Global: Hong Kong Regulator Unveils Tokenized Investment Requirements in Response to Growing Demand

The Securities and Futures Commission (SFC) of Hong Kong has issued a set of business requirements for the provision of tokenized securities and other investment products in a circular released on November 2.

The rising demand in Hong Kong for tokenized investment products, combined with the numerous advantages offered by blockchain technology, played a pivotal role in prompting the SFC to consider issuing public guidelines regarding the tokenization of securities and futures markets.

The circular outlines 12 key points, with a specific focus on four aspects: tokenization arrangements, disclosure, intermediaries, and staff competence. These aspects are crucial for determining eligibility to engage in activities related to tokenized securities.

The intent behind SFC-authorized investment product tokenization is to meet the increasing market demand and support market development in line with the government’s objectives. The SFC believes it is appropriate to allow the primary dealing of tokenized SFC-authorized investment products, provided that they meet all relevant product authorization requirements and include safeguards to address associated risks.

Providers are expected to assume full responsibility for their tokenized products, maintain effective record-keeping, and demonstrate operational soundness, among other factors. The SFC has also specified that “Product Providers should not use public-permissionless blockchain networks without additional and proper controls.”

Regarding disclosure requirements, providers must transparently state whether settlements occur off-chain or on-chain and ensure continuous ownership verification of tokens. Additionally, the SFC will mandate providers to have at least one competent staff member with relevant experience and expertise to oversee the tokenization process and manage new risks related to ownership and technology appropriately.

Despite the government’s efforts to tokenize investment products, local interest in cryptocurrency in Hong Kong has seen a significant decline. A survey conducted by the Hong Kong University of Science and Technology’s business school indicated that the alleged $166-million JPEX scandal negatively impacted investor confidence in crypto. Out of 5,700 respondents, 41% expressed a preference not to hold digital assets.