The Securities and Futures Commission (SFC) of Hong Kong has issued two circulars to regulate digital asset tokenization.

The circulars  offer  instructions to intermediaries participating in tokenized securities activities and outline the criteria for tokenizing investment products authorized by the SFC.

The SFC considers tokenized securities as traditional securities with a tokenization layer. As a result, the exact legal and regulatory requirements that apply to conventional securities markets also apply to tokenized securities.

The regulator specified that tokenized securities offerings must adhere to the Companies Ordinance’s Prospectus Regime and the Securities and Futures Ordinance on offers of investment. Additionally, intermediaries providing advice on tokenized securities, managing tokenized funds, and facilitating secondary market trading on virtual asset trading platforms must comply with the existing conduct requirements for securities-related activities.

Hong Kong issues rules for asset tokenization as interest mounts image 0 Screenshot of the tokenized security circular. Source: SFC

The recent guidance from the regulator coincides with Hong Kong’s exploration of tokenization. In February, the Hong Kong Monetary Authority  issued the world’s inaugural tokenized green bond,  raising approximately $100 million.

The circular also states that trading platforms with licenses must establish SFC-approved compensation arrangements to safeguard against potential security token losses. To illustrate, operators of cryptocurrency trading platforms can show their adoption of protective measures like transfer restrictions or whitelisting to ensure the security of tokenized securities.

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Conversations about tokenization have recently surged, and the SFC noted a heightened interest from financial institutions in tokenizing traditional financial instruments within global financial markets.

The regulatory body clarified that it has been reviewing different suggestions regarding tokenizing investment products, including those related to the primary offering and secondary trading of tokenized products on SFC-licensed virtual asset trading platforms. It added:

“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 using this technology.” 

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