In a move to bolster innovation and protect consumers, the Hong Kong Monetary Authority (HKMA) recently introduced comprehensive regulatory standards for the sale and distribution of tokenized financial products by authorized institutions. This initiative comes as a response to the rapid advancement in tokenization technologies and their increasing application in the financial sector. By setting clear guidelines, the HKMA aims to ensure that existing rules and protections for traditional financial products are equally applicable to tokenized products.
The regulatory standards delineate the scope of tokenized products covered under the new framework, explicitly excluding those already regulated by the Securities and Futures Ordinance and specific regulations enforced by the Securities and Futures Commission (SFC) and HKMA. This includes structured investment products and tokenized precious metals, while notably omitting coverage for stablecoins. The HKMA is focused on implementing comprehensive rules for the sector, emphasizing the need for thorough due diligence by authorized institutions before offering tokenized products to customers.
Authorized institutions are required to conduct comprehensive due diligence on the nature, features, and risks of tokenized products, as well as the issuers and third-party service providers involved in the tokenization process. This includes assessing their experience, track record, and the associated risks. In terms of product and risk disclosure, institutions must act in the best interests of their clients by providing full disclosure of key terms, features, and risks related to tokenized products. This encompasses risks associated with distributed ledger technology (DLT) networks, security threats like hacking, and legal uncertainties surrounding ownership and transaction finality on DLT networks.
Risk management is a critical focus area outlined by the HKMA, requiring authorized institutions to establish robust policies, procedures, systems, and controls to identify and mitigate risks associated with the sale and distribution of tokenized products. This includes the development of a comprehensive risk management framework covering policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning. For institutions providing custody services for tokenized products, compliance with the HKMA’s standards for digital asset custody is mandatory to ensure the security and reliability of these services.
The introduction of comprehensive regulatory standards by the HKMA represents a significant step towards regulating the sale and distribution of tokenized financial products in Hong Kong. By setting clear guidelines, emphasizing due diligence, and prioritizing risk management, the HKMA aims to foster innovation in the sector while safeguarding consumer interests. As the use of tokenization technology continues to evolve, adherence to these regulatory standards will be crucial for authorized institutions to navigate the complexities of the digital asset landscape effectively.