Key takeaways:
- In a circular, the SFC of Hong Kong established the business prerequisites for providing tokenized securities and other investment products.
- The circular outlines twelve points in general, with a focus on four areas: staff competency, intermediaries, disclosure, and tokenization arrangement.
In a circular published on Nov. 2, the Securities and Futures Commission (SFC) of Hong Kong established the business prerequisites for providing tokenized securities and other investment products.
One of the main reasons the SFC decided to consider publishing public recommendations on tokenizing the securities and futures markets was the market demand in Hong Kong for tokenized investment products paired with the many advantages of blockchain technology.
The circular outlines twelve points in general, with a focus on four areas: staff competency, intermediaries, disclosure, and tokenization arrangement. These areas determine eligibility for activities related to the issuance of tokenized securities.
Rising market demand and the government’s desire to support market development are the driving forces behind tokenizing investment products with SFC approval.
The SFC declared the following after taking into account that the underlying product can satisfy all applicable product authorization requirements as well as the additional safety measures to mitigate the related risks:
“By adopting a see-through approach, the SFC is of the view that it is appropriate to allow primary dealing of tokenized SFC-authorised investment products.”
Among other things, providers must guarantee efficient record-keeping, accept full responsibility for their tokenized products, and exhibit operational soundness. The SFC went on to clarify:
“Product Providers should not use public-permissionless blockchain networks without additional and proper controls.”
Regarding disclosure regulations, suppliers must consistently demonstrate token ownership and explicitly state whether settlements occur off- or on-chain.
Finally, to handle the increased risks associated with ownership and technology and to administer and/or oversee the tokenization arrangement, the SFC will also require providers to have at least one competent staff member with the necessary experience and skills.
In a Bloomberg interview on the same day, SFC CEO Julia Leung reaffirmed the regulator’s keen interest in reviewing retail investment products that use cutting-edge technology to improve productivity and client satisfaction. Retail investors may trade popular cryptocurrencies on exchanges authorized by the SFC under its digital asset regulations.
