HKMA sets out stricter standards for digital asset custody


21st February 2024 – (Hong Kong) The Hong Kong Monetary Authority (HKMA), in a notable move towards regulating digital assets, has released a detailed 11-page circular outlining stringent standards for tokenisation and digital asset custody. The instructions were directed at locally authorised institutions on Tuesday, delineating the expectations for the governance and risk management in the burgeoning sector of crypto custody services.

The circular impresses upon these institutions to undertake thorough risk assessments and guarantee the allocation of adequate resources to establish sound governance frameworks. The HKMA’s document specifically calls for robust risk management practices to underpin the operations of crypto custody services.

Institutions are urged to delineate clearly between customer assets and their own corporate assets to protect clients. The guidance is clear in its requirement for entities to have in place solid contingency plans and disaster recovery strategies. These measures are intended to mitigate the risks of customer asset loss due to theft, fraud, negligence, or other malevolent acts, as well as to prevent any delays or difficulties in customers accessing their digital assets.

The Hong Kong de facto central bank’s guidance also mandates full transparency regarding the risks associated with cryptocurrency custody and adherence to anti-money laundering and countering of terrorist financing protocols.

A key requirement set out by the HKMA is for such authorised institutions—or relevant locally incorporated authorised institutions with subsidiaries already engaged in similar activities—to notify the authority and confirm their compliance with the expected standards outlined in the annex of the circular within six months from its date of issuance.

This directive forms part of Hong Kong’s broader strategy to reclaim its status as a leading crypto hub in Asia. The region has taken significant steps in this direction, having initiated a crypto licensing regime in June 2023 that allows licensed exchanges to offer retail trading services. To date, Hong Kong has issued licenses to two virtual asset trading platforms, namely HashKey and OSL.