Hong Kong's "ICO" has made a comeback, setting off another bull market frenzy?

Recently, the Hong Kong Securities and Futures Commission issued a circular to provide regulatory guidance on the development of “tokenized securities” in Hong Kong. Tokenized securities belong to a narrow branch of STO (security token issuance), which is still traditional securities in essence, but after tokenized on-chain issuance, it can bring higher transparency, lower circulation costs, and potential staking returns.

Taking the lead in testing the waters of STOs in the form of “tokenized securities” is more suitable for the early stage when the regulation is not perfect and the risk cannot be fully controlled, and as the industry continues to mature, it is expected that more asset categories will be tokenized. The agency predicts that the scale of Hong Kong’s STO is expected to reach trillions of US dollars in the future.

Compared with the early ICO (Initial Coin Offering), the STO must be regulated by the relevant securities institutions and securities laws and regulations, and can be regarded as a “compliance-level ICO” with controllable risks. In addition, it has a lower threshold and difficulty than IPO issuance, which will significantly improve the financing efficiency and financial market vitality.

STO can be issued?

After allowing virtual asset exchanges to operate in Hong Kong, Hong Kong’s embrace of financial innovation has not stopped, and Hong Kong regulators and practitioners have acted quickly to unleash the potential of the traditional securities industry using tokenization technology.

**According to the “Circular on Tokenized SFC-Authorized Investment Products” and the “Circular on Intermediaries Engaging in Tokenized Securities-related Activities” issued by the Securities and Futures Commission of Hong Kong, the regulatory framework of the traditional securities market for “tokenized securities” has been adopted, and the mandatory requirement of “professional investors only” has been removed, which has opened the door for retail investors to subscribe for tokenized securities and laid the lead for the expansion of the market scale. **

After the issuance of the two circulars, the enthusiasm of Hong Kong financial practitioners for the STO industry has increased sharply, and a number of Hong Kong brokerages have begun to process or provide advice on tokenized securities, and fund managers are also exploring the issuance and distribution of tokenized funds to manage funds investing in tokenized securities.

At present, there are a number of compliance-level STO cases in Hong Kong, but due to risk considerations, participation is still limited to professional investors. Among them, Tai Chi Capital launched STO, a real estate fund for professional investors, to acquire five retail properties located in the BCH tourist hotspots in Kowloon. Investors who hold tokens receive the rental income generated by the property every year. Gopp Technologies launched a STO platform for issuers of securities and professional investors, specializing in the initial offering and distribution of STOs. Leung Hon King, Head of Fintech at InvestHK, believes this is an important milestone and that tokenising real-world assets is one of the best opportunities in the digital asset space.

STO investable ?

While the mandate for tokenized securities to be “professional investors only” has been lifted, regulators remain cautious due to the increased potential technical risks due to the introduction of DLTs (e.g., blockchain technology) in tokenized securities. **Currently, there are no STO products available to retail investors in Hong Kong. **

In response to the risk challenge, the SFC explicitly requires intermediaries to manage new risks that are not related to traditional securities, particularly those related to ownership risks and technology risks in tokenisation activities, such as forking, blockchain network disruption and cyber security risks. STO practitioners should also have professional personnel to conduct due diligence on products using tokenized technology, understand new technology risk prevention measures, storage arrangements for tokenized securities, and safeguards against hacking.

For these professional knowledge, traditional brokerages 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 Kong’s new compliant virtual asset exchanges are uniquely positioned to meet compliance requirements and better understand the technologies and risks associated with “tokens” from the ground up.

It is understood that at present, a number of virtual asset exchanges licensed in Hong Kong or on the application list have launched STO-related layouts, and HKbitEX, an exchange under Taiji Capital, which launched the real estate fund STO, is on the application list.

The head of the exchange explained that although tokenized securities are still securities in essence, how to tokenize securities to achieve on-chain circulation and properly manage assets is a new business for traditional institutions, which involves many technical details, including code audit of smart contracts, security of DLT network, interoperability between back-end systems of all parties involved, prevention of hacker theft risks, etc. "We are very familiar with these links, but it can be a problem for traditional brokers. ”

The future of STO ?

Despite the risk uncertainties, the SFC believes that tokenisation will bring some potential benefits to the financial markets, particularly in terms of improving efficiency, increasing transparency, shortening settlement times and reducing costs for the traditional financial industry.

Strictly speaking, tokenized securities are just an early cautious test of Hong Kong regulation. Since it is still a traditional security by nature, it is conceptually only a narrow branch of STO. A comprehensive understanding of STO (security tokens), the financial assets and rights it corresponds to, including not only tokenized traditional securities, but also gold, real estate investment trusts, data assets, blockchain system dividend rights (such as blockchain native tokens), etc., so the market size of STO is larger than that of tokenized securities.

STO, in turn, belongs to a branch of RWA (Real-World Asset Tokenization). In addition to securities and financial products such as stocks and bonds, the asset classes in RWA also include real estate, automobiles, liquor, luxury goods, precious metals, and more. Tokenizing real-world assets with value and low liquidity can significantly improve liquidity and financing efficiency.

A 2022 report by the Boston Consulting Group (BCG) and ADDX predicts a 50-fold increase in asset tokenization and a market size of $16.1 trillion by 2030.

In the era of tokenization, the potential of the trillion-dollar STO and RWA markets has emerged, and Hong Kong’s forward-looking policies provide opportunities for local companies to deploy early. This will be a historic opportunity for both traditional brokerage firms and emerging compliant virtual asset exchanges.