On February 20, the Hong Kong Monetary Authority (HKMA) addressed the heads of authorized institutions (AI) through a letter discussing the tokenization and custody of digital assets, signaling the regulator's proactive stance on navigating the evolving landscape of financial technology.
Outlined in the letter is the HKMA's intention to develop custody standards for client assets, drawing upon international benchmarks and practices. These standards are deemed applicable regardless of how the authorized institution acquires the assets, be it through independent services or other means. The letter emphasizes the importance for authorized institutions to engage with the HKMA in advance to ensure compliance with the expected standards and requirements outlined therein.
An attachment to the letter delineates eight categories of standards, covering various aspects such as governance, risk management, asset segregation, outsourcing, disclosure, and anti-money laundering and counter-terrorism financing. While the standards are framed as general statements, they underscore the necessity for senior managers and staff engaged in AI hosting activities to possess the requisite knowledge, skills, and expertise to fulfill their duties effectively.
A separate letter addresses the sale and distribution of tokenized products not regulated under the Securities and Futures Ordinance or supervised by the Securities and Futures Commission. It underscores that existing regulatory requirements and consumer/investor protection measures apply equally to tokenized products, given their similarity in terms, functionality, and associated risks to their underlying counterparts.
Furthermore, the letter highlights potential regulatory implications arising from tokenization structures, cautioning that certain arrangements, such as those tokenizing fractional interests in assets, may raise concerns akin to collective investment schemes. Detailed guidance is provided on due diligence, disclosure practices, risk management protocols, and the provision of escrow services. Ultimately, the HKMA expresses support for authorized institutions' endeavors in tokenization, affirming the industry's progress while urging continued adherence to regulatory standards and best practices.
