Hong Kong Monetary Authority Sets Regulatory Standards for Tokenized Products

The Hong Kong Monetary Authority (HKMA) has issued a circular outlining the regulatory standards for institutions selling and distributing tokenized products to encourage 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 institutions must adhere to when selling and distributing tokenized products (cryptocurrency, virtual asset) to customers. The move marks a significant step in the regulator’s efforts to embrace technological advances 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 cover tokenized products that are regulated by the Securities and Futures Ordinance or those that are subject to the regulations and guidelines issued by the Securities and Futures Commission (SFC) and the HKMA.

The HKMA expressed its support for the industry’s initiatives in the field of tokenization, recognizing the progress made so far. The regulatory standards outlined in the circular are aimed at providing clear guidance to the banking sector to promote innovation in tokenization while implementing appropriate measures to protect consumers and investors.

The 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 tokenized form. This is because the terms, features and risks associated with tokenized products (except for risks arising specifically from tokenization) are similar to those of related products.

Specific examples provided in the circular include the distribution of tokenized structured investment products, which are not regulated by 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 circular also emphasizes the need for authorized institutions to conduct due diligence, transparently disclose product risks and features, and effectively manage the 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 control measures to address the specific risks and unique nature of tokenized products.

The circular represents the HKMA’s proactive approach to regulating emerging technologies in the financial sector, ensuring that the benefits of innovation are realized in a way 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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