The Hong Kong Monetary Authority (HKMA) recently introduced a set of regulatory standards on February 20 to govern the sale and distribution of tokenized financial products by authorized institutions. This move marks a significant step towards promoting innovation and safeguarding consumer interests in the rapidly evolving field of tokenization.
The guidelines set forth by the HKMA outline the specific scope of tokenized products that are subject to this new regulatory framework. It is important to note that these regulations do not overlap with existing regulations under the Securities and Futures Ordinance or specific rules established by the Securities and Futures Commission (SFC) and HKMA. The aim is to address the growing importance of tokenization technologies in the financial industry and to ensure that consumer protection measures are in place.
Due Diligence Requirements
Authorized institutions are required to conduct thorough due diligence before offering tokenized products to customers. This includes a deep understanding of the product’s characteristics, features, and associated risks. Moreover, institutions must assess the issuers and third-party service providers involved in the tokenization process to evaluate their experience, track record, and potential risks. Continuous due diligence is necessary to adapt to any changes in the market dynamics.
Institutions must act in the best interests of their clients by providing full disclosure of key terms, features, and risks associated with tokenized products. This includes informing customers about risks related to underlying distributed ledger technology (DLT) networks, security threats like hacking, and legal uncertainties concerning ownership and finality of transactions on DLT networks. Transparent disclosure is crucial to ensuring that customers are well-informed before investing in tokenized products.
The HKMA emphasizes the importance of risk management in the sale and distribution of tokenized products. Authorized institutions are required to establish robust policies, procedures, systems, and controls to identify and mitigate risks associated with these products. This involves developing a comprehensive risk management framework that covers areas such as policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning. Institutions providing custody services for tokenized products must adhere to the HKMA’s standards for digital asset custody to ensure the security and reliability of these services.
The introduction of regulatory standards for tokenized financial products in Hong Kong signifies a commitment to fostering innovation while safeguarding consumer interests. By setting clear guidelines and expectations for authorized institutions, the HKMA aims to establish a robust regulatory framework that adapts to the evolving landscape of tokenization technologies. It is essential for institutions to comply with these standards to protect customers, promote transparency, and maintain the integrity of the financial system.
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