Hong Kong Regulator Issues Guidelines for Digital Asset Tokenization

According to Cointelegraph, Hong Kong's Securities and Futures Commission (SFC) has released two circulars to regulate digital asset tokenization as part of its efforts to become a leading Web3 hub in Asia. The circulars provide guidance for intermediaries involved in tokenized securities activities and outline the criteria for tokenizing investment products authorized by the SFC. The regulator considers tokenized securities as traditional securities with a tokenization layer, meaning the same legal and regulatory requirements that apply to conventional securities markets also apply to tokenized securities.The SFC specified that tokenized securities offerings must adhere to the Companies Ordinance's prospectus regime and the Securities and Futures Ordinance's offers of investments regime. Intermediaries providing advice on tokenized securities, managing tokenized funds, and facilitating secondary market trading on virtual asset trading platforms must comply with the existing conduct requirements for securities-related activities. The recent guidance coincides with Hong Kong's exploration of tokenization. In February, the Hong Kong Monetary Authority issued the world's first tokenized green bond, raising approximately $100 million.According to the circular, licensed trading platforms must establish SFC-approved compensation arrangements to protect against potential security token losses. For example, operators of cryptocurrency trading platforms can demonstrate their adoption of protective measures such as transfer restrictions or whitelisting to ensure the security of tokenized securities. The SFC has noted increased interest from financial institutions in tokenizing traditional financial instruments within the global financial markets. The regulatory body is reviewing various proposals regarding tokenizing SFC-authorized investment products, including those related to the primary offering and secondary trading of tokenized products on SFC-licensed virtual asset trading platforms. The SFC recognizes the potential benefits of tokenization to the financial markets, such as increased efficiency, enhanced transparency, reduced settlement time, and lower costs, but is also aware of the new risks arising from using this technology.