The financial world is undergoing a transformative shift as blockchain technology reshapes how assets are issued, traded, and managed. One of the most promising frontiers in this evolution is capital markets tokenization—a process that digitizes traditional financial instruments using distributed ledger technology (DLT). On April 9, 2024, DMI hosted the first installment of its "High Thinking in the Cloud" webinar series, co-organized with King & Wood Mallesons, to explore the regulatory landscape, institutional adoption trends, and Hong Kong’s strategic positioning in this emerging domain.
This comprehensive discussion brought together Flora Sun, Deputy CEO of DMI, and Andrew Fei, Partner at King & Wood Mallesons, who shared insights into global developments, risk considerations, and the unique advantages Hong Kong offers in the tokenized capital markets ecosystem.
Understanding Asset Tokenization: A New Financial Paradigm
👉 Discover how tokenization is redefining ownership and investment accessibility in modern finance.
At its core, asset tokenization involves representing ownership of physical, intangible, or financial assets as digital tokens on a blockchain. These tokens can represent full or fractional ownership and enable seamless issuance, transfer, and management across decentralized networks. Once issued, they can be traded on secondary markets—offering unprecedented liquidity and efficiency.
Tokenized assets span three primary categories:
- Real World Assets (RWA): Including real estate, art, and precious metals. Tokenization enhances liquidity and lowers entry barriers for retail investors.
- Intangible Assets: Such as intellectual property or data rights, enabling broader monetization and innovation.
- Financial Assets: Particularly bonds and equities—crucial for Hong Kong’s role as a global financing hub.
With increasing institutional interest and regulatory clarity, tokenization is no longer theoretical—it's operational.
The Growth Trajectory: Market Size and Future Projections
According to Boston Consulting Group (BCG), the global market for tokenized assets could reach $16 trillion by 2030, with 75% concentrated in capital markets products such as tokenized debt funds and private equity. This explosive growth is driven by clear benefits:
- Fractionalization: Smaller investment units allow broader participation.
- 24/7 Settlement: Enables near-instantaneous transactions across time zones.
- Smart Contracts: Automate interest payments, dividend distributions, and trade settlements—reducing counterparty risk and operational costs.
- Cost Efficiency: Leverages open-source infrastructure to lower issuance and maintenance expenses.
These advantages are not just theoretical—they are already being realized through real-world implementations.
Institutional Adoption: Real-World Examples in Funds and Bonds
Financial institutions worldwide are actively testing and deploying tokenized solutions. Here are key milestones:
Tokenized Funds:
- 2021: Partners Group listed its global value SICAV fund on ADDX.
- 2022: Hamilton Lane launched a private markets fund on ADDX.
- 2023: UBS piloted a tokenized money market fund on Ethereum under Project Guardian.
- 2023: Standard Chartered launched Libeara to tokenize Singapore dollar government bond funds.
- 2024: BlackRock partnered with Securitize to launch its first tokenized fund.
- 2024: Sygnum tokenized $50 million of treasury reserves on zkSync.
Tokenized Bonds:
- 2021: DBS issued a S$15 million digital bond via DDEX.
- 2021: CGS-CIMB issued early digital commercial paper on ADDX.
- 2023: The Hong Kong government became the first sovereign issuer to launch an HK$800 million tokenized green bond on GS DAP.
- 2023: Olam International completed a S$400 million digital bond issuance on SGX’s Marketnode.
- 2024: The Hong Kong government issued a multi-currency digital-native bond worth HK$60 billion (~$7.67 billion USD) on HSBC’s Orion platform.
- 2024: China Guangfa Bank issued a $100 million tokenized commercial paper on Ethereum via ABT Tech.
These cases illustrate a growing trend: from pilot projects to scalable, production-level deployments—particularly in Asia.
Global Regulatory Landscape: A Comparative Overview
Regulators globally are adapting existing frameworks rather than creating entirely new ones. The guiding principle? "Same activity, same risk, same regulation."
United States
The SEC applies the Howey Test to determine whether a token qualifies as a security. If it involves investment of money, participation in a common enterprise, and expectation of profit from others’ efforts, it falls under securities law. Enforcement is aggressive, with limited formal approvals for digital securities.
European Union
Under MiCA (Markets in Crypto-Assets Regulation), crypto assets are regulated without undermining existing financial laws. If a token resembles a transferable security, it remains subject to traditional EU financial regulations.
United Kingdom & Singapore
Both jurisdictions adopt technology-neutral and substance-over-form approaches. The UK has introduced a digital securities sandbox to foster innovation under supervision.
Hong Kong: A Leader in Regulatory Clarity
Hong Kong stands out with its coordinated approach among regulators like the HKMA and SFC. Key features include:
- Piercing Principle (Penetration Principle): Tokenized assets are viewed as traditional assets wrapped in DLT. Legal classification depends on the underlying asset.
- Regulatory Certainty: Existing securities laws apply directly to tokenized equivalents.
- Risk Disclosure Requirements: Institutions must disclose additional risks including technical vulnerabilities, cybersecurity threats, custody issues, and AML compliance.
- Basel III Alignment: Hong Kong plans to implement capital requirements for banks holding digital assets—non-compliant tokens face up to 1250% risk weighting.
Beyond Tokenization: Bitcoin ETFs and Digital Currencies
Hong Kong is also advancing in adjacent areas:
Spot Bitcoin ETFs
While the U.S. SEC approved spot Bitcoin ETFs in January 2024, Hong Kong’s SFC had already signaled openness in late 2023. Retail-accessible Bitcoin and Ethereum ETFs are expected soon—further solidifying Hong Kong’s status as a digital asset gateway.
Stablecoins & Central Bank Digital Currencies (CBDC)
Hong Kong is developing a robust stablecoin regulatory framework aligned with international standards (IOSCO, FSB). Requirements include:
- Issuers must be Hong Kong-incorporated entities with local management.
- Full reserve backing at all times.
- High-quality, liquid, segregated reserves.
The e-HKD (digital Hong Kong dollar) has completed its first-phase pilot and entered Phase II. It aims to support both retail and wholesale use cases—especially for settling tokenized assets.
Three types of settlement vehicles are under consideration:
- CBDC
- Regulated stablecoins
- Tokenized bank deposits
Frequently Asked Questions (FAQ)
Q: What additional considerations do issuers face with digital bonds vs. traditional ones?
A: Beyond standard financial disclosures, issuers must address DLT-specific risks such as smart contract vulnerabilities, cybersecurity threats, and custody arrangements. They may also need to engage licensed intermediaries (e.g., Type 1 or Type 9 license holders) for distribution. If issuing proprietary stablecoins for settlement, a separate licensing process applies.
Q: How do intermediaries adapt in a tokenized market?
A: Traditional custodians and clearinghouses like Euroclear and Clearstream are redefining their roles. While DLT reduces reliance on centralized registries, these institutions aim to remain key players by offering regulated infrastructure for issuance, settlement, and compliance.
Q: How is ownership legally enforced in tokenized assets?
A: Under Hong Kong or English law, issuers can amend legal documents (e.g., deed of covenant) so that obligations flow directly to token holders. The blockchain registry becomes the authoritative source—replacing paper-based or centralized electronic systems.
Q: Does Hong Kong have an edge over Singapore in tokenization?
A: Yes. While both are leaders in Asia, Hong Kong offers greater policy integration—covering tokenized securities, retail ETFs, CBDCs, stablecoin regulation, and Basel III implementation. Its proximity to mainland China also enables stronger cross-border financial linkages.
Q: Can KYC be maintained despite blockchain’s pseudonymity?
A: Absolutely. Even on public blockchains like Ethereum, permissioned tokens can be programmed using smart contracts to restrict transfers only to verified addresses. Financial institutions maintain whitelists and enforce AML/KYC protocols within decentralized environments.
Conclusion: Hong Kong’s Ascent as a Digital Finance Hub
With coordinated regulatory leadership, pioneering government issuances, and growing institutional participation, Hong Kong is poised to become a global leader in tokenized capital markets. From green bonds to ETFs and stablecoins, the city is building a holistic ecosystem where innovation meets compliance.
As Flora Sun noted, DMI continues to track these developments closely through dedicated research columns, market reports, and thought leadership initiatives—including future installments of the "High Thinking in the Cloud" series focused on digital assets.
For investors, issuers, and financial institutions alike, the message is clear: the future of finance is being written on-chain—and Hong Kong is helping author it.