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Hong Kong's Securities and Futures Commission (SFC) is preparing to issue guidance on the tokenization of authorized investment products, according to Christina Choi, Executive Director of Investment Products at the SFC. In a recent speech, Choi indicated that the guidance is expected to be released "in the near term." The move comes as Hong Kong seeks to navigate the evolving landscape of digital assets while addressing the legal, regulatory, and supervisory challenges associated with tokenization.
Primary Dealing of Tokenized SFC-Authorized Products
Choi explained that the SFC's current approach involves considering primary dealing of tokenized SFC-authorized products as the initial step, given the nascent state of development of virtual asset services platforms (VATPs) in Hong Kong. This approach focuses on allowing authorized investment products to be tokenized and offered for primary trading. It is seen as a more controlled way to introduce tokenization to the market.
Risks Associated with Tokenization
While tokenization presents new opportunities, Choi acknowledged that it also introduces risks and legal complexities. She pointed out that secondary trading of tokenized SFC-authorized products on VATPs would necessitate more caution and careful consideration. Secondary trading would amplify certain risks that might be manageable in primary dealing but become more challenging in a 24/7 trading environment.
Tokenization as Exchange-Traded Products
Choi highlighted that secondary trading would effectively transform a tokenized product into an "exchange-traded product." In this context, VATPs would function similarly to conventional stock exchanges, facilitating the secondary trading of securities and other tokenized products. The key difference is that these products are represented as tokens rather than traditional stocks.
Heightened Scrutiny and Recent Enforcement Actions
Recent developments in the Hong Kong cryptocurrency landscape have prompted increased scrutiny by authorities. Notably, Hong Kong authorities took action against JPEX, a crypto exchange, and arrested multiple individuals in a police operation known as "tieguan" or "iron gate." This action followed warnings from the SFC regarding false or misleading statements made on social media by crypto influencers and JPEX, claiming that the firm had applied for a virtual asset trading license in Hong Kong.
The crackdown on JPEX and related enforcement actions demonstrate Hong Kong's commitment to regulating its cryptocurrency and digital asset space, with a focus on ensuring compliance and investor protection.
Conclusion
Hong Kong's issuance of guidance on the tokenization of authorized investment products reflects the ongoing efforts of regulators to adapt to the evolving digital asset landscape. The decision to begin with primary dealing of tokenized products and proceed cautiously with secondary trading highlights the need to balance innovation with risk management in the emerging world of digital assets.
