The Hong Kong Financial Authority (HKMA) unveiled complete regulatory requirements on Feb. 20 for the sale and distribution of tokenized monetary merchandise by licensed establishments.
The initiative goals to foster innovation whereas guaranteeing strong shopper safety throughout the burgeoning area of tokenization, the place real-world property (RWA) are digitally represented utilizing distributed ledger know-how or related methods.
The rules delineate the scope of tokenized merchandise that fall underneath this new regulatory framework, explicitly excluding merchandise already lined by the Securities and Futures Ordinance and particular laws by the Securities and Futures Fee (SFC) and HKMA.
The transfer is a response to the speedy development in tokenization applied sciences and their software within the monetary sector. Hong Kong has turn out to be more and more open towards Web3 know-how in current months and is targeted on implementing complete guidelines for the sector.
Present guidelines to use
The regulatory discover establishes clear rules that present 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 licensed establishments adhere to those requirements, the HKMA mandates thorough due diligence earlier than providing tokenized merchandise to clients. 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, monitor report, and the dangers related to the tokenization preparations.
Disclosures and danger administration
When it comes to product and danger disclosure, establishments are required to behave in the perfect 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 know-how (DLT) networks, potential safety threats similar to hacking, and authorized uncertainties relating to possession and finality of transactions on DLT networks.
Threat administration is one other important space outlined by the HKMA. Licensed establishments should set up sufficient insurance policies, procedures, methods, and controls to establish and mitigate dangers associated to the sale and distribution of tokenized merchandise.
This features a complete danger administration framework protecting insurance policies, inside controls, grievance 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.
