Tokenisation of Real World Assets in Hong Kong: The Legal Framework

Introduction: What Is RWA Tokenisation?

Tokenisation refers to the process of representing ownership of a real-world asset (RWA) on a blockchain or distributed ledger. RWAs subject to tokenisation include real estate, private equity, debt instruments, commodities, and infrastructure assets. By converting these assets into digital tokens, issuers can potentially improve liquidity, reduce settlement times, enable fractional ownership, and broaden investor access.

Hong Kong has positioned itself as a leading jurisdiction for regulated RWA tokenisation, with the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) both issuing policy guidance and facilitating pilot programmes to advance the ecosystem.

Regulatory Framework: When Is a Token a Security?

The central regulatory question in any tokenisation exercise is whether the token constitutes a "security" or "collective investment scheme" (CIS) under the Securities and Futures Ordinance (Cap. 571). Tokens that represent rights in a CIS or that constitute debentures, shares, or other instruments listed in Schedule 1 of the SFO are regulated securities.

Tokenised security interests are treated the same as their traditional counterparts under Hong Kong law. This means:

• Issuance of tokenised securities may require a prospectus or rely on exemptions (e.g., professional investor exemption, small offer exemption)
• Intermediaries dealing in, advising on, or managing tokenised securities must be licensed by the SFC
• Anti-money laundering (AML) and know-your-customer (KYC) requirements apply in full

SFC's RWA Tokenisation Circular (2024)

In November 2024, the SFC issued a circular on the tokenisation of SFC-authorised investment products, setting out conditions under which licensed firms may offer tokenised funds and other products to retail investors. Key requirements include:

• Proper custody arrangements for the underlying assets and tokens
• Clear disclosure of the tokenisation structure and associated risks
• Investor access controls consistent with the authorised product's distribution requirements
• Smart contract audit and code review prior to launch

The circular builds on earlier SFC guidance on tokenised securities and represents a significant step towards a fully regulated retail tokenisation market in Hong Kong.

HKMA's Project Ensemble

The HKMA's Project Ensemble is a tokenisation sandbox initiative that facilitates interbank settlement of tokenised assets using wholesale central bank digital currency (wCBDC). The project has explored use cases including tokenised bonds, green bonds, trade finance assets, and fund units.

Project Ensemble highlights the HKMA's view that tokenisation infrastructure — particularly settlement rails — is critical infrastructure for Hong Kong's future financial ecosystem.

Smart Contracts and Legal Enforceability

A key legal consideration in any tokenisation project is the enforceability of smart contracts. Under Hong Kong law, a smart contract can in principle constitute a binding legal contract, provided the standard elements of contract formation are satisfied: offer, acceptance, consideration, and intention to create legal relations.

However, practical challenges arise where:

• The code does not accurately reflect the parties' intentions
• Errors or bugs result in unintended outcomes
• The smart contract interacts with off-chain data through oracles, which may introduce reliability issues
• Disputes arise that require judicial interpretation of code

Issuers should ensure that the legal documentation (subscription agreements, trust deeds, offering memoranda) expressly governs the relationship between the parties, with the smart contract operating as an automated execution mechanism rather than the sole legal instrument.

Custody and Title

One of the most significant legal challenges in RWA tokenisation is ensuring that token holders have clear, enforceable rights to the underlying asset. Structures commonly used include:

• Trust structures: The underlying asset is held by a trustee on trust for token holders, whose beneficial interests are represented by the tokens
• SPV structures: An SPV holds the underlying asset, and tokens represent equity or debt interests in the SPV
• Direct registration: Applicable in some asset classes (e.g., certain securities) where the ledger can serve as the primary register of ownership

Each structure has different implications for investor rights, tax treatment, and insolvency resilience.

Cross-Border Issues

RWA tokenisation projects frequently involve multiple jurisdictions — for example, a Hong Kong-issued token backed by Singapore real estate or a US private equity fund. Cross-border issues include applicable law, recognition of tokenised ownership interests in foreign courts, and whether foreign regulatory approvals are required.

How Alan Wong LLP Can Assist

Alan Wong LLP advises issuers, asset managers, platforms, and investors on all legal aspects of RWA tokenisation projects in Hong Kong. Our digital assets team combines deep expertise in securities regulation, trust law, and blockchain technology to provide practical, commercially focused advice. We assist with structuring, regulatory engagement, smart contract review, offering documentation, and ongoing compliance.