Fintech is the intertwining of finance and technology that seeks to “improve and automate the delivery and use of financial services.” It has rapidly transformed the financial services sector as we know it. Mobile banking apps, pay-and-go paperless payments, e-commerce, robo-advisors, smart contracts, peer-to-peer lending services, crowdfunding campaigns, blockchain technology, and cryptocurrencies are all Fintech innovations.
The fintech revolution swept through Hong Kong, becoming an incubator for many start-ups in the crypto industry. Cryptocurrency in Hong Kong is still booming but regulatory bodies are creating much anxiety as they seek to develop parameters to contain the flourishing industry.
Cryptocurrency in Hong Kong
Hong Kong has developed into a hotspot for blockchain and crypto-related businesses. Many of the global crypto industry elites started in Hong Kong, including exchanges Crypto.com, BitMEX, Bitfinex, and OSL, among others. The world’s largest stablecoin, Tether, was also launched from Hong Kong. Between July 2020 and June 2021, Hong Kong was estimated to be worth a staggering $60 billion in incoming cryptocurrencies, according to blockchain data firm, Chainalysis.
Approximately one-third of Hong Kong’s residents are estimated to have invested in, transferred, or exchanged cryptocurrencies for goods and services, according to a published survey by payments giant, Visa. The survey reported that among developed markets, Hong Kong was ranked only behind the U.S. in terms of its residents’ engagement with digital assets.
According to Deloitte’s 2017 report on global fintech hubs, Hong Kong’s position as Asia’s super-connector is particularly useful for B2B solutions. Where Hong Kong excels with regulations, governmental support and proximity to expertise. With an abundance of start-ups, confirmed unicorns attracting record-breaking funding, Hong Kong is a magnet for investment in game-changing tech adding to the financial value chain.
Several of the e-commerce giants, including Alibaba, WeChat Pay and Quiptal, are extremely active in the TechFin companies leveraging their technology to penetrate the financial industry.
WeChat Pay launched in Hong Kong in 2016 allowing WeChat users to connect their MasterCard or Visa credit cards with their accounts to allow them to pay for products and services without exiting the WeChat app. They are the first Chinese company to let users settle bills on the mainland with HKD.
Hong Kong is also taking the role of a settlement hub for China’s international payments and securities transactions. Some examples of successful startups include:
Spark, a remittance platform for money transfer businesses that enables users to buy and sell Bitcoin and other cryptocurrencies; TNG, an e-wallet that supports real-time remittance, bill payment, mobile SIM top-ups and the transfer of funds across 12 countries; and Plain Exchange, a platform helping individuals trade currencies with fellow travelers at market rates.
WeWork, a leading flexible working space provider, began servicing a new economy by accepting payment in select cryptocurrencies for inbound and outbound transactions last year in its US operations. In addition, Coinbase will be the first WeWork member to use cryptocurrency to pay for its WeWork membership.
Understanding this growing demand for optionality and convenience, WeWork accelerated its focus on leveraging technology to take flexibility to the next level. In 2020, WeWork digitized its real estate portfolio with the release of its WeWork On Demand and WeWork All Access products, enabling members to choose when, where, and how they work.
But regulatory uncertainty in Hong Kong is driving some crypto companies to shift their operations to other markets such as Singapore, where regulators are showing a more favorable position toward the growing industry.
Crypto.com, the world’s third-largest spot exchange by 24-hour trading volume, shifted its headquarters last year from Hong Kong to Singapore. The Eqonex Group, a Nasdaq-listed digital asset financial services firm, established its crypto derivatives exchange in Singapore rather than Hong Kong, citing the country’s regulatory regime, which bans crypto derivatives and limits trading services to professional investors, as the main reason for their decision.
Hong Kong introduced an opt-in licensing regime in 2019 for platforms that allow investors to buy and sell security tokens (traditional stocks and bonds in a digital form). At the time, most cryptocurrencies fell outside the scope of the framework. Licensed exchanges are only allowed to serve professional investors with a portfolio of at least HK$8 million ($1 million) in liquid assets. They are also banned from offering traders access to crypto futures and derivatives.
Regulators are considering compulsory licensing regimes for exchanges that offer virtual asset trading, including bitcoin and others that were previously excluded. So far, the only firm to be granted a license under Hong Kong’s voluntary regime is crypto trading platform, OSL. The Securities and Futures Commission (SFC) said in November 2021 that it has applications from several other firms under consideration.
In January 2022, the Hong Kong Monetary Authority (HKMA) released a Discussion Paper on the expansion of the Hong Kong regulatory framework to stablecoins (e.g. crypto-assets pegged to fiat currencies). The paper considers the adequacy of the existing regulatory framework in light of the growing use of stablecoins and other types of crypto-assets in financial markets, and the challenges posed by this increase in their prevalence.
It further proposes eight questions for consideration by the industry, including the scope of a proposed new regulatory regime to cover what the HKMA describes as “payment-related stablecoins”, and makes its intentions clear that it will be regarded as the primary regulator of stablecoins going forward. The HKMA has requested industry responses to the paper by 31 March 2022, and has indicated that it intends to introduce this new stablecoin regulatory regime by 2023–2024.
Smart contracts
Smart contracts refer to computer protocols that digitally facilitate the verification, control, or execution of an agreement. Smart contracts run on the blockchain platform, which will process all the transactions in an automated contract, so that intermediary middlemen are not required for executing the transactions.
The integral components of a smart contract are termed “objects”. There are essentially three objects in a smart contract: the signatories, who are the parties involved in the smart contracts that use digital signatures to approve or disapprove the contractual terms; the subject of the agreement or contract; and the specific terms. Smart contracts can be used in a variety of fields, from healthcare to supply chain to financial services.
Some of the main benefits of smart contracts are that they do not need brokers or other intermediaries to confirm the agreement, thus eliminating the risk of manipulation by third parties. Further, the absence of intermediaries in smart contracts results in cost savings.
As smart contracts are encrypted, cryptography keeps all the documents safe from infiltration. Smart contracts can also save time as many processes are automated, thus ensuring better accuracy without the risk of human error. But on the other hand, changing smart contract processes is almost impossible, with an error in the code being time-consuming and expensive to correct.
In closing
Fintech has tremendous potential to create a financial system that is more inclusive and equitable for everyone. It can empower consumers to take charge of their financial decisions, leading to better financial literacy throughout society. Hong Kong remains well-positioned to help shape fintech to make it more accessible for all from consumers to businesses.
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