Recently, the Hong Kong Monetary Authority (HKMA) introduced comprehensive regulatory standards for the sale and distribution of tokenized financial products by authorized institutions. The main goal of these standards is to promote innovation while also protecting consumers within the expanding field of tokenization, where real-world assets are represented digitally using distributed ledger technology.
The guidelines set by the HKMA specify the range of tokenized products that fall under this new regulatory framework. This framework excludes products that are already regulated by the Securities and Futures Ordinance and specific regulations set by the Securities and Futures Commission (SFC) and HKMA. The rapid growth in tokenization technologies and their application in the financial sector has prompted this move by the HKMA.
The regulatory notice establishes clear principles about how existing rules and protections for traditional financial products should also apply to tokenized products due to their similarity in terms, features, and risks. The guidelines cover structured investment products and tokenized precious metals that are not currently regulated by the Securities and Futures Ordinance but explicitly exclude stablecoins.
To ensure that authorized institutions comply with these standards, the HKMA requires thorough due diligence before offering tokenized products to customers. This includes understanding the product’s nature, features, and risks, as well as continuous monitoring to adapt to any changes. Institutions must also conduct due diligence on issuers and third-party service providers involved in the tokenization process. Risk disclosure is also emphasized, with institutions being obligated to act in the best interests of their clients by providing full disclosure of key terms, features, and risks associated with tokenized products.
Risk management is highlighted as a critical aspect by the HKMA, requiring authorized institutions to establish comprehensive policies, procedures, systems, and controls to identify and mitigate risks related to the sale and distribution of tokenized products. This includes implementing a risk management framework covering areas such as policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning.
Institutions providing custody services for tokenized products are instructed to adhere to the HKMA’s expected standards for digital asset custody. This includes ensuring that custody services are secure and reliable to protect the assets of clients. Measures should be taken to safeguard against potential security threats such as hacking and to address legal uncertainties surrounding ownership and finality of transactions on distributed ledger technology networks.
The introduction of regulatory standards for tokenized financial products in Hong Kong is a significant step towards ensuring the growth and development of the sector while safeguarding the interests of consumers. The guidelines provided by the HKMA serve as a blueprint for authorized institutions to follow in offering and managing tokenized products, emphasizing the importance of due diligence, risk disclosure, and comprehensive risk management practices in this evolving landscape.