FameEX Hot Topics | Hong Kong Authority Releases Tokenization and Custody Guidance for Financial Institutions

On February 20th, the Hong Kong Monetary Authority (HKMA) communicated with the heads of authorized institutions (AIs) regarding the tokenization and custody of digital assets through a series of guidance letters. These communications mark a significant step in the HKMA's efforts to regulate and standardize practices within the burgeoning digital asset space.

In one of these letters, the HKMA outlined standards for the custody of customer assets. These standards are designed to align with international norms and practices, and they are applicable whether the assets are obtained via standalone services or through other activities by the AIs. The guidance is broad, emphasizing that senior management and staff involved in custodial activities must have the requisite knowledge, skills, and expertise. The standards cover eight main areas, including governance, risk management, asset segregation, outsourcing, disclosure, and compliance with Anti-Money Laundering and Counter-Financing of Terrorism measures.

The annex of this letter elaborates on these standards, presenting them as generalized statements to ensure a wide application across various scenarios and institutions. This approach indicates the HKMA's intention to foster a robust and secure environment for the custody of digital assets, emphasizing the importance of expertise and careful management within institutions.

Another letter addresses the sale and distribution of tokenized products that fall outside the purview of the Securities and Futures Ordinance and are not subject to the requirements of the Securities and Futures Commission. This guidance clarifies that existing supervisory requirements and consumer/investor protection measures applicable to traditional products will also apply to their tokenized versions, given the similarity in terms and risks associated with both forms. However, it specifically exempts stablecoins, which will be regulated under a separate licensing regime as outlined in a consultation paper published by the HKMA and other regulators in December.

This letter also highlights the potential for the nature of an asset to change due to the tokenization process, using the example of fractionalized interests in an asset potentially being classified as a collective investment scheme. The HKMA delves into various aspects such as due diligence, disclosure, risk management, and custodial services, providing detailed guidance to ensure that institutions can navigate the complexities of tokenization responsibly.

The HKMA's supportive stance towards AI's initiatives on tokenization, as expressed in the letters, reflects its encouragement for the industry's progress. By issuing these guidance letters, the HKMA aims to facilitate the responsible development and distribution of tokenized products, ensuring that the financial sector's foray into digital assets is marked by high standards of security, transparency, and compliance.

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