The Hong Kong Securities and Futures Commission issues a circular regarding intermediaries engaging in tokenized securities-related activities and SFC-authorized investment products

Hong Kong’s Securities and Futures Commission (SFC) has issued a circular regarding intermediaries engaging in tokenized securities-related activities. The Hong Kong Securities and Futures Commission has observed that in the global financial market, financial institutions are increasingly interested in tokenizing traditional financial instruments, and the number of intermediaries that have begun to explore the tokenization of securities and distribute tokenized securities to customers has also continued to increase. Generally speaking, tokenization involves the process of recording rights to assets that exist within a traditional ledger on a programmable platform, including the use of distributed ledger technology (DLT) during the security lifecycle. This can be thought of as record keeping in digital form, incorporating the rules and logic that govern the asset transfer process. The SFC is aware that tokenization can bring some potential benefits to the financial market, especially in improving efficiency, increasing transparency, shortening settlement times and reducing costs in the traditional financial industry. However, the SFC is also aware that the use of this New technologies bring new risks. Many intermediaries are already undertaking pilot programs to experiment with the tokenization of securities. For example, traditional brokerage houses already buy, sell or provide advice on tokenized securities. Fund managers are issuing and distributing tokenized funds and managing funds that invest in tokenized securities. Licensed operators of virtual asset trading platforms have been experimenting with and integrating tokenization into their business operations. The SFC supports intermediaries taking steps to tokenize traditional securities and believes that the industry has made encouraging progress in developing scalable and interoperable tokenization solutions to date. The SFC believes it is time to provide more guidance on activities related to tokenized securities. This move will help clarify the regulatory requirements that intermediaries engaged in these activities should meet, thereby providing clear regulatory guidance to support the industry's continued innovation while taking appropriate preventive measures from the perspective of investor protection. The focus of this circular is to provide intermediaries with guidance on how to respond to and manage new risks arising from the use of this new tokenization technology so that the tokenization market can develop in a robust, responsible and sustainable manner. In relation to SFC-authorized investment products, this circular should be read in conjunction with the SFC’s circular on tokenized SFC-authorized investment products. According to the circular, the primary trading requirements for tokenized investment products recognized by the China Securities Regulatory Commission include: Product providers of tokenized investment products should ensure that the underlying products comply with the applicable requirements of relevant rules, regulations and product codes (including the product provider’s eligibility, product structure, investment and operating requirements, disclosures and ongoing compliance obligations). The SFC will pay close attention and continue to engage with market participants to develop appropriate measures to address risks associated with secondary trading of tokenized investment products recognized by the SFC. In addition, new investment products that have tokenization capabilities and plan to seek approval from the China Securities Regulatory Commission need to consult the China Securities Regulatory Commission in advance. Tokenization of existing investment products authorized by the Securities and Futures Commission also requires prior consultation.