HashKey's Head of Tokenization Business, Anna Liu, delves into the evolution of tokenization in the Web3 and cryptocurrency space, the compliance challenges it faces, and its future development potential in Hong Kong and global markets.

Editor: Wu Says Blockchain

HashKey's Head of Tokenization Business, Anna Liu, delves into the evolution of tokenization in the Web3 and cryptocurrency space, the compliance challenges it faces, and its future development potential in Hong Kong and global markets.

In this episode, Anna Liu shares her journey from a legal position to the tokenization business and discusses the importance of tokenization in the Web3 and cryptocurrency fields. She analyzes the latest regulatory policies for virtual assets in Hong Kong, particularly how they support the compliant development of Security Token Offerings (STO) and digital assets. The discussion covers the key differences between STOs and IPOs, including their differences in financing, liquidity, and compliance costs, as well as how tokenization can bring efficiency to the market. Anna also envisions Hong Kong's potential as a global virtual asset hub and shares scenarios for tokenized bonds and the application of STOs in the secondary market, exploring the impact of traditional financial institutions like BlackRock entering the tokenization space, as well as the competitiveness and cooperation prospects between Hong Kong and Singapore in the virtual asset field.

Host Introduction and Guest Introduction

Colin: Hello everyone, today we are going to talk about a hot topic recently: Tokenization. We have invited Anna Liu, the head of relevant business at HashKey. First, Anna, could you introduce your background and work experience?

Anna: Thank you, hello everyone! I joined HashKey in 2018, and for the first five years, I was mainly responsible for legal work at HashKey. During my tenure as the head of legal, I was deeply involved in compliance development and licensing arrangements in regions such as Hong Kong, Singapore, and Japan, providing comprehensive legal support for the HashKey Group and its various business lines. Since last year, I transitioned from a legal role to a business role, overseeing HashKey's tokenization business line, and I have been doing this for over a year now.

Before joining HashKey, I worked at a large internet company, mainly focusing on legal work related to investment and mergers and acquisitions. Prior to that, I worked at a law firm, primarily dealing with capital markets-related business, such as cross-border investment and financing, mergers and acquisitions, and domestic and foreign capital markets.

Anna's Transition from Legal to Business

Colin: What does it feel like to switch from a legal position to a business role? What are the differences?

Anna: It's actually quite different. I think the focus is still different; legal is a field I am more familiar with, and the content I deal with is mostly based on past accumulated experience. The business role updates faster, presents greater challenges, but is also very interesting.

The Origin of HashKey's Tokenization Business

Colin: When did the tokenization business start within HashKey? Why did you decide to start this business?

Anna: We actually began preparations for this at the beginning of last year, laying the groundwork for the next cycle. The previous year, we obtained some very significant licenses for the group, which I believe Colin is also aware of. In regions like Hong Kong, Singapore, and Japan, we have obtained relevant licenses or Approval-in-Principle (AIP) for various business segments, such as exchanges, OTC, asset management, and infrastructure.

In the past five years, whether in Hong Kong or other mainstream jurisdictions, the regulation of virtual assets has been more focused on the secondary market, particularly the trading market. Taking Hong Kong as an example, in addition to the licenses required by securities law, we also obtained the VATP license for exchanges, which is related to compliance requirements for combating terrorism and money laundering. In October 2022, the Hong Kong Financial Services and the Treasury Bureau released a policy declaration on the development of virtual assets in Hong Kong, clarifying the government's policy stance and guidelines for the thriving virtual asset industry and ecosystem.

From the perspective of a sound industrial chain, merely having virtual asset trading activities is not enough to support Hong Kong as a virtual asset hub; industrial aggregation is necessary to form a complete closed loop. The construction of a comprehensive international virtual asset center requires three levels: first, a compliant and efficient secondary market, i.e., the trading market; second, a primary market based on an active secondary market, i.e., the issuance market; and third, the aggregation of upstream and downstream industries of virtual assets based on active primary and secondary markets.

After the regulation of the secondary market is gradually improved, we believe the next focus will be on the primary market, i.e., the issuance market. Therefore, we hope to invest more resources in this area, and I personally hope to explore more about what can be done in the issuance market. This is why we established this tokenization business.

Additionally, we are optimistic about the next phase, especially in Hong Kong, where there may be more high-quality and unique assets emerging in the issuance of virtual assets. We hope, or rather, we set our own expectations to be able to deliver some quality assets for Hong Kong and compliant exchanges.

The Relationship Between Hong Kong Regulation and Tokenization

Colin: Understood. Is your tokenization business closely related to the progress of the industry in Hong Kong? In which specific areas does Hong Kong want to explore or open up further?

Anna: Our tokenization business includes the well-known STO (Security Token Offering). Currently, Hong Kong's regulatory authorities have provided some clear guidelines on tokenized securities and digital securities. Our business covers these security tokens as well as new crypto assets, such as utility tokens. The legislative and compliance requirements for these two areas in Hong Kong are somewhat different. We can start by discussing from the STO perspective.

In November last year, the Hong Kong Securities and Futures Commission (SFC) issued two circulars, one regarding guidelines for intermediaries engaging in tokenized securities-related activities, and the other concerning investment products authorized by the SFC. These circulars have three main points. First, it clarifies that tokenized securities, which package tokens while the underlying assets remain traditional securities, are subject to the relevant rules of traditional securities law. The SFC follows the principle of "same business, same risks, same rules," requiring intermediaries to pay more attention to the new risks brought by tokenization, such as ownership issues on and off-chain, technology risks, and cybersecurity risks. This is especially a regulatory focus in terms of blockchain selection and protocol token issuance.

The second point is that whether tokenized securities are considered complex products depends on whether the underlying traditional securities are complex.

The third point is whether tokenized investment products can be offered to retail investors, which mainly depends on whether the underlying assets can be sold to retail investors. If they meet the criteria, the possibility of tokenization being offered to retail investors is very high. Overall, I understand that the SFC holds a relatively open attitude towards tokenized investment products in the primary market, while still being cautious in the secondary market.

From a product perspective, especially regarding STOs, there have been many 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 innovation in tokenization in the financial sector. We believe that more similar projects will be launched next year.

In addition to STOs, we can also discuss other crypto assets, particularly utility tokens. Compared to asset issuance, utility tokens have more regulatory focus on intermediaries. On June 1, 2023, the Hong Kong SFC implemented a new licensing regime specifically for virtual asset trading platforms. Under the new regime, central virtual asset trading platforms operating in Hong Kong must apply for licenses from the SFC under the Securities and Futures Ordinance (Cap. 571) and/or the Anti-Money Laundering Ordinance (dual licensing arrangement). Our company currently holds complete licenses in Hong Kong, including Securities License No. 1479 and VATP license. Additionally, an innovation this year was that in April, the Hong Kong SFC approved six crypto asset spot ETFs.

Can STOs Be Seen as a Variant of IPOs? What Are Their Advantages?

Colin: Can we understand that Tokenization or STOs are somewhat like a variant of an IPO? What do you think are the advantages of STOs compared to IPOs?

Anna: I think it cannot be simply and bluntly understood that STOs are IPOs; there are still significant differences between them. Tokenization has a broader scope, and STOs are just a part of it. If we take IPOs as an example, IPOs are primarily aimed at publicly offering company equity, issuing shares, and raising funds, and they must go through a very strict process, ultimately being listed on recognized exchanges and offered to retail investors.

The concept of STOs may be somewhat similar, but their underlying assets are not necessarily equity; they could be debt, or some non-equity, non-debt income-generating assets (such as future earnings), etc. STOs also require a compliance process, but they may not necessarily follow the traditional listing rules like IPOs; they may be conducted more through virtual asset exchanges, such as our HashKey Exchange.

Moreover, the target investors for STOs are also different. IPOs can be offered to retail investors, while most STOs at this stage can only be offered to professional investors (PI), meaning investors with liquid financial assets of over USD 1 million. Only a few SFC-recognized STO investment products are currently exploring pathways to open up to retail investors.

There are many such differences, but there are also similarities between the two, such as both being compliant financing methods. For traditional investors familiar with IPOs, comparing the two can help them better understand STOs.

Does STO Face Industry Dilemmas?

Colin: I also feel that the topic of STOs or tokenized securities has been around for quite some time. Its essence is somewhat similar to RWA (Real World Assets), both involving the tokenization of real assets. However, the core issue is that it may encounter some difficulties when facing retail investors, especially since regulatory authorities may not be able to quickly approve these projects. This has led some token issuance projects to take a more "virtual" route, such as the currently popular game tokens, while projects that are genuinely related to real assets are hindered by regulatory restrictions, making it difficult to advance. Is this a dilemma faced by the industry? What are your thoughts on this issue?

Anna: I think the reason why STOs attract attention is mainly due to their greatest advantage in compliance. The essence of security tokens is securities, so the issuance of STOs must comply with the relevant legal framework of the jurisdiction in which they are located, conducting token issuance on a compliant basis. Although the cost of STOs is lower than that of IPOs, the compliance costs and requirements are still very high, which is why we have not seen a large number of STO projects emerging.

Secondly, STOs are primarily aimed at qualified investors, so their liquidity is relatively limited. For tokens, liquidity is a very important condition. If liquidity is restricted, the attractiveness to investors will decrease.

In addition, the yields from STOs or RWAs mainly come from the traditional financial world, which has a mature risk and return system, with volatility and risk not as high as other crypto assets. For Web3 investors, especially during bull markets, the appeal of STOs may not be as great as that of other crypto assets. However, during bear market cycles, the allocation of STOs and RWA-related assets becomes more attractive.

I believe that the development of STOs needs to comprehensively consider several core demands. First is the financing needs of issuers, whether they can legally issue tokens for fundraising. Second is the liquidity needs of existing investors; everyone hopes that these assets can be traded on compliant exchanges and possess liquidity. Third is the asset allocation needs of new investors; crypto investors and traditional investors have different demands for assets. When these factors are combined, the costs of compliance and technology are not low, and whether the returns can cover the costs is an important consideration for the sustainability of the project. Therefore, many projects may still be in the proof-of-concept stage, making it difficult to sustain commercially.

The Strategic Reasons for HashKey's Focus on Tokenization

Colin: You mentioned many difficulties, but since this is a relatively traditional field, which may differ from the genetic makeup of the crypto space, why does HashKey Group still regard it as an important strategic position?

Anna: The core of this question lies in our belief that high-quality, unique assets are very important for compliant exchanges in Hong Kong and for Hong Kong itself. If an asset is available on exchanges globally, why would investors choose a Hong Kong exchange? However, if this asset can only be traded in Hong Kong and is of very high quality, it can attract global investors.

We position ourselves as a role to help cooperative projects issue digital assets. We assist entrepreneurs in the process of issuing assets from 0 to 1 by providing guidance and support; we invest not only time but also professional knowledge. By deeply engaging with cooperative projects, we help them clarify their business models, provide advice based on DLT (Distributed Ledger Technology), token economics, and compliant issuance structures.

Tokenization can utilize blockchain technology to tokenize high-quality assets, creating liquidity for Web2 and Web3 projects at various stages, becoming a "router" and "connector" that promotes the upgrading of Hong Kong as a city and its economic transformation. It also serves as a bridge connecting the real economy, supporting innovative technology, and aiding the construction of financial markets. We can provide a series of solution services such as economic mechanism design and tokenization consulting for blockchain application projects like STOs/RWAs and non-security tokens, assisting in the innovative financing models of virtual assets under the compliance of relevant laws.

Through this approach, we hope to attract more projects, talent, and capital to settle in Hong Kong, ultimately drawing the industry to gather here.

Does Tokenization Truly Enhance Efficiency and Profitability?

Colin: Regarding bonds, there may be a question that the final form of performance may not differ much from traditional sales, so does tokenization really bring higher efficiency or profitability? This seems to be somewhat questionable.

Anna: I think this issue can be viewed from two dimensions. The first dimension is whether the tokenization process achieves cost reduction, efficiency enhancement, and increased trust. The second dimension is whether the liquidity of the generated assets themselves has improved. Regarding cost reduction and efficiency enhancement, I believe the effect is significant.

Basically, all data is on-chain, which means everyone records and settles on the same public ledger. From this dimension, the significance of tokenization is still notable. As for liquidity, it depends on whether there is a secondary market and new trading scenarios. If it is still only aimed at professional investors (PIs) and primarily traded in the primary market, liquidity may not improve significantly. However, if it involves other types of STOs and can expand to the secondary market, or even open up to retail investors in the future, then liquidity will definitely improve.

I believe that if there is a secondary market, assets will have a certain premium. Although this enhancement will not happen overnight, it is undoubtedly a gradual process.

Comparison with the U.S. Market

Colin: I wonder if there is a possibility that if the goal is to form a market similar to the U.S. pink sheet market, although it is not on traditional IPOs, it can be seen as related to the Nasdaq market? Is this a correct understanding?

Anna: I understand your point. The pink sheet market trades shares of companies that have not fully met or no longer meet listing conditions, or do not wish to make regular reports to financial regulators. Such a market needs a platform to provide trading services to achieve liquidity, filling a gap in the equity trading market. Therefore, this market is a market-driven initiative. This is in terms of traditional securities.

In the realm of virtual asset trading, whether through trading platforms or OTC, the aim is to meet the trading needs of the Web3 world, with a richer variety of trading targets that should not be limited to tokenized equity. Therefore, it cannot be simply stated that the goal is to establish a trading market similar to the pink sheet market.

The Impact of U.S. Financial Institutions' Participation in Tokenization

Colin: Finally, I would like to ask you one more question. What do you think about the two products issued by BlackRock and Franklin this year, whether RWA or tokenized products? Do they have a guiding influence on the industry?

Anna: Yes, I believe that the launch of such tokenized products by traditional financial institutions actually indicates the recognition of tokenization by the financial market, which is a clear trend. The fact that these representative traditional financial institutions are beginning to lay out in the Web3 and crypto space shows their recognition of this new technology called blockchain. We believe that with the entry of BlackRock and Franklin, more financial institutions will follow their lead.

We have always believed that tokenization is an indispensable part of the development process of Web3. Financial assets are easier to combine with Web3 and can launch related products, so we consider financial assets to be very important in tokenization projects.

After these two large fund companies launched these products, financial institutions globally, including those in Hong Kong, have also begun to make related attempts. For example, the previously mentioned HKMA's Ensemble project is also considering 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 next year.

Comparative Competitiveness of Hong Kong and Singapore

Colin: How do you see the competitiveness of Hong Kong compared to Singapore? How does it compare to the U.S.? Will there be some interaction with mainland China?

Anna: Hong Kong indeed has unique advantages. In September, including activities in August and September, I participated in events in Singapore, South Korea, and other places, where financial institutions and regulatory bodies generally believe that Hong Kong's policy support is very strong. Everyone says that Hong Kong's regulatory authorities are worth learning from for other places. This policy benefit is very favorable for attracting quality projects and capital to enter Hong Kong. However, whether it can ultimately land still depends on specific details and how it is executed.

Additionally, Hong Kong has a significant advantage in terms of tech talent. This is something that is difficult for other places to compare with. Hong Kong is backed by the mainland, especially the Greater Bay Area, which has many high-quality tech talents and universities, with fresh talent input every year. At the same time, both Singapore and Hong Kong have launched plans to attract top talent, hoping to create healthy competition in tech talent.

Indeed, tech talent is a natural advantage for Hong Kong. Of course, Singapore also has its unique advantages, such as a high degree of internationalization and a concentration of overseas projects. We have offices in both locations and have made deep layouts.

Regarding the linkage with the mainland, I believe that tokenization will be a direction of focus in the future. The mainland has a large number of high-quality assets that can be transformed through Web3, utilizing Hong Kong's policy advantages for implementation. Therefore, we see many related attempts, and I believe this will pave the way for better linkage between the two regions, with more similar projects gradually coming to light.

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