Venturing Out: Web 3.0 (I) — Hong Kong Virtual Asset Regime Overview

Authors: Felix MIAO丨Sheng LI丨Clarence CHUNG丨Carmen LIU丨Matthew WONG

Introduction

Web 3.0 is the latest evolution of the World Wide Web that envisages a more decentralized version of the web, underpinned by a constellation of advanced technologies and applications such as virtual assets ("VA(s)") of cryptocurrencies and non-fungible tokens ("NFT(s)"), and blockchain technology.

Hong Kong has taken significant steps to establish an appropriate regulatory framework for the VA sector.  Cybersecurity alongside investor protection are matters of utmost importance in Web 3.0 development.  The regulation of VA trading platforms ("VATP(s)") took effect in June 2023, after an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the laws of Hong Kong) ("AMLO").  The Financial Services and the Treasury Bureau ("FSTB") consulted the public in February 2024 on legislative proposals to regulate over-the-counter ("OTC") trading of VAs.  The Hong Kong Monetary Authority ("HKMA") and the FSTB also proposed a licensing and regulatory regime for fiat-referenced stablecoins ("FRS") in December 2023.  This article aims to highlight the key points to note for commencing Web 3.0 VA-related businesses in Hong Kong.

An overview of Hong Kong's VA regulatory landscape

Understanding the regulatory regime in relation to VAs is vital for those intending to commence a Web 3.0 business in Hong Kong.

In many facets of the regulatory regime surrounding VAs, it is essential, yet sometimes challenging, to ascertain whether the specific VA constitutes a security.  For example, where an NFT is a genuine digital representation of a collectible, the activities related to it fall outside the regulatory remit of the Hong Kong Securities and Futures Commission ("SFC").  However, where an NFT constitutes an interest in a collective investment scheme, it may fall within the definition of "securities" under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) ("SFO").  Considering the intricacies involved, it is advisable to seek legal advice on determining whether a VA constitutes securities if needed.

The table below is an overview of the existing regulatory regime for VA and the proposed regulatory regime for VA OTC trading and FRS.

Conclusion

To promote the development of the Web 3.0 ecosystem in Hong Kong, the Hong Kong government has developed a robust and wide-ranging regulatory framework governing relevant VA activities.  Beyond regulating just VATPs, Hong Kong has proposed rules for other VA business lines such as VA OTC trading and FRS.  This demonstrates Hong Kong's determination to strengthen investor protection and promote the development of Web 3.0 in Hong Kong in a stable and responsible manner through a multi‑pronged approach.  Web 3.0 industry participants in Hong Kong are recommended to seek legal advice to proactively address compliance requirements and mitigate potential risk exposure.