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Hong Kong Greenlights Tokenised Investments Requirements In Light Of Market Demand

The Securities and Futures Commission (SFC) of Hong Kong published two circulars aimed at overseeing the city’s digital asset tokenisation activities as it attempts to bolster its standing as a global virtual asset hub.

William Willis
Feb 04, 20244951 Shares66010 Views
The Securities and Futures Commission (SFC) of Hong Kong published two circulars aimed at overseeing the city’s digital asset tokenisation activities as it attempts to bolster its standing as a global virtual asset hub.
In November 2023, the SFC postedabout guided tokenised securities-related and detailed the requirements for the tokenisation of SFC-authorised investment products. The move made by the SFC to consider issuing public guidelines on tokenising the securities and futures markets was driven by the market demand in Hong Kong for tokenised investment products combined with the various benefits of blockchain technology.

Overview

In the circular,the SFC mentioned that tokenised securities are fundamentally traditional securities wrapped up with a tokenisation layer. The SFC said, “The existing legal and regulatory requirements governing the traditional securities markets continue to apply to Tokenised Securities.”
According to the regulator, offerings of tokenised securities would be subject to the prospectus regime under the Companies Ordinance and the supplies of investments regime under Part IV of the Securities and Futures Ordinance.
The SFC highlighted that intermediaries were advising on tokenised securities, management of tokenised securities in the form of tokenised funds, and secondary market trading of tokenised securities on virtual asset trading platforms, which are also governed by existing conduct requirements for securities-related activities. Additionally, this latest move by the regulators comes as the city is studying and exploring tokenisation.
In February 2023, the Hong Kong Monetary Authority, its de facto central bank, issued the world’s first tokenised green bond under the Government Green Bond Programme (GGBP). The Tokenised Green Bond was cleared and settled through the Central Money Markets Unit (CMU), and the settlement of transactions made through the CMU benefits from statutory settlement finality under Hong Kong law. The Financial Secretary, Paul Chan, said, “Hong Kong has been proactively fostering the application of innovative technologies in the financial field and is actively exploring new ideas and technologies to enhance the efficiency, transparency and security of financial transactions.”
Chan added that the Policy Statement on Development of Virtual Assets in Hong Kong published in October last year sets out that we actively embrace financial innovations related to Web3 and promote steady and cautious market development.
The successful issuance of this tokenised green bond marks an important milestone as it displays Hong Kong’s strengths in combining the bond market, green and sustainable finance as well as fintech. The HKSAR Government will continue to foster the innovative progression of the financial market.” The Secretary for Financial Services and the Treasury, Christopher Hui, said, “Green bond tokenisation is one of the pilot projects issued on the Government’s Policy Statement on Development of Virtual Assets in Hong Kong.” Hui added, “Through a clear policy stance and roadmap, the Government will work towards administering a facilitating environment to promote continuous and responsible development of the virtual asset sector. We welcome market players to conduct tokenised issuances in Hong Kong.”

Requirements for Virtual Asset Trading Platforms

According to the circular, licenced trading platforms must put compensation arrangements in place and be approved by the SFC to cover the potential loss of security tokens. The Regulator said, “The SFC wishes to clarify that it may consider, on application by a VATP, to exclude certain Tokenised Securities from the required coverage on a case-by-case basis.”
The regulator added, “In assessing the application, the VATP will need to demonstrate to the SFC’s satisfaction that the risk of financial loss to its clients holding those Tokenised Securities can be effectively mitigated if the Tokenised Securities become lost.”
Bitcoin Apexthat it is exploring realistic practices for real-world asset tokenisation earlier this week. The Exchange’s COO, Livio Weng, emphasised that it is in talks with the SFC for such tokenisation and that it is “exploring two important RWA cases that may bring huge impact to the market.” Weng added, “HashKey received approval from the SFC to launch the app to serve both professional and retail users. We’ve recorded large trading volume since we began to serve retail users.” According to Weng, the app is essential for running a retail trading platform.

Growing Interest in Tokenised Assets

The regulator highlighted that discussions surrounding tokenisation have gained traction lately, and the SFC ”has observed financial institutions’ growing interest in tokenising traditional financial instruments in the global financial markets.” The SFC revealed that it had been assessing various proposals on the tokenisation of SFC-authorised investment products - some for primary dealing of a tokenised product and some for secondary trading of a tokenised product on an SFC-licenced virtual asset trading platform. The Regulator added, “The SFC sees the potential benefits of tokenisation to the financial markets, particularly in increasing efficiency, enhancing transparency, reducing settlement time and lowering costs for traditional finance, but it is also aware of the new risks arising from the use of this technology.”
Despite the city’s aggressive push, the interest in crypto for Hong Kong locals witnessed a significant decline. The Hong Kong University of Science and Technology’s business school conducted a survey that revealed that the alleged $166-million JPEX scandal negatively impacted investors’ willingness to invest in crypto.
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