Carrie Lam, you need to take fintech seriously.
That is the message aimed at the incoming Hong Kong chief executive by a pair of papers issued on May 9 by the Financial Services Development Council, a think tank-slash-advisory body internal to the government.
The FSDC issued two white papers that lay out a strategy for the Hong Kong government to understand fintech and distributed-ledger technology, with recommendations on how to forge a development strategy.
Due to legacy laws and a fractured regulatory system, designed for a pre-digital, much more siloed financial services industry, Hong Kong has not fostered a welcoming environment for innovation in finance-related technology. The FSDC’s papers aim to put fintech and distributed ledgers on the agenda of the incoming chief executive of the Chinese territory.
Carrie Lam Cheng Yuet-ngor, currently chief secretary, will take on the chief executive role effective July 1.
“This is the starting point of a conversation,” said James Lloyd, who led the FSDC taskforce that penned the white paper on distributed-ledger technology (his day job: Asia Pacific fintech leader at EY).
Pick your fights
The paper on fintech identifies five areas that are the most relevant to Hong Kong, given its massive financial services industry and proximity to China, and urges the government to set up a fintech office to coordinate development activities.
“It’s important to have our own recommendations,” said a person involved in the fintech paper’s taskforce. “It’s important to have a strategy at the highest level. The market looks to the government to have a voice. Otherwise it just devolves into a long laundry list of suggestions.”
The twin taskforces involved inputs from trade associations, industry executives, fintech company founders and an analysis of government strategies in China, Singapore, the U.S., Australia and other countries.
“The crucial foundation for the fintech ecosystem is facilitative regulation that recognizes and supports digital approaches to financial activities,” said Matthew Dooley, managing director at Connected Thinking and a contributor to the studies.
Industry bodies such as the Hong Kong Venture Capital Association also announced their endorsement of the papers, as supportive of venture and early-stage investments playing a role in developing innovation in the territory.
Banging bureaucratic heads
The first paper, FSCD paper number 29, calls for the creation of a central fintech office that can analyze options, coordinate and execute policy across Hong Kong’s fragmented regulatory landscape, which includes separate authorities for banking, securities, insurance and pensions, as well as more generally for technology.
Its second major recommendation is for government policy to focus on five areas: cyber-security, payments and securities settlement, digital identity and a know-your-customer facility, innovation in wealth management and insurance, and ‘regtech’ for compliance.
This reflects the size of Hong Kong’s banking, wealth management and insurance sectors, and the need to address KYC and similar burdens.
It also ignores fintech developments that are not prevalent in Hong Kong or that would require substantive changes to existing securities legislation, such as peer-to-peer lending.
Of these, perhaps the area in which the government could play the most vital role is with regards to digital identity. The FSDC calls for the government to establish a digital identity/KYC utility, which “might be literally a single database, or a federation of (existing and new) databases compiled under common standards, or some other format”.
Noting that Singapore has already undertaken a similar program, the FSDC says: “cooperation and eventual interoperability with Singapore’s initiative – and other equivalent initiatives overseas – should be considered”.
The paper goes on to say: “Within the proposed Hong Kong utility, each participating Hong Kong individual and corporate customer would have a digital profile comprising identity, preferences and transaction history, which, once established, should be owned and updated by the customers themselves.”
The second paper deals with distributed-ledger technology. It repeats the exhortation for the establishment of a fintech office, and recognizes that DLT can extend beyond finance.
“The targeted uses fall into two main groups,” says the FSDC’s paper number 30, “those that focus on digital currencies, and (mainly) those that focus on the broader record-keeping properties of DLT…Hong Kong with its large financial sector would be especially affected. DLT opportunity is that of transformation.”
The FSDC calls for a government ‘DLT lead function’ and a related research hub or library, to advance the agenda for blockchain technology, in finance but also in the advancement of ‘smart city’ or logistics-related technology, streamlined government administration and other potential uses.
It also urges the government to be prepared for the likely eventuality of mainland China issuing its own digital currency. Given Hong Kong’s role as a financial center for offshore renminbi, to be unprepared for when the People’s Bank of China issues digital yuan would be a big mistake, the FSDC warns. It calls for tweaking regulation so that it can supervise digital currencies, be able to handle payments of digital renminbi, and perhaps issue its own.
One initiative backed by the Hong Kong Monetary Authority, ASTRI, the Hong Kong Applied Science and Technology Research Institute, is already testing blockchain solutions around mortgages (with Bank of China HK), trade finance and digital identity management; the FSDC calls for boosting ASTRI’s funding.
People involved in these reports told DigFin (with a sense of relief) that their work is done. It is now up to the new chief executive and her team to decide which recommendations to embrace or discard. But they add that now, at least, there is a starting point for the government to set priorities and push for results.
Noting the fractured nature of the city’s financial regulators, one person said, “It’s something to help the government discuss these issues with everyone at the same table. That sounds basic, but it doesn’t happen often in Hong Kong.”
The fintech paper can be read here.
The paper on distributed ledgers can be read here.