The Securities and Futures Commission of Hong Kong (SFC) has on 2 November 2023 issued guidance for the tokenisation of investment products authorised by it for offer to the public in Hong Kong, such as mutual funds, unit trusts and other collective investment schemes. The SFC is adopting a see-through approach, permitting tokenisation of authorised investment products if the underlying product satisfies all applicable authorisation requirements and additional safeguards are in place to address the new risks associated with tokenisation arrangements. 

Only primary dealing will be permitted initially. The SFC will continue to engage with market participants on measures to address risks relating to secondary trading, such as the accuracy of instant token ownership records, readiness of the trading infrastructure, liquidity support arrangements and fair pricing.

Product providers will be ultimately responsible for the soundness of the tokenisation arrangements, and must put in place appropriate cybersecurity, data privacy and systems integrity measures. Third party audit or verification of the tokenisation systems, ownership records and integrity of the smart contracts may be required. Tokens cannot be on a public-permissionless blockchain network and cannot be issued in bearer form. 

The product offering document should clearly explain the tokenisation arrangements (including whether on-chain or off-chain settlement is final), the ownership representation of tokens, and risks associated with the tokenisation.

Tokenised SFC-authorised investment products should be distributed only by SFC-licensed corporations or registered institutions. The SFC had on the same date also issued new guidance for intermediaries engaging in tokenised securities-related activities.

The SFC should be consulted in advance for any proposed tokenisation of SFC-authorised investment products, and prior approval may be required for the tokenisation of existing products.