The Securities and Futures Commission (SFC) of Hong Kong laid down the business requirements for offering tokenized securities and other investment products in a circular released Nov. 2.
The market demand in Hong Kong for tokenized investment products combined with the various benefits of blockchain technology became one of the key drivers for the SFC to consider issuing public guidelines on tokenizing the securities and futures market.
With the conclusion of the closely watched central financial work conference, China has outlined future priorities and directions for the pursuit of the country’s high-quality financial development. pic.twitter.com/Jq4ax0cb3X
— SFC TALK (@sfc_talk) November 2, 2023
The circular broadly details 12 points, emphasizing four aspects — tokenization arrangement, disclosure, intermediaries and staff competence — for eligibility in issuing tokenized securities-related activities.
The intent behind the tokenization of SFC-authorized investment products is tied to the rising market demand and the government’s willingness to facilitate market development. Considering that the underlying product can meet all the applicable product authorization requirements and the additional safeguards to address the associated risks, the SFC stated:
“By adopting a see-through approach, the SFC is of the view that it is appropriate to allow primary dealing of tokenized SFC-authorised investment products.”
Providers are expected to take full responsibility for their tokenized products and ensure effective record-keeping, large risk appetite and demonstrate operational soundness, among other factors. The SFC further clarified:
“Product Providers should not use public-permissionless blockchain networks without additional and proper controls.”
Regarding disclosure requirements, providers need to clearly disclose whether settlements happen off-chain or on-chain and prove the ownership of tokens at all times. Lastly, the SFC will also require providers to “have at least one competent staff with relevant experience and expertise to operate and/or supervise the tokenization arrangement and to manage the new risks relating to ownership and technology appropriately.”
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