Hong Kong SFC Completes the Regulatory Structure of Tokenised Securities

Key Takeaways:

• Securities and Futures Commission (SFC) considers tokenized securities as traditional financial products that have only a digital form.  
• The new framework removes the professional-investors-only limitation, enabling the retail to participate in eligible tokenized assets.  
• The licensing intermediaries are in charge of performing technical due diligence and authoritatively recording ownership on-chain.

The Hong Kong Securities and Futures Commission (SFC) has revised its regulatory framework to include all the tokenized securities formally in the main financial markets. These tools will be handled just like ordinary securities, as long as they comply with the current safety and compliance standards.

The regulator claimed that tokenized securities will be on equal footing with common securities like bonds or funds that are issued through distributed ledger technology (DLT). In the SFC see through approach, the pre existent protection of the investors under the existing see through approach are not overlooked, and issuers are allowed to tokenize legacy securities without necessarily declaring them complex products only accessible to professional investors.  

This is a major change to the previous regime of 2019 where only professional investors were allowed to buy security tokens. Plain-vanilla tokenized bonds or funds can be provided to the retail investors under the new regulations. The SFC still needs intermediaries to evaluate the technological risks and guarantee that the rights of investors in legal terms are properly represented and maintained in digital format.

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The SFC leaves the system security and solid keeping operations in the hands of the issuers of the products mainly. The firms need to select individuals who are knowledgeable on tokenization technology. The ownership records should always remain in order and fit within all the service providers of the ecosystem.

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The middlemen must go down to the nitty-gritty of technical due diligence, in investigating cybersecurity threats and the expected business continuity. In the case of public, permissionless blockchains, then additional security is required to prevent theft or hacking.

The regulator also refers to having utmost clarity on when a settlement is open-ended. Disclosure documents should explicitly indicate on-ledger moves, the last word or not, on that the off-chain records are still sovereign. That is not to lose the ownership tussle in case the network crashed or something else became rogue.

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