The Hong Kong Monetary Authority (HKMA) Sets Regulatory Standards for Tokenized Products

The Hong Kong Monetary Authority (HKMA) has issued a new circular detailing the regulatory standards authorized institutions must adhere to when selling and distributing tokenized products (cryptocurrency, virtual asset) to clients. This move marks a significant 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 digitally represented using distributed ledger technology (DLT) or similar technologies. The scope of this circular does not extend to tokenized products that are regulated under the Securities and Futures Ordinance or those 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 the realm of tokenization, acknowledging the progress made thus far. The regulatory standards outlined in the circular are aimed at providing clear guidelines for the banking sector to foster innovation in tokenization while implementing appropriate measures to safeguard consumers and investors.

Key Aspects of the Circular

Key aspects covered in the circular include general principles that existing regulatory requirements and consumer/investor protection measures applicable to the sale and distribution of a product also apply when the product is sold and distributed in a tokenized form. 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 provided in the circular include the distribution of tokenized structured investment products not regulated under the Securities and Futures Ordinance and tokenized gold, which should 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 perform due diligence, disclose risks and product features transparently, and manage risks associated with the sale and distribution of tokenized products effectively. Institutions are expected to establish sufficient systems and control measures to ensure compliance with all applicable regulations and to implement appropriate internal control measures to address the specific risks and unique nature of tokenized products.

Proactive Regulatory Approach

The circular represents a proactive approach by the HKMA to regulate emerging technologies in the financial sector, ensuring that the benefits of innovation are realized in a manner that protects consumers and maintains the integrity of the financial system.

Authorized institutions with queries regarding the circular are encouraged to contact designated HKMA representatives for further guidance. The HKMA will continue to monitor the regulatory environment and global developments in the tokenization market, providing further guidance to authorized institutions as necessary.

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