, Mr. Chen Haolian, that the Hong Kong government consider including digital assets and cryptocurrencies in the fiscal reserves, and continue to use the Exchange Fund to make continuous purchases and long-term holdings. Although Chen Haolian did not directly approve this idea, he seemed unexpectedly open to it.

Hong Kong may see cryptocurrency thawing

In recent months, Hong Kong has been committed to becoming the leading cryptocurrency financial center in Asia. As early as April, the Securities and Futures Commission of Hong Kong approved the listing of six virtual currency spot ETFs on the Hong Kong Stock Exchange. Councilor Wu Jie Zhuang has been advocating for policies that support cryptocurrencies in Hong Kong. For example, in July of this year, he proposed that Hong Kong include Bitcoin in its strategic financial reserves under compliance, following Trump's plan to establish a 'Bitcoin national strategic reserve' during the election. At this Legislative Council meeting, Wu Jie Zhuang's proposal focuses on using cryptocurrencies as a high-performance investment option:

"According to reports, financial institutions around the world have been increasing their investments in digital assets. Since the beginning of this year, the price of Bitcoin, known as the 'digital gold', has been soaring, and the development of global currencies will move towards digitization," said Wu Jiezhuang.

He asked if the government has plans to improve regulations or appoint a committee to study the market potential of cryptocurrencies. He also highlighted the benefits of incorporating digital assets and cryptocurrencies into its fiscal reserves.

Chen Haolian's position is very mild towards the industry, claiming that cryptocurrencies are "bringing new innovative opportunities... to the financial system," and he also points out that cryptocurrencies are integrating well into global financial institutions: "Although cryptocurrencies are not the target assets of foreign exchange funds, external managers also invest in diversified asset classes and markets worldwide. It cannot be ruled out that there may be investments involving cryptocurrencies in investment operations... but the relevant proportion is minimal."

Compared to some of the past hostilities with Hong Kong, this is a very encouraging response. Chan Ho-lam just casually mentioned the metaphor of anti-encryption, such as its potential criminal applications, and explicitly acknowledged that encryption is developing on the world stage. This echoes a ruling by the Chinese Supreme Court in November, which directly confirmed the legitimate use of cryptocurrencies.

Despite the strict ban on Bitcoin domestically, there are signs that Bitcoin may be thawing. At the October BRICS summit, Chinese representatives supported solutions based on cryptocurrency and blockchain to promote international de-dollarization efforts. Perhaps these favorable signals represent a positive and undoubtedly bright future for cryptocurrencies in the region.

Legislative Council Fifteen Questions: Policy on Digital Assets

Below are the questions raised by Hon Jekson Woo and the written response provided by the Acting Secretary for Financial Services and the Treasury, Mr Chen Haonan, at the Legislative Council meeting today (11 December).

Question:

According to reports, global financial institutions have been increasing their investments in digital assets. The price of Bitcoin, known as the "digital gold", has been soaring this year, and the world's currencies are moving towards digitization. In addition, some regions are planning to position Bitcoin as a strategic reserve asset of the government, and are considering appointing commissioners to be responsible for formulating and implementing related policies, as well as promoting the development of the cryptocurrency industry. In this regard, can the government inform us:

(1) In view of the opinions that the cryptocurrency industry is developing rapidly, but the current regulatory system for cryptocurrencies in Hong Kong still needs improvement, will the government further accelerate the improvement of the regulatory system?

(2) Will the government consider establishing a dedicated department or commissioner to research and formulate policies related to digital assets and cryptocurrencies;

(3) In view of the opinion that the global acceptance of Bitcoin is increasing, and Bitcoin, as a digital asset, despite its risks, has decentralized characteristics, will the government consider including digital assets and cryptocurrencies in its financial reserves, and consider using foreign exchange reserves to continue purchasing and holding them for the long term; and

(4) Has the government assessed and studied the impact of foreign countries designating Bitcoin as a strategic reserve asset on the financial security of China and Hong Kong (such as whether it will exert pressure on the Hong Kong dollar system and the economic situation in Hong Kong in the long run)? If so, what are the impacts and what measures does the government have in place, including whether to leverage Hong Kong's first-mover advantage and unique resources in the field of cryptocurrency to make strategic deployments and contribute to the maintenance of national financial security?

Reply:

Chairman:

Regarding Councilor Wu Jiezhuang's question, after consulting the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), the reply is as follows:

(1) and (2) The rapid development of the virtual asset industry has brought new opportunities for financial innovation and popularization on the one hand, but also increased the complexity of the financial system on the other. In terms of regulation, the connection between the traditional financial system and the virtual asset market seems to be becoming more obvious and close, and international organizations and standard-setting organizations are quite concerned about the potential risks to monetary and financial stability that the spread of virtual assets can bring. Among them, the Financial Stability Board, in consultation with standard-setting organizations, released the final version of the global regulatory framework for crypto-asset activities in July 2023. The framework advises on the regulation and monitoring of crypto-asset activities and markets, as well as global stablecoin arrangements. Hong Kong is Asia's leading international financial centre with significant influence in the regulation and development of virtual assets. In this regard, to promote the long-term sustainable development of the virtual asset-related industries, the Financial Secretary has set up a Task Force on the Development of the Third Generation Internet in 2023 to submit proposals to the Government on the sustainable and responsible development of the industry. In addition, the Government issued the Policy Statement on the Development of Virtual Assets in Hong Kong in October 2022, indicating that the Government and regulators will strive to improve the regulatory framework for virtual assets based on the principle of "same business, same risks, same rules".

As far as the specific regulatory policies and measures for virtual assets are concerned, the Financial Services and the Treasury Bureau (FSTB) is responsible for formulating the relevant policies and coordinating the relevant departments and financial regulators. Among them, the Government has introduced a licensing regime for virtual asset service providers by amending the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) to ensure that virtual asset trading platforms comply with international standards on anti-money laundering and counter-terrorist financing and to protect investors. Following the above-mentioned licensing regime coming into effect last year, the FSTC consulted the Panel on Financial Affairs of the Legislative Council on the regulation of the issuer regime for fiat currency stablecoins this year and will introduce the relevant bill into the Legislative Council within this month. In addition, for OTC virtual asset trading services, we are adjusting our recommendations in light of the results of the public consultation conducted earlier this year and will conduct a second round of public consultation next year; Next year, we will also propose a proposed licensing regime for virtual asset custody service providers.

(III) Forex funds invest in diversified asset classes and markets worldwide to diversify risks and enhance long-term returns. Although cryptocurrencies are not the target assets for forex fund investment, the external investment managers appointed by the Monetary Authority also invest in diversified asset classes and markets globally. During the investment operations of different external investment managers at different times, individual investments involving cryptocurrencies may be involved, but the proportion is very small.

(4) The linked exchange rate system (LERS) has been in place for over 40 years since 1983. It has withstood multiple economic and interest rate cycles, as well as numerous global and regional economic and financial crises, and has been effective in maintaining the stability of Hong Kong's financial and monetary system. The LERS operates on a rigorous 'currency board' model and is widely recognized in the global financial and monetary markets. International institutions such as the International Monetary Fund consistently consider the LERS to be a suitable monetary system for Hong Kong.

As mentioned earlier, the interaction between virtual assets and traditional finance is becoming more frequent. On the one hand, the development of virtual assets and related technologies can bring potential benefits to the overall financial market, such as the potential of blockchain technology to enhance the efficiency and transparency of economic and financial activities. On the other hand, it also involves risks related to financial stability, money laundering, and investor protection. The government and regulatory agencies will continue to formulate regulatory systems based on the principles of 'same business, same risks, same rules' to address these risks. This can create a conducive environment to promote sustainable and responsible innovation while ensuring financial security and consolidating Hong Kong's role as an international financial center.

In addition to improving regulatory systems, the government and regulatory agencies have also introduced measures to promote market development. In terms of tokenization, to enhance market clarity, the Securities and Futures Commission issued two circulars in November last year, respectively, on the guidance for intermediary institutions engaging in tokenized securities-related activities and the guidance for investment products tokenization authorized by the SFC, to clarify regulatory expectations from the perspective of investor protection. The SFC also announced a number of measures to promote the development of virtual assets in Hong Kong in October this year, including a rapid licensing process related to virtual asset trading platforms, and the establishment of consultation groups for licensed platforms. It is expected that the consultation groups will be launched early next year.