Tokenization is rapidly gaining traction in the traditional financial sector, with some of the world’s largest banks exploring stablecoins and other real-world asset (RWA)-backed tokens. However, global banking regulations remain restrictive on tokens issued on public blockchains, constraining the sector’s growth. Hong Kong now aims to relax these laws and ease capital requirements for banks holding decentralized tokens as it seeks to become the global tokenization hub.
Meanwhile, Swiss banking giant UBS has launched a pilot project exploring automated tokenization in Hong Kong. Partnering with Singapore’s DigiFT and Chainlink, the bank says the pilot could reduce manual errors and cut significant costs.
Hong Kong to relax banking restrictions on tokenization
The Hong Kong Monetary Authority (HKMA) is seeking public feedback on proposed amendments to the country’s implementation of ‘crypto’ banking standards issued by the Basel Committee on Banking Supervision (BCBS).
Under the Committee’s guidance, stablecoins and other tokens issued on public networks are assigned a risk weighting of 1250%, the highest of any asset. The BCBS doesn’t distinguish between asset-backed tokens and ‘crypto,’ with both deemed the riskiest assets a bank can hold. The weighting means that for every dollar worth of any token a bank holds, it must set aside a dollar of capital.
In contrast, real estate gets a 35% risk weighting, so for a $1 million loan, the capital requirement would be $28,000 (8% of RWA). The standards favor permissioned blockchains; tokens issued on these networks receive the same risk weighting as the underlying asset.
HKMA intends to relax these standards to enable public blockchains to compete against the permissioned networks. According to local media, the de facto central bank issued a consultation paper on a new supervision module — CRP-1 — which amends the Committee’s standards. The new module would lower capital requirements if the token issuers met strict risk management standards from the regulator.
HKMA wrote a letter to banks in August notifying them that Basel standards would take effect in January next year.
The regulator becomes the latest banking industry organization opposing the Basel Committee’s stringent rules.
In August, a group of industry associations, including the Global Financial Markets Association (GFMA), wrote to the Committee requesting that it relax the standards. In particular, they criticized the different capital requirements imposed on tokens from permissioned and public blockchains, which they said “is neither risk-sensitive nor economically rational.”
Three months prior, another group of ten associations, led by the International Capital Market Association (ICMA), voiced similar concerns.
Under Hong Kong’s vision to become the global Web3 hub, relaxing these laws is critical, as it allows local firms to compete with global rivals in jurisdictions yet to implement the Committee’s guidelines.
UBS pilot targets automated tokenization
Still in Hong Kong, Swiss banking giant UBS has launched a new pilot to automate the entire tokenization process.
UBS partnered with Singaporean RWA platform DigiFT and Chainlink, a public oracle network, on the project, which was approved under the city-state’s Cyberport Blockchain & Digital Asset Pilot Subsidy Scheme.
The three are developing blockchain-powered infrastructure that will automate the lifecycle management of tokenized products, from issuance to distribution and settlement. They claim it will significantly cut costs for issuers while minimizing manual errors.
Under the new platform, investors can submit their subscriptions to UBS’s tokenized products through smart contracts deployed by DigiFT.
The processing would be powered by Chainlink’s Digital Transfer Agent smart contracts and recorded on-chain. This would trigger an automatic process of issuing and distributing the UBS tokenized products.
“Through this project, we are combining institutional partners, regulated infrastructure, and blockchain technology to build the next chapter of tokenized fund distribution — one that moves us closer to a truly open economy where financial products can interoperate seamlessly across borders and platforms,” commented DigiFT founder Henry Zhang.
UBS is among dozens of global financial giants rapidly investing in tokenization as the sector becomes the primary blockchain application in the financial sector. It first launched a tokenized fund last November in Singapore, which was available on DigiFT’s distribution platform.
It joins industry leaders such as JPMorgan (NASDAQ: JPM), Citigroup (NASDAQ: C), DBS (NASDAQ: DBSDY), and Deutsche Bank, which have all launched tokenization pilots in the past year.
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