Hong Kong becomes a global centre for investors of virtual assets, an increasingly viable asset class in the city, finds KPMG

Clear regulatory guidelines and maturing service offerings are key drivers

Clear regulatory guidelines and maturing service offerings are key drivers

25 March 2021, Hong Kong – Regulatory bodies around the globe, including Hong Kong, are now taking the Virtual Asset industry more seriously, while Virtual Asset Service Providers (VASPs) continue to mature their service offerings and to disrupt the financial services landscape where the real potential lies for growth, finds KPMG’s latest report on the virtual assets industry. These developments have been crucial to help crypto assets in becoming more accessible for institutional investors.

The report titled Investing in Virtual Assets examines the recent evolution of the industry, and looks ahead to the operational changes that VASPs need to implement to succeed at institutionalisation. By virtual assets, the report refers to “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”, such as crypto-currency or asset-backed tokens.

Paul McSheaffrey

Paul McSheaffrey, Partner, Head of Banking and Capital Markets, Hong Kong, KPMG China, says:

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Home to more than 30 VASPs, Hong Kong has emerged as one of the global centres in crypto, and since the Hong Kong Securities & Futures Commission (SFC) announced its opt-in regulatory scheme in 2019, many players are looking to professionalise their service offerings to meet regulatory and institutional grade requirements.

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Continuing the direction of clearer regulation, the SFC together with the Financial Service and Treasury Board (FSTB) is currently leading a consultation to extend the opt-in to a mandatory regulation scheme for VASPs in the city, too.

James O’Callaghan

James O’Callaghan, Partner, Head of Technology Consulting, Hong Kong, KPMG China, says:

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Since our last deep-dive report in 2018, many VASPs, such as virtual asset exchanges and virtual assets custodians, have leapt forward on their path to institutionalisation. The industry has demonstrated great innovation in creating new products and new asset classes, and exciting players have appeared, unburdened by legacy processes or infrastructure.

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Today, Hong Kong offers asset managers and exchanges of virtual assets a reputable license that demonstrates a fit and proper business conduct and compliance to protect investors in a quickly emerging industry.

Laszlo Peter

VASPs have also weathered the COVID-19 crisis well, according to Laszlo Peter, Head of Blockchain Services, KPMG Asia Pacific:

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In March 2020, the COVID-19 pandemic led to a virtual asset 'flash crash'. But while traditional stocks continued to suffer severe volatility, virtual asset markets recovered within just a few weeks. This was a proof point for VASPs, as it showed their resilience to rapid market movements.

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Additionally in 2020, major announcements with regards to the institutionalisation of the industry were seen globally, including the SFC issuing its first in principle virtual asset trading licenses to OSL in Hong Kong, the city’s first regulated Virtual Asset exchange. These are signs of a new era where VASPs become part of the traditional financial services ecosystem.

Similar to virtual banks, VASPs are playing an important role when it comes to the immersion of new financial products into everyday financial services.

“Success in the virtual asset space, particularly in the fast-growing institutional and professional segment will be dependent on service providers achieving superior customer engagement, unquestionable regulatory compliance and scalable, well-governed and stable technology operations,” says Wayne Trench, CEO of OSL, Hong Kong’s first listed, SFC-licensed, insured and Big Four audited virtual asset platform. "Regulatory frameworks, such as the SFC’s in Hong Kong, have greatly increased security and counterparty confidence through strict customer onboarding, Know Your Customer (KYC) programs, Anti- Money Laundering (AML) and Counter Terrorism Financing (CTF) programs."

Peter adds: "By delivering an optimal customer engagement experience, VASPs can streamline participation for institutional players. Drawing on evolving regulations, they can increase security through strict customer onboarding and KYC programs, while through AML and CTF practices, they can build trust."

The report notes that the professionalisation and institutionalisation of virtual assets comes with significant opportunity for traditional asset managers and investors. 

Ben Usinger

Ben Usinger, Lead for KPMG’s Crypto & Blockchain Advisory in Hong Kong, concludes:

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In the next 1-2 years, we expect to see more VASPs follow the institutionalisation route, increasingly becoming part of the traditional financial services ecosystem.

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About KPMG China

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KPMG China is based in 28 offices across 25 cities with around 12,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Hefei, Jinan, Nanjing, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Tianjin, Wuhan, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR. Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.

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In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong firm can trace its origins to 1945. This early commitment to this market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in KPMG’s appointment for multi-disciplinary services (including audit, tax and advisory) by some of China’s most prestigious companies.

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