Hong Kong’s Securities and Futures Commission (SFC) has recently issued a comprehensive set of business requirements for firms looking to offer tokenized securities and other investment products. This significant move, announced in a circular released on November 2, is driven by the growing market demand for tokenized investment products and the manifold benefits that blockchain technology offers to the financial sector.
The circular outlines 12 key points, with a strong focus on four critical aspects: tokenization arrangement, disclosure, intermediaries, and staff competence. To be eligible for offering tokenized securities-related activities, providers must meet these requirements. The SFC’s decision to tokenize authorized investment products is in line with the government’s commitment to fostering market development and meeting the increasing demand for these innovative financial instruments.
The SFC’s approach emphasizes transparency and responsibility for providers of tokenized products. They are required to ensure effective record-keeping, operational soundness, and compliance with applicable product authorization requirements, while also addressing associated risks. The SFC has made it clear that public-permissionless blockchain networks should not be used without the proper additional controls.
In terms of disclosure, providers must be transparent about whether settlements occur off-chain or on-chain and demonstrate ownership of tokens at all times. The SFC is also mandating that providers have at least one competent staff member with the requisite experience and expertise to operate and oversee the tokenization arrangement and effectively manage the new risks associated with ownership and technology.
While the government is actively promoting tokenization, it’s important to note that the interest in cryptocurrencies among Hong Kong locals has experienced a notable decline. This decline can be attributed, in part, to the aftermath of the alleged $166-million JPEX scandal, which had a negative impact on investors’ willingness to invest in crypto. According to a survey conducted by the Hong Kong University of Science and Technology’s business school, 41% of the 5,700 respondents expressed a preference for not holding digital assets.
In conclusion, the SFC’s move to lay down these business requirements for tokenized securities and investment products underscores Hong Kong’s commitment to staying at the forefront of financial innovation while maintaining regulatory standards and safeguarding investors.