Regulatory clarity: Key to industry’s healthy development

August 05, 2021 06:00
Photo: Reuters

In the previous column, we introduced various forms of digital assets with a particular focus on security token offerings (STOs), a new, promising and regulated means of capital raising. In this column, we will analyze the global STO landscape and opportunities for its use in Hong Kong and the Greater Bay Area (GBA).

Global STO landscape

STOs, regulatory-compliant tokens that combine features of cryptocurrency and traditional stocks, have replaced the unregulated frenze of ICOs and are expected to be a new fundraising channel for illiquid assets

Just in May this year, crypto exchange INX completed the listing of INX Limited, the first STO registered with the US Securities and Exchange Commission (SEC), raising more than US$125 million. Meanwhile, Singapore-based DBS Bank issued a US$11.3 million digital bond to professional investors.

There are many examples of using technology to digitize existing securities such as stocks and bonds. The table below listed a few notable ones.

Increasing global regulatory clarity

One of the biggest developments we are seeing in the global crypto space is the increase in regulatory clarity. The developments in this space over the last couple of years have been remarkable. Below are some examples of recent legal and regulatory actions.

The Securities and Futures Commission (“SFC”) issued a warning statement on July 16, 2021 indicating its regulatory stance on virtual asset funds and exchanges. The SFC was aware of Binance’s offering of trading services in stock tokens in a number of jurisdictions and was concerned that these services may also be offered to Hong Kong investors, hence, it made clear to investors that no Binance entity is licensed or registered to conduct “regulated activities” in Hong Kong.

Hong Kong customs has arrested four suspects for allegedly laundering illegal funds through cryptocurrency, marking the first arrests of this nature in the city. Authorities in China have escalated their campaign against cryptocurrencies, arresting more than 1,100 people suspected of using digital assets to launder illegal funds and ordering mines in one of its western provinces to shut down.

In the West, the Commodity Futures Trading Commission (CFTC) has also initiated investigations on Binance over concerns that it allows Americans to trade regulated derivative products on its unregulated trading platform.

What is next for STOs with increased global regulations?

The increased regulatory clarity has been welcomed by the community as regulatory clarity will manage out the bad apples and invite more institutional investors to enter the space.

Professional investors are becoming more comfortable as the digital asset management industry matures alongside regulation. Regulation is key in unlocking the potential of digital assets and protecting investors so they can invest with trust and confidence, something that unregulated exchanges fail to offer.

Opportunities in HK and GBA

Hong Kong: The de facto center for STO development in APAC

Hong Kong has one of the most-established capital market infrastructures in the world with US$3.7 trillion assets under management (2019 data, source: HKMA), as well as an abundance of licensed financial advisors, broker-dealers and sponsors ready to serve security token issuers. Hong Kong was ranked 5th in the Global Financial Centres Index (GFCI) released by Z/Yen Group and the China Development Institute in September 2020. Since the first of its semi-annual ratings were published in March 2007, GFCI has consistently ranked Hong Kong as one of the top international financial centres in Asia.

With the introduction of clear regulatory frameworks, the recent government promotion of the Limited Partnership Fund (LPF) Regime and Hong Kong’s ongoing promotion as the Asian hub for capital market, we expect STOs to benefit significantly in the next few years.

While mainland China has imposed stricter regulations on digital assets with a clear intention of limiting their growth, Hong Kong has taken a more liberal approach by outlining a clear regulatory framework to upgrade the quality of issuers and protect investor rights, and hopefully to become a hub for STOs in the Asia Pacific.

As STOs are very much still in the “innovator / early adopter” stage of their development, the supporting ecosystem plays an imperative role in determining their success. In the next column, we will explain the end-to-end process of completing an STO and how each ecosystem participant plays a role.

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The writer is Co-Founder and Chief Strategy Officer at HKbitEX, a regulated digital asset trading platform for professional investors, as well as an adjunct assistant professor for the Master of Fintech Program at the Chinese University of Hong Kong.