Tokenised Funds

The applications of Fintech are growing. In particular, the tokenisation of assets, such as securities and commodities, is one of the major areas that is gaining popularity recently. Following the launch of a local bank’s SFC-authorised gold token product last year, a fund manager has recently launched an SFC-authorised tokenised fund. This innovation gives investors a range of options for investing in these traditional financial products.

To put it simply, tokenisation of assets refers to the creation of blockchain-based digital tokens (also known as tokens) that represent ownership or records of ownership in the corresponding assets.

Blockchain technology is an indispensable technology for tokenisation. A blockchain is a ledger on a network / platform that uses "distributed ledger" technology. Transactions on a blockchain, as well as their records, are encrypted and theoretically cannot be altered.

Traditional finance may benefit from tokenisation, particularly in terms of increasing efficiency, enhancing transparency, reducing settlement time and lowering costs. The tokenisation of funds through the blockchain technology is currently an emerging trend that is continually evolving and gaining momentum.

Regardless of the type of tokenised investment product, investors must carefully consider the underlying product’s risk-return profile before making any investment decisions, taking into account its investment features and risks. After all, tokenisation is a technology wrapper, and should not be regarded as the selling point of the product. Investors should not invest into any investment product merely because it is tokenised.

While tokenised funds have unique and novel features in the dealing and record keeping aspects, they are still funds in nature with distinct investment objectives.

Before investing in tokenised funds, investors should do their homework and thoroughly understand the funds’ investment objectives, strategies, features, operations and the associated investment risks as provided in the offering documents.

In particular, investors should pay attention to the following when investing in SFC-authorised tokenised funds.

• No secondary trading currently

Currently, investors may only subscribe and redeem SFC-authorised tokenised funds through distributors in the primary market. Those interested in investing in the SFC-authorised tokenised funds should contact the eligible distributors for further information on the subscription and redemption procedures.

• Risks associated with tokenisation

Examples of risks include cybersecurity, system outages, the possibility of undiscovered technical flaws associated with blockchain technology, evolving regulatory landscape and potential issues with the application of existing laws.

• Settlement arrangements for tokenised assets

Transactions of tokenised funds can be settled “on-chain” or “off-chain” (i.e., recorded and maintained in a traditional book-entry register). Investors should understand the funds’ settlement arrangements and their different associated risks.

Investors should refer to the offering documents and product key facts statements of the SFC-authorised tokenised funds for the detailed risks and the tokenisation arrangement specific to the product.

Unauthorised tokenised funds are not authorized by the SFC and therefore cannot be marketed to the public in Hong Kong. Their offering documents have not been vetted by the SFC. Beyond the above considerations relevant to SFC-authorised tokenised funds, investors of unauthorised tokenised funds should do their homework and pay extra attention to understand the use of the underlying technology specific to the product and be cautious of any additional risks involved. Investors should also note the additional risks in relation to unauthorised funds

Investors should not invest in any product, whether fund or not, merely because it is tokenised.