Recently, the Hong Kong Securities and Futures Commission issued a circular to provide regulatory guidelines for the development of “tokenized securities” in Hong Kong. Tokenized securities belong to a narrow branch of STO (security token issuance). They are still traditional securities in essence, but after being tokenized and issued on the chain, they can bring higher transparency, lower circulation costs and potential Staking income.
Taking the lead in testing STO in the form of tokenized securities is more suitable for early stages when supervision is not perfect and risks cannot be fully controlled. As the industry continues to mature, it is expected that more asset types will be tokenized. Institutions predict that the scale of Hong Kong STO is expected to reach one trillion U.S. dollars in the future.
Compared with early ICOs (initial coin offerings), STOs must be supervised by relevant securities agencies and securities laws and regulations, and can be regarded as compliance-level ICOs with controllable risks. And it has lower threshold and difficulty than IPO, which will significantly improve financing efficiency and financial market vitality.
Can STO be issued?
After allowing virtual asset exchanges to operate under license in Hong Kong, Hong Kongs embrace of financial innovation has not stopped. Regarding STO, Hong Kong regulators and practitioners acted quickly to use tokenization technology to unleash the potential of the traditional securities industry.
According to the Circular on Tokenized Securities Regulatory Commission Authorized Investment Products and the Circular on Intermediaries Engaging in Tokenized Securities-Related Activities issued by the Hong Kong Securities and Futures Commission, the traditional securities market rules for tokenized securities are followed. The regulatory framework and the removal of the mandatory requirement of professional investors only have opened the door for retail investors to subscribe for tokenized securities, and also laid the lead for the expansion of the market size.
After the issuance of the two circulars, Hong Kong financial practitioners enthusiasm for the STO industry increased sharply. Many Hong Kong securities firms began to deal with or provide advice on tokenized securities. Fund managers are also exploring the issuance and distribution of tokenized funds. Manages funds that invest in tokenized securities.
Currently, many compliance-level STO cases have been launched in Hong Kong, but due to risk considerations, participation is still limited to professional investors. Among them, Tai Chi Capital launched a real estate fund STO for professional investors to acquire five retail properties located in the tourist hotspot of Prince Edward in Kowloon District. Investors who hold tokens receive the rental income generated by the property each year. Gaopu Technology launches an STO platform targeting securities issuers and professional investors, specializing in the initial issuance and distribution of STOs. Liang Hanjing, head of fintech at Invest Hong Kong, believes that this is an important milestone and tokenizing real-world assets is one of the best opportunities in the field of digital assets.
Is STO investable?
Although the mandatory requirement for “professional investors only” for tokenized securities has been relaxed, due to the introduction of DLT (such as blockchain technology) into tokenized securities, potential technical risks have increased, and regulatory authorities still hold the view that Be cautious.Currently, there is no STO product in Hong Kong that retail investors can participate in.
In response to risk challenges, the China Securities Regulatory Commission clearly requires intermediaries to manage new risks unrelated to traditional securities, especially ownership risks and technology risks in tokenization activities, such as forking, blockchain network interruptions and network Security risks. STO practitioners should also have professional manpower to conduct due diligence reviews of products using tokenized technology, understand new technology risk prevention measures, custody arrangements for tokenized securities, and safeguards against hackers, etc.
For this professional knowledge, traditional securities firms lack sufficient technical reserves, and some institutions have begun to urgently recruit blockchain talents to cope with the development trend of STO. In this regard, Hong Kongs new compliant virtual asset exchanges have unique advantages. They can not only meet compliance requirements, but also better understand the technologies and risks related to tokens from the bottom up.
It is understood that many virtual asset exchanges currently licensed in Hong Kong or on the application list have launched STO-related layouts. The above-mentioned exchange HKbitEX of Taiji Capital, which launched the real estate fund STO, is on the application list.
VDX, another Shenpai platform, is also paying attention to the progress of STO. The person in charge of the exchange explained that although tokenized securities are still securities in essence, how to tokenize securities to realize circulation on the chain and properly manage assets is a problem for traditional institutions. It is a completely new business, which involves many technical details, including smart contract code auditing, DLT network security, interoperability between the back-end systems of all parties involved, preventing the risk of hackers stealing money, etc. “We are very familiar with these links, but they may be a difficult problem for traditional securities firms.”
The future of STO?
Despite the risk uncertainty, in the view of the Hong Kong Securities and Futures Commission, tokenization will bring some potential benefits to the financial market, especially in allowing the traditional financial industry to improve efficiency, increase transparency, shorten settlement time and reduce costs. cost aspect.
Strictly speaking, tokenized securities are just a cautious early stab at Hong Kong regulation. Since its essence is still a traditional security, it is conceptually only a narrow branch of STO. To fully understand STO (security token), its corresponding financial assets and rights include not only tokenized traditional securities, but also gold, real estate investment trusts, data assets, and dividend rights of blockchain systems (such as blockchain chain native tokens), etc., therefore the market size of STO is larger than that of tokenized securities.
STO is a branch of RWA (Real World Asset Tokenization). In addition to securities and financial products such as stocks and bonds, asset classes in RWA also include real estate, cars, wine, luxury goods, precious metals, etc. Tokenizing valuable and less liquid assets in the real world can significantly improve liquidity and the efficiency of financing and lending.
A 2022 report jointly released by the Boston Consulting Group (BCG) and ADDX predicts that asset tokenization will grow 50 times by 2030, with the market size reaching $16.1 trillion.
In the era of tokenization, the trillion-dollar potential of the STO and RWA markets has emerged, and Hong Kongs forward-looking policies provide local companies with early opportunities for deployment. This will be a historic opportunity for traditional securities brokerage companies and emerging compliant virtual asset exchanges.
