21 April, 2024

Hong Kong SFC Prepares to Unveil Tokenization Guidelines for Financial Assets

27 Sep, 2023

01 Dec, 2023

  • Hong Kong’s SFC is finalizing rules for tokenizing authorized investment products, with a focus on primary trading.
  • The regulatory approach aims to be technology-neutral and principles-based, as emphasized by Christina Choi.
  • Concerns were raised about the complexities of secondary trading in a tokenized environment, including liquidity and record-keeping.

The Hong Kong Securities and Futures Commission (SFC) is in the final stages of formulating comprehensive guidelines on the tokenization of its authorized investment products. The regulatory body has indicated that while primary trading is currently permitted, secondary trading on platforms should be approached with caution.

Christina Choi, Chair of the International Organization of Securities Commissions’ Committee on Investment Management, elaborated on the SFC’s stance during a Bloomberg buy-side forum. Choi emphasized the SFC’s dual role. It involves not only protecting investors but also fostering innovation to maintain Hong Kong’s competitive edge as a global asset management hub. She highlighted the SFC’s technology-neutral and principles-based regulatory approach, aiming to balance innovation with robust risk management. She cited,

Regulation enables innovation. Robust regulation is key to ensuring the industry’s sustainable development, building trust in our markets, and enabling further innovation.

The forthcoming guidelines align with recent amendments to Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance. These amendments have made it mandatory for all centralized trading platforms of non-security tokens to obtain an SFC license. Choi pointed out that tokenization could offer multiple benefits, including increased efficiency, reduced costs, and new distribution channels for asset managers. However, she also stated that tokenization introduces new types of risks and regulatory challenges that need to be addressed. Choi added, “Innovation without proper regulation would be unsustainable, as history has repeatedly taught us hard-learnt lessons”.

The SFC has also expressed specific concerns about the secondary trading of tokenized products. These concerns include potential liquidity mismatches and the necessity for instantaneous record-keeping in a 24/7 trading environment. Choi also touched upon the SFC’s “mutual market access” or “connectivity” initiatives. 

These aim to connect Hong Kong’s investment products to other markets, most notably Mainland China. These initiatives have seen significant success, as evidenced by the twenty-fold increase in the average daily turnover of southbound trading of eligible Hong Kong ETFs in its debut year.

Choi extended an invitation to SFC-authorized product providers who are interested in exploring tokenization to engage with the regulatory body for further discussions. As of now, the SFC is expected to release these detailed guidelines on tokenization in the near future.


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