On 28 October 2024, the Hong Kong Securities and Futures Commission (HK SFC) has announced a development within the Project Ensemble Sandbox, a financial technology testing environment established in collaboration with the Hong Kong Monetary Authority (HKMA). In a first-of-its-kind simulation within the Sandbox, a local financial institution successfully completed a trial involving a tokenised money market fund (MMF) underpinned by tokenised deposits (TD). This test covers the full lifecycle of asset management processes and represents an early step in evaluating how tokenisation might streamline operations and reduce costs across the asset management sector.
Launched in August 2024, Project Ensemble Sandbox was designed to provide a controlled regulatory environment for financial institutions to experiment with digital innovations in a way that is both safe and compliant. Here, participants are given the latitude to test tokenisation and blockchain models across various financial use cases, allowing the HK SFC and HKMA to provide targeted regulatory guidance that keeps pace with evolving technologies. Within this environment, the recent pilot involved a local financial institution collaborating with its asset management and trustee divisions to test a tokenised MMF structured specifically for institutional clients. The simulation covered several functions in asset management such as subscription, redemption, and cross-bank settlement.
The institution carried out a comprehensive delivery-versus-payment (DvP) settlement process for tokenised fund units, where the transfer of assets occurred concurrently, ensuring that no part of the transaction would be left incomplete. By securing settlement at the moment of trade, DvP aims to mitigate traditional settlement risks, such as counterparty defaults and operational delays.
A central feature of this pilot was the introduction of atomic settlement, a method that could allow transactions to be completed instantaneously, simultaneously, and irrevocably. Atomic settlement is seen as a transformative approach within digital finance, especially in cross-bank and international transactions, where it can eliminate gaps in settlement timing. This technology, if widely adopted, would allow transactions to occur on a 24/7 basis, aligning Hong Kong’s financial services with the continuous operation needs of international clients. Such an approach could change transaction models by reducing costs and making services more efficient and responsive across global time zones.
The immediate and irrevocable nature of atomic transactions means that traditional mechanisms for resolving transaction disputes, errors, or fraud may not apply in the same way. The need for regulatory oversight becomes more pronounced when dealing with tokenised assets, as the finality of atomic settlement calls for precise compliance standards. Regulators will need to consider how best to integrate security and compliance controls, such as enhanced cybersecurity protocols and real-time monitoring, into frameworks governing atomic transactions.
Commenting on the project’s progress, Christina Choi, Executive Director of Investment Products at HK SFC, stated: “The progress made by Sandbox participants provide valuable insights for regulators and industry players on how advanced applications of tokenisation in asset management can be implemented in practice down the road to achieve scale and tangible economic benefits. Christina Choi explained that the data and feedback generated from Sandbox participants’ experiments with tokenisation are invaluable, shedding light on how digital assets might scale effectively in a regulatory environment and how the technology could yield measurable economic benefits.
As Project Ensemble Sandbox advances, HK SFC and HKMA are providing ongoing support to asset managers and financial institutions interested in exploring tokenisation. The Sandbox offers these companies a structured pathway to refine tokenised financial products under regulatory supervision. By doing so, the HK SFC aims to create an ecosystem in Hong Kong that allows financial innovation to thrive without compromising on legal and regulatory integrity. In parallel, HK SFC continues to actively engage with asset managers to ensure their product tokenisation initiatives align with existing compliance standards.
With atomic settlement and DvP models under real-world conditions, Project Ensemble Sandbox represents an ongoing experiment in financial systems to make them faster, safer, and more responsive to a globalised economy. It seems, the lessons learned in Hong Kong’s Sandbox environment will likely influence international approaches to tokenisation.
(Source: https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR182)
