On 16 July 2024, the Securities and Futures Commission (SFC) released its consultation conclusions regarding the proposed subsidiary legislation, code, and guidelines for implementing an uncertificated securities market (USM) in Hong Kong. Following extensive market feedback, the SFC has outlined a meticulous 5-year timeline to ensure a smooth transition to the new regime.

With the legislative process expected to conclude, the USM regime is scheduled for implementation towards the end of 2025. Companies whose laws align with the new regime will transition in phases, with a complete transition anticipated by the end of 2030. A detailed timeline will be established to guarantee an orderly and efficient shift.

The SFC will also conduct a separate consultation to determine the maximum levels of specific USM-related fees. In collaboration with Hong Kong Exchanges and Clearing Limited and the Federation of Share Registrars Limited, the SFC will engage issuers, investors, and other market participants to enhance their understanding of the new regime, its impact, and the required steps for participation. Issuers will receive comprehensive guidelines, including preparatory steps and ongoing obligations, along with sample provisions for amending articles or bye-laws to ensure USM compatibility.

The introduction of an uncertificated securities market aims to eliminate manual and paper-based processes, significantly boosting operational efficiency within Hong Kong’s financial market infrastructure. Investors will benefit from holding securities in electronic form with direct legal ownership, replacing the existing nominee structure in the Central Clearing and Settlement System (CCASS). This shift promises enhanced shareholder protection and the convenience of electronic portfolio management. Issuers and intermediaries will also gain from increased efficiency through streamlined and automated processes.

The implementation of USM holds substantial advantages for the burgeoning crypto and virtual asset industry in Hong Kong. By enabling electronic ownership and modernizing processes, the SFC is fostering an environment that is conducive to digital innovation. This initiative ensures that crypto companies can seamlessly integrate with traditional financial market structures, creating a cohesive and advanced financial ecosystem. The move towards an uncertificated market aligns with the operational models of many virtual asset firms, which rely on digital and automated systems. This will likely attract more crypto companies to Hong Kong, in furtherance of the city’s reputation as a leading hub for financial innovation and digital assets.

Moreover, the enhanced regulatory framework will provide greater transparency and security, addressing common concerns within the financial industry. The shift to an uncertificated market demonstrates a forward-thinking approach, ensuring that Hong Kong remains at the forefront of financial technology advancements. This progressive measure is expected to drive growth, attract investment, and bolster confidence among market participants and strengthen Hong Kong’s position as a global financial center.

(Source: SFC Announcement)