Hong Kong’s Securities and Futures Commission (SFC) outlined the business requirements for offering tokenized securities and other investment products in a circular issued on November 2.
Market demand in Hong Kong for tokenized investment products, coupled with the various benefits of blockchain technology, was one of the key factors that prompted the SFC to consider issuing public guidelines on tokenization of the securities and futures markets. “At the conclusion of a closely watched central financial work conference, China has outlined future priorities and directions to achieve high-quality financial development for the country,” SFC Talk (@sfc_talk) said in a post on November 2, 2023.
The circular details 12 points, emphasizing four aspects – tokenization mechanism, information disclosure, intermediaries and personnel competence – for obtaining the right to issue tokenized securities. The purpose of tokenization of investment products permitted by the SFC is due to growing market demand and the government’s willingness to facilitate market development. Given that the underlying product may comply with all applicable product authorization requirements and additional safeguards to address the risks involved, the SFC stated: “Taking an end-to-end approach, the SFC considers it appropriate to allow primary trading of tokenized investment products authorized by the SFC.”
Providers are expected to take full responsibility for their tokenized products, ensure efficient record keeping, and demonstrate reliable operation, among other factors. The SFC further clarified: “Product providers should not use public blockchain networks without additional and appropriate controls.”
In terms of disclosure requirements, providers must clearly indicate whether settlements occur off-chain or on-chain and always prove ownership of tokens. Finally, the SFC will also require providers to “have at least one competent employee with appropriate experience and knowledge to operate and/or oversee the tokenization mechanism, and to appropriately manage new risks associated with ownership and technology.”
Despite the federal government’s efforts to tokenize investment products, interest in cryptocurrency among Hong Kong residents has declined significantly. The recent JPEX scandal in Hong Kong sent shockwaves through the crypto community. New research shows how this is affecting trust in the digital asset industry. A survey conducted by the Hong Kong University of Science and Technology Business School found that the alleged $166 million JPEX scandal has negatively impacted investors’ willingness to invest in the cryptocurrency. Of the 5,700 respondents, 41% would prefer not to hold digital assets.
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