Hong Kong’s Initiatives to Accelerate Tokenisation of Real-World Assets

In the context of tokenisation, a “real-world asset” refers to a physical asset or a traditional financial asset that is represented digitally on a blockchain. These assets may include equities, bonds, financial instruments, and funds, as well as non-financial assets such as real estate, intellectual property, natural resources, art pieces or even income streams. While Hong Kong is continuously taking initiates to build infrastructure for tokenisation of securities and other investment products, such targets are, in fact, a common subset of the term “real-world assets”, which includes diverse categories of other assets that can be tokenised.

Guidance on tokenisation of financial assets

The Securities and Futures Commission of Hong Kong (SFC) has provided regulatory guidance on tokenised securities-related activities as well as SFC-authorised investment products. Although the guidance focuses on issuance of tokenised financial products (including green bonds, commercial papers, warrants, aircraft leasing funds, as well as authorised retail products), it also gives insights into the tokenisation of other real-world assets.

Intermediaries play a crucial role in the tokenisation, and they include product providers, managers of product issuance, fund managers of tokenised funds, and distributors of tokenised assets, etc. The SFC guidance reminds such intermediaries to adopt safeguards in managing risks associated with tokenisation, such as:

1. Product providers should remain, and ultimately be, responsible for the overall operation of the tokenisation arrangement, regardless of any outsourcing of certain functions (e.g. the technical creation of the tokens, ledger/record maintenance, smart contract audit) to other service providers;

2. Conduct due diligence on, amongst other things, the issuers, the products to be tokenised, the technology aspects of tokenisation, the features and risks arising from the tokenisation arrangement, and third-party service providers;

3. Ensure proper records of token holders’ ownership interests are maintained, and that the tokenised products are not issued in bearer form;

4. Have appropriate measures in place to manage and mitigate cybersecurity risks, data privacy, system outages and recovery, and to maintain a comprehensive and robust business continuity plan;

5. Put in place appropriate custodial arrangements which address the features and risks of the tokenised products;

6. Not to use public-permissionless blockchain networks without additional and proper controls;

7. Make adequate disclosure regarding the tokenisation arrangement (including whether off-chain and/or on-chain settlement is final), limitations imposed on token transfers, whether a smart contract audit has been conducted, the legal and beneficial title of the tokens, ownership of / interests in the underlying product, cybersecurity risks, the possibility of undiscovered technical flaws or system outage, and potential challenges in application of existing laws; and

8. Discuss the tokenisation business plan with the SFC in advance.

The SFC points out that… READ FULL ARTICLE

By: Rossana Chu and Sam Wu at YYC Legal LLP

Note: This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please contact us for specific advice.