The Hong Kong Monetary Authority (HKMA) recently introduced new regulatory standards for the sale and distribution of tokenized financial products by authorized institutions. These guidelines aim to promote innovation while maintaining strong consumer protection in the growing field of tokenization. With the use of distributed ledger technology, real-world assets (RWA) are represented digitally, leading to increased interest and adoption in the financial sector.
The regulatory standards provide a clear scope of tokenized products that fall under this new framework. It emphasizes that products already regulated under existing securities laws are excluded from these guidelines, ensuring that there is no overlap with the Securities and Futures Ordinance or regulations set forth by the Securities and Futures Commission (SFC) and HKMA. The move comes as a response to the rapid advancement of tokenization technologies, indicating Hong Kong’s commitment to embracing Web3 technology and establishing comprehensive rules for the sector.
Authorized institutions are required to conduct thorough due diligence before offering tokenized products to customers. This process involves understanding the nature, features, and risks associated with these products, as well as continuously adapting to any changes that may occur. In addition, institutions must assess the experience, track record, and risks of issuers and third-party service providers involved in the tokenization process to ensure compliance with the new standards.
To safeguard the interests of clients, institutions must provide full disclosure of key terms, features, and risks related to tokenized products. This includes risks associated with distributed ledger technology networks, potential security threats like hacking, and legal uncertainties surrounding ownership and transaction finality on these networks. By enhancing transparency and accountability, institutions can build trust with their clients and manage risks effectively.
Risk management is a critical aspect outlined by the HKMA in the new guidelines. Authorized institutions are required to establish robust policies, procedures, systems, and controls to identify and mitigate risks associated with the sale and distribution of tokenized products. This includes implementing a comprehensive risk management framework that covers areas such as policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning. Institutions offering custody services for tokenized products must also meet the expected standards for digital asset custody to ensure the safety and reliability of these services.
The HKMA’s new regulatory standards on tokenized financial products represent a significant step towards fostering innovation while protecting consumers in the evolving landscape of tokenization. By setting clear guidelines, promoting due diligence, enhancing disclosure practices, and implementing robust risk management frameworks, authorized institutions can navigate the complexities of offering tokenized products effectively and responsibly. This proactive approach by the HKMA reflects Hong Kong’s commitment to embracing technological advancements in the financial sector while safeguarding the interests of all stakeholders involved.
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