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A new guidance creates a regulatory framework for tokenisation of retail investment products and provision of services for tokenised financial instruments.

By Simon Hawkins and Adrian Fong

On 2 November 2023, the Securities and Futures Commission (SFC) issued two widely anticipated circulars on tokenisation during the 2023 Hong Kong FinTech Week.

One circular provides conduct-related guidance to intermediaries engaging in tokenised securities-related activities (Activities Circular). The other circular addresses the tokenisation of SFC-authorised investment products (Products Circular), such as retail investment funds.

Before the circulars were released, the SFC’s chief executive spoke of the regulator’s evolutionary rather than revolutionary approach to addressing digital asset-related activities. The circulars indeed reflect this gradual, incremental approach rather than a big-bang moment of regulatory change, and we expect market participants to welcome the SFC’s new guidance as some of them consider exploring tokenised products and services.

The new law establishes the Dubai Virtual Assets Regulatory Authority and identifies activities to be regulated, such as operating virtual asset platforms.

By Andrew Moyle, Ksenia Koroleva, and Matthew Rodwell

On March 11, 2022, Dubai Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai (Virtual Assets Law) was published in the Official Gazette of the Government of Dubai. The new law is a landmark piece of legislation for Dubai, which aims to become one of the leading jurisdictions for virtual assets.

In a year-end change of course, the SEC identified the minimum steps that broker-dealers must take when acting as custodians of digital asset securities.

By Stephen P. Wink, Naim Culhaci, Shaun Musuka, and Deric Behar

On December 23, 2020, the US Securities and Exchange Commission (SEC) staff issued a statement (Custody of Digital Asset Securities by Special Purpose Broker-Dealers) (the Statement) outlining its position on how broker-dealers must operate when acting as custodians of digital asset securities[i] in order to avoid enforcement action. The SEC’s Statement, which will be in effect for five years, is intended to encourage innovation while providing both industry participants and the SEC the opportunity to develop best practices with respect to the custody of digital asset securities.

The US agency has used a no-action letter to enable a sandbox-like approach to blockchain-based trade settlements.

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

In what may be the first regulator-approved application of blockchain technology for the settlement of US equities trades, the Division of Trading and Markets of the US Securities and Exchange Commission (SEC) recently granted no-action relief to Paxos Trust Company (Paxos) to conduct a two-year “feasibility study” of a securities settlement service using distributed ledger technology. During this period, Paxos will be permitted to operate as a clearing agency under Section 3(a)(23) of the Securities Exchange Act without needing to register as a clearing agency under Section 17A(b)(1) of the Act. The no-action relief for the Paxos Settlement Service (PSS) is limited to clearing a volume-restricted number of trades per day of highly liquid publicly traded equities, for at most seven eligible broker-dealers.

By Andrew Moyle and Stuart Davis

The Project Stella report, a European Central Bank (ECB) and Bank of Japan (BOJ) joint venture, details the applicability of distributed ledger technology for financial market infrastructure. During a one-month research project, the central banks tested whether distributed ledger technology (DLT) could sustain the liquidity saving mechanisms — a system introduced in 2013 to ensure the liquidity of banking institutions — in their current real-time gross settlement systems (RTGS).

Published in September 2017, the report concluded that DLT solutions have the potential to increase the resilience and reliability of financial transactions and are scalable to meet the needs of large value payment systems, but they have not yet reached the level of maturity needed to replace the RTGS that the ECB and BOJ currently use. The findings on the scalability of DLT are important, because regulators such as ESMA and FCA have previously questioned whether DLT could be scalable enough to meet the needs of the financial market infrastructure.