Hong Kong eyes DeFi and metaverse to boost fintech dominance

A recent report from the Hong Kong Institute for Monetary and Financial Research (HKIMR) has identified decentralised finance (DeFi) and metaverse technologies as key to expanding the fintech sector.

HKIMR, the research arm of the Hong Kong Academy of Finance (AoF), published two reports on June 25 regarding the impact the DeFi and Metaverse sectors can have on the nation’s fintech sector.

According to Enoch Fung, CEO of the AoF:

The emerging technologies of DeFi and the metaverse, which are closely connected to the broader virtual asset and Web3 developments, will likely present various opportunities for the financial services industry in Hong Kong.

DeFi sector remains untapped

The DeFi sector reportedly grew from a $6 billion market to over $80 billion in between 2021 and 2023. Per the HKMI, this explosive growth “cannot be ignored.”

With DeFi accounting for just 4% of the overall crypto sector, it has been flagged as an untapped market. According to the report, more than 70% of participants in the study were yet to dip their toes in the sector.

The HKMI highlighted that DeFi can potentially enable new avenues in financial services. Liquid staking, flash loans, and automated market makers were among the few named in the report.

However, the report also acknowledged the various risks involved with DeFi, including governance issues, compliance challenges, and technological vulnerabilities.

Addressing these risks was deemed crucial for sustainable development.

Overall, the study remained optimistic about the unique characteristics the sector offers. The report suggested developing centralised DeFi (CeDeFi) models to “ realise the benefits of both worlds.”

Metaverse holds potential

The metaverse sector was also seen as integral to supporting Hong Kong’s virtual asset (VA) ecosystem. The study saw market participants increasingly engaging with the technology.

However, 51% of those involved in the study bet against the metaverse’s future potential. The respondents cited very limited use cases in this regard that could be integrated into their day-to-day operations.

Yet 79% of the participants acknowledged that integrating metaverse applications would allow for more engaging branding activities. 33% said the technology could also improve operational efficiency.

User adoption and data privacy issues were flagged as the primary factors holding back metaverse integration.

The report follows Hong Kong’s recent efforts to regulate the cryptocurrency trading sector. 

The Securities and Futures Commission (SFC) of Hong Kong has mandated registration for all cryptocurrency exchanges. The regulator will carry out on-site inspections as a part of the licensing process.

The move came in response to the growing cases of fraud and scams in the region. $400 million worth of cryptocurrency assets were lost to such cases in 2023 alone.

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