Tokenization in HK

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What is tokenization?
Tokenization is the process of linking assets to crypto tokens, and tying the token price to the value of the asset. Essentially, owning a token means owning the corresponding asset. Sometimes, tokens represent a portion of an investment or an asset.
Tokenization has five key features:

1. Blockchain: The platform on which the tokens are issued, which can be either permissioned or permissionless. Government-issued tokens typically use private blockchains.
2. Reference Asset: The asset that the token represents, which can be on-chain or off-chain. Off-chain token assets often involve intermediaries like banks, while on-chain token assets utilize smart contracts for transactions, storage, and other actions.
3. Price Link Mechanism: A method to connect the token’s price to the asset’s value.
4. Storage/Custody: Means to store or provide custody for the asset.
5. Redemption Mechanism: A way to redeem the asset, applicable to both off-chain and on-chain assets. Redemption of intangible assets and some off-chain assets usually involves more complex legal procedures.

Tokenization was initially carried out by private companies, often venture capital-backed, and later by financial firms. State entities, such as government agencies and monetary authorities, have also started exploring tokenization.

Real World Asset (RWA)
RWA protocols, which are decentralized applications for tokenizing and trading real-world assets, have recently become popular. These assets include stocks, government bonds, real estate, and commodities. RWA protocols enable the purchase of fractional shares of assets, similar to buying shares in publicly traded companies.

According to DefiLlama, the Total Value Locked (TVL) of RWAs exceeded $2.4 billion in October 2023, about 5% of the total TVL in DeFi. In 2023, RWA on-chain value (excluding stablecoins) grew by $1.05 billion.

Top RWA protocols, such as Ondo Finance, have partnered with prominent asset managers like BlackRock, allowing stablecoin holders to invest directly in exchange-traded funds. Other institutions, including Goldman Sachs and Deloitte, have initiated their tokenization projects.
Advantages of Tokenization

• Improved Liquidity: Tokenizing assets like real estate can increase market liquidity by enabling faster transactions and broader investor access.
• Lower Barrier to Entry: Tokenization can make markets more accessible by allowing fractional investments, reducing the minimum investment required.
• Reduced Costs: Tokenization can lower costs by eliminating intermediaries such as lawyers and brokers, replacing them with smart contracts.
• Programmability: Tokens can be programmed for specific uses, times, or locations, enhancing their functionality.
• Quicker Transactions: Digital representation of assets allows for 24/7 trading, unlike traditional assets which are limited to working hours.

Challenges of Tokenization
Linking real-world assets to the blockchain can introduce blockchain and crypto-related issues, such as volatility, to traditional markets.

Hong Kong Tokenization Market
During the 2023 Hong Kong Fintech Week, the Chief Executive of the Hong Kong Monetary Authority (HKMA), Eddie Yue, highlighted the city's focus on Central Bank Digital Currencies (CBDC), tokenization, and digital assets like NFTs.
Recent key tokenization projects in Hong Kong include:

• Security Tokenization Circulars (November 2023): The Securities and Futures Commission (SFC) issued circulars providing guidance on managing risks and regulatory requirements for tokenized securities and products.
• Tokenized Green Bonds (February 2023): Hong Kong issued HK$800 million of tokenized green bonds, using a private blockchain for definitive records of ownership.
• Tokenized e-HKD Deposits: Visa, Hang Seng Bank, and HSBC explored tokenized deposits to enable seamless and faster transactions.
• Hong Kong’s First Real Estate Fund STO (September 2023): Tykhe Capital Group launched PRINCE Token, the first real estate fund Security Token Offering in Hong Kong.

Hong Kong is expected to see increased tokenization of real-world assets, predicted to be a key driver of digital asset adoption. A report by Boston Consulting Group estimated that by 2030, asset tokenization could become a multi-trillion dollar market.

This article provides a summary of key regulations and practices related to tokenization in Hong Kong and is not intended as legal or regulatory advice.