Hong Kong Securities and Futures Commission intends to open up tokenized securities for retail investors

As the financial industry continues to explore and experiment with digitization, the Securities and Futures Commission (SFC) of Hong Kong has begun to provide regulatory guidance on related activities aimed at promoting a healthy, responsible, and sustainable development of the financial market.

Exploring the Digitization of Traditional Financial Instruments in Hong Kong

The Securities and Futures Commission (SFC) recently indicated that it has observed a growing interest among financial institutions worldwide in the digitization of traditional financial instruments, with more intermediaries attempting to make progress in this area. These institutions are exploring the possibility of digitizing securities and offering them to clients.

The digitization process involves transcribing ownership rights from traditional ledgers onto programmable platforms, often utilizing Distributed Ledger Technology (DLT) in a secure and reliable manner to manage the transfer of assets. While acknowledging the potential of this technology to enhance market efficiency, increase transparency, shorten settlement times, and reduce traditional financial costs, the SFC also recognizes that it may introduce new risks.

Various intermediaries have initiated pilot projects for digitized securities. Traditional brokerage firms are making strides in trading and advising on digitized securities; fund managers are issuing and distributing digitized funds that invest in these securities. At the same time, licensed virtual asset trading platform operators are integrating digital technology into their business practices. The SFC has expressed support for these developments and believes the industry has made encouraging progress in developing scalable and interoperable digital solutions.

Therefore, the SFC deems it timely to provide more guidance on activities related to digitized securities.

This will help intermediaries understand regulatory expectations, ensure regulatory certainty, support ongoing innovation with investor protection as a premise, and introduce appropriate safeguards. The focus of this notification from the SFC is to assist intermediaries in addressing the risks associated with using new digitalization technologies, ensuring the healthy development of the digitized market. For investment products authorized by the SFC, relevant digitalization notices should be reviewed in conjunction with this announcement.

Definition of Tokenized Securities in Hong Kong

The SFC believes that there is currently no universally applicable definition or classification that can be used to distinguish Tokenized Securities, and there may be various structures in the market.

For the purposes of this announcement, Tokenized Securities refer to traditional financial instruments such as bonds or funds that circulate using DLT, such as blockchain technology or similar technology, and meet the definition of "securities" as defined in the Securities and Futures Ordinance.

There are also digital securities that do not fall under Tokenized Securities, which may be considered Collective Investment Schemes (CIS), such as fractional interests in real-world assets or digital artworks or digital land, which are different from traditional funds.

Intermediaries Can Offer Products to Retail Investors

The SFC believes that, with intermediaries complying with regulations, as Tokenized Securities are essentially packaged traditional securities, the SFC does not see the need to impose mandatory restrictions solely targeting professional investors.

The SFC emphasizes that Tokenized Securities are distinct from security tokens.