Unlocking Secondary Market Liquidity: How Pillar II Transforms Tokenized Debt into Tradable Financial Assets

HONG KONG — Private credit and SME loan portfolios have traditionally suffered from a fundamental structural flaw: severe illiquidity. Once a loan is issued to an enterprise, it remains locked until maturity or refi, trapped in fragmented, manual secondary channels with high administrative overhead.

As part of the Association of Blockchain Development’s (ABCD) 2026 Policy Address Proposal presented to the Chief Executive’s Policy Unit (CEPU), Pillar II: From Secondary Market Fragmentation to Liquidity delivers a groundbreaking regulatory and statutory framework. Championed by ABCD, Pillar II converts illiquid SME debt and private yield notes into standardized, fractionally tradable digital securities backed by institutional-grade legal title recognition.

At a Glance	Pillar II: Secondary Market Liquidity
Problem	Private credit remains illiquid and manually traded; ATS access is limited; ownership rights on DLT registries lack explicit legal certainty.
Intervention 3	Create an SFC fast-track sandbox for Type 1 and Type 9 licensees to issue and trade tokenized credit, with targeted prospectus, fee and capital-adequacy relief.
Intervention 4	Recognize compliant DLT-based debt registries as legally binding ownership records under Hong Kong law, with statutory title protection for tokenized debt fractions.
Outcome	Illiquid SME loans become tradable tokenized assets; regulated ATS venues provide secondary-market exit liquidity; Hong Kong gains clearer statutory foundations for RWA markets.

The Bottleneck: High Costs, Secondary Fragmentation, and Title Uncertainty

Private credit is one of the fastest-growing asset classes globally. However, in Hong Kong, secondary market fragmentation forces private lending transactions to remain manual, bespoke, and expensive. Without regulated secondary Automated Trading Services (ATS) platforms for tokenized private credit fractions, institutional allocators face steep entry barriers and high exit friction.

Compounding this liquidity gap is a legal void: current company and property laws do not explicitly recognize Distributed Ledger Technology (DLT) asset registries as legal records of ownership title. Without statutory clarity, institutional investors risk legal disputes over ownership rights in the event of default or secondary transfer.

The Blueprint: 2 Strategic Policy Interventions

To establish an institutional-grade secondary market for tokenized real-world assets (RWAs), ABCD’s Pillar II proposes two critical regulatory interventions:

Intervention 3: SFC Onshore RWA Digital Securitization Fast-Track Sandbox

ABCD advocates launching a dedicated Securities and Futures Commission (SFC) sandbox tailored for Type 1 (Dealing in Securities) and Type 9 (Asset Management) licensed entities.

This sandbox enables licensed managers and brokers to structure, tokenize, and trade short-duration SME credit pools and trade receivables under explicit regulatory safe harbors:

• Prospectus Exemptions: Defining clear prospectus exemptions under the Securities and Futures Ordinance (SFO) for offerings tailored to qualified institutional allocators and family offices.

• Capital Adequacy & Fee Relief: Granting temporary licensing fee relief and capital adequacy concessions for RWA trading books held by Type 1 and Type 9 licensees during the sandbox testing phase.

• ATS Secondary Trading: Establishing clear technical and operational standards for SFC-licensed Automated Trading Services (ATS) to facilitate continuous secondary trading of tokenized debt fractions.

The proposal notes that secondary liquidity requires an estimated 12 to 18-month maturation runway, requiring sustained regulatory sandbox support to cultivate vibrant secondary order books.

Intervention 4: Recognition of On-Chain Debt Registry Standards in HK Company Law

To complement the SFC sandbox, ABCD recommends enacting statutory amendments to Hong Kong Company Law. This legislative reform will explicitly treat compliant DLT-based asset registries as legal title records under Hong Kong law.

By recognizing on-chain records as legally binding proof of ownership, Hong Kong will provide institutional investors with absolute statutory certainty, ensuring that tokenized debt fractions confer enforceable rights in courts of law.

Operational Risk & Liability Governance

Building a secure secondary market for digital credit demands transparent legal and operational boundaries:

• Smart Contract Liability Allocation: Establishing a clear legal liability framework where RWA issuers (responsible for business logic and disclosure), AI code auditors (responsible for scope and testing methodology), and licensed intermediaries (responsible for execution and operational controls) share defined accountability.

• Intermediary Safeguards: Requiring sandbox participants to implement robust custody, valuation, and investor disclosure controls to safeguard market integrity.

Measurable Value for Hong Kong's Economy

Pillar II bridges the gap between illiquid real-economy credit and global institutional capital:

1. For Institutional Allocators & Family Offices: Unlocks access to high-yielding, short-duration private credit with dynamic repricing and secondary exit liquidity via regulated ATS venues.

2. For SFC Licensees & FinTechs: Opens lucrative new revenue streams in digital asset origination, tokenization management, and secondary ATS brokerage fees.

3. For the HKSAR Government: Establishes Hong Kong as the world’s premier statutory and regulatory venue for onshore RWA tokenization, cementing its edge as an international financial center.

Through Pillar II, Hong Kong can pioneer a regulated, highly liquid secondary marketplace for tokenized assets, setting the global benchmark for digital asset finance under "One Country, Two Systems."

To read the full ABCD 2026 Policy Address Proposal and explore all 4 Operational Pillars, visit abcdevelopment.org.