The Securities and Futures Commission (SFC) of Hong Kong Regulates Digital Asset Tokenization
The Securities and Futures Commission (SFC) of Hong Kong has issued two circulars to regulate the tokenization of digital assets. These circulars provide instructions for intermediaries involved in tokenized securities activities and outline the criteria for tokenizing investment products authorized by the SFC.
The SFC considers tokenized securities to be traditional securities with a tokenization layer. Therefore, the same legal and regulatory requirements that apply to conventional securities markets also apply to tokenized securities.
Regulatory Requirements for Tokenized Securities Offerings
The SFC specified that tokenized securities offerings must comply with the Companies Ordinance’s Prospectus Regime and the Securities and Futures Ordinance on offers of investment. Intermediaries providing advice 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.
Trading platforms with licenses must establish SFC-approved compensation arrangements to protect against potential security token losses. Cryptocurrency trading platform operators can demonstrate their adoption of protective measures such as transfer restrictions or whitelisting to ensure the security of tokenized securities.
Hong Kong’s Exploration of Tokenization
The SFC’s recent guidance aligns with Hong Kong’s exploration of tokenization. In February, the Hong Kong Monetary Authority issued the world’s first tokenized green bond, raising approximately $100 million.
The SFC has observed a growing interest from financial institutions in tokenizing traditional financial instruments within global markets. It recognizes the potential benefits of tokenization in increasing efficiency, transparency, reducing settlement time, and lowering costs for traditional finance. However, it is also aware of the new risks associated with this technology.
Hot Take: Regulating Digital Asset Tokenization in Hong Kong
The Securities and Futures Commission (SFC) of Hong Kong has taken steps to regulate the tokenization of digital assets. The SFC’s circulars provide guidance for intermediaries participating in tokenized securities activities and outline the criteria for tokenizing investment products authorized by the SFC.
By considering tokenized securities as traditional securities, the SFC ensures that the same legal and regulatory requirements apply to both. This includes compliance with prospectus and investment offer regulations. Intermediaries involved in tokenized securities must also adhere to existing conduct requirements for securities-related activities.
Hong Kong’s exploration of tokenization is evident with the issuance of the world’s first tokenized green bond by the Hong Kong Monetary Authority. The SFC recognizes the potential benefits of tokenization, such as increased efficiency and transparency in financial markets, but also acknowledges the new risks associated with this technology.
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