SFC updates regulatory framework for security token offerings

New SFC framework aims to foster active virtual asset markets while ensuring investor safety and market reliability.

The Securities and Futures Commission (SFC) of Hong Kong has recently updated its regulatory framework for Security Token Offerings (STOs), marking a significant step in fostering Web 3 development. 

Padraig Walsh, Partner at Tanner De Witt, emphasised that the goal is to allow Web 3 community members to bring virtual asset products to the market securely, reliably, and safely for investors.

“The framework introduced by the SFC aims to establish an active market for the trading and provision of virtual assets,” Walsh said. 

One of the significant shifts in the SFC’s approach is the refinement of regulatory measures for intermediaries engaging in tokenized securities-related activities. “The SFC now applies a 'same product, same risk, same regulation' approach,” Walsh explained. 

This means, he explained, that the complexity of the tokenisation layer doesn’t alter the underlying financial product's complexity. Therefore, if the underlying product is not complex, the tokenised security won’t be either, simplifying regulatory requirements.

Another critical change is the relaxation of restrictions on offering tokenised securities to professional investors only. “Tokenised securities can now be offered to retail investors as well, provided they comply with the regulatory requirements that apply to all security offerings in Hong Kong,” Walsh added.

Regarding secondary trading of tokenised investment products, Walsh noted that the SFC plans to engage in market consultation to address different and more complex risks associated with secondary trading. 

He said that issues such as maintaining an accurate real-time register of tokenised securities and ensuring market liquidity are at the forefront of these considerations. “The market's ability to demonstrate maturity in handling new products is crucial for the SFC to proceed with regulatory proposals,” he stated.

The approach to consultation involves initial feedback from the market, followed by a formal consultation process where specific proposals are published and analysed. “This process allows the industry to voice its concerns and feedback, enabling the SFC to bring forth well-informed regulatory proposals,” Walsh clarified.