HKMA Outlines Standards for Tokenization and Digital Asset Custody
Summary:
The Hong Kong Monetary Authority (HKMA) recently issued letters detailing standards for the custody of digital assets by authorized institutions (AIs). The guidelines, following international standards, comprehensively cover governance, risk management, asset segregation, disclosure and Anti-Money Laundering. The HKMA also addressed the sale and distribution of tokenized products not regulated under existing laws, emphasizing that such products should have similar protection measures as their non-tokenized counterparts.
On February 20, the Hong Kong Monetary Authority (HKMA) addressed letters to the CEOs of officially ratified institutions (AIs) discussing matters of tokenization and digital asset custody. The HKMA outlined in a letter that it was establishing norms for overseeing customer assets, "taking note of global standards and norms." These protocols are intact regardless of whether standalone services or other activities provide the assets to AIs. "AIs should liaise with the HKMA beforehand and affirm to HKMA's satisfaction that they comply with the expected norms and prerequisites stated in this circular," the HKMA penned.
The letter's annex introduces standard parameters in eight classifications. These standards are predominantly broad-ranging statements such as, "Upper management and workforce involved in the AI's custodial activities should possess the required knowledge, skillset, and expertise to perform their duties."
Key topics explored include governance, risk management, asset segregation, outsourcing, disclosure, and Anti-Money Laundering along with Counter-Financing of Terrorism. The second letter pertained to the sale and distribution of tokenized items not regulated by the Securities and Futures Ordinance or obliged to the Securities and Futures Commission's requirements. It pointed out the pertinent supervision requirements and investor protection measures for selling and distributing a product, which are equally valid for its tokenized version as it possesses terms, characteristics, and risks akin to the original product.
However, such rules are not applicable to stablecoins, which are subject to licensing based on a discussion paper circulated in December by the HKMA along with other regulatory authorities. The HKMA also cautioned in its February 20 letter that the structuring of the tokenization process might impact the nature of the asset. The letter goes deep into due diligence, risk management, and custodial services. "The HKMA appreciates the AIs' endeavors in tokenization and acknowledges the significant strides the industry has made till now," concludes the letter.
Published At
2/20/2024 9:45:00 PM
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