Zahid Ali’s Post

So, Hong Kong Has Now, Officially, Issued Its Very Own Regulatory Standards. For Tokenized Financial Products, Issued Within The City... 🚀🚀 The initiative aims to foster innovation and ensure robust consumer protection within the field of tokenization. The HKMA's, comprehensive regulatory standards issued on February 20th, cover the sale and distribution of tokenized financial products by authorized institutions. It aims to foster innovation while ensuring robust consumer protection within the field of tokenization, where RWA's, are digitally represented using DLT or similar systems. The guidelines delineate the scope of tokenized products that fall under this new regulatory framework, explicitly excluding products already covered by the SFO and specific regulations by the SFC and HKMA. It's a response to the rapid advancement in tokenization tech and it's application in the financial sector. Hong Kong has become increasingly open towards Web3 tech in recent months, and is now focused on implementing comprehensive rules for the sector. #ExistingRulesToApply... 📌📌 The regulatory notice establishes clear principles that existing rules and protections for TradFi products should similarly apply to tokenized products. Given their comparable terms, features, and risks. Including structured investment products and tokenized precious metals not regulated by the SFO, they did explicitly state the new rules do not cover stablecoins. To ensure authorized institutions adhere to these standards, the HKMA mandates thorough due diligence before offering tokenized products to customers. Including understanding the product’s nature, features, risks, and continuous due diligence to adapt to change. Institutions must also perform due diligence on issuers and third-party service providers involved in the tokenization process, assessing their experience, track record, as well, the risks associated with such arrangements. #DisclosuresAndRiskManagement... 🚨🚨 Re product and risk disclosure, institutions must act in the best interests of their clients, fully disclosing key terms, features, and risks associated with tokenized products. Including risks associated with the underlying DLT networks, potential security threats like, hacking, legal uncertainties regarding ownership and finality of transactions on DLT networks. Risk management is a key area outlined by HKMA. Authorized institutions must establish adequate policies, procedures, systems, and controls to identify and mitigate risks related to the sale and distribution of tokenized products. Including risk management framework covering policies, internal controls, complaint handling, compliance, internal audit, and business continuity planning. Institutions providing custody services for tokenized products must comply with the HKMA’s expected standards for digital asset custody, ensuring services are secure as well reliable. #HONGKONGandCHINAsTOKENIZEDREGULATORYstrategy... 🇭🇰🇨🇳 #LFGrowASIA... 💥💥

Panther Protocol will soon enable Shielded Pools to be divided into infinitely customizable Zones, empowering institutions to create compliance controls and manage risk within DeFi. Each Zone, led by a Zone Manager, will offer granular control over user access, ensuring confidentiality while supporting regulatory compliance. This breakthrough will allow institutions to operate securely and privately in decentralized finance. Learn more about how Panther Protocol’s Zones will revolutionize risk management in DeFi: https://lnkd.in/gy_aBEnX

For financial institutions, the effects of IT failure can be critical. Every second of outage means lost transactions, failed payments, and frustrated customers, risking reputational damage. LogicMonitor's Andrew Crowe explores defining a compliant technology strategy as the DORA regulations loom closer.

For financial institutions, the effects of IT failure can be critical. Every second of outage means lost transactions, failed payments, and frustrated customers, risking reputational damage. LogicMonitor's Andrew Crowe explores defining a compliant technology strategy as the DORA regulations loom closer.

Balancing Act: Navigating Regulation and Innovation in Finance The financial industry is teetering on a high-wire act. The relentless march of technological advancement beckons with promises of efficiency, personalization and unprecedented growth. However, with increasing complex regulations casting a long shadow, this threatens to stifle innovation and erode profitability. While the digital economy has unlocked new avenues for financial services, it has also created a breeding ground for financial crime. The landscape is shifting rapidly, leaving institutions struggling to keep pace. The Crushing Weight of Compliance Regulatory burdens have swelled to epic proportions. The study "True cost of financial crime Compliance study": https://lnkd.in/det3AvGd published by LexisNexis Risk Solutions highlights that compliance costs have increased 98%, with industry costs rising to just over $60 billion. Finding efficient means to cut costs is a no-brainer in this predicament. However, the compliance overload is not merely a cost; it's a strategic impediment. The costs also include time, resources and human capital diverted to compliance efforts instead of core business functions not to mention innovative initiatives. Key blind spots: One critical area is the rapid evolution of financial products and services. The mismatch of traditional compliance frameworks with that of innovation creates opportunities for regulatory arbitrage and exposes institutions to unforeseen risks. Another blind spot is the increasing interconnectedness of the financial ecosystem. While technology has facilitated seamless cross-border transactions, it has also made it easier for criminals to launder money and evade sanctions. The challenge lies in effectively monitoring and managing risks across complex networks. What part can the Blockchain play in all of this? This distributed ledger system has the potential to revolutionize compliance by providing an immutable record of transactions providing much need verification. By enhancing transparency and traceability, the blockchain can help to mitigate financial crime risks. Furthermore, smart contracts can be programmed to automate compliance checks, reducing the burden on human capital. While the regulatory landscape for blockchain is still evolving, it is clear that this technology has the potential and the appetite to reshape the industry. In Conclusion... The financial industry must find a way to balance the competing demands of regulation and innovation. This requires a fundamental shift in mindset, with a focus on embedding compliance into the core of the business strategy. What are your thoughts on the rise of compliance costs?

For financial institutions, the effects of IT failure can be critical. Every second of outage means lost transactions, failed payments, and frustrated customers, risking reputational damage. LogicMonitor's Andrew Crowe explores defining a compliant technology strategy as the DORA regulations loom closer.

For financial institutions, the effects of IT failure can be critical. Every second of outage means lost transactions, failed payments, and frustrated customers, risking reputational damage. LogicMonitor's Andrew Crowe explores defining a compliant technology strategy as the DORA regulations loom closer.

HKMA Circular catch-up - the HKMA issued new circulars on 20 February 2024 to authorized institutions (AIs) about the provision of custodial services for digital assets, and the sale and distribution of tokenised products. In the first, the HKMA sets out the expected standards relating to custodial services for digital assets, including risk management, segregation and safeguarding of client assets, delegation and outsourcing, and AML, etc. Digital asset specific requirements include requirements on security and technology, and that such services can only be delegated to other AIs (or their subsidiaries) or licensed virtual asset trading platforms (holding assets through its associated entity). In the second, the HKMA sets out the requirements relating to the sale and distribution of tokenised products, defined as digital representations of real-world assets using distributed ledger technologies, but which does not include products regulated under the SFO (securities, etc.). It is noted that the relevant regulation for the underlying product would still apply to its tokenised form, and that AIs should be aware of the nature, features, and risks are affected by the tokenisation process. Specific requirements include requirements on due diligence, risk and product disclosures, and risk management. The two circulars and their requirements add to the recent plethora of guidance and requirements from regulators in Hong Kong, as the city continues its push to become a thriving and well-regulated digital asset hub for the Asia-Pacific. It is encouraging that the HKMA has taken some initiative to introduce guidelines to give clarity to AIs as they look to expand their businesses to this new frontier. Links to the two circulars are below:- Provision of Custodial Services for Digital Assets: https://lnkd.in/gf8dzqEk Sale and distribution of tokenised products:  https://lnkd.in/gZnUWhZi

On July 9, 2024, The Financial Action Task Force (FATF) issued its periodic report titled " Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs" June 2024. This report provides the fifth update on jurisdictions’ compliance with FATF Recommendation 15 and its Interpretative Note (R.15/INR.15). 🌟 Key Findings: 🌟 🌍 Global Progress: Although some jurisdictions have made progress in implementing AML/CFT regulations, global implementation is still lagging. Many governments have not taken significant steps to regulate the sector, and these countries need to prioritize fully implementing the standards urgently. 🗺 Jurisdictional Compliance: Based on the results of 130 FATF mutual evaluation and follow-up reports since the revised R.15/INR.15 was adopted in 2019, 75% of jurisdictions are either partially compliant or non-compliant with FATF requirements, the same percentage as in April 2023, indicating slight improvement. 📈 Progress in Key Sectors: Jurisdictions with significant virtual asset sectors, according to the roadmap analysis published in March 2024, have shown improvement, with most having core measures in place. However, much work remains to complete the global regulatory system for the virtual asset sector, and FATF will strive to close these gaps. 🔴 Challenges in Implementing R.15: Jurisdictions continue to face difficulties in implementing the fundamental requirements of R.15, such as conducting risk assessments and supervisory inspections. However, the results of the 2024 survey showed progress in some areas since 2023, such as an increase in the number of jurisdictions that have registered or licensed VASPs in practice. 💣 Concerns Over Slow Regulation: The slow progress in regulating the virtual asset sector is a serious concern, as virtual assets continue to be used to support the proliferation of weapons of mass destruction, as well as by scammers, terrorist groups, and other illicit actors. 💹 Positive Developments: The report acknowledges positive developments in the virtual asset sector reported by the private sector, such as increased virtual asset transaction volumes using Travel Rule compliance tools, and increased consideration of Travel Rule obligations by VASPs in their operations. ⚡ Decentralized Finance (DeFi): While DeFi arrangements still account for a relatively low percentage of overall virtual asset activity, the report points to the need to monitor these arrangements for illicit finance risks. The report also acknowledges the increased adoption and use of stablecoins, including for illicit activities, and FATF will continue to monitor the risks and developments in this sector. Read the full report her https://lnkd.in/d6EHgtYF

Last week, the Hong Kong Monetary Authority (HKMA) provided guidance to banks on their use of distributed ledger technology (DLT). When public blockchains are allowed, the regulator remarks that, in some cases, they should not be the first choice, and proper risk assessment and compensatory measures must be put in place. To achieve the efficiencies promised by DLT in traditional finance operations, which blockchain maximalists have been advocating (we too since 2017), jurisdictions must have clear regulations in place to govern the use of blockchains. For instance, a repo transaction conducted in the scope of Project Guardian required nine months of preparation on the legal side. Interestingly, the involved parties—UBS (Switzerland), DBS Bank (Singapore), and SBI Securities (Japan)—operate in some of the most progressive jurisdictions for tokenization. Switzerland and Singapore legislation support native securities issued on public blockchains, while Japan permits native digital securities on permissioned platforms without using a CSD. In this particular case, the FSA in Japan gave permission for the one-off transaction and observed the transactions. Other jurisdictions that have already taken stances on the public | private blockchain concern and DLT regulations: 🇩🇪 ⚫ Germany has passed early legislation, leading to a reasonable volume of token issuances. 🇪🇺 ⚫ The EU's DLT Pilot Regime supports both blockchain as the primary securities registry and the use of public blockchains. 🇬🇧 ⚪ The UK's Digital Securities Sandbox, starting in January, permits blockchain as the registry but initially requires permissioned blockchains. 🇨🇭 ⚪ The Basel Committee considers all bank usage of public blockchains as high risk, resulting in unattractive balance sheet treatment for banks, prompting pushback from industry bodies. 🇦🇪 ⚫ In the UAE, the “Guidelines for Financial Institutions adopting Enabling Technologies” issued by the Central Bank of the UAE, together with the Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) of the DIFC, and the Financial Services Regulatory Authority (FSRA) of ADGM in November 2021, allow both permissioned and permissionless DLT applications with certain caveats: ◼ Institutions developing permissionless DLT applications should ensure that users are not anonymous or pseudonymous, as allowing anonymity and pseudonymity can facilitate criminal purposes like tax evasion, bribery, money laundering, or terrorism financing. ◼ Applications involving any of the following elements should use permissioned systems: a. Customer assets, funds, or other forms of ownership, rights, or interests such as contracts; b. Personal Data; c. Requirements for a controlled set of participants or restricted access. ▫ ◽ ◻ Looking forward to seeing other jurisdictions join with their regulations on the issue.