Hong Kong Approves Tokenized Securities in Ongoing Digitalization Drive

Jimmy Aki
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Hong Kong’s Securities and Futures Commission (SFC) has given the green light on the tokenization of securities and regulated funds. This milestone approval underscores the ongoing efforts of the financial authority to enhance its appeal as a welcoming hub for virtual assets.

SFC Asserts That Tokenization Could Help Increase Product Efficiency

On November 2, the SFC released a circular outlining guidelines for regulated third parties, including investment fund managers, regarding the issuance of tokenized securities.

In the comprehensive notice, the commission states its position on permitting the primary trading of tokenized investment products that have received SFC authorization.

It emphasizes that tokenized products can be traded if they meet existing product authorization requirements and incorporate additional security measures to mitigate the risks associated with tokenization.

Tokenized securities are blockchain tokens representing ownership in investment products. The SFC highlights that the seamless integration of tokenization can enhance product efficiency and reduce operational costs.

To get started, the SFC identifies four key components – tokenization arrangement, disclosure, intermediaries, and staff competence.

However, the commission clarified that providers must manage their tokenized products, maintain thorough record-keeping, and implement security measures that align with regulatory expectations to ensure efficiency and compliance.

Additionally, service producers will be required to disclose settlements on both off-chain and on-chain and prove ownership of tokens at all times.

On a closing note, the Hong Kong regulator recommended individuals or entities interested in providing digital securities, including tokenized securities, discuss with its agency.

While the commission is open to applications from crypto-trading platforms, all service providers must have a compensation arrangement to cater to investors in case of potential loss of security tokens.

The Rise of Friendly Virtual Asset Region

Hong Kong’s latest guidelines on tokenized securities reflect its ongoing commitment to establish itself as a welcoming destination for traders, investors, and Virtual Asset Service Providers (VASPs).

Initially, the SFC had downplayed the integration of cryptocurrencies and related products and services. In a circular dated March 28, 2019, the commission categorized security tokens as complex products and vowed to implement additional protective measures for investors.

However, in 2023, a shift towards more crypto-friendly policies and the open embrace of the growing crypto landscape and digitalization have become evident.

On February 16, the Hong Kong government successfully issued its first tokenized asset as a green bond with 800 million Hong Kong dollars ($101 million).

The green bond was offered by the Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR).

This was followed by the introduction of a new set of policies to govern the crypto industry on May 31, opening doors for crypto-centric platforms to apply for licenses and permits to offer and trade assets.

By August, the first licenses were granted, permitting crypto trading platforms to offer their services to retail investors.

In a recent report, the Hong Kong Monetary Authority highlighted the potential of tokenization due to its transformative capabilities, which turn real-world assets into blockchain tokens.

Citing the 800 million worth of green bonds, the agency stressed that tokenization can enhance efficiency, liquidity, and transparency in bond markets.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.