Looking back, looking forward: Highlights and prospects in Hong Kong fintech regulation

The fintech landscape in Hong Kong witnessed significant regulatory developments in 2024. More lies ahead for 2025 with several regulatory initiatives in prospect. In this article, Pádraig Walsh from our Fintech team highlights three key developments in 2024, and foreshadows three possible highlights in the year to come.

2024 in review

Virtual assets and tokenisation

In the course of 2024, the Financial Services and Treasury Bureau conducted and concluded its public consultation for feedback on proposals to regulate service providers of over-the-counter trading of virtual assets. The proposals will result in a new licensing system which will require licensees to abide by anti-money laundering and counter-terrorist financing requirements, to appoint competent compliance officers, and to implement internal policies and procedures to mitigate cybersecurity risks. The competent regulator will be the Customs and Excise Department (CED), though we would not be surprised if the Securities and Futures Commission (SFC) was involved in some form once the proposals are finalised. The legislative changes will be in the form of an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and we can expect the draft legislation to be published soon.

In March 2024, the Hong Kong Monetary Authority (HKMA) launched Project Ensemble aimed at exploring the potential tokenization of financial and real-world assets and the use of a wholesale central bank digital currency (wCBDC) for interbank settlements. Central to this project was the Project Ensemble Sandbox, established with the aim of exploring the potential interoperability of tokenized assets, tokenized deposits, and wCBDC. The sandbox has also identified several use cases involving the tokenization of bonds and investment funds, liquidity management solutions, and applications in green finance. The HKMA is also working with the Banque de France to test cross-border payment functionalities, demonstrating the potential for interbank settlement between different jurisdictions.

Digital money

On 23 September 2024, the Hong Kong Monetary Authority (HKMA) launched Phase 2 of the e-HKD Pilot Programme, now renamed Project e-HKD+, to explore use cases for digital money, including e-HKD and tokenised deposits. The regulatory sandbox for this project involves 11 selected firms from various sectors, focusing on three main themes: the settlement of tokenised assets, programmability, and offline payments. The HKMA plans to share its key findings with the public by the end of 2025. This study will assist in addressing the practical challenges of designing a digital money ecosystem that includes both publicly and privately issued currencies.

Artificial intelligence

Each of the three core financial services regulators made significant policy statements in 2024 on the risk and potential of generative AI. The key touchstone is a Research Paper on Generative AI in financial services published by the HKMA, but with significant contributions by the SFC and the Insurance Authority. This led to separate guidelines on the use of Generative AI published by the HKMA in September 2024, and by the SFC in November 2024, which focused on governance and risk expectations of the regulators in respect of the adoption, use and reliance on generative AI. The HKMA has also announced and accepted the first cohort of its Gen AI sandbox initiative to provide a risk-controlled environment for banks to test AI-based solutions in real-world banking scenarios. 2024 was the year when Gen AI crossed the rubicon to become a priority topic of interest to regulators in Hong Kong.

2025 in prospect

Stablecoin legislation

The Stablecoins Bills was published on 6 December 2024 and was introduced to the Legislative Counsel for first reading on 18 December 2024. We can expect 2025 to be the year when this significant legislation to implement stablecoin regulation in Hong Kong is enacted and in force in Hong Kong. This will introduce a regulatory framework for fiat referenced stablecoin (FRS) issuers in Hong Kong. Stablecoin issuers that wish to issue a fiat referenced stablecoin in Hong Kong (or actively market to Hong Kong), or to issue a Hong Kong dollar referenced stablecoin, will require to be licensed by the HKMA. They must also fulfil the requirements of the HKMA in respect of capital reserves and asset-backing.

Cybersecurity, governance and resilience

The Protection of Critical Infrastructure (Computer System) Bill is already in formal reading before the Legislative Council in Hong Kong and will be implemented in 2025. Banking and financial services is one of the sectors specified for the definition of critical infrastructure in the draft legislation. As part of this initiative, a Commissioner’s Office will be established to oversee compliance and designate Critical Infrastructure Operators (CIOs). CIOs will be required to establish security management units, conduct annual risk assessments, and submit regular incident reports. The Security Bureau has stated that it will designate certain sector regulators as designated authorities to monitor organisational and preventive obligations, and has indicated that the HKMA will be a designated authority responsible for regulating some service providers in the banking and financial services sector. This will mean that CIOs under the regulatory remit of the HKMA will not need to fulfil additional requirements of the Commissioner’s Office in relation to organisational and preventive obligations under the new legislation. We can expect that, in time, the Security Bureau may also consider the SFC and the Insurance Authority as designated authorities. The industry will also focus on how the Security Bureau will streamline compliance obligations as the new legislation is implemented.

All banks go fintech

Building on the Smart Banking Era Strategy introduced in 2017, the HKMA plans to support fintech adoption among Hong Kong banks by promoting digitalization across their operations. To facilitate this, the HKMA will conduct a Tech Baseline Assessment in 2025 to evaluate banks’ current and future use of fintech, focusing on areas that may need further development such as wealthtech, insurtech, and greentech. The HKMA will again focus on use cases and implementation of artificial intelligence and distributed ledger technology. The HKMA intends to provide additional supervisory guidance to encourage the adoption of new technologies, and will enhance its own supervisory processes.

Conclusion

A lot happened in fintech regulation in 2024, and much more will happen in the coming 12 months. The key drivers are virtual assets, artificial intelligence and cybersecurity.

The financial services industry must bear the burden of meeting obligations of new laws and regulations as they come into force and are implemented. Just as importantly, the industry must engage with regulators to influence the regulatory perspective before the direction for further laws and regulations is set. These are interesting times when tech in financial services is more crucial than ever. Collaboration and consultation is key. It’s getting to be that new regulation is up there with death and taxes as only certainties we can hold on to.

Pádraig Walsh and Oliver Lam

Extracts from this article were first published on Reglex.io.

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Pádraig Walsh

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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last reviewed on 22 January 2025.