May 22 2024

Hong Kong steps up fintech sandbox efforts

Across Asia, there have been many regulatory sandboxes launched in recent years intended to support fintech innovation. However, in many cases, big fintech success stories emerged outside of the sandboxes, usually because the sandboxes were too restrictive. While regulatory support is important to facilitate a healthy fintech ecosystem, it is not usually government that spurs the most significant innovation – but the private sector. That said, Hong Kong appears to be leaning into the sandbox concept as part to see that as part of its plan to build a hub for cryptocurrency.

In many cases, the sandbox concept looks good on paper, but once put into practice, it constrains a fintech’s ability to grow. This can be especially detrimental for very young companies that are trying to scale up and build significant user bases.

However, the cryptocurrency segment could be an exception to this rule. The reason is that compared to other fintech segments like payments (in fiat currency), digital banking, embedded finance etc. crypto is much more volatile and prone to problems. In a sandbox scenario, the crypto sector could feel relatively free to experiment while being insulated from the typical regulatory challenges it faces.

In March, the Hong Kong Monetary Authority (HKMA) announced the launch of a sandbox for stablecoins. Applicants should have genuine interest in developing a stablecoin issuance business in Hong Kong with a reasonable business plan, and their proposed operations under the sandbox arrangement will be conducted within a limited scope and in a risk-controllable manner, the HKMA said in a news release.

“The sandbox arrangement serves as an effective channel for the HKMA and the industry to exchange views on the proposed regulatory regime, and will facilitate the formulation of fit-for-purpose and risk-based regulatory requirements, which is key to promoting the sustainable and responsible development of the stablecoin issuance business,” HKMA chief executive Eddie Yue said in the news release.

One of the sandbox’s first projects is a proof-concept pilot involving Standard Chartered, the digital bank Mox Bank, Mastercard and Libera. The project explores the operational and risk management benefits of tokenized deposits to support the settlement of tokenized assets.

We will be interested to see how the pilot pans out, as while the participants laud the benefits of tokenized asset settlement in the context of carbon credits in a news release, it is not fully clear why tokenization would be necessary, and how it would better support sustainable finance than non-blockchain solutions.