Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
What Are Tokenised Funds?
A tokenised fund is an investment fund in which the fund's units or shares are represented as digital tokens on a distributed ledger or blockchain. Rather than holding fund units in a traditional register maintained by a fund administrator, investors hold digital tokens that represent their beneficial interest in the fund. These tokens can be transferred, traded, or pledged using blockchain infrastructure, potentially enabling new levels of operational efficiency and investor accessibility.
Tokenisation of fund units is distinct from funds that invest in crypto assets or virtual assets. A tokenised fund may invest in entirely conventional assets — equities, bonds, real estate, private equity — while using blockchain technology solely for the representation and transfer of its units.
SFC's Approach to Tokenised Funds
The Securities and Futures Commission (SFC) has been actively developing its approach to tokenised funds. In November 2023, the SFC issued a circular on the tokenisation of SFC-authorised investment products, setting out the conditions under which SFC-authorised funds may tokenise their units and the requirements for doing so.
The SFC's key requirements for tokenised SFC-authorised funds include:
Same investor protection standards: Tokenised funds must provide the same level of investor protection as conventional funds. Tokenisation is treated as an operational feature, not a reason to lower investor protection standards.
Regulated distribution: Tokenised fund units distributed in Hong Kong must be distributed through SFC-licensed intermediaries. Distribution through decentralised exchanges or unlicensed platforms is not permitted.
Custody of digital tokens: Digital tokens representing fund units must be held by regulated custodians that meet the SFC's custody requirements for virtual assets.
Disclosure: Fund offering documents must disclose the tokenisation arrangements, including the blockchain infrastructure used, the custodian of the tokens, and any risks specific to the tokenised structure.
Benefits of Fund Tokenisation
The primary benefits of tokenising fund units include improved operational efficiency through automated settlement and transfer on blockchain (reducing processing times from T+2 or longer to near-instantaneous), enhanced transparency through immutable on-chain records of unit holdings and transfers, potential for fractionalisation enabling smaller minimum investment sizes and broader investor access, programmable compliance through smart contracts that automatically enforce transfer restrictions and investor eligibility requirements, and the potential for secondary market liquidity in fund units that are traditionally illiquid.
Types of Funds Being Tokenised
Both open-ended and closed-ended funds can in principle be tokenised. The most active area of fund tokenisation in Hong Kong has been in money market funds, bond funds, and private equity fund units. Several major asset managers and fund platforms have piloted or launched tokenised fund products in Hong Kong in partnership with licensed VATPs and blockchain infrastructure providers.
Legal Structure of Tokenised Funds
A tokenised fund is typically structured as a conventional fund vehicle (such as an open-ended fund company (OFC), a unit trust, or a limited partnership fund (LPF)) with an additional layer of tokenisation infrastructure. The legal ownership of the fund assets remains with the trustee or general partner in the traditional manner; the blockchain tokens serve as a digital representation of the investor's beneficial interest rather than as the primary legal instrument of ownership.
Fund documentation (constitutive documents, subscription agreements, and offering materials) must be updated to reflect the tokenisation arrangements, including the basis on which token transfers are recognised as valid transfers of fund units, the procedures for resolving discrepancies between on-chain records and the fund's official register, and the rights of token holders.
Regulatory Outlook
Hong Kong's SFC has signalled that it views fund tokenisation as an important area of financial innovation and intends to continue developing its regulatory framework to accommodate tokenised products. The HKMA has separately supported tokenisation initiatives through its Project Ensemble platform, which is developing interoperable infrastructure for tokenised assets in Hong Kong.
How Alan Wong LLP Can Help
Alan Wong LLP advises fund managers, technology providers, and investors on the legal structuring of tokenised funds in Hong Kong, including SFC authorisation and compliance, fund documentation review and amendment, tokenisation infrastructure agreements, and regulatory analysis. We work with clients at the forefront of fund tokenisation innovation to ensure their products are legally robust and regulatory compliant. Contact us to discuss tokenised fund structuring for your business.
