On November 2, the Securities and Futures Commission (SFC) of Hong Kong unveiled a comprehensive set of business requirements pertaining to the issuance of tokenized securities and other investment products.
This initiative was driven by the growing market demand for tokenized investment products in Hong Kong, coupled with the manifold advantages of blockchain technology.
The SFC’s circular delineates 12 key points, with a primary focus on four crucial aspects: tokenization arrangements, disclosure practices, intermediaries involved, and the competence of personnel, all of which are deemed essential for entities seeking eligibility to offer tokenized securities-related activities.
The primary motivation behind the tokenization of SFC-authorized investment products is the surging market demand, paralleled with the government’s determination to foster market expansion.
As long as the underlying product complies with all applicable product authorization prerequisites and incorporates additional safeguards to address associated risks, the SFC expressed its endorsement of the “primary dealing of tokenized SFC-authorized investment products” through a transparent approach.
Providers entering this domain are obligated to shoulder full responsibility for their tokenized offerings. This entails ensuring robust record-keeping mechanisms, operational soundness, and the implementation of effective controls.
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The SFC has made it abundantly clear that “Product Providers should not use public-permissionless blockchain networks without additional and proper controls.”
Regarding disclosure requisites, providers are mandated to transparently specify whether settlements occur off-chain or on-chain, and they must continuously validate token ownership.
Moreover, the SFC stipulates that providers must have at least one proficient staff member equipped with relevant experience and expertise to oversee the tokenization process and manage the new risks associated with ownership and technology.
In spite of federal endeavors to encourage the tokenization of investment products, interest in cryptocurrencies among Hong Kong residents has seen a notable decline.
According to a survey conducted by the Hong Kong University of Science and Technology’s business school, the infamous $166-million JPEX scandal has cast a shadow over investor sentiment, with 41% of the 5,700 respondents expressing a reluctance to hold digital assets.
This suggests that while regulatory frameworks are evolving to accommodate tokenized securities, the scars of past crypto-related incidents continue to influence investment decisions among the local populace.
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