Introduction
As 2023 concluded, Hong Kong unveiled pivotal regulatory updates advancing the distribution and trading of virtual asset (VA)-related products and tokenised securities. These changes signal Hong Kong’s commitment to embracing digitisation, blockchain innovation, and asset tokenisation in its financial markets.
Key developments include:
- The Securities and Futures Commission (SFC) issued the Tokenisation Circulars (November 2023), replacing its 2019 stance on security token offerings (STOs).
- The VA Funds Circular (December 2023) greenlit retail access to SFC-authorised VA funds.
- A refreshed Joint Circular by the SFC and Hong Kong Monetary Authority (HKMA) expanded guidance for intermediaries in VA activities.
Key Updates
Tokenisation Circulars: A Paradigm Shift
The SFC redefines tokenised securities as traditional securities with a tokenisation wrapper, diverging from its 2019 view that classified them as complex products restricted to professional investors.
Implications:
- Broader Investor Access: Tokenised securities can now target retail and non-professional investors, subject to standard prospectus/securities regulations.
- Complex Product Classification: Tokenised securities are no longer automatically deemed complex—evaluated based on underlying assets.
VA Funds Circular: Expanding Retail Participation
The SFC now accepts applications for VA fund authorisation, including:
- Funds investing directly in spot VA tokens traded on SFC-licensed platforms.
- Funds with indirect exposure (e.g., VA futures, ETFs).
Distribution Rules:
- Listed VA funds: No suitability requirements for exchange-traded units (VA knowledge test still required).
- Unlisted/off-exchange VA funds: Full suitability and disclosure protocols apply.
Tokenisation Explained
What Is Tokenisation?
Tokenisation uses distributed ledger technology (DLT) to create digital tokens representing ownership of assets (e.g., bonds, real estate). The SFC emphasizes:
- Benefits: Enhanced efficiency, transparency, and cost reduction.
- Risks: DLT introduces technical/ownership complexities.
Regulatory Measures
Intermediaries must adopt a “see-through” approach, applying traditional securities laws to tokenised assets. Key requirements:
- Due Diligence: Assess issuers and third-party service providers.
- Disclosures: Clarify tokenisation risks (e.g., smart contract audits, custodial arrangements).
Significance of SFC’s New Stance
- Democratising Access: Tokenised securities and VA funds are no longer exclusive to professional investors.
- Encouraging Innovation: The SFC’s flexible framework fosters product digitisation (e.g., tokenised ETFs, real-world asset funds).
👉 Explore how tokenisation is reshaping global finance
Regulatory Expectations for Intermediaries
Compliance Highlights
- VA Dealing Services: Align with SFC’s VATP licensing conditions.
- Portfolio Management: RA9 terms apply if ≥10% allocated to VAs.
- Advisory Services: Suitability obligations and VA knowledge tests mandatory.
Example: An intermediary issuing tokenised bonds must:
- Verify the issuer’s DLT infrastructure.
- Disclose settlement finality risks to investors.
FAQs
1. Can retail investors now trade tokenised securities?
Yes, provided the offering complies with standard securities regulations (e.g., prospectus filings).
2. Are all VA funds considered complex products?
No. Listed VA funds traded on-exchange bypass suitability rules, though investors must pass a VA knowledge test.
3. What risks do tokenised securities carry?
DLT-specific risks (e.g., smart contract failures, custody gaps) require transparent mitigation strategies.
👉 Learn more about Hong Kong’s VA regulatory framework
Conclusion
Hong Kong’s updates mark a progressive leap toward mainstreaming VA and tokenised products. By balancing innovation with investor protection, the SFC sets a benchmark for global financial hubs. Market participants should leverage these opportunities while ensuring rigorous compliance.