Hong Kong regulator issues guidance letters to institutions on tokenization, custody

Hong Kong regulator issues guidance letters to institutions on tokenization, custody

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The Hong Kong Monetary Authority (HKMA) issued letters to the heads of authorized institutions (AIs) on Feb. 20 concerning tokenization and custody of digital assets.

In one letter, the HKMA wrote that it was setting out standards for the provision of custody of customer assets, “with reference to international standards and practices.” They apply whether the AIs receive the assets from providing standalone services or through other activities.

“AIs […] should discuss with the HKMA in advance and demonstrate to the satisfaction of the HKMA that they meet the expected standards and requirements in this circular.”

The annex to the letter presents standards in eight categories. The standards are mainly highly generalized statements, such as “Senior management and staff engaging in the AI’s custodial activities and related control functions should possess the necessary knowledge, skills and expertise to discharge their responsibilities.”

Topics covered include governance and risk management, asset segregation, outsourcing, disclosure and Anti-Money Laundering and Counter-Financing of Terrorism.

Related: Hong Kong regulator issues tokenized investments requirements amid demand

The second letter concerned the sale and distribution of tokenized products that are not regulated under the Securities and Futures Ordinance or subject to the requirements the Securities and Futures Commission. It noted:

“The prevailing supervisory requirements and consumer/investor protection measures for the sale and distribution of a product are also applicable to its tokenised form as it has terms, features and risks […] similar to those of the underlying product.”

It does not apply to stablecoins, which will be subject to licensing according to a consultation paper released by the HKMA and other regulators in December. The Feb. 20 letter cautioned that the nature of the asset may be affected by the structure of the tokenization:

“For example, the arrangement for tokenisation of fractionalised interests in an asset may amount to a collective investment scheme.”

Due diligence, disclosure, risk management and custodial services are treated in detail.

“The HKMA is supportive of AIs’ initiatives on tokenisation, and is encouraged by the progress the industry has made so far,” the letter states.

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