Hong Kong Releases New Guidelines for Asset Tokenization

The financial regulator in Hong Kong, the Securities and Futures Commission (SFC) has released new guidelines for asset tokenization in the Chinese administrative region.

In a circular released on Thursday 2 November, the SFC provided rules for intermediaries engaging in tokenized securities-related activities and detailed the requirements for the tokenization of SFC-authorized investment products.

The regulator said that tokenized securities are “fundamentally traditional securities with a tokenization wrapper,” hence “The existing legal and regulatory requirements governing the traditional securities markets continue to apply to Tokenized Securities.”

Under the new guidance, offerings of tokenized securities will be subject to the Companies Ordinance and the offers of investments regime under Part IV of the Securities and Futures Ordinance.

The guidance became necessary as the demand for asset tokenization is on the rise, and as Hong Kong is exploring the use of tokenization. 

The circular further stated that intermediaries advising on tokenized securities, management of tokenized securities in the form of tokenized funds, and secondary market trading of tokenized securities on virtual asset trading platforms are also governed by existing conduct requirements for securities-related activities.

Hong Kong has been working on tokenization for a long time, and the release of these guidelines is just another big step towards realizing its goals in this area. The Hong Kong Monetary Authority, HMA had in February issued the world’s first tokenized green bond through which it raised $100 million.

“The SFC sees the potential benefits of tokenization 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,” it added.

Rules for Crypto Trading Platforms

Among the requirements are rules for crypto trading platforms. The circular stated that licensed crypto trading platforms must have a compensation arrangement approved by the SFC to cover the potential loss of security tokens.

“The SFC wishes to clarify that it may consider, on application by a VATP, to exclude certain Tokenized Securities from the required coverage on a case-by-case basis,” the regulator said. “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 Tokenized Securities can be effectively mitigated if the Tokenized Securities become lost.”

Such arrangements may include administrative controls such as transfer restrictions or whitelisting to protect the holders of tokenized securities. 

Hong Kong’s Role in Crypto Development

Hong Kong has fully embraced the crypto industry and keeps working towards developing it, an aspect of which is tokenization. The SFC is encouraging the growth of tokenization because of the apparent interest.

The regulator admits that it “has observed financial institutions’ growing interest in tokenizing traditional financial instruments in the global financial markets.”

The promotion of tokenization is a major way the Hong Kong authorities will help to encourage crypto adoption. 

Although the region recently had issues with fraudulent crypto platforms, it has only strengthened its efforts towards keeping the space safe rather than go back on the support it is giving to the industry. 

Hong Kong authorities were among the first jurisdictions to provide clear guidance for the crypto industry, making it a leading crypto hub. With the embrace of tokenization, it can become even greater in leading crypto innovation going forward.

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