Tokenized Financial Products Receive Regulatory Standards in Hong Kong

By: Eliza Bennet

The Hong Kong Monetary Authority (HKMA) enforced comprehensive regulatory measures on February 20, for the sale and distribution of tokenized financial products by authorized institutions, highlighting the scope of the tokenized products that will fall under the new regulatory structure. The HKMA notes, this initiative will boost innovation while ensuring strong consumer protection within the rapidly growing field of tokenization, where real-world assets are digitally depicted using distributed ledger technology or similar systems.

The regulations stipulate that rules applicable to traditional financial products will similarly apply to tokenized products due to their comparative terms, features, and risks, including structured investment products and tokenized precious metals. However, this notice does not cover stablecoins. It requires institutions to perform thorough due diligence before offering tokenized products to customers.

As per product and risk disclosure, institutions must act in their clients' best interests while providing complete disclosure of key terms, features, and risks related to the tokenized products including risks connected with the underlying distributed ledger technology (DLT) networks, potential safety threats like hacking and legal uncertainties.

The HKMA further demands authorized institutions to ascertain appropriate policies, procedures, systems, and regulations to classify and alleviate risks related to the sale and distribution of tokenized products. Additionally, those providing custody services for tokenized products must comply with the expected standards for digital asset custody laid out by the HKMA.