In this episode, Colin from WuBlockchain interviews Anna Liu, Head of Tokenisation at HashKey, to delve into the evolution of Tokenisation in the Web3 and cryptocurrency space, its compliance challenges, and its future potential in Hong Kong and the global market.

Anna shares her journey transitioning from a legal role to Tokenisation, discussing its significance in the Web3 and cryptocurrency sectors. She analyzes Hong Kong’s latest regulatory policies on virtual assets, particularly how they support the compliant development of Security Token Offerings (STOs) and digital assets. The discussion covers key differences between STOs and IPOs, including variations in financing, liquidity, and compliance costs, and how Tokenisation can enhance market efficiency. Anna also envisions Hong Kong as a global virtual asset hub, sharing insights on tokenized bonds, the application of STOs in secondary markets, and the influence of traditional financial institutions like BlackRock entering Tokenisation in the U.S., as well as the competitive and cooperative landscape between Hong Kong and Singapore in virtual assets.

Host Introduction and Guest Introduction

Colin:

Hello everyone, today we’re discussing a trending topic: Tokenisation. We have Anna Liu from HashKey here; Anna, please introduce your background and work experience.

Anna:

Thank you, everyone! I joined HashKey in 2018, and it’s been six and a half years. For the first five years, I focused on legal work because of my legal background, engaging deeply in compliance and licensing related works in different regions including Hong Kong, Singapore, and Japan. Since last year, I internal transferred to the business side, overseeing HashKey’s Tokenisation business line for a year until now.

Prior to joining HashKey, I worked in a sizeable internet giant with focusing on legal aspects of investments and mergers, and before that, I was at a law firm responsible for the transactions of capital markets, IPOs, and M&A.

Transfer from Legal to Business Role

Colin:

What’s your feeling about transferred from legal to a business role? What differences do you notice?

Anna:

It’s quite different especially from the angle of its focus areas. I was more familiar with legal aspects and mainly have the knowledge from prior experiences. The business role evolves faster and presents greater challenges, making it very interesting.

Origin of HashKey’s Tokenisation Business

Colin:

When did HashKey start its Tokenisation business internally, and why?

Anna:

We began preparing for it at the beginning of last year, positioning and planning for the next cycle. In the previous several years, as Colin may be aware, HashKey obtained relevant significant business licenses or Approval-in-Principle from the financial regulators in different regions, including Hong Kong, Singapore, Japan, and Bermuda, across various business segments like exchanges, asset management and OTC, etc.

In the past five years, the regulation in virtual assets has been primarily focused on secondary market trading. In Hong Kong, besides the required licenses we obtained under the Securities and Futures Ordinance, we also have been approved as the licensed virtual asset trading platform which related to anti-terrorism and money laundering compliance. In October 2022, The Financial Services and the Treasury Bureau issued a policy statement on the development of Virtual Assets (VA) in Hong Kong. The statement sets out the Hong Kong Government’s policy stance and approach towards developing a vibrant sector and ecosystem for VA in Hong Kong.

From the perspective of a well-developed industrial chain, merely having virtual asset trading activities is not enough to support Hong Kong in becoming a virtual asset center. The aggregation of whole industry is necessary for forming a complete closed-loop market. The construction of a comprehensive international virtual asset center requires three elements: first, a well regulated and efficient secondary trading market; second, a robust primary issuance market that supported by an active and liquid secondary trading market; and third, the congregation of upstream and downstream industries related to virtual assets based on active primary and secondary markets.

With the improvement in the regulation of secondary market, we believe the next focus will be on primary market, hence we are keen to allocate more resources into the primary market and explore potential opportunities in this area. This’s the main reason that we established our Tokenisation business.

We’re optimistic about the next phase, particularly in Hong Kong, where unique and high-quality assets are likely to emerge in the primary issuance market. We aim to provide quality assets for licensed exchanges in Hong Kong.

Relationship Between Hong Kong Regulation and Tokenisation

Colin:

Got it. Is your Tokenisation business closely linked to the developments in Hong Kong’s industry? What specific areas does Hong Kong aim to explore or open up?

Anna:

Our Tokenisation business includes STOs that is a type of well-known virtual asset in the market. Currently, Hong Kong regulators have provided some clear guidelines on tokenised securities and digital securities. Our business encompasses these tokenised securities and new crypto assets, like utility tokens, which have different legislative and compliance requirements.

In November 2023, the Hong Kong Securities and Futures Commission issued two circulars: one is on intermediaries engaging in tokenised securities-related activities and another is on tokenisation of SFC-authorised investment. There are three main areas have been covered in these circulars: at first, it provided the clarity on tokenised securities which are fundamentally traditional securities with a tokenisation wrapper, the existing legal and regulatory requirements governing the traditional securities markets continue to apply to Tokenised Securities. The overarching principle of the SFC’s regulatory approach is “same business, same risks, same rules”. So, in addition to complying with existing legal and regulatory requirements applicable to traditional securities, the intermediaries are required to manage the new risks arising from tokenisation, which are not typically associated with traditional securities, especially ownership risks and technology risks.

The second, to evaluate whether a Tokenised Security is a complex product or not is based on an assessment of the complexity of its underlying traditional security. In other words, a see-through approach should be adopted in assessing complexity.

The third, whether the tokenised securities can faced to the retail market which is mainly depends on if the products have been distributed to retail originally. In overall, we understand that the regulator maintains a relatively open stance towards tokenised investment products in primary markets, while being cautious in secondary markets.

From the product perspective, particularly regarding Security Token Offerings (STOs), there have been several attempts in the Hong Kong market since 2023. For example, the Hong Kong Monetary Authority (HKMA) issued HKD 800 million in tokenized green bonds last year. In the second half of last year, several commercial banks issued digital structured notes on private or consortium blockchains. This year, the HKMA also launched Project Ensemble to explore innovations in tokenisation within the financial sector. We believe that more similar projects will be launched next year.

In addition to STOs, we can also discuss other virtual asset types, in particular, utility tokens. As the comparision, the regulation on utility tokens which is more focused on the intermediaries. On 1 June 2023, the Hong Kong Securities and Futures Commission launched the new licensing regime for virtual asset trading platforms. Under the new regime, centralised virtual asset trading platforms operating in Hong Kong will need to apply to the SFC for a licence under the Securities and Futures Ordinance (Cap 571) (SFO) and/or the AMLO (Dual Licence Arrangement). Our company currently holds a full set of required licenses in Hong Kong, including Type 1, 4, 7 and 9 and a VATP licence. Besides, as one of innovated initiatives, in April this year, the SFC approved six virtual asset spot ETFs in Hong Kong.

Can STOs be Viewed as a Variant of IPOs? What Advantages Do They Offer?

Colin:

Can we think of Tokenisation or STOs as a variant of IPOs? What advantages does STO have over IPOs?

Anna:

It’s not accurate to simplify STOs as IPOs; there are significant differences. Tokenisation encompasses a broader scope, with STOs being a part of it. IPOs focus on public equity offerings, needing stringent processes before being listed on recognised exchanges.

The concept of STOs is similar but it can involve various asset types beyond equity, such as debt or revenue-generating assets. While STOs also require a compliance process, they don’t always follow traditional listing rules, often utilizing virtual asset exchanges like HashKey Exchange.

Moreover, STOs typically target professional investors rather than the general public. Most STOs currently are restricted to accredited investors, with only a few authorized by the SFC considering opening to retail investors.

There are many other differences like previous mentioned, but the nature of these two listing methodologies is similar. For instance, both are well regulated financing tools. For traditional investors who are familiar with IPOs which can help them to have better understanding in STOs.

Is There an Industry Dilemma for STOs?

Colin:

STOs or tokenized securities have been around for a while. Their essence is similar to RWAs, but they face challenges when targeting retail investors, particularly with regulatory approvals. This leads some projects to take more “abstract” routes, while genuine asset-linked projects struggle due to regulatory constraints. Is this an industry dilemma? What’s your take?

Anna:

STOs got attention mainly due to their compliance advantages. The essence of a security token is that it must adhere to the relevant legal frameworks of its jurisdiction. Although STOs have lower costs than IPOs, the compliance cost remain high, that is why there is limited cases and projects in relation to STO in the market.

Furthermore, STOs primarily target the specific group of client such as professional investors which resulted in low liquidity. Liquidity is quite important for tokens, investors will not interested in the investment with low liquidity.

Additionally, the return of STOs or RWAs usually are derived from the underlying which mainly are traditional financial instruments. Generally, it present lower risk and less volatility compared to other virtual asset types. During bull markets, STOs may be less attractive for investors but will draw the attention under the bear market situation.

There are three elements are needed to be consider for the development of STO: 1) the issuers’ financing needs; 2) existing investors’ demand in liquidity; and 3) new investors’ asset allocation needs. These factors led to quite high compliance and technology costs which bringing out the concern that whether the costs can be covered by the returns from the issuance.

Strategic Reasons for HashKey’s Focus on Tokenisation

Colin:

You’ve mentioned several challenges, but given this is a relatively traditional field, why does HashKey consider it a critical strategic area?

Anna:

The core is that high-quality, unique assets are important for both licensed exchanges and local market in Hong Kong. If the asset is available for trading on the exchanges anywhere, why would investors choose coming to Hong Kong? Therefore, if an asset with unique feature and high-quality and can only be traded in Hong Kong which will attract the investors globally.

We position ourselves as facilitators in the issuance of digital assets for the projects we collaborated with. We will provide guidance and support to entrepreneurs in the entire process of asset issuance from 0 to 1 where not only the time we will devote but also our skills and professional knowledge. Through the high degree of involvement in such projects, we help the issuers to build the business model and provide the advice in terms of DLT network, token economies and compliance, etc.

Through blockchain technology, the high-quality assets can be tokenised which help to create liquidity for the projects at the stage of Web2 and Web3 respectively. It serves as a “router” and “connector” for promoting urban upgrading and economic transformation in Hong Kong. Additionally, it acts as a bridge connecting the real economy, supporting innovative technology, and aiding the development of financial markets. We can provide a range of solution services, including economic mechanism design and tokenisation consulting, for blockchain application projects such as STOs/RWAs and non-security tokens, assisting in the innovative financing models of virtual assets while complying with relevant legal requirements.

We aim to attract more projects, talents, and capitals to Hong Kong, ultimately foster the industry development in Hong Kong.

Does Tokenisation Truly Enhance Efficiency and Profitability?

Colin:

Regarding bonds, some may question whether the final format differs significantly from traditional sales. Does Tokenisation genuinely lead to greater efficiency or profitability? This seems questionable.

Anna:

We believe this issue can be viewed from two dimensions. The first dimension is whether the tokenisation process has achieved cost reduction, efficiency improvement, and enhanced credibility. The second dimension is whether the liquidity of the generated assets has improved.

Regarding cost reduction and efficiency improvement, I think the effects are evident. Essentially, all data is recorded on the blockchain, meaning that everyone operates on the same public ledger for recording and settlement. From this perspective, the significance of tokenisation is quite substantial.

As for liquidity, it depends on whether there is a secondary market and new trading scenarios. If it remains focused only on professional investors (PIs) and primarily trades in the primary market, liquidity may not see much improvement. However, if other types of STOs are involved and can expand into the secondary market, or even open up to retail investors in the future, then liquidity will certainly be enhanced.

It’s believed that the assets will carry a certain premium in the secondary market. Although this improvement may not be happened within a very short period of time, instead, it is undoubtedly that will process gradually.

Comparing to the U.S. Market

Colin:

Is there a possibility of developing a market akin to the U.S. Pink Sheets, not in traditional IPOs but as related to Nasdaq?

Anna:

I understand your point. The transactions made on the pink sheets mainly are the companies that have either not fully met or no longer meet the listing requirements, or that do not wish to make regular reports to financial regulatory authorities. Such a market requires a platform to provide trading services to achieve liquidity which filled the gap in the equity trading market. Therefore, in terms of traditional securities trading, this type of market is an initiative driven by the market demand.

For the virtual assets trading including both exchange traded platforms and over-the-counter (OTC), the objective is to satisty all the needs in trading from Web3, with a wider range of tradable assets that including but not limited to tokenised securities and equities. Therefore, it cannot be simply stated that the goal is to establish a trading market similar to the pink sheets market.

The Role of Traditional Finance in Tokenisation

Colin:

We’ve seen firms like BlackRock entering this space. How does traditional finance influence the development of Tokenisation?

Anna:

Yes, I believe that the launch of such tokenised products by traditional financial institutions actually indicates the financial market’s recognition of tokenisation, which is an obvious trend. The fact that these representative traditional financial institutions are beginning to lay out plans in the Web3 and crypto fields shows their acknowledgment of this new technology, blockchain. We believe that with the entry of firms like BlackRock and Franklin Templeton, more financial institutions will follow.

We have always regarded tokenisation as an indispensable part of the development process of Web3. Financial assets are more easily integrated with Web3 and can lead to the launch of related products, which is why we believe financial assets are very important in tokenisation projects.

After these two major fund managers launched these products, financial institutions globally, including those in Hong Kong, have also begun to make related attempts. For example, the earlier mentioned HKMA’s Ensemble project is incorporating money market funds as one of the application scenarios. Therefore, I believe that Hong Kong may launch similar products in the future, at the latest by next year.

The Competitive Landscape Between Hong Kong and Singapore

Colin:

What are your thoughts on the competition and cooperation dynamics between Hong Kong and Singapore in the realm of virtual assets?

Anna:

Hong Kong indeed has unique advantages. In August and September, during my participation in the Web3 related market events in Singapore and South Korea, we are happy to see that financial institutions and regulatory bodies from different jurisdictions recognized that Hong Kong has strong policy and regulation support. Many of them think that what the Hong Kong financial regulators have did actually is the good reference for other regions. This favorable policy environment is very beneficial for attracting high-quality projects and funds to Hong Kong. However, whether these initiatives can ultimately be realized will depend on the specific details and how the policies are executed.

Additionally, Hong Kong has a significant advantage in terms of technological talents. With backing by the mainland market, especially in the Greater Bay Area, there is quite a lot top-tier educational institutions, providing the talents who we need each year. Moreover, both Singapore and Hong Kong have launched admission schemes to attract talents and professionals, which we hope that will foster healthy competition in this area.

In fact, technological talent is a natural advantage for Hong Kong. But of course, Singapore also has its unique strengths, such as a high degree of internationalization and a concentration of overseas projects. We have offices in both places and have made deep deployments.

Regarding the connection with the mainland, I believe that tokenisation will be a key focus in the future. There are numerous high-quality assets in the mainland that can be transformed through Web3, leveraging Hong Kong’s policy advantages for implementation. Therefore, we are seeing many related attempts, and I believe this will set a positive precedent for collaboration between the two regions, leading to more similar projects gradually coming to the forefront.

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