The Hong Kong Securities and Futures Commission (SFC) has issued two circulars to regulate digital asset tokenization. This is in a significant move towards establishing itself as a key Web3 hub in Asia.

Treating Tokenized Securities Like Traditional Counterparts

The SFC considers tokenized securities as traditional securities with an added tokenization layer. This perspective aligns tokenized securities with the same legal and regulatory requirements that govern conventional securities markets.

In the issued circulars, the SFC provided explicit instructions to intermediaries engaged in tokenized securities activities. These guidelines outline the criteria for tokenizing investment products authorized by the SFC. Tokenized securities offerings are required to adhere to the prospectus regime outlined in the Companies Ordinance and the offers of investments regime in the Securities and Futures Ordinance.

Furthermore, intermediaries involved in advising on tokenized securities, managing tokenized funds, and facilitating secondary market trading must comply with existing conduct requirements for securities-related activities.

Hong Kong’s Growing Interest in Tokenization

This regulatory development coincides with Hong Kong’s active exploration of tokenization. In February, the Hong Kong Monetary Authority, acting as the de facto central bank, successfully raised approximately $100 million through the issuance of the world’s inaugural tokenized green bond.

One of the circulars issued by the SFC

Safety Measures for Trading Platforms

The circular emphasizes that trading platforms with licenses must establish SFC-approved compensation arrangements to safeguard against potential security token losses. Operators of cryptocurrency trading platforms are encouraged to adopt protective measures such as transfer restrictions. This is to further ensure the security of tokenized securities.

The SFC noted a surge in conversations about tokenization, with increased interest from financial institutions in tokenizing traditional financial instruments within the global financial markets.

Reviewing Suggestions for Tokenization

Further, the regulatory body clarified its ongoing review of various suggestions related to tokenizing SFC-authorized investment products. This includes considerations for the primary offering and secondary trading of tokenized products on SFC-licensed virtual asset trading platforms.

While recognizing the potential benefits of tokenization, such as increased efficiency, enhanced transparency, reduced settlement time, and lower costs for traditional finance, the SFC remains cautious about the new risks associated with this technology.

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