Hong Kong issues regulatory standards for tokenized financial products

The Hong Kong Financial Authority (HKMA) unveiled comprehensive regulatory requirements on Feb. 20 for the sale and distribution of tokenized monetary merchandise by authorized institutions.

The initiative objectives to foster innovation while guaranteeing tough particular person protection all around the burgeoning self-discipline of tokenization, where exact-world assets (RWA) are digitally represented the usage of distributed ledger skills or identical programs.

The rules delineate the scope of tokenized merchandise that fall below this fresh regulatory framework, explicitly aside from merchandise already lined by the Securities and Futures Ordinance and explicit rules by the Securities and Futures Commission (SFC) and HKMA.

The transfer is a response to the snappy pattern in tokenization technologies and their utility within the monetary sector. Hong Kong has change into increasingly extra commence in opposition to Web3 skills in most up-to-date months and is centered on implementing comprehensive principles for the sector.

Existing principles to practice

The regulatory witness establishes optimistic principles that fresh principles and protections for dilapidated monetary merchandise would possibly presumably perchance also just soundless similarly practice to tokenized merchandise, given their comparable phrases, aspects, and risks.

This entails structured investment merchandise and tokenized precious metals no longer regulated by the Securities and Futures Ordinance while explicitly pointing out that this witness does no longer camouflage stablecoins.

To present distinct that authorized institutions adhere to these requirements, the HKMA mandates thorough due diligence earlier than providing tokenized merchandise to prospects. This entails determining the product’s nature, aspects, risks, and actual due diligence to adapt to any adjustments.

Institutions have to additionally create due diligence on issuers and third-event service companies inflamed by the tokenization process, assessing their experience, observe chronicle, and the dangers associated with the tokenization arrangements.

Disclosures and difficulty administration

In phrases of product and difficulty disclosure, institutions are required to act in basically almost definitely the greatest pursuits of their clients, providing fleshy disclosure of key phrases, aspects, and risks associated with tokenized merchandise.

This entails risks associated with the underlying distributed ledger skills (DLT) networks, doable safety threats a lot like hacking, and just uncertainties regarding ownership and finality of transactions on DLT networks.

Possibility administration is one more severe home outlined by the HKMA. Authorized institutions have to connect enough policies, procedures, programs, and controls to title and mitigate risks associated to the sale and distribution of tokenized merchandise.

This entails a comprehensive difficulty administration framework covering policies, inner controls, criticism handling, compliance, inner audit, and industry continuity planning.

Meanwhile, institutions that offer custody companies for tokenized merchandise have to follow the HKMA’s anticipated requirements for digital asset custody, guaranteeing that these companies are stable and official.