The Hong Kong Monetary Authority (HKMA) recently released a set of comprehensive regulatory standards regarding the sale and distribution of tokenized financial products by authorized institutions. The main goal of this initiative is to encourage innovation in the field of tokenization while ensuring that consumers are adequately protected.
The guidelines provided by the HKMA specify the scope of tokenized products that fall under this new regulatory framework. It is crucial to note that products already covered by existing regulations by the Securities and Futures Commission (SFC) and HKMA are excluded from these guidelines. The rapid advancement in tokenization technologies has prompted Hong Kong to establish clear principles that would apply to tokenized products.
Due Diligence and Risk Management
Authorized institutions are required to conduct thorough due diligence before offering tokenized products to customers. This includes understanding the nature, features, and risks associated with these products, as well as continuous monitoring to adapt to any changes. Additionally, institutions must assess the experience and track record of issuers and third-party service providers involved in the tokenization process.
Institutions are mandated to act in the best interests of their clients by providing full disclosure of key terms, features, and risks associated with tokenized products. This includes risks related to the underlying distributed ledger technology (DLT) networks, potential security threats like hacking, and legal uncertainties concerning ownership and finality of transactions on DLT networks.
A critical aspect outlined by the HKMA is the establishment of adequate risk management policies, procedures, systems, and controls by authorized institutions. This comprehensive risk management framework should cover areas such as policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning. Institutions providing custody services for tokenized products are also expected to adhere to the HKMA’s standards for digital asset custody to ensure the security and reliability of these services.
The HKMA’s regulatory standards for tokenized financial products in Hong Kong signify a significant step towards fostering innovation and ensuring consumer protection in the realm of tokenization. The guidelines provided aim to bring clarity and transparency to the sale and distribution of these products while emphasizing the importance of due diligence, risk management, and product disclosure. As the financial sector continues to embrace blockchain technology and tokenization, these regulatory standards play a crucial role in safeguarding the interests of consumers and maintaining the integrity of the market.