The Securities and Futures Commission (SFC) of Hong Kong has taken significant steps to regulate the burgeoning field of digital asset tokenization.
In this regard, the SFC has issued two important circulars that provide comprehensive guidelines and directives for intermediaries involved in tokenized securities activities.
These circulars also outline the specific criteria that must be met when tokenizing investment products that are authorized by the SFC.
The SFC has firmly established its stance on tokenized securities, considering them to be equivalent to traditional securities but with an added layer of tokenization.
As a result, the legal and regulatory requirements that traditionally apply to securities markets also extend to tokenized securities.
To maintain regulatory compliance, the SFC has specified that tokenized securities offerings must adhere to the Companies Ordinance’s Prospectus Regime and the Securities and Futures Ordinance pertaining to offers of investment.
Furthermore, intermediaries engaged in activities such as providing advice on tokenized securities, managing tokenized funds, and facilitating secondary market trading on virtual asset trading platforms must adhere to the existing conduct requirements applicable to securities-related activities.
The issuance of these regulatory guidelines comes at a time when Hong Kong is actively exploring tokenization opportunities.
In February, the Hong Kong Monetary Authority made history by launching the world’s first tokenized green bond, successfully raising approximately $100 million.
The SFC’s circulars also address the security concerns associated with tokenized securities trading platforms.
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Trading platforms with licenses are required to establish SFC-approved compensation arrangements to safeguard against potential security token losses.
These protective measures can include transfer restrictions and whitelisting protocols, ensuring the security of tokenized securities.
The recent surge in discussions about tokenization has not gone unnoticed by the SFC.
The regulatory body has observed a heightened interest from financial institutions in tokenizing traditional financial instruments within the global financial markets.
In response, the SFC has been actively reviewing various proposals related to the tokenization of investment products, encompassing both primary offerings and secondary trading on SFC-licensed virtual asset trading platforms.
In conclusion, the SFC acknowledges the significant potential benefits of tokenization for financial markets, including increased efficiency, enhanced transparency, reduced settlement times, and lowered costs for traditional finance.
However, the regulatory body remains vigilant about the new risks associated with this technology and is committed to balancing innovation with safeguarding the integrity of financial markets.
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