FameEX Hot Topics | Hong Kong Regulator Provides Tokenization and Custody Guidelines to Financial Entities

The Hong Kong Monetary Authority (HKMA) took a pivotal step towards the regulation of digital assets on February 20th by issuing guidance letters to authorized institutions (AIs) about the tokenization and custody of these assets. This move signifies the HKMA's commitment to shaping a regulated and standardized environment for the rapidly growing digital asset sector.

In a detailed letter, the HKMA established a set of standards for the safekeeping of customer assets, aiming to synchronize with global norms and practices. These guidelines are applicable irrespective of how the assets are acquired, whether through standalone services or other business operations conducted by the AIs. The communication stresses the necessity for senior management and staff involved in custody services to possess appropriate knowledge, skills, and expertise. The outlined standards span across eight critical areas including governance, risk management, the segregation of assets, outsourcing practices, as well as adherence to Anti-Money Laundering and Counter-Financing of Terrorism protocols.

The annex attached to this letter further clarifies these standards, presenting them in a generalized format to ensure broad applicability across diverse institutional and operational settings. This initiative by the HKMA aims to create a secure and resilient framework for digital asset custody, highlighting the need for skilled management and operational integrity within financial institutions.

Another significant aspect of the HKMA's guidance concerns the sale and distribution of tokenized products that do not fall under the regulatory umbrella of the Securities and Futures Ordinance or the Securities and Futures Commission's requirements. The HKMA points out that the regulatory framework and consumer protection measures in place for conventional financial products are equally applicable to their tokenized counterparts, reflecting the similar nature of risks and features. Notably, this directive exempts stablecoins, which are slated for a distinct licensing framework as per a consultation paper issued by the HKMA and other regulatory bodies in December.

The guidance also illuminates the potential for the nature of assets to alter through tokenization, for instance, tokenizing fractional interests in an asset could constitute a collective investment scheme. The HKMA provides comprehensive advice on due diligence, disclosure, risk management, and custody services to guide institutions through the complexities of managing tokenized assets responsibly.

Through these guidance letters, the HKMA expresses its support for AI's tokenization initiatives, underscoring its positive stance towards the industry's advancements. The aim is to champion the prudent development and offering of tokenized products within the financial sector, ensuring that engagements with digital assets meet stringent standards of security, transparency, and regulatory compliance, thereby fostering a safe and innovative digital finance ecosystem.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.