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In a significant move towards bolstering its position as a global virtual asset hub, Hong Kong’s Securities and Futures Commission (SFC) has announced guidelines allowing the tokenization of securities and regulated funds. The circular, issued on Thursday, provides a framework for regulated intermediaries, including fund managers, to issue tokenized securities, described as “blockchain-based tokens that represent or aim to represent ownership in an investment product.”

The SFC believes that tokenization can enhance product efficiency and reduce operational costs by minimizing reliance on intermediaries. The initiative aligns with global trends, with major financial institutions such as JP Morgan Chase and Citi recognizing the potential of blockchain technology beyond cryptocurrencies. However, the adoption of tokenization is contingent upon expected demand, considering the associated compliance costs and the need for enhanced procedures to comply with regulations.

Hong Kong’s government has been actively promoting the digital asset sector, issuing its first tokenized green bonds worth $800 million Hong Kong dollars in February. This move, coupled with the city’s acceptance of retail traders investing in virtual assets since June, signals a significant shift in attitude. It has also granted licenses to crypto trading platforms, allowing them to serve retail customers, which contrasts with the previous 18 months of crypto hostility.

The SFC’s latest announcement signifies a departure from its previous stance in March 2019 when it considered security tokens as “complex products,” subjecting them to additional investor protection measures. The recent move opens the door for primary dealing of tokenized SFC-authorized investment products, provided they meet all applicable authorization requirements and incorporate additional safeguards to address new risks associated with tokenization arrangements.

Tokenization, the process of creating blockchain-based tokens representing ownership in an investment product, is viewed as transformative. It offers potential benefits such as increased efficiency, enhanced transparency, reduced settlement time, and lower costs for traditional finance. Market participants in Hong Kong are already exploring the possibilities of tokenization, further emphasizing the city’s dedication to fostering innovation in the financial sector.

As Hong Kong continues to welcome crypto-related activities, industry participants interested in digital securities, including tokenized securities, are encouraged to discuss their business plans with the SFC’s case officers in advance. The SFC might consider applications to exclude specific tokenized securities from crypto trading platforms, but operators will be required to establish compensation arrangements to cover potential losses of security tokens.

This strategic move underscores Hong Kong’s determination to create an efficient, transparent, and innovative digital asset ecosystem, attracting both local and international market players to its burgeoning virtual asset market.

Photo by Christian Lendl on Unsplash

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