The Hong Kong Monetary Authority (HKMA) has published a circular outlining regulatory standards for institutions selling and distributing tokenized products, with the aim of promoting innovation, ensuring consumer and investor protection, and ensuring due diligence, transparency and risk management promote.
The Hong Kong Monetary Authority (HKMA) has issued a new circular detailing the regulatory standards that authorized institutions must adhere to when selling and distributing tokenized products (cryptocurrency, virtual assets) to customers. This move marks an important step in the regulatory body’s efforts to embrace technological advancements in the financial sector while ensuring consumer and investor protection.
Tokenized products, as defined by the HKMA in this circular, refer to real-world assets that are digitally represented using distributed ledger technology (DLT) or similar technologies. The scope of this circular does not extend to tokenized products regulated under the Securities and Futures Ordinance or subject to the regulations and guidelines issued by the Securities and Futures Commission (SFC) and the HKMA.
The HKMA has expressed its support for the industry’s initiatives in tokenization and recognizes the progress made to date. The regulatory standards outlined in the circular aim to provide clear guidance for the banking industry to promote innovation in tokenization while implementing appropriate measures to protect consumers and investors.
Key aspects addressed in the circular include the general principles that existing legal requirements and consumer/investor protection measures that apply to the sale and distribution of a product also apply when the product is in a tokenized form is sold and distributed. This is because the terms, features and risks associated with the tokenized products (excluding risks specifically arising from tokenization) are similar to those of related products.
Specific examples in the circular include the distribution of tokenized structured investment products that are not regulated under the Securities and Futures Ordinance and tokenized gold, which must follow the same regulatory requirements and investor protection measures as their non-tokenized counterparts.
The HKMA’s circular also emphasizes the need for authorized institutions to conduct due diligence, transparently disclose risks and product features, and effectively manage risks associated with the sale and distribution of tokenized products. Institutions are expected to establish sufficient systems and controls to ensure compliance with all applicable regulations and to implement appropriate internal controls to address the specific risks and uniqueness of tokenized products.
The circular represents a proactive approach by the HKMA to regulate emerging technologies in the financial sector and ensure that the benefits of innovation are realized in a way that protects consumers and maintains the integrity of the financial system.
Authorized institutions with questions regarding the circular are encouraged to contact the designated HKMA representatives for further guidance. The HKMA will continue to monitor the regulatory environment and global developments in the tokenization market and provide further guidance to authorized institutions as necessary.
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