Hong Kong's virtual banks should strive harder to expand their services to capture a larger share of assets in the Web 3.0 industry than conventional bricks-and-mortar lenders, according to a legislator.

"The government has made efforts to develop virtual banks and upgrade services in the past few years," Johnny Ng Kit-Chong, a member of Hong Kong's legislature known for his support of cryptocurrencies, said during a media briefing. "It's an important time for the city to contribute more to the Web 3.0 sector in the next two years."

Ng's call to action followed the decision this week by the Hong Kong Monetary Authority (HKMA) to stop issuing additional licenses for branchless banks, giving the city's eight licensed operators room and time to grow. The eight licensees together owned HK$49.9 billion (US$6.4 billion) in assets last year, merely 0.3 per cent of the assets owned by all retail banks, according to the HKMA's data.

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Virtual banks were established in Hong Kong with the mission to spur fintech adoption, innovation and competition. By keeping their operations virtual, they save on the overhead of running bricks-and-mortar branches, which can cost as much as HK$1 million to operate, according to the city's banking guild.

Hong Kong Legislative Council member Johnny Ng Kit-chong, known for his supportive stance on cryptocurrencies, spoke at the Bitcoin Asia conference on May 9, 2024. Photo: Matt Haldane alt=Hong Kong Legislative Council member Johnny Ng Kit-chong, known for his supportive stance on cryptocurrencies, spoke at the Bitcoin Asia conference on May 9, 2024. Photo: Matt Haldane>

No virtual bank had earned a profit. But the potential is "enormous", Ng said, adding that he expects them to break even by 2026.

One growth area lies in serving the needs of Web 3.0 companies by helping them open accounts and facilitating their digital-asset services, Ng said. Most companies involved in cryptocurrencies, non-fungible tokens and all aspects of the blockchain face difficulties opening accounts with virtual banks, with 40 per cent of them saying the task is "extremely hard", Ng said, citing a survey conducted by his office in August.

The need for the companies' executives or chairperson to be in Hong Kong and strenuous standards for fixed-term deposits are two frequently cited challenges, according to the survey.

The account problem has had a "fatal effect" on Web 3.0 development, and some companies have moved out of Hong Kong to more friendly locations because of the issue, Ng added.

He suggested the government needs to have a specific blueprint for Web 3.0 development, something that Chief Executive John Lee Ka-chiu can provide direction on in his coming policy address.

To be sure, some progress is under way. Mox Bank, the virtual bank owned by Standard Chartered, started a cryptocurrency exchange-traded fund (ETF) this week, the first virtual bank in Hong Kong to offer transactions in spot bitcoin and ether ETFs.

"We aim to empower our customers to explore these new digital investment opportunities and diversify their portfolios," said Mox Bank's chief executive Barbaros Uygun. "Going forward, with a focus on financial inclusion, we will further expand our innovative offerings, especially in emerging sectors, to deliver an enriched digital banking experience."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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