The Hong Kong Financial Authority (HKMA) unveiled complete regulatory requirements on Feb. 20 for the sale and distribution of tokenized monetary merchandise by approved establishments.
The initiative goals to foster innovation whereas guaranteeing sturdy client safety throughout the burgeoning area of tokenization, the place real-world belongings (RWA) are digitally represented utilizing distributed ledger expertise or related programs.
The rules delineate the scope of tokenized merchandise that fall below this new regulatory framework, explicitly excluding merchandise already lined by the Securities and Futures Ordinance and particular rules by the Securities and Futures Fee (SFC) and HKMA.
The transfer is a response to the speedy development in tokenization applied sciences and their utility within the monetary sector. Hong Kong has change into more and more open towards Web3 expertise in latest months and is concentrated on implementing complete guidelines for the sector.
Current guidelines to use
The regulatory discover establishes clear ideas that current guidelines and protections for conventional monetary merchandise ought to equally apply to tokenized merchandise, given their comparable phrases, options, and dangers.
This contains structured funding merchandise and tokenized treasured metals not regulated by the Securities and Futures Ordinance whereas explicitly stating that this discover doesn’t cowl stablecoins.
To make sure that approved establishments adhere to those requirements, the HKMA mandates thorough due diligence earlier than providing tokenized merchandise to prospects. This contains understanding the product’s nature, options, dangers, and steady due diligence to adapt to any adjustments.
Establishments should additionally carry out due diligence on issuers and third-party service suppliers concerned within the tokenization course of, assessing their expertise, observe document, and the dangers related to the tokenization preparations.
Disclosures and threat administration
When it comes to product and threat disclosure, establishments are required to behave in the most effective pursuits of their purchasers, offering full disclosure of key phrases, options, and dangers related to tokenized merchandise.
This contains dangers related to the underlying distributed ledger expertise (DLT) networks, potential safety threats equivalent to hacking, and authorized uncertainties concerning possession and finality of transactions on DLT networks.
Threat administration is one other essential space outlined by the HKMA. Approved establishments should set up satisfactory insurance policies, procedures, programs, and controls to establish and mitigate dangers associated to the sale and distribution of tokenized merchandise.
This features a complete threat administration framework protecting insurance policies, inside controls, criticism dealing with, compliance, inside audit, and enterprise continuity planning.
In the meantime, establishments that present custody companies for tokenized merchandise should adjust to the HKMA’s anticipated requirements for digital asset custody, guaranteeing that these companies are safe and dependable.
