Author: Zou Chuanwei; Source: Digital Financial Asset Research Center
January 2024 On the 12th, the "2024 Third Digital Finance Frontier Academic Conference" was successfully held at the School of Economics and Management of Tsinghua University. The conference was hosted by the Digital Financial Asset Research Center of Tsinghua University School of Economics and Management and co-organized by Tsinghua SEM Executive Education Center. On the afternoon of the 12th, Dr. Zou Chuanwei, chief economist of Wanxiang Blockchain and invited researcher of Tsinghua SEM Digital Financial Asset Research Center, delivered a keynote speech on the topic of "Practical Progress of Tokenization of Securities and Investment Products in Hong Kong".
Dr. Zou Chuanwei shared from four parts: from tokenization to digital assets; two circulars from the Hong Kong Securities and Futures Commission on the tokenization of securities and investment products; the progress of tokenization practice in Hong Kong; about Tokenization conjecture.
The core logic of tokenization is to map traditional assets to programmable blockchain ledgers to achieve digitization and flexible operation of assets. This process involves the interaction of two ledger systems: the traditional ledger and the blockchain ledger. Traditional ledgers mainly use relational databases and do not have natural programmability. Blockchain Token realizes programmed operations through smart contracts, and has the advantages of openness, point-to-point transactions, and settlement of transactions.
The process of tokenization includes locking assets in traditional ledgers and generating corresponding Tokens in blockchain ledgers. These Tokens represent assets, and Token transactions represent the circulation of assets. The two ledgers need to be synchronized both statically and dynamically, which is the core of tokenization. Through tokenization, we can operate assets in a more flexible and convenient way, breaking through the limitations of traditional finance.
However, not all assets are suitable for tokenization. Some assets that do not have ledgers, such as cars and collectibles, are difficult to tokenize due to their uniqueness and inability to be uniformly registered. Even for assets with existing ledgers, not all assets are suitable for tokenization. The key lies in the synchronization issue between the two ledgers.
In addition, security tokenization also involves issues at the financial infrastructure level. Securities trading involves registration, custody, clearing and settlement, etc., which all need to be compatible with existing financial infrastructure. How to be legally compatible with the financial regulatory framework after tokenization is an issue that has been ignored in many industry discussions.
The securities tokenization experiment mainly focuses on the post-trade processing link, aiming to improve efficiency and reduce the custody chain. Investors typically do not hold tokenized securities themselves but trade them through brokers or professional institutions. Tokenization of income rights is a combination of securitization and tokenization, which packages the cash flow of a company or project into tokenized products and delivers them to investors. The benefits of tokenization are to revitalize existing assets, improve the efficiency of fund use, and provide investors with new investment products. However, tokenization also faces many challenges and limitations and requires continuous exploration and improvement.
Regarding Hong Kong’s circular, tokenized securities are still essentially traditional securities, with just an added layer of packaging. Therefore, tokenization itself does not complicate the product. Regarding the new risks arising from tokenization, the internationally accepted regulatory logic is “same business, same risks, same rules”. In addition to meeting traditional securities market regulatory rules, new risks arising from tokenization also need to be additionally managed.
The Hong Kong Securities and Futures Commission takes a cautious attitude towards investment and product tokenization. At present, the China Securities Regulatory Commission is relatively open to the primary market for tokenized investment products (such as subscription and redemption), but is more conservative about secondary market transactions. The Hong Kong Securities and Futures Commission requires secondary market transactions of tokenized products to provide the same level of protection as non-tokenized products and has proposed strict regulatory requirements.
In practice, tokenization in Hong Kong is mainly divided into three types of projects: government projects, financial institution projects and financial technology institution projects. There is currently no mature template for tokenized securities investment products. Runs through very smoothly. Under Hong Kong’s common law system, there are many links in the tokenization process that need to be polished by market institutions and the Hong Kong Securities and Futures Commission.
Huang Bo
