HKMA Clarifies Tokenization Standards for Authorized Institutions

The Hong Kong Monetary Authority (HKMA) has recently published two detailed guidance letters to all authorized institutions (AIs) in its domain. By doing so, these communications also set the regulatory requirements and standards for the tokenization and custody of digital assets, which represents a significant step towards harmonizing the rapidly growing tokenization area with the existing financial practices and international norms.

HKMA’s Tokenization and Custody Standards

One of the two letters addresses the depositary function of digital assets, demanding AIs follow the criteria that align with the global best practices in management. These criteria cover eight vital aspects, governance, risk management, and asset segregation.

The HKMA stresses that the senior management and staff involved in custody should have the necessary experience for their duties to be carried out efficiently.

Additionally, the letter emphasizes the importance of AIs initiating discussions with the HKMA and demonstrating their adherence to the standards and requirements as specified. Such a proactive approach is intended to make the custodian services of the institutions strong, safe, and customer-friendly.

Tokenized Products Regulations and Consequences

The second letter deals with the sale and distribution of tokenized products, which are not subject to the Securities and Futures Ordinance. It also reaffirms that the current oversight requirements and consumer protection policies that apply to traditional financial assets also apply to their tokenized versions.

This refinement guarantees that the tokenized products’ essential characteristics, terms, and risks are clear and understandable to both consumers and investors.

The letter identifies that specific tokenization structures, such as the division of stake in an asset, may be termed collective investment schemes. This understanding causes AIs to practice due diligence and employ complete risk management and disclosure practices when dealing with tokenized products.

Market Overview and Developments

The HKMA letters not only define the regulatory regime for the tokenization and custody services but also express the authority’s friendly attitude towards innovation in the financial sector.

Recognition of the strides made by the industry in tokenization by HKMA is proof of Hong Kong’s dedication to nurturing an environment where digital asset innovation is promoted and at the same time, investor protection and market integrity are maintained.

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