Hong Kong Monetary Authority Guidance on Digital Asset Custody Services and Tokenized Product Activities

Source: The Paper

Hong Kong’s supervision of digital assets has gone further.

On February 20, the Hong Kong Monetary Authority (hereinafter referred to as the "Hong Kong Monetary Authority") issued two currently effective regulatory guidance notices on digital assets and tokenized products, respectively titled "Providing Digital Assets" Custody Services” and “Sales and Distribution of Tokenized Products Circular”.

Previously, Yu Jianing, co-chairman of the Blockchain Committee of the China Communications Industry Association and honorary chairman of the Hong Kong Blockchain Association, told The Paper (www.thepaper.cn) that the global digital asset market is Compliance and institutionalization are the general trend.

The Hong Kong Monetary Authority provides guidance on digital asset custody services, emphasizing the segregation of customer digital assets

The notice on the provision of digital asset custody services stated that as the digital asset industry continues to develop, Hong Kong’s financial The Authority has noted the growing interest of authorized institutions in digital asset-related activities, especially in providing digital asset custody services to clients.

In order to ensure that clients’ digital assets held by authorized institutions are fully protected and relevant risks are properly managed, the Hong Kong Monetary Authority considers it necessary to provide guidance on the provision of digital asset custody services by authorized institutions. The Hong Kong Monetary Authority draws on international standards and practices to formulate the expected standards set out in the annex, and gives authorized institutions the flexibility to formulate corresponding operational arrangements based on the nature, characteristics and risks of the digital assets under their custody.

The Guidelines apply to the custody activities of digital assets (i.e. digital assets that primarily rely on encryption and distributed ledgers or similar technologies) held by authorized institutions and subsidiaries of locally registered authorized institutions on behalf of clients, provided that Excludes limited-use digital tokens. Covered assets include virtual assets, tokenized securities and other tokenized assets.

The Hong Kong Monetary Authority is mainly engaged in governance and risk management, segregation of customer digital assets, protection of customer digital assets, delegation and outsourcing of custody functions, disclosure, record keeping and reconciliation of customer digital assets, and combating money laundering. and provide specific guidance on eight aspects including terrorist financing and continuous monitoring.

It is worth noting that in terms of segregating customer digital assets, the Hong Kong Monetary Authority clearly stated that authorized institutions should hold customer digital assets in separate customer accounts and separate them from the authorized institution’s own assets to ensure that once When an authorized institution becomes insolvent or enters resolution proceedings, customers' digital assets can be protected from claims by the authorized institution's creditors.

In terms of implementation, if an authorized institution or (if it is a locally registered authorized institution) its subsidiary intends to provide digital asset custody services, it should discuss with the Hong Kong Monetary Authority in advance, and display and inform the Hong Kong Monetary Authority. They comply with the expected standards and requirements set out in this notice (and such standards and requirements as amended from time to time).

If an authorized institution or a subsidiary of a locally registered authorized institution has carried out digital asset custody activities, its systems and control measures should be reviewed and revised as necessary. Locally registered authorized institutions where such authorized institutions or their subsidiaries have carried out digital asset custody activities should notify the Hong Kong Monetary Authority within 6 months from the date of the above notification and confirm that they have met the expected standards set out in the attachment.

The Hong Kong Monetary Authority provides guidance on tokenized product activities and provides clear regulatory requirements for the banking industry

The circular on the sale and distribution of tokenized products shows that the Hong Kong Monetary Authority supports authorized institutions initiatives on tokenization and are encouraged by the progress the industry has made so far. The Hong Kong Monetary Authority believes that now is the time to provide guidance on activities related to tokenized products and provide the banking industry with clear regulatory requirements to support the industry in continuing to innovate and realize the benefits that tokenization can bring, while safeguarding consumers/investors Take appropriate safeguards from this perspective.

Tokenized products covered by the circular refer to real-world assets expressed in digital form using distributed ledgers or similar technologies, but are not applicable to securities regulated by the Securities and Futures Ordinance and Hong Kong securities and tokenized products subject to relevant regulations issued by the Futures Commission and the Hong Kong Monetary Authority from time to time.

The Hong Kong Monetary Authority pointed out that, as a general principle, the existing regulatory requirements and consumer/investor protection measures regarding the sale and distribution of a certain product also apply to the sale and distribution of the product in the form of tokenization. Authorized institutions should ensure that they evaluate and understand the terms, features and risks of each tokenized product and should use professional judgment to determine applicable legal and regulatory requirements. At the same time, when authorized institutions sell and distribute tokenized products to customers, they should develop adequate systems and control measures to ensure compliance with all applicable regulations, and implement appropriate internal control measures to address the specific risks of relevant tokenized products. with unique properties.

In addition to the above general principles, authorized institutions should implement consumer/investor protection measures regarding due diligence, disclosure and risk management for tokenized products.

In terms of implementation, authorized institutions should implement adequate policies, procedures, systems and monitoring measures before engaging in activities related to tokenized products to ensure compliance with the requirements set out in this notice and other applicable requirements, and Discuss with the Hong Kong Monetary Authority in advance.