Special Topics | Research based on the innovative development of virtual assets

Virtual assets are a new vane for future financial development, and as of Q3 2022, the market value of global virtual assets has exceeded the trillion dollar mark.

Several financial center cities such as Singapore, Tokyo, Seoul, and Bangkok have announced their plans to become virtual asset hubs and cryptocurrency financial centers.

As an international financial centre, on 31 October 2022, the HKSAR Government officially issued the Policy Declaration on the Development of Virtual Assets in Hong Kong, which sets out the policies and guidelines to be implemented for the development of the virtual asset industry and ecosystem in Hong Kong, and will continue to create a convenient environment while encouraging the virtual asset business to maintain an open and compatible innovative attitude.

1. Behind the rise of virtual assets

In recent years, virtual assets have gradually developed into a new asset class with a huge scale in the global market: according to data released by the digital currency market information website CoinGecko on December 31, the total global cryptocurrency market value is as high as $842.9 billion. At the same time, regions around the world are accelerating the strategic layout of virtual assets, and after the issuance of the Policy Declaration on the Development of Virtual Assets in Hong Kong, Hong Kong has made up its mind to compete with Singapore, London, New York and other cities for the status of a global crypto financial center and virtual asset center.

2. The concept and classification of virtual assets

The Securities and Futures Commission of Hong Kong defines virtual assets as assets expressing value in digital form, which may be in the form of digital tokens (such as cryptocurrencies, functional tokens, or tokens backed by securities or assets), any other virtual commodities, crypto assets or other assets of the same nature, regardless of whether such assets constitute "securities" or "futures contracts" as defined in the SFO. Virtual assets come in many forms and can be broadly divided into the following categories:

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1) Non-Fungible Tokens (NFT)

The full name is Non-Fungible Token, which refers to non-homogeneous tokens. It is essentially a credible digital equity certificate with unique characteristics in the blockchain network. It is a multi-dimensional and complex attribute that can be recorded and processed on the blockchain. data object. According to their different properties, they can be divided into financial NFT and non-financial NFT (such as NFT digital art collections)

(2) Asset tokenization

Tokenized assets refer to products that convert rights and interests into specific value units through technology, such as converting assets into digital tokens that run on the Bitcoin (BSV) blockchain. Tokens are flexible and informative. Its mode of operation can be combined and integrated infinitely. The continuous development of tokenized assets is conducive to greatly improving the efficiency of economic operation.

(3) Stable coins

It is a digital currency linked to stable reserve assets, and is also regarded as a bridge connecting cryptocurrency and legal currency. Its main purpose is to ensure the price stability of traders when trading cryptocurrency with legal currency. Its biggest use is that traders can use stablecoins to easily conduct cryptocurrency transactions, avoiding the transaction fees incurred by traders due to using legal currency to deposit funds.

3. The regulatory status of virtual assets

(1) NFT products

At present, the regulation of NFT in the mainland is still in the exploratory stage. As a product of the application of new technologies such as blockchain, it is difficult to characterize and supervise it under the existing legal framework. At the same time, it has some characteristics related to various products such as artworks, commodities, financial products and cryptocurrencies, which brings challenges to supervision.

The mainland has strictly separated NFT and financial activities, and clearly proposed to curb the tendency of NFT financial securitization and prevent NFT financialization. The policy tone for NFT is to affirm its value in literary and artistic creation, which is conducive to the development of cultural and creative development.

It is worth mentioning that Hong Kong has adopted a positive attitude towards financialized NFT. The Hong Kong Securities Regulatory Commission pointed out that if an NFT constitutes a structure similar to securities or equity under collective investment, it is defined as a financialized NFT, which requires Licensed issue.

(2) Tokenized assets

Article 127 of my country's "Civil Code" stipulates that if the law has provisions on the protection of data and network virtual property, follow its provisions. At the same time, according to Article 58 of the Notice of the Supreme People's Court on Amending the "Regulations on the Causes of Action of Civil Cases" (Fa [2020] No. 346), under the third-level cause of action "346. Internet tort liability dispute": Add "(1) Dispute over network infringement of virtual property".

On September 15, 2021, ten departments including the People's Bank of China and the Supreme People's Procuratorate issued the "Notice on Further Preventing and Dealing with the Risks of Hype in Virtual Currency Transactions", clarifying that virtual currency-related business activities are illegal financial activities, and participating in virtual currency investment transactions Activities cannot be protected by law, and those who carry out related illegal financial activities constitute a crime will be investigated for criminal responsibility according to law.

Generally speaking, for virtual assets, my country's overall regulatory policies are in a relatively strict state. At the same time, in order to prevent financial risks, the circulation and speculation of virtual currency has always been prohibited in our country.

(3) Stable currency

China is the first major economy in the world to issue a national digital currency. As a kind of stable currency, digital renminbi is backed by national credit and issued by the People's Bank of China in digital form as a legal currency, which is operated by designated operating agencies and exchanged to the public. Based on a broad account system, it supports loose coupling of bank accounts The function is equivalent to banknotes and coins, has value characteristics and legal compensation, and supports controllable anonymity.

As a legal tender supported by national credit, the digital renminbi has been included in the currency in circulation, that is, the M0 statistics, which accurately reflects the overall size of the currency in circulation. As of the end of 2022, the stock of digital renminbi in circulation is 13.61 billion yuan. After being included in M0, the year-on-year growth rate of M0 is 15.3%. The digital renminbi has the characteristics and advantages that ordinary electronic payment tools do not have, and will form a new pattern of digital payment in my country. At the same time, it will open up a new space for the precise implementation of my country's monetary and fiscal policies, and will also help the internationalization of my country's renminbi.

4. Technology applications in virtual assets

The channel for creating and trading virtual assets is often referred to as blockchain. The entire development process of digital assets driven by blockchain technology is a process of transforming assets from physical form to virtualization. Recognizing the limitless potential of blockchain technology, large companies around the world are adjusting their strategic direction to apply blockchain and related technologies in areas such as supply chain management and data privacy and protection.

The core advantage of blockchain is decentralization. Without relying on additional third-party management institutions or hardware facilities, there is no central control, except for the self-contained blockchain itself, through distributed accounting and storage, each node realizes information self-verification, transmission and management. Decentralization is the most prominent and essential feature of blockchain. At the same time, blockchain technology has significant advantages in securing entries or data stored in its digital ledger. Each blockchain platform employs a consensus model to guide the entry or registration of data on the ledger. As the number of node operators increases, the security of the network is further enhanced.

Blockchain technology disrupts existing business models, requiring companies to take advantage of new opportunities while dealing with multiple risks. While the financialization of virtual assets and blockchain technology have always been the topic of concern around the world, blockchain is revolutionizing the original fintech industry.

5. Outlook

Although virtual assets are still in the ascendant, in the future, with the rise of emerging concepts and technologies such as Web 3.0, meta-universe, and digital currency, virtual assets will become a new track for financial innovation and development, injecting new vitality into financial development, and the market scale of virtual asset trading will also occupy a large proportion in the financial field. The open financial market and advanced financial technology infrastructure are necessary conditions for the development of virtual assets, and "embracing" innovation is more to express an open and inclusive attitude, and also convey people's expectations for the future financial digital ecology.