The virtual banks of Hong Kong, despite representing only a small part of the market, are determinedly exploring the potential of web3, facing regulatory challenges to expand their digital presence.

Let’s see all the details below. 

Opportunities in web3: the virtual banks of Hong Kong show digital ambitions

As anticipated, the virtual banks in Hong Kong are facing a crucial moment, with a currently limited market share, representing only 0.3% of the total assets of retail banks. 

However, the rapidly evolving context of web3 offers new opportunities for these financial institutions.

The legislator of Hong Kong, Johnny Ng Kit-chong, a well-known supporter of cryptocurrencies, believes that virtual banks can play a more significant role in serving businesses related to Web3.

According to Ng, the government of Hong Kong has already made significant progress in the field of virtual banks and in updating financial services. 

Ng sees the next two years as a critical period to strengthen the city’s contribution to the development of Web 3.0, one of the most promising emerging technologies.

One of the main difficulties that virtual banks in Hong Kong face is the complexity in opening accounts for companies operating in the cryptocurrency, non-fungible token (NFT), and blockchain sectors. 

A recent survey, reported by the South China Morning Post (SCMP), revealed that 40% of the companies interviewed consider this process “extremely complicated”. In particular, citing as main obstacles the localization and the “onerous standards”.

These difficulties have led some companies to move to more welcoming regions, risking to slow down digital innovation in Hong Kong.

Progress among the difficulties

Despite the challenges, Ng remains optimistic about the potential of virtual banks, emphasizing the importance of a clear government plan for the development of Web3. 

Mox Bank, owned by Standard Chartered, has already taken a step forward by launching a exchange-traded fund (ETF) of cryptocurrencies. Thus becoming the first virtual bank in Hong Kong to facilitate spot ETF transactions on Bitcoin and Ether.

Barbaros Uygun, CEO of Mox Bank, has announced the bank’s intention to further expand into emerging sectors, offering new digital investment opportunities to its clients.

In a context of growing interest in cryptocurrencies, Ng recently announced the intention to collaborate with various stakeholders to evaluate the inclusion of Bitcoin in the financial reserves of Hong Kong. 

Defining Bitcoin as “digital gold”, Ng highlighted its potential in protecting the economy from inflation, thanks to the growing recognition of the value of this asset on a global level. 

This move could represent a significant step towards the integration of cryptocurrencies into Hong Kong’s economy, provided that the right regulatory conditions are established.

ETF on Ether in Hong Kong 

August 5, 2024 marked a historic moment for Hong Kong’s cryptocurrency-linked ETFs, with a daily trading volume reaching approximately 44.56 million dollars. 

That is, the highest ever recorded since these financial products were launched. 

The spot ETFs on Bitcoin (BTC) and Ethereum (ETH) were introduced on April 30, 2024, as part of a complex regulatory framework developed to ensure investor protection and maintain market integrity. 

The Securities and Futures Commission (SFC) has authorized companies such as China Asset Management and HashKey Capital to manage these ETFs. Thus offering a regulated and secure option for investors interested in gaining exposure to digital assets.

The record trading volumes reflect the growing confidence of investors in spot ETFs on BTC and ETH and in the cryptocurrency market in general.

Currently, the spot ETF on BTC in Hong Kong manages 248.71 million dollars, while the spot ETF on ETH controls 37.48 million dollars of assets. 

We remind you that these ETFs use a in-kind creation model, which allows converting BTC and ETH into ETF shares, simplifying access to investments and improving liquidity.

The combination of a creation model in nature, which favors liquidity, and a rigorous regulatory framework, offers a guarantee of compliance for both retail and institutional investors. 

This approach places Hong Kong ETFs in a favorable position for future success, with the potential to become a benchmark for the regulation of crypto ETFs globally.

Whatever sector you cast your eyes into, what seems clear is the expansion of NFTs, whether fungible or not. Increasingly more banks, games, social networks and whatever else are becoming familiar with these assets.

NFTs take hold everywhere 

Research conducted by YouGov and published on 18 February 2022 titled “Awareness of Non-Fungible Tokens among Adults in the US during March 2021/February 2022” brings to light people’s perceptions of these tokens and how entrenched it is among the common population (including non-investors). 

Based on the assumption that NFTs (Non-Fungible Tokens) are intertwined with the crypto sector in that both are linked to the blockchain, often the user base of the two assets coincide and those who become passionate about one usually end up playfully making contact with the other as well, NFTs have also enjoyed a great expansion in the wake of the spread of major cryptocurrencies such as BTC and ETH. 

Although the spread of cryptocurrencies has also driven the spread of virtual artworks, there are other factors that come into play in their proliferation, one of which is the intermingling of art and technology; blockchain and cryptography have given rise to new palettes on which artists and programmers combine their know-how to experiment with exclusive works of great value. 

NFT collections are often limited series or even one-of-a-kind pieces, and this, combined with technology that makes them impossible to copy and replicate, increases their value. 

The research conducted by YouGov first points the spotlight on an important data point that is evolving this year compared to the last: the number of people who have never heard of NFTs. 

The data found in YouGov’s research

While in March 2021 the word NFT was unknown to 66% of the population, this year it is only 44% who do not know what it is. 

The research goes even deeper and differentiates between those who have heard of it and know what it is, those who have heard of it but are not sure what it is, and finally those who have heard of it but do not know what it is. 

The data reported by YouGov shows that since last year, the percentage of people who are knowledgeable has increased by 10% from 12% to 23%, while those who are uncertain have only increased by 7% from 13% to 19%.

These numbers make it clear that at least 50% of people are aware of them regardless of the level of knowledge, and this has led many financial institutions to pounce on the deal. 

Goldman Sachs is studying “non-fungible tokens in the context of financial instruments” to develop ad hoc tools to make it easier for its clients to buy and exchange them. 

JP Morgan recently opened a private lounge in the metaverse where users can purchase virtual land plots via NFTs while Nomura, a major Japanese bank, is distinguishing itself as a presence in the cryptocurrency and NFT sector with promotions to attract new users and existing customers.

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