Hong Kong has introduced guidelines for the tokenization of assets, responding to increasing interest in this field.
The securities regulator in Hong Kong applies the same legal and regulatory standards to tokenized securities as it does to traditional securities.
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The Securities and Futures Commission (SFC) of Hong Kong has issued two circulars to regulate the tokenization of digital assets.
These circulars provide guidance to intermediaries involved in tokenized securities activities and establish the criteria for tokenizing investment products authorized by the SFC.
The SFC treats tokenized securities as equivalent to traditional securities with an additional tokenization layer. Consequently, the same legal and regulatory requirements that govern conventional securities markets also apply to tokenized securities.
The regulator has specified that tokenized securities offerings must comply with the Prospectus Regime outlined in the Companies Ordinance and the Securities and Futures Ordinance governing investment offers. Moreover, intermediaries engaged in advisory services for tokenized securities, management of tokenized funds, and facilitation of secondary market trading on virtual asset trading platforms must adhere to the existing conduct requirements for activities related to securities.
Screenshot of the tokenized security circular. Source: SFC
The SFC's recent guidance coincides with Hong Kong's growing interest in tokenization. In February, the Hong Kong Monetary Authority issued the world's first tokenized green bond, raising approximately $100 million.
The circular also mandates that trading platforms with licenses must establish SFC-approved compensation arrangements to mitigate potential losses related to security tokens. For instance, operators of cryptocurrency trading platforms can demonstrate their adoption of protective measures such as transfer restrictions or whitelisting to ensure the security of tokenized securities.
In recent times, discussions about tokenization have surged, and the SFC has observed increased interest from financial institutions in tokenizing traditional financial instruments within global financial markets.
The regulatory body clarified that it has been evaluating various proposals concerning the tokenization of investment products, encompassing primary offerings and secondary trading of tokenized products on SFC-licensed virtual asset trading platforms. The SFC recognizes the potential benefits of tokenization for financial markets, including increased efficiency, enhanced transparency, reduced settlement times, and lower costs for traditional finance. However, the regulator is also mindful of the new risks associated with this technology.
