- The Hong Kong Monetary Authority (HKMA) issued guidelines on February 20 for the tokenization and custody of digital assets by authorized institutions (AIs).
- These guidelines aim to align AIs’ operations with international standards and practices, ensuring a robust regulatory framework for digital finance.
- The HKMA’s directive includes two letters that outline regulatory expectations and standards for digital asset custody and tokenization activities.
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On February 20, the Hong Kong Monetary Authority (HKMA) unveiled detailed guidelines focused on the tokenization and custody of digital assets by authorized institutions (AIs). This move highlights HKMA’s dedication to harmonizing AI operations with global standards and practices, aiming to fortify the regulatory infrastructure for the rapidly changing digital finance sector.
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Establishing new benchmarks for the custody of digital assets
The HKMA issued two letters directed at the leaders of authorized institutions (AIs), detailing the regulatory requirements and benchmarks for participation in digital asset custody and tokenization operations. The initial letter stresses the need for a strong governance structure and risk management strategies for AIs that manage customer assets. It underscores the essentiality of senior management and personnel in charge of custodial services to have sufficient knowledge, abilities, and proficiency, guaranteeing their capability to execute their responsibilities efficiently.
The annex of the letter outlines standards across eight key sectors, such as governance and risk management, asset segregation, outsourcing, disclosure, and adherence to Anti-Money Laundering and Counter-Financing of Terrorism rules. These regulations are meant to be applicable whether authorized institutions (AIs) provide custodial services independently or as part of broader financial offerings. AIs must consult with the HKMA prior to launching these services, showing their alignment with the specified standards and criteria.
HKMA Provides Guidance on the Distribution of Tokenized Products
The HKMA’s second letter focuses on the marketing and distribution of tokenized products that are not covered by the Securities and Futures Ordinance and thus fall outside the regulatory scope of the Securities and Futures Commission. This letter specifies that supervisory standards and protections for consumers and investors, already in place for conventional financial products, are equally applicable to their tokenized equivalents, recognizing the parallels in their terms, features, and risks involved.
Nevertheless, the letter sets apart stablecoins, which are earmarked for a distinct licensing framework according to a consultation document published by the HKMA and other regulators in December. It notes that the structure of tokenization might change the nature of the asset, with fractional interests in an asset possibly being considered as a collective investment scheme. Further, the letter details the required due diligence, disclosure, risk management, and custody services for handling tokenized products, signaling the HKMA’s encouragement of AI efforts in tokenization and recognizing advancements within the sector.
Consequences for the Financial Sector
The recent guidelines issued by the HKMA underscore its forward-looking stance on overseeing the digital asset domain, aimed at keeping Hong Kong’s financial entities competitive and committed to superior consumer protection and financial stability standards. Through these directives, the HKMA seeks to stimulate innovation within the financial industry, motivating authorized institutions to delve into the possibilities of digital assets and tokenization under a safeguarded and regulatory-compliant environment.
The HKMA is committed to preserving the integrity of Hong Kong’s financial system, which is reflected in the emphasis on governance, risk management, and adherence to anti-money laundering regulations. These guidelines will be vital in forming AI practices as the digital asset market develops further, ensuring that these professionals are prepared to handle the intricacies of this new field.
With approved institutions now having a clear roadmap for incorporating tokenization and digital asset custody into their service offerings, the HKMA’s initiative is anticipated to open the door for future advancements in the field of digital finance. Following these guidelines will be essential to fostering a secure, dependable, and forward-thinking financial environment in Hong Kong as the sector develops.
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