The Payment Systems and Stored Value Facilities Ordinance (Cap. 584) (PSSVFO) empowers the Hong Kong Monetary Authority (HKMA) to regulate both Retail Payment Systems (RPS) and Stored Value Facilities (SVF) for ensuring financial stability and consumer protection. A RPS is a system for the transfer, clearing or settlement of payment obligations relating to retail activities. A SVF is a facility in which money is paid and stored and used as a means of making payments. The most common SVFs in Hong Kong are Octopus Cards and e-wallets.

While the PSSVFO is the most direct relevant source of payments law, the offering of payment services and products in Hong Kong are subject to further confines imposed by other legislation in various respects, including but not limited to the Banking Ordinance (Cap. 155) and Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615), the Money Lenders Ordinance (Cap. 163), and the Securities and Futures Ordinance (Cap. 571).

Yes. Currently, there are 12 non-bank SVF licensees. The PSSVFO provides that the HKMA may only grant a SVF licence to an applicant if (a) all the minimum criteria applicable to the applicant are fulfilled, and (b) those minimum criteria will continue to be fulfilled by the applicant on the grant of the licence. The minimum criteria include, inter alia, the following: –

(a) the applicant’s principal business must be the issue of SVF under an SVF licence;

(b) the applicant must have either a paid-up share capital of not less than HK$25 million, or other financial resources that are equivalent to or exceed HK$25 million.

(c) the applicant must have in place adequate (a) systems of control to ensure that each manager is a fit and proper person to hold the position concerned; (b) risk management policies with reference to the scale and complexity of the business; and (c) systems guarding against anti-money laundering and counter-terrorist financing; and

(d) the applicant must redeem in full the stored value that remains on the facility as soon as practicable after being requested to do so by a user.

In Hong Kong, credit cards are the leading payment method at points-of-sale, as well as in e-commerce transactions. However, credit card usage is projected to decline through 2025, yielding to digital wallets. The use of cash is still prevalent, but its long-term decline continues, falling below 10% in 2022.

Increasingly popular is the Faster Payment System (FPS), a real-time settlement payment platform launched by the HKMA in September 2018 that allows banks and SVF service providers to offer almost-instant payment services. The main advantages of FPS are wide adoption (including government departments), the availability to transact through QR codes, e-wallet support, multiple currency payment (HKD and RMB) and electronic direct debit applications.

Currently, there is no legally mandated open banking in Hong Kong. However, in July 2018, the HKMA launched the Open Application Programming Interface Framework (Open API Framework) for the banking sector and relevant third-party service providers (TSPs). The Open API Framework is one of the seven initiatives taken by the HKMA to move Hong Kong into a new era of smart banking in a secure, controlled and convenient operating environment.

The Open API Framework was rolled out in four phases, covering functions such as product information, customer acquisition, account information and transactions.

Phases I and II of the Open API Framework were launched in January and October 2019, respectively, with over 20 retail banks having released their product and service data to TSPs and 800 Open APIs launched. The most commonly adopted categories of use cases in both phases were (a) product and service information enquiries from third-party websites, (b) real-time product and service comparisons, and (c) streamlining product/service subscriptions.

The HKMA announced the implementation plan for Phases III and IV in May 2021, covering the retrieval of deposit account information for customers and FPS app-to-app payments, respectively. As of September 2022, 20 out of 28 participating banks launched API functions.

Personal data is regulated in Hong Kong by the Personal Data (Privacy) Ordinance (Cap. 486) (PDPO). The PDPO is technology-neutral, principle-based, and applicable to private and public sectors. Most importantly, the PDPO introduces six data protection principles (DPPs) that outline how data users should collect, handle and use personal data.

For companies that provide financial services, it must adhere to, inter alia, the following DPPs:

(a) Principle 1 (purpose and manner of collection) which requires that where a financial institution collects data it should not use deceptive or misleading means to do so, nor collect excessive amounts;

(b) Principle 2 (accuracy and duration of retention) which requires that where a financial institution collects data it should also ensure that data collected and maintained should be accurate with regard to its purpose; and

(c) Principle 4 (security of personal data) which requires that all data should be sufficiently secured.

The HKMA released its “Fintech 2025” Strategy in June 2021 in a bid to (a) promote the digitalisation of the operations of Hong Kong banks by all-round adoption of fintech, (b) explore the future-proofing of Hong Kong for Central Bank Digital Currencies (CBDCs), (c) enhance and expand the city’s existing data infrastructure, and (d) increase the pool of fintech talent within the city.

The HKMA further encourages innovation via its Fintech Supervisory Sandbox (FSS), which allows banks and partnering technology firms to conduct pilot trials of their fintech initiatives without the need to fully comply with the HKMA’s supervisory requirements to a limited number of participating customers. This aims to increase the quality and variety of fintech products and services available in Hong Kong. FSS has been updated twice since its launch, first in 2016 and again in November 2021; the latter facilitates technology firms to apply for funding of up to HK$1 million for eligible projects. FSS operates under close dialogue with and the supervision of the SFC, so that potential regulatory risks are identified at an early stage.

The growth of fintech in Hong Kong faces imminent risk from three significant barriers: demand, technological innovation, and financial regulation. On the demand side, the limited size of the Hong Kong market and the resulting saturation of the incumbent institutions presents significant risk to the demand for B2C fintech. Technological innovation also manifests as a hurdle because (a) international technology companies that operate in Hong Kong prefer to focus their resources on marketing instead of innovation, and (b) universities in Hong Kong provide limited business-ready research. Lastly, financial regulations with respect to KYC and AML impose primarily paper-based requirements, as well as face-to-face meetings that entrench incumbent institutions.

More generally, there is a significant talent shortage in Hong Kong that directly impacts several sectors across fintech, which has worsened in recent years due to COVID-19 travel bans and local talent migration. See below for recent changes to immigration policy in Hong Kong.

Hong Kong benefits from a straightforward two-tier profits tax regime for corporations, where the first HK$2 million of profits are taxed at 8.25%, and profits exceeding HK$2 million are taxed at 16.5%. Special tax deductions may also be available for eligible R&D expenditure.

In May 2021, the Inland Revenue Ordinance (Cap. 112) was amended to give profits tax and salaries tax concessions to qualifying persons and employees in relation to particular types of carried interest received by them from the provision of investment management services for certain private equity funds operating in Hong Kong. Furthermore, the amendments also allow special purpose vehicles established by a private equity fund to hold, administer and carry out transactions in certain specified financial assets on behalf of the fund for profits tax exemption purposes.

Due to Hong Kong’s role as an international financial centre, numerous start-ups across fintech sectors attract a wealth of investment in both early and later series funding. Various government schemes, including the FinTech Proof-of-Concept Subsidy Scheme, provides early-stage funding for fintech start-ups partnered with incumbent financial institutions. Hong Kong also sees a variety of private equity and venture capital funding rounds for fintech businesses that are start-ups and those that are established. Benefiting from its renowned status as a global financial centre and a leader in fintech development and adoption, Hong Kong attracts a wide variety of fintech funding across the entire spectrum from pre-seed all the way through to the later series.

Findexable’s 2022 Asia Pacific Fintech Rankings report placed Hong Kong in the top spot for fintech throughout APAC. As of late 2021, Hong Kong is home to 3,700 start-ups, 12 of which had grown to become unicorns (i.e., valued at over US$1 billion). Consumers in Hong Kong are keen to adopt fintech where possible. Aside from consumer-focused fintech, a majority of fintech companies also focus on developing B2B ecosystems.

Hong Kong’s low-tax regime (for both corporations and individuals) and investment enthusiasm in fintech with disruptive potential are prime incentives for entrepreneurs. In September 2022, the Hong Kong Government unveiled its plan to award cash grants of up to US$1.3 million for fintech start-ups. Furthermore, the lack of exchange controls and capital inflow restrictions make Hong Kong one of the world’s freest economies, and hence, an ideal location for companies to expand their cross-border operations. Hong Kong also benefits from its world-renowned ease of setting up businesses and direct access to other major markets, including the ASEAN region and Mainland China (in particular, the Greater Bay Area).

On 19 October 2022, Hong Kong’s Chief Executive, John Lee Ka-chiu, delivered his first policy address presenting far-reaching policy proposals to attract foreign talent (Policy Address). The General Employment Policy (GEP) was relaxed to scrap the requirement of having to prove difficulties in hiring local talent before companies are able to hire foreign talents for 13 professions facing workforce shortages or for posts with an annual income of over HK$2 million. Requirements under the Technology Talent Admission Scheme (TechTAS), a fast-track admission for non-local technology talent, were also relaxed whereby companies acquiring foreign talent under TechTAS are no longer required to employ additional local talent. As a further policy introduced to attract talent, those who purchase residential property in Hong Kong and hold the same property for a least seven years is also entitled to a refund of Buyers’ Stamp Duty.

Under the existing GEP for Entrepreneurs, individuals can apply for a work visa when they either join or establish a business. For entrepreneurial applicants, a business plan, a balance sheet or a two-year forecast of profit-and-loss, evidence of financial resources, documentary proof of the amount of funds invested into the business, and the number of jobs created locally are required to be provided.

In October 2021, the Hong Kong Institute for Monetary and Financial Research (HKIMR) published a report concluding that a shortage of skilled finance talent in areas such as Artificial Intelligence and Big Data (AI/BD) are significant challenges in the Asia Pacific region and is expected to continue for several years. Although Hong Kong had a relatively high rate of AI/BD professionals participating in financial sectors (25%), there is still demand for further talent. As a result, it is anticipated that professionals in those fields will be especially welcomed over the following years. The recent Policy Address highlights the strong influence the fintech industry has on the immigration policy of Hong Kong.

The Industry Project Masters Network (IPMN) scheme is a part of the HKMA’s “Fintech 2025” Strategy. It aims to grow fintech talent by providing opportunities to postgraduate students to gain hands-on experience in fintech departments of banks or in industry projects. In October 2021, the HKMA partnered with several local universities to allow their postgraduate students to enrol in the IPMN. A cornerstone of the IPMN is the Mentorship Network, in which mentors meet with enrolled students to offer advice on projects and evaluate their performance accordingly. A number of multinational technological and consulting firms have since joined the Mentorship Network to offer opportunities and their expertise.

Hong Kong has a robust regime protecting intellectual property (IP) rights to the highest international standards, covered mainly by three legislations, namely, the Copyright Ordinance (Cap. 528), the Patents Ordinance (Cap. 514), and the Trade Marks Ordinance (Cap. 559). The latter two allow patents and trade-marks to be registered with the Intellectual Property Department (IPD). In contrast, copyright does not require registration as it subsists automatically once the copyright work is reduced to material form.

Fintech companies will likely be most concerned with IP rights protection on their software and computer codes. In Hong Kong, a computer program or the preparatory design material for a computer program is recognised as literary work under the Copyright Ordinance. Copyright subsists in the literary work automatically without the need for registration. Computer programs, however, cannot be patented per se. It is only possible to apply for a patent on a particular computer program if that computer program gives rise to an invention which is novel, inventive, and capable of industrial application. Additionally, any business plans or innovative ideas, including software or computer code, can be regarded as confidential information and/or trade secrets in a commercial transaction and be protected through confidentiality agreements accordingly.

The Hong Kong government recognises the importance of intangible IP assets. It has set up a free “One-On-One IP Consultation Service” to provide consultations and raise awareness on IP registration, management, licensing and due diligence for SMEs in Hong Kong. Further, the IPD operates the “Intellectual Property (IP) Manager Scheme” to assist Hong Kong SMEs build up their IP capacity such that they may take advantage of IP trading.

The HKMA and the Securities and Futures Commission (SFC) put forward the “Joint Circular on Intermediaries’ Virtual Asset-related Activities” (Crypto Regulation Circular) in January 2022 to provide a more up-to-date regulatory stance on the distribution and dealing of virtual assets and virtual asset-related products as well as advisory services relating thereto.

The Crypto Regulation Circular differentiates Virtual Assets (VAs) and VA-related products. VAs are defined as digital representations of value in the form of digital tokens, any other virtual commodities, crypto assets or other assets of the same nature. However, the definition excludes (a) any VA which amounts to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance (Cap. 571) (SFO), and (b) any digital representation of fiat currencies provided that central banks issued such VAs. VA-related products are defined as investment products with principal investment objectives or strategies to invest in VAs, derive their value principally from the value and characteristics of VAs, or track or replicate the investment results or returns which closely match or correspond to VAs.

The Crypto Regulation Circular institutes several restrictions on the sale of VA-related products but not on the sale of VAs themselves and provides that where VA-related products are considered complex products under the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct), then any institutions or individuals licensed or registered with the SFC should abide by the complex products regime of the Code of Conduct. While the Crypto Regulation Circular does not go so far as to consider all VA-related products as complex products, it indicated that they likely would be due to the risks associated with them.

Further, the Hong Kong Government gazetted the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (the Amendment Bill) on 24 June 2022. The Amendment Bill introduces a licensing regime for virtual asset service providers (VASPs) to be effective from 1 March 2023. The Amendment Bill provides that any person (a) carrying on a business of providing a virtual asset service in Hong Kong, which is currently defined to mean the operation of a VA exchange, or (b) holding themselves out as doing so, is required to be licensed as a VASP by the SFC. A contravention attracts both a severe fine and imprisonment.

The VASP licencing requirements to be introduced will require that the applicants must be Hong Kong-incorporated companies with a permanent place of business in Hong Kong or registered overseas companies. The requirements further stipulate that the applicant must, inter alia, (a) appoint at least two responsible officers to oversee the VASP operation and ensure compliance; (b) ensure all individuals offering the VA services are licensed representatives; (c) ensure all licensed representatives, directors, ultimate owners, and responsible officers pass a fit and proper test; and (d) get SFC approval for the premises where AMLO-required records are kept.

Once licensed, VASPs are subject to continuing obligations, including but not limited to (a) compliance with AML/CTF requirements; (b) only offer services to professional investors; (c) acquiring written approval from the SFC for any person who wishes to become an ultimate owner; and (d) being required to notify the SFC on the occurrence of a variety of events.

Where the digital tokens involved in an initial coin offering (ICO) fall under the definition of “securities”, dealing in or advising on the digital tokens, amongst other things, constitutes a “regulated activity” under the SFO. Accordingly, entities involved will require an appropriate licence granted by, or registration with, the SFC. A digital token offered in an ICO that represents an equity or ownership interest or acknowledges a debt or liability is likely to be regarded as “securities” within the meaning of the SFO.

Alternatively, ICOs and other digital tokens may also be considered as collective investment schemes (CIS) within the meaning of the SFO which in turn constitute “securities” thereunder. A CIS needs to be authorised by the SFC unless exempted before any interest entailed can be offered to the public.

Under the SFO, any marketing of “securities” to the Hong Kong public shall also be authorised by the SFC, regardless of whether the promoter is located in Hong Kong.

As at the date of writing, we have not learnt of any change of regulatory attitude towards digital assets beyond the existing regulatory regime and the proposed regime under the Amendment Bill as discussed above.

Yes, they are primarily focused in the financial and investment sectors. A prominent example is eTradeConnect, a large-scale multi-bank blockchain trade finance platform facilitated by the HKMA and led by a consortium of banks. It aims to improve overall trade efficiency and reduce costs and risks by digitising trade documents and automating trade finance processes.

Further, Hong Kong Exchanges and Clearing Limited (HKEX), in collaboration with The Depository Trust & Clearing Corporation, has launched HKEX Synapse, a blockchain-based settlement platform, leveraging on smart contracts to assist institutional investors which make use of the Northbound Stock Connect to manage and organise post-trade operations with Mainland China’s securities market.

The HKIMR report discussed above dissected the use and adoption of AI/BD in financial services, where 71% of survey respondents across financial service sectors in six major Asia-Pacific financial centres indicated that they have adopted or planned to adopt AI/BD in the next 12 months. In Hong Kong specifically, those market participants that have adopted AI/BD believe it has allowed them to offer better products due to enhanced modelling and increased productivity.

While some respondents in Hong Kong emphasised future regulatory restrictions as prominent challenges potentially impeding the further adoption and use of AI/BD in the financial sector, they are far more concerned with the shortage of talent, data quality, and governance issues, both now and in the next five years.

There are various Insurtech companies in Hong Kong, generally targeting the sectors of digital-only insurance providers, comparison sites, ecosystems, and health and wellness. The Insurance Authority (IA) is the Hong Kong regulator of insurance companies and licensed insurance intermediaries which operates a supportive regulatory environment for Insurtech, as evidenced in the Fast-Track Authorisation scheme for insurance companies that carry out their business solely through digital channels.

InvestHK 2021 found that the most vital fintech sectors in terms of growth were FinTech Enterprise Solutions and CreditTech, closely followed by Insurtech and Regtech. The HKMA also stated in its report of June 2022 that it expects Regtech, Paytech and Lendingtech to be the most widely adopted fintech business areas by 2025.

Hong Kong has attracted a multitude of talent and start-ups in the Virtual Assets (VA) sector due to the city’s role as a leading international financial centre. As of March 2022, the Hong Kong government has launched an abundance of initiatives with respect to three core areas to the VA sector, namely (a) establishing a licensing regime for VA service providers; (b) contemplating regulation of payment-related stablecoins; and (c) providing incumbent financial institutions with guidelines where they are providing VA-related services.

The Hong Kong fintech ecosystem is one of both collaboration and disruption. The Hong Kong Government actively promotes collaboration between start-ups and incumbent institutions to ensure Hong Kong’s role as a global fintech hub. Government-led collaboration is evident in the fintech Facilitation Office (FFO), established in 2016. The FFO facilitates development by providing a platform for exchanging ideas for innovative fintech initiatives among key stakeholders and allowing market participants and regulators to improve the industry’s understanding of the regulatory landscape. The Open API Framework and the PoC Scheme, both discussed above, are further examples of collaboration between emerging fintech and incumbent financial institutions, aiming to promote and innovate financial services.

However, it is impossible to ignore the now commonplace fintech start-ups in Hong Kong, numbering over 3,700 in 2021. Not only is the number of start-ups looking to disrupt the current landscape expected to grow, but trends indicate that instances of success will also increase. In particular, during the period between 2017 and 2021, the number of fintech companies in Hong Kong has more than tripled from 180 to 600. Many start-ups and more established fintech companies aim to disrupt the existing ecosystem, especially in the virtual assets, virtual banking and Insurtech sectors.

According to the HKIMR, more than half of the incumbent banks and institutions in Hong Kong adopt existing innovations or look to innovate in services across payment, fund transfers, personal finance, investment and wealth management services. Overall, fintech development and innovation are commonplace among incumbent banks, in which as of 2021, only a fraction of Hong Kong banks does not have a dedicated fintech team (13%). The notion that incumbent financial institutions are carrying out their own fintech development and innovation is supported by the fact that at least half of the incumbent banks state they are embracing fintech and a vast majority have applied or plan to apply innovative fintech solutions (70%-100%). Further, a majority of the incumbent financial institutions see fintech as an opportunity rather than a risk.

There is a variety of disruptive fintech in Hong Kong, commonly found across the banking, insurance, blockchain, and regulatory compliance sectors, including (a) a first digital-only bank in Hong Kong which provided banking services at first and later expanded into insurance after receiving a digital-only insurer license; (b) a SFC licenced entity operating in both the fintech and blockchain sectors focusing on research aimed at community engagement, system development, university research sponsorship, and strategic investment; and (c) one of Hong Kong’s first RegTech company which applies advanced analytics and machine learning to provide regulatory and compliance services to financial institutions.