Hong Kong Fintech Week: Virtual Asset Index Series Unveiled, SFC Accelerates Regulation, AI Policy Declaration Released

Hong Kong Fintech Week: Virtual Asset Index Series Unveiled, SFC Accelerates Regulation, AI Policy Declaration ReleasedOctober 28, 2023 saw the grand opening of Hong Kong Fintech Week, a highly anticipated annual event. As the Asian financial hub, Hong Kong unveiled a series of impactful policies during this tech summit, focusing on virtual asset markets, artificial intelligence applications, and regulatory system enhancements

Hong Kong Fintech Week: Virtual Asset Index Series Unveiled, SFC Accelerates Regulation, AI Policy Declaration Released

October 28, 2023 saw the grand opening of Hong Kong Fintech Week, a highly anticipated annual event. As the Asian financial hub, Hong Kong unveiled a series of impactful policies during this tech summit, focusing on virtual asset markets, artificial intelligence applications, and regulatory system enhancements.

HKEX: Launches Hong Kong Exchanges and Clearing Virtual Asset Index Series, Providing a Reliable Benchmark for the Virtual Asset Market

Hong Kong Exchanges and Clearing Limited (HKEX) announced the launch of the "Hong Kong Exchanges and Clearing Virtual Asset Index Series" on November 15, 2024, offering a trustworthy benchmark price for the rapidly evolving virtual asset market. The index series will encompass Bitcoin and Ethereum, providing transparent and reliable pricing references for the Asian time zone. This initiative aims to address the challenge of price discrepancies between different exchanges within the virtual asset market.

HKEX stated that the launch of this index series marks a significant step in its exploration of emerging sectors, supporting the advancement of Hong Kong's fintech landscape while providing investors with crucial benchmark tools and solutions.

The index series will comprise reference indices and reference rates for Bitcoin and Ethereum, denominated in US dollars. The reference indices are based on a 24-hour volume-weighted benchmark spot price, calculated from aggregated market prices from multiple leading virtual asset exchanges. The reference rates are used for financial product settlements and are calculated at 4:00 PM daily.

Notably, this index series will be the first virtual asset index series in Hong Kong to comply with the European Union Benchmark Regulation (BMR). It is jointly managed and calculated by CCData, a UK-registered benchmark administrator and virtual asset data and index provider.

HKEX CEO Nicolas Aguzin stated that the launch of the Hong Kong Exchanges and Clearing Virtual Asset Index Series is designed to meet the regional demand for this rapidly growing asset class. By offering transparent and reliable real-time benchmarks, he hopes to empower investors to make informed investment decisions, foster the healthy development of the virtual asset ecosystem, and solidify Hong Kong's position as an international financial center.

Industry experts have expressed their approval. Greta, CMO of VDX Victory Fintech, pointed out: The index references the CCData EU standard and incorporates the EOD concept. This truly paves the way for virtual assets, as indices enable the possibility of derivative products. Livio Weng, CEO of HashKey Exchange, emphasized that HKEXs introduction of a virtual asset index series in the Asian time zone will provide transparent and reliable benchmark prices, empowering investors to make better decisions. This also signals the further integration of virtual assets into mainstream financial markets.

Hong Kong Securities and Futures Commission (SFC): Accelerates Regulation of Virtual Asset Trading Platforms, Establishes Advisory Group in Early 2025

Ye Chi-hang, Executive Director of the Intermediaries Division at the SFC, revealed that three virtual asset trading platforms have already obtained licenses, while applications from 14 other platforms are currently under review.

Ye Chi-hang highlighted that the SFCs key focus this year lies in those applicants who will be "deemed to have been granted a license" as of June 1, 2024, totaling 11 in number. These applicants were already operating related businesses in Hong Kong, and the SFC is employing a fast-track approval process.

"We have not used a document-based approval process, but have conducted risk-based on-site inspections of all 11 applicants, assessing key areas such as the safekeeping of client virtual assets, cybersecurity, and anti-money laundering and know-your-customer processes."

Ye Chi-hang outlined the SFCs "three-step" approach to handling license applications:

1. Upon receiving feedback from the SFC's on-site inspection, applicants must negotiate a series of improvement measures with the SFC.

2. Once these improvements are implemented, the SFC will issue licenses to these applicants, allowing them to operate within a limited scope.

3. The SFC will collaborate with licensed virtual asset trading platforms to conduct external reviews through a third-party, enhancing the platforms robustness. Upon completion of these reviews, the platforms business restrictions will be lifted.

Importantly, the SFC will establish a formal advisory group for all licensed platforms in early 2025. Representatives from each licensed entity will be appointed as group members. Ye Chi-hang stated that this will enable the SFC to fully listen to and consider the platforms perspectives, foster collective brainstorming, and systematically prioritize development matters based on investor protection.

Regarding regulation, Ye Chi-hang emphasized that creating a comprehensive virtual asset activity framework necessitates reference to trading, settlement, and custodial mechanisms in the securities market to promote liquidity aggregation, establish effective pricing, and facilitate orderly risk transfer.

The SFC will exert every effort to leverage the advantages of its existing regulatory framework, simultaneously supporting the Hong Kong government in formulating further legislative frameworks applicable to virtual asset trading and custody. Public consultations will be held to introduce a new licensing system.

The SFC will also actively engage with the virtual asset industry to understand the operating models of asset management companies, market makers, brokers, and dealers, as well as efficient anti-money laundering compliant deposit and withdrawal processes. The objective is to identify ways to enhance market structure, encouraging more diverse trading activities, and exploring how third-party custodians can better support the virtual asset industry in safeguarding asset security and compliant on-chain transfers.

The SFC will continue to support industry initiatives related to tokenization. As a core member of the Architecture Working Group for the Hong Kong Monetary Authority's (HKMA) Ensemble project, the SFC will co-lead tokenized asset settlement solutions within the asset management sector. The Ensemble project aims to establish the necessary infrastructure for Hong Kong's tokenized ecosystem, ultimately setting industry standards for tokenized asset settlement.

Greta believes that custodial licenses and OTC licenses may emerge in the future. Livio Weng remarked that the entire crypto market is likely to undergo numerous transformations. As the final outcome of the US presidential election, and continued breakthroughs in Web3 compliance by the United States, Hong Kong, Dubai, and other jurisdictions, materialize, the market is poised to enter a new phase of rapid growth.

Livio Weng believes that Hong Kong will become a key global participant, and Hong Kong institutions will play a pivotal role in collaboratively building a better Web3 ecosystem.

Hong Kong Releases Application of Artificial Intelligence Policy Declaration, Promoting the Responsible Use of AI in Financial Markets

Paul Chan Mo-po, Financial Secretary of Hong Kong, stated that as an international financial center, Hong Kong adopts an open and prudent approach to the application of artificial intelligence (AI) in financial markets. This policy declaration clarifies the government's policy stance and direction, aiming to promote the responsible use of AI in financial markets. As AI technology continues to advance, Hong Kong will closely monitor market developments, reference international experiences, leverage its unique advantage of converging mainland and international data and free information flow, and drive the adoption of AI in the financial services industry, accelerating the cultivation of new types of productivity in a tailored manner.

Christopher Hui, Secretary for Financial Services and the Treasury, emphasized that the government will collaborate with financial regulators and industry participants to cultivate a healthy and sustainable market environment, enabling financial institutions to seize opportunities, responsibly adopt AI, and propel Hong Kong's high-quality development as an international financial center.

"Numerous AI models and infrastructure are currently available for use by financial institutions, accounting firms, and solution providers. Financial services are encouraged to actively utilize these market resources."

The policy declaration primarily encompasses five key areas:

1. The application of AI in financial markets exhibits data-driven, double-edged, and dynamic characteristics. The SAR government will adopt a dual-track approach, encouraging the adoption and development of AI in the financial services industry while simultaneously addressing potential challenges such as cybersecurity, data privacy, and intellectual property protection.

2. Financial institutions should establish AI governance strategies, providing guidance on implementing and utilizing AI systems. A risk-based approach should be adopted for the procurement, use, and management of AI systems. Human oversight is crucial in mitigating potential risks.

3. The Hong Kong University of Science and Technology will open its developed AI models and computing resources for use by Hong Kong's financial services industry, providing consulting and training services for financial institutions when deploying internal systems or developing applications and web interfaces.

4. For regulated financial institutions, potential risks posed by AI are appropriately reflected in relevant regulations or guidelines issued by financial regulators. To align with the latest AI advancements and international practices, including the emergence of explainable AI, financial regulators will continuously review and update current relevant regulations or guidelines.

5. The police force will engage in intelligence sharing with international organizations, law enforcement agencies in other jurisdictions, and the AI industry to address the challenges of AI in cyber policing. Regarding public education, the Investor and Financial Education Council will enhance public awareness and understanding of AI technologies, helping them recognize the opportunities and risks presented by AI technologies in retail investment and financial management.

This series of policy announcements at Fintech Week marks a significant stride for Hong Kong in the virtual asset and AI domains. It will further propel the development of Hong Kong's fintech landscape and solidify its position as a leading global financial center.