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ASPIRe and Hong Kong SFC's Vision for Digital Asset Ecosystem


Please note that we provide links to external sites which were correct at the time of publication, but they may be updated. Cognitive GRC provides advisory services to regulated firms in Hong Kong on international requirements and works with various service partners to deliver these services. Firms should obtain specific advice relating to matters that we highlight here. The following is neither legal, accounting or investment advice.



As the world rapidly embraces digital advancements, the financial industry is undergoing a significant transformation. Hong Kong, recognized as a global financial hub, is responding to this shift with the ASPIRe framework. The Securities and Futures Commission (SFC) is on a mission to create a robust ecosystem for digital assets. In this blog, we will examine the details of ASPIRe and its implications for the future of digital finance in Hong Kong. We will also consider global developments that are likely to have an influence on Hong Kong.



Key Components of A-S-P-I-Re


As highlighted in our previous explainer blog (Source: Cognitive GRC), there are still a number of challenges that need to be addressed to help take advantage of the strong head start that Hong Kong has established for itself in developing an ecosystem here. The US is now playing catch up, at speed, and has the full backing of the administration in taking its programme forward. Given the re-emergence of protectionism, and the speed at which circumstances are developing, it provides an impetus to improve on what has been already achieved here in Hong Kong in order to ensure that the region is able to stay ahead, as least in an effort to keep up.

 

Even if you are a non-believer, with respect to the currency of crypto, the existence of an ecosystem in digital assets improves traditional finance and keeps Hong Kong in the global position that it has achieved in the traditional space. We note how developments in digital assets are influencing policy and how that it is likely to result in some congruence in regulatory direction.

 

The SFC road map issued and coinciding with Consensus Hong Kong brought a thoughtful collection of initiatives that require further curation. However, they cross through all the major challenges that we believe exist.

 

“A-S-P-I-Re” Roadmap for a Resilient Virtual Asset Ecosystem

  • Pillar A (Access) – Streamline market entry through regulatory clarity.

  • Pillar S (Safeguards) – Optimising compliance burdens without compromising security.

  • Pillar P (Products) – Expand product offerings and services based on investor categorisation.

  • Pillar I (Infrastructure) – Modernise reporting, surveillance and cross-agency collaboration.

  • Pillar Re (Relationships) – Empower investors and industry through education, engagement and transparency

 

Also and as promised last year, the SFC has already set up an industry group to manage priorities which has already hit some of the self set targets, almost as soon as they have set them :


We understand that the central tenant of the panel initiative is to put the industry in the driving seat as to where they would like the regulator to focus. We would comparing this panel with a traditional style exchange membership panel, made up of stakeholder firms who can assist with determining priorities for market development. We are not yet sure how well it is going to work but we like the idea of how this may work if curated appropriately and resourced with the top minds of our industry.


Close-up view of a digital asset transaction platform interface
Detailed view of a digital asset transaction platform showcasing transaction processes. WIX AI

Key ASPIRations:

 

"These dynamics underscore the market’s inherent tensions: between innovation and stability, accessibility and protection, and globalisation and regulatory sovereignty."

 

We raised these specific dynamics in more depth in our prior discussion blog and the programme tries to balance the needs as well as they can. What was clear from Consensus Hong Kong (Source: CoinDesk) is that market development is dependent on whether Hong Kong (and indeed any market) can attract enough liquidity to pay for itself. That razor sharp focus needs to be the driving factor of future efforts, given the efforts of the ecosystem in getting us to where we are today.


In addition, it is emphasised that:

 

"The line between TradFi and virtual assets is blurring, driven by institutional adoption and technological cross-pollination. This convergence presents dual opportunities: applying TradFi’s compliance rigor to virtual assets and leveraging blockchain-driven innovations to modernise TradFi."


The factor means that ultimately the markets and the technologies need to develop in a symbiotic and complimentary manner, even though some parts may never cross over with each other.

Initiatives being developed:


Initiative 1: Establish licensing regimes for OTC trading and custody services

  • Virtual asset OTC trading

Anyone that that has been involved in the development of markets understands that there is a place for both lit and dark venues but the dark venues need to operate with semi-transparency in order to ensure that they are not hiding manipulation.

  • Virtual asset custody services

More detail on the proposed framework to build out the functionality of the ecosystem and balance new functionality with appropriate security of assets.


Initiative 2: Attract global platforms, order flows and liquidity providers

  • Integration of global platforms [Key issue for success in attracting liquidity but it is also likely to be necessary to bring back some of the players that may of felt unwelcome because of the length of time taken to get established became unworkable. As digital assets already exist globally, you cannot really complete the custody chain without most of the major owners. Liquidity is only available if all the major actors feel that they can participate]

  • Participation of Liquidity Providers - This is key, international participants will need to want to participate and trade within Hong Kong. In order to get there, Hong Kong will need to pull out all the stoppers.

 

Initiative 3: Explore adopting a dynamic approach to custody technologies and storage ratios

  • Emerging custody technologies - critical for the other initiatives

  • Mandatory hot/cold storage ratios - balancing security with functionality

 

Initiative 4: Enhance insurance and compensation frameworks

  • This had not received much attention before but highlights the importance of both factors in establishing any ecosystem where risk will be balanced.

 

Initiative 5: Clarify investor onboarding and product categorisation

  • Investor onboarding - We saw significant technology developments that are bringing benefits to both decentralised finance and the traditional space at both Chainlink and Consensus Hong Kong.

  • Product categorisation

 

Initiative 6: Explore regulatory framework for professional investor-exclusive new token listings and virtual asset derivative trading

  • New token listings

  • Virtual asset derivative trading

 

Initiative 7: Explore virtual asset margin financing requirements aligned with securities market risk management safeguards

 

Initiative 8: Consider allowing staking and borrowing/lending services under clear custody and operational guidelines

  • Staking - See most recent update from SFC On staking opportunities.

  • Borrowing/lending services

 

Initiative 9: Consider solutions for efficient regulatory reporting and deploy advanced surveillance tools to detect illicit activities

  • This is an area that we have explored with surveillance providers and got us first interested in virtual asset developments (Source: Cognitive GRC 2022), as the ability to monitor and find market misconduct will be key to protecting markets and this was an area that the SFC had already focused on as part of the original framework for VATP.

 

Initiative 10: Strengthen local cross-agency collaboration and promote cross-border cooperation with global regulators

This is important to reduce regulatory arbitrage.

 

Initiative 11: Consider regulatory framework for financial influencers (Finfluencers) to address new investor engagement channels


The SFC has already significantly increased its focus in this area in both preventing firms from presenting themselves as regulated and following up of activities in the market that will damage reputation. We have already seen the SFC take action (SFC suspends finfluencer for 16 months Source SFC), specifically on the well established influencer channel, that is, in many ways much more efficient at reaching out to investors in the digital asset space than others.


The interest of the SFC is clear, as evidenced by their participation in the various events that are occurring in Hong Kong and elsewhere and continuing to deliver developments as they do. The hard work done in the last few years has left the SFC with an extremely well developed understanding of what is needed and whatever you may think with regards to overall speed of development, it is evidence that forward progression continues to take place. Against the global concerns around staking, the SFC has now moved the debate forward by coming out on how they are prepared to allow staking to take place within the ecosystem that has developed.



Digital Asset Architecture - WIX AI
Digital Asset Architecture - WIX AI

As discussed in our earlier updates, the SFC has provided feedback to applicants on the licensing process and implemented an enhanced process were they are taking a more active involvement.


We understand why the SFC is only allowing practicing accountants to get involved in the back end of the process, but not entirely sure that practicing accountants have the greatest understanding on the relevant technologies, to enable a smooth and inexpensive exercise, as often the technical accountant's sign off, does not necessarily always result in optimum outcomes for those that have sought them. In our long standing experience with new regulations and markets, we have often noted that where internal control necessitates understanding that goes beyond established accounting principles, that sometimes the practicing certificate is not always the litmus test of understanding the product, technology and/or control risks, but certainly results in complete, clean and well presented documentation. (e.g. Global Financial Crisis/Collateralised Debt Obligation Funds etc).


We are yet to see whether these changes and new initiatives will deliver the desired efficiency but as they say, sometimes making a list provides a greater chance that issues will be addressed. At Consensus Hong Kong a number of regulators presented their own development frameworks and their desire to co-operate more across the region and we look forward to their own assessment of how well they can achieve this in the coming year.


US Developments on Digital Assets


Going for Gold: - You are now playing catch up. We



If you are looking for a succinct design map of these developments I would also recommend United States Financial System 3.0 | Chainlink Blog. Chainlink again has neatly put forward the requirements and potential of an improved roadmap and how it can be achieved. I respect the clarity in which Chainlink has helped beat the path forward in a number of jurisdictions and the efforts by them in helping with convergence. In addition to seeking altruistic goals of a neat and effective global ecosystem, it is clearly attempting to put themselves at the centre of these developments.


As a lot of the US development is still work in process, it is impossible to say which jurisdiction will win the current race, but ultimately the developments in the US will make it even more important to get involved and rooted in a legal system that is currently more manageable, at least from a transparency point of view. The speed at which the US is now approaching this, and how the global market is already in existence will likely push Hong Kong forward in its readiness. The current advantage is that the regulatory infrastructure is in an advanced phase and the decision makers are already well educated with respect to what needs to happen. All we are waiting for is some industry leadership to shape both direction and speed and Hong Kong is lucky to have so many new entrants, service providers and participants to step up to the plate while the rest of the world is playing catch.

Meanwhile we work with firms interested in developing their strategies over digital assets while monitoring those developments that are more than likely going to bleed into traditional clients that need to be aware.


If you are interested in exploring digital assets strategies as a licensed provider in Hong Kong, please get in touch. We will continue to monitor these developments with interest as we believe they will play an important role in the development of traditional finance as well as influencing global direction on digital assets.

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