The Hong Kong Monetary Authority (HKMA) has taken a significant step towards the regulation and standardization of digital asset custody and tokenization by issuing detailed guidelines to authorized institutions (AIs) on February 20. These guidelines aim to ensure that the custody of customer assets adheres to international standards and practices, whether these assets are acquired through standalone services or other financial activities.
The HKMA’s directive mandates AIs to proactively engage with the authority to demonstrate their compliance with the outlined standards and requirements. The letter specifies eight broad categories, emphasizing the need for senior management and staff involved in custodial activities to possess the requisite knowledge, skills, and expertise. The guidelines cover critical areas such as governance, risk management, asset segregation, outsourcing, and compliance with Anti-Money Laundering and Counter-Financing of Terrorism measures.
Additionally, the HKMA addressed the sale and distribution of tokenized products, particularly those not regulated under the Securities and Futures Ordinance or the Securities and Futures Commission. The authority clarified that existing supervisory requirements and consumer protection measures applicable to traditional financial products would also extend to their tokenized counterparts, given their similar terms, features, and risks. However, this does not apply to stablecoins, which are slated for a separate licensing regime as per a consultation paper issued by the HKMA and other regulatory bodies in December.
The guidance also highlights the potential for the nature of assets to change due to the tokenization process, citing the example of fractionalized interests possibly constituting a collective investment scheme. The HKMA detailed the necessity for due diligence, transparent disclosure, effective risk management, and reliable custodial services in the context of tokenization.
The HKMA’s communication reflects a supportive stance towards the industry’s tokenization initiatives, acknowledging the significant progress made so far. This move represents a crucial development in the regulatory landscape of Hong Kong’s digital asset market, aiming to foster innovation while ensuring robust consumer protection and market integrity.
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