The Hong Kong Monetary Authority (HKMA) has published a circular outlining regulatory standards for entities selling and distributing tokenized products to foster innovation, ensure consumer and investor protection, and promote due diligence, transparency and risk management.
The Hong Kong Monetary Authority (HKMA) has issued a new circular detailing the regulatory standards that authorized entities must adhere to when selling and distributing tokenized products (cryptocurrencies, virtual assets) to customers. This move is an important step in the regulator’s efforts to embrace technological advancements in the financial sector while protecting consumers and investors.
Tokenized products, as defined by the HKMA in this Circular, mean real assets represented digitally 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 Regulations or products subject to regulations and guidance issued by the Securities and Futures Commission (SFC) and the HKMA.
The HKMA expressed its support for industry initiatives in the area of tokenization and acknowledged the progress made to date. The regulatory standards outlined in the circular aim to provide clear guidance to the banking sector to promote tokenization innovation while implementing appropriate measures to protect consumers and investors.
Key aspects addressed in the circular include the general principle that existing regulatory requirements and consumer/investor protection measures applicable to the sale and distribution of products apply when products are sold and distributed in tokenized form. This is because the terminology, features, and risks associated with tokenized products (except those specifically arising from tokenization) are similar to related products.
Specific examples provided in the circular include tokenized structured investment products and distributions of tokenized gold that are not regulated under the Securities and Futures Act, which are subject to the same regulatory requirements and investor protection measures as non-tokenized products.
The HKMA circular also highlights the need for authorized entities to conduct due diligence, transparently disclose risks and product features, and effectively manage risks associated with the sale and distribution of tokenized products. Institutions must establish sufficient systems and controls to ensure compliance with all applicable regulations and implement appropriate internal control measures to address the specific risks and unique characteristics of tokenized products.
The circular signals the HKMA’s proactive approach to regulating new technologies in the financial sector and realizing the benefits of innovation in a way that protects consumers and maintains the integrity of the financial system.
Approved organizations with any inquiries regarding the circular are encouraged to contact their designated HKMA representative 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 entities as required.
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