In Depth: How Hong Kong Could Help Craft Mainland Policies for Digital Assets

Hong Kong is seeking to position itself as a global hub for trading virtual assets (VAs), attracting several mainland financial institutions to issue innovative digital financial products based on blockchain technology. This initiative not only enhances Hong Kong's profile but also allows Beijing's regulators to observe the VA market for potential policy development for the onshore market [para. 1].

In April, three Hong Kong subsidiaries of major mainland mutual fund companies – Harvest Global Investments Ltd., Bosera Asset Management (International) Co. Ltd., and China Asset Management (Hong Kong) Ltd. – received approval from Hong Kong's securities regulator to list the first batch of spot VA exchange-traded funds (ETFs). These ETFs invest in cryptocurrencies, with three funds backed by Bitcoin and three by Ether [para. 2]. The six ETFs, launched on April 30, attracted subscriptions totaling approximately $300 million during their initial offering period [para. 3].

Currently, these ETFs are not accessible to mainland investors due to a ban on all crypto-related trading. The products have grabbed the attention of retail investors in Hong Kong and local and overseas funds managed by family offices based in the city, Southeast Asia, or the Middle East [para. 4]. Since 2022, Hong Kong has been expanding its digital asset sector and creating a regulatory framework for cryptocurrency trading, which includes requirements for crypto futures ETFs [para. 5].

Mainland institutions have also been exploring the Hong Kong market with real world assets (RWAs) — blockchain-based digital tokens representing physical and traditional financial assets [para. 6]. In June 2023, BOCI issued 200 million yuan ($27.6 million) of fully digital structured notes, tokenized on the Ethereum blockchain and sold to clients in the Asia-Pacific region [para. 7]. Likewise, GF Securities (Hong Kong) Brokerage Ltd. issued its first tokenized financial note in January, representing significant progress for Hong Kong as a hub for virtual and digital financial assets [para. 8].

Mainland authorities have been cautious with VAs, observing offshore markets before making any decisions for onshore policies. Christina Yan Zhang, CEO of the Metaverse Institute, notes that many factors, including regulatory changes, potential financial system impacts, and public attitudes, will influence these decisions [para. 9][para. 10]. Even with Hong Kong's advancements, they may not directly impact mainland policies due to differing regulatory frameworks [para. 11].

Hong Kong, as a special administrative region, operates under a regulatory system independent of Beijing. This independence allows subsidiaries of mainland institutions to introduce innovative financial products without needing mainland regulatory approval. Meanwhile, China focuses primarily on non-token blockchain applications, leveraging the technology's advantages while minimizing associated financial risks [para. 12][para. 13].

China's national strategy emphasizes blockchain's role in data circulation and digital economy development. The Ministry of Science and Technology has issued annual national key research and development programs for blockchain projects since 2021 [para. 14][para. 15]. Experts believe that favorable policies towards blockchain provide a strong foundation for developing VAs on the mainland, potentially leading to lower transaction costs and improved transparency [para. 16].

Hong Kong serves as a "sandbox" for financial innovation, as stated by Han Tongli, CEO of Harvest Global. If VA-backed ETFs demonstrate stability and manageable risks in Hong Kong, mainland investors might access these products in the future [para. 17].