Hong Kong Will Allow Some Tokenized Securities-Related Activities

Hong Kong is set to allow primary dealing of tokenization by providing more guidance on tokenized securities-related activities, the Securities and Futures Commission (SFC) announced on Thursday.

“The SFC is of the view that it is appropriate to allow primary dealing of tokenized SFC-authorised investment products, as long as the underlying product can meet all the applicable product authorization requirements and the additional safeguards to address the new risks associated with the tokenization arrangement,” one of the two SFC announcements meant to be read together said.

The move appears to be another step in Hong Kong’s recently accelerated ambitions to become a virtual asset hub. It implemented a new regulatory regime in June, accepting applications for crypto trading platform licenses, and granted the first set in August, allowing exchanges to serve retail customers.

This was a U-turn after 18 months of hostility toward crypto. The latest move supersedes a statement from March 2019 when the SFC took the stance that security tokens were “complex products” and, therefore, extra investor protection measures would apply.

“SFC has been assessing various proposals on tokenization of SFC-authorised investment products, for example, some for primary dealing of a tokenized product (i.e., subscription and redemption) and some for secondary trading of a tokenized product on an SFC-licensed virtual asset trading platform,” the SFC said.

Tokenization is the process of creating blockchain-based tokens that represent ownership in an investment product, and with some market participants in Hong Kong already exploring it, the SFC said its “potential benefits” include increasing “efficiency, enhancing transparency, reducing settlement time and lowering costs for traditional finance.”

The SFC said those interested in any activities involving any Digital Securities (including Tokenised Securities) should discuss their business plans with their case officer in advance. While the SFC might consider applications by crypto trading platforms to exclude specific tokenized securities, it will require all operators to put in place a compensation arrangement to cover the potential loss of security tokens.

Hong Kong recently allowed intermediaries to sell spot products to a broader range of clients, not just to professional investors. The Hong Kong Monetary Authority had said tokenization could enhance efficiency, liquidity and transparency in bond markets a few months after a successful $100 million tokenized green bond issuance by its central bank.