Hong Kong’s Securities and Futures Commission (SFC) is taking significant steps to regulate the tokenization of assets in its pursuit of becoming a leading hub for Web3 in Asia. The SFC issued two circulars aimed at guiding intermediaries involved in tokenized securities activities and setting out the criteria for tokenizing investment products authorized by the SFC.
In these circulars, the SFC treats tokenized securities much like traditional securities, subjecting them to the same legal and regulatory norms. They view tokenized securities as essentially traditional securities with an added layer of tokenization. Consequently, all the legal and regulatory requirements that apply to conventional securities markets also apply to tokenized securities.
The SFC outlined that tokenized securities offerings must comply with the Companies Ordinance’s prospectus regime and the Securities and Futures Ordinance’s offers of investments regime. Intermediaries involved in advising on tokenized securities, managing tokenized funds, and facilitating secondary market trading on virtual asset trading platforms must also adhere to existing conduct requirements for securities-related activities.
This regulatory guidance comes at a time when Hong Kong is actively exploring the potential of tokenization. Earlier in the year, the Hong Kong Monetary Authority, acting as the de facto central bank, successfully issued the world’s first tokenized green bond, raising approximately $100 million.
The circular also emphasizes that trading platforms with licenses must establish SFC-approved compensation arrangements to mitigate potential losses related to security tokens. Cryptocurrency trading platform operators can demonstrate their commitment to security by implementing protective measures such as transfer restrictions or whitelisting for tokenized securities.
The SFC has noticed a surge in discussions surrounding tokenization and a growing interest from financial institutions in tokenizing traditional financial instruments within the global financial markets.
The regulatory body clarified that it has been actively exploring various proposals related to tokenizing SFC-authorized investment products, including primary offerings and secondary trading of tokenized products on SFC-licensed virtual asset trading platforms. The SFC acknowledges the potential benefits of tokenization in terms of increasing efficiency, transparency, reducing settlement times, and lowering costs in traditional finance. However, they also remain vigilant about the new risks associated with this technology.