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“Hong Kong has a thriving fintech scene: a highly integrated network of start-ups and investors, a large market of technology-ready consumers hungry for innovative solutions, and a host of conducive fintech initiatives. Besides, the city's connectivity with other Asian capital cities and proximity to Mainland China have made it the centre of Asia's vibrant fintech ecosystem…” —Nelson Chow , Chief FinTech Officer of HKMA
INTRODUCTION
For many years, Hong Kong has fought to maintain its unique position as the FinTech capital of Asia. Whilst many people will forever remember 2020 as the year of pandemic, 2020 and 2021 also saw the unprecedented digitization of Hong Kong (and the globe’s) economy on a massive scale. It is, therefore, crucial to examine the FinTech landscape of the past year and projected trends for the coming 2021.
FINTECH LANDSCAPE OF 2020
The resilience of Hong Kong’s FinTech economy shined during the course of 2020. Despite the general downturn of the global economy as a result of COVID, Hong Kong’s FinTech market continued to thrive which can be seen in the following six (6) major developments in Hong Kong:
First and foremost, the Securities and Futures Commission (“SFC”) decides to take a more proactive approach towards regulating virtual assets exchanges and depart from their previous opt-in model. Legislation is expected to take place in 2021.
Second, on the list is the operation of virtual banks in Hong Kong. Enthusiasts have cited that virtual bank’s ability to cross-sell and bundle customers by partnering with third party providers along with other innovative products offered them distinct advantages over traditional banks.
Third, the Hong Kong Monetary Authority (“HKMA”) announced the building of a new financial infrastructure called the Commercial Data Interchange, a consent-based financial infrastructure. This will enable more efficient financial intermediation in the banking system.
Fourth, no 2020 policy will be complete without a COVID relief package. The Fintech Anti-epidemic Scheme for Talent Development (“FAST Scheme”) aims to provide financial assistance to FinTech companies to create new FinTech jobs in Hong Kong.
Next, HKMA issued a white paper entitled “Transforming Risk Management and Compliance: Harnessing the Power of Regtech” provides the foundation for the Hong Kong Government’s support in the development of the RegTech market.
Last, Blockchain enthusiasts will be please that HKMA has announced that the Inthanon-LionRock Project, a collaboration with Bank of Thailand to develop a blockchain-based central currency, has moved into the proof of concept stage.
FINTECH OUTLOOK FOR 2021
Turning to 2021, the following are likely trends amongst the FinTech ecosystem that stakeholders should keep an eye on:
Regulatory framework will catch up with the innovation of 2020. Already the SFC has commenced the legislative process to expand its jurisdiction over the virtual asset space. Further development in law using tech is also likely to occur as civilizations are forced to expand and get used to the virtual space.
Improvement and implementation of new privacy laws and data use is to be expected. Already, we have seen a global trend in managing corporate use of big data. FinTech and other Tech companies will therefore have to be prepared for regulation.
DeFi or Decentralized Finance took the world by storm in 2020. Expecting DeFi to continue to develop and go mainstream, it is just a matter of time before regulators examine DeFi is to be regulated.
The world is also moving away from cash. Historically, the biggest resister to virtual assets has been banks. However, with the use of cash becoming deadly during the COVID era (being a medium to spread the virus), alternative payment methods have became a necessity and gone mainstream.
Hong Kong can also expect a focus on anti-money laundering (“AML”) and FinTech especially with the recent announcement of enhanced measures to address the virtual asset space. Global FinTech firms operating out of Hong Kong can expect to experience issues harmonized Know Your Client (“KYC”).
Regulation on big data. With more and more focus seen in both the legislative and judiciary over issues such as doxing and data privacy, it is expected that both financial and competition regulators may be focusing on how data is being used and data ethics of big data companies. The SFC has already rolled out various notices requesting financial institutions to pay greater attention to data security.
Last but not least, the Hong Kong – Singapore rivalry. Both jurisdictions have for years jousted for supremacy in becoming Asia’s premier FinTech hub. Notable areas of regulatory competition will likely include:
Regulatory sandbox
Stored Value Facility (“SVF”)
Open Application Programming Interface (“API”)
CONCLUSION
All in all, it can be foreseen that the robust environment which has enabled FinTech enterprises to thrive in Hong Kong will continue into 2021 and beyond. Therefore, FinTech enterprises should always remember:
Be prepared for regulation. How regulations will turn out can be projected. Hong Kong carries a strong Common Law tradition and experience and pioneering practice in Europe are often considered and, if appropriate, adopted. Being geared for regulation will also mean enterprise can serve wider clientele, being able to operate even in jurisdictions with advanced regulations in place;
The key to Hong Kong’s continued success in its FinTech ecosystem lies in its three pillars (i) strong regulatory environment (making it safe for investors to operate in), (ii) strong operating environment and (iii) significant market expansion potential’; and
FinTech remains as the strategic priority for Hong Kong in the post-COVID-19 realm. This is especially true for banks and financial institutions. FinTech companies are therefore likely look for strategic partnership in the coming days to break out of their initial growth stage, which in turns, translates into significant market potential.
This article is co-authored by Joshua Chu from ONC Lawyers