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 making certain strong client safety throughout the burgeoning area of tokenization, the place real-world property (RWA) are digitally represented utilizing distributed ledger know-how or related programs.
The rules delineate the scope of tokenized merchandise that fall underneath this new regulatory framework, explicitly excluding merchandise already coated 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 fast development in tokenization applied sciences and their utility within the monetary sector. Hong Kong has develop into more and more open towards Web3 know-how in latest months and is concentrated 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 consists of structured funding merchandise and tokenized valuable 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 consists of 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 file, and the dangers related to the tokenization preparations.
Disclosures and danger administration
By way of product and danger disclosure, establishments are required to behave in the very best pursuits of their shoppers, offering full disclosure of key phrases, options, and dangers related to tokenized merchandise.
This consists of dangers related to the underlying distributed ledger know-how (DLT) networks, potential safety threats equivalent to hacking, and authorized uncertainties relating to possession and finality of transactions on DLT networks.
Danger administration is one other important space outlined by the HKMA. Licensed establishments should set up enough insurance policies, procedures, programs, and controls to determine and mitigate dangers associated to the sale and distribution of tokenized merchandise.
This features a complete danger administration framework overlaying insurance policies, inner controls, grievance dealing with, compliance, inner audit, and enterprise continuity planning.
In the meantime, establishments that present custody providers for tokenized merchandise should adjust to the HKMA’s anticipated requirements for digital asset custody, making certain that these providers are safe and dependable.
