The Hong Kong Monetary Authority (HKMA) recently announced new regulatory standards for the sale and distribution of tokenized financial products by authorized institutions. This move is aimed at fostering innovation while ensuring robust consumer protection in the field of tokenization. The guidelines define the scope of tokenized products falling under this regulatory framework, excluding those already covered by existing regulations.
The rapidly evolving landscape of tokenization technologies in the financial sector prompted the HKMA to establish clear principles. The regulations ensure that existing rules and protections for traditional financial products are equally applicable to tokenized products due to their similar terms, features, and risks. As such, structured investment products and tokenized precious metals not regulated by existing ordinances are now subject to these new guidelines.
Authorized institutions are required to conduct thorough due diligence before offering tokenized products to customers. This includes understanding the product’s nature, features, and risks, as well as continual monitoring to adapt to changes. Moreover, institutions must assess issuers and third-party service providers involved in the tokenization process to evaluate their experience, track record, and associated risks. Risk management is emphasized, with institutions mandated to establish comprehensive policies, procedures, systems, and controls to identify and mitigate risks related to the sale and distribution of tokenized products.
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 disclosure encompasses risks related to underlying distributed ledger technology (DLT) networks, potential security threats like hacking, and legal uncertainties regarding ownership and finality of transactions on DLT networks. Transparency and comprehensive disclosure are essential in ensuring that customers are fully informed before investing in tokenized products.
Institutions offering custody services for tokenized products are required to adhere to the HKMA’s standards for digital asset custody. This includes ensuring the security and reliability of these services to safeguard customers’ assets. Comprehensive risk management frameworks covering policies, internal controls, compliance, and business continuity planning are essential for institutions offering custody services for tokenized products.
The introduction of comprehensive regulatory standards by the HKMA marks a significant step towards regulating the sale and distribution of tokenized financial products in Hong Kong. By establishing clear principles, emphasizing due diligence, risk management, product disclosure, and compliance with custody service standards, these regulations aim to promote innovation while safeguarding consumer interests in the burgeoning field of tokenization. Adherence to these standards is crucial for authorized institutions to build trust and credibility in offering tokenized products to customers in a secure and reliable manner.
Leave a Reply