According to more guidance on activities related to tokenized securities, Hong Kong will permit primary dealing of tokenization, the Securities and Futures Commission (SFC) said on Thursday.
One of the two SFC announcements that were meant to be read together stated, “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.”
The action seems to be another step in Hong Kong’s recently accelerated efforts to establish itself as a hub for virtual assets. It began accepting applications for licences to operate cryptocurrency trading platforms in June of last year, and in August it granted the first set of licences, enabling exchanges to provide services to individual consumers.
After 18 months of animosity towards cryptocurrencies, this was a U-turn. The SFC’s March 2019 statement that security tokens were “complex products” and that additional investor protection measures would be necessary has been superseded by the most recent action.
“SFC has been reviewing different proposals for the tokenization of investment products authorised by SFC. For instance, some of the proposals are for the primary dealing of a tokenized product (subscription and redemption), while others are for the secondary trading of a tokenized product on an SFC-licensed virtual asset trading platform,” the SFC said.
Some market participants in Hong Kong are already investigating tokenization, which is the process of creating blockchain-based tokens that represent ownership in investment products. According to the SFC, tokenization has “potential benefits” that include enhancing transparency, decreasing settlement times, lowering costs for traditional finance, and increasing efficiency.
The SFC advised anyone interested in engaging in any activity involving digital securities, including tokenized securities, to speak with their case officer ahead of time about their business plans. The SFC will need all operators to set up a compensation plan to cover the possible loss of security tokens, even though it may accept applications from cryptocurrency trading platforms to exclude particular tokenized securities.
Recently, Hong Kong opened up the sale of spot products by intermediaries to more customers than just experienced investors. A few months after its central bank successfully issued $100 million in tokenized green bonds, the Hong Kong Monetary Authority stated that tokenization could improve efficiency, liquidity, and transparency in bond markets.