Hong Kong securities regulator to roll out framework on tokenizing investment assets

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As part of its bid to embrace digitization, Hong Kong is leaning on tokenizing investment products, throwing its weight behind developing a rule book in the coming months.

Hong Kong’s Securities and Futures Commission (SFC) executive, Christina Choi, said the securities regulator will roll out a framework to guide tokenization attempts. She disclosed that the SFC will be issuing guidance in the “near term” but did not give a specific date for the publication of the rules.

The forthcoming rule book will encompass the tokenization of bonds, stocks, real estate, mutual funds, and corporate bonds. Although specifics are limited, experts suggest that the SFC’s efforts to regulate tokenization will proceed in two phases—primary and secondary trading.

Given the region’s early-stage development of the digital currency ecosystem, Choi noted that the securities regulator would be comfortable with the primary dealing of tokenized SFC-authorized products. Hong Kong has launched a new licensing regime for digital currency service providers amid plans to transform the city-state into a Web3 hub.

Currently, the SFC sees secondary trading of tokenized products with great skepticism, noting that it could stir up new legal and supervisory risks. However, it argues that the risks associated with primary trading of tokenized investment products can be managed, but secondary trading requires “more caution and careful consideration.”

Secondary trading will require a 24/7 setup, which the SFC says it is not equipped to handle, noting that the tokenized products will most likely operate as an exchange-traded product.

“Secondary trading would effectively make a tokenized product an ‘exchange traded product,'” said Choi. “In this case, the VATP would function like a conventional stock exchange that facilitates secondary trading of securities and other products offered to the Hong Kong public, with the only key difference being that it is represented as a token rather than a stock.”

Hong Kong has dabbled in tokenization through its experimental green-bond project. Called Project Evergreen, the $101 million offering relied on blockchain to tokenize bonds, offering several upsides for the financial ecosystem.

“As stated by the Hong Kong Monetary Authority (HKMA), the project demonstrated the potential of distributed ledgers to ‘improve efficiency, liquidity, and transparency in bond markets.'”

A tough approach

Despite the pioneering stance of Hong Kong’s regulators with tokenization and Web3, authorities have maintained a tough stance against bad actors. Following the enforcement action against JPEX, an unregistered exchange facing a liquidity crisis, the government underscored its position.

So far, Hong Kong authorities have arrested over 12 people in connection to the case in a raid after receiving 1,600 complaints from aggrieved investors. However, JPEX continues to deny any wrongdoing, blaming the SFC for “continuous unfair treatment” and threatening to abandon its plans to pursue formal registration in Hong Kong.

Watch: The Future of Digital Asset Exchanges & Investment