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 shopper safety inside the burgeoning discipline of tokenization, the place real-world belongings (RWA) are digitally represented utilizing distributed ledger know-how or related techniques.

The rules delineate the scope of tokenized merchandise that fall beneath 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 fast development in tokenization applied sciences and their software within the monetary sector. Hong Kong has grow to be 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 current 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 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 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, observe document, 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 one of the 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 akin 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 enough insurance policies, procedures, techniques, and controls to establish 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 companies for tokenized merchandise should adjust to the HKMA’s anticipated requirements for digital asset custody, guaranteeing that these companies are safe and dependable.