Hong Kong regulator issues guidance letters to institutions on token protection

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

In a letter, HMA wrote that it is developing standards for the management of customer property “in line with international standards and practices.” AIS applies whether the assets are received from independent service providers or other activities.

“AIS […] They must discuss with the HKMA in advance and demonstrate to the satisfaction of the HKMA that they meet the standards and requirements set out in this circular.

The appendix of the letter presents the standards in eight categories. The requirements are primarily very general statements, such as “Senior management and staff involved in AI maintenance activities and related regulatory activities must have the necessary knowledge, skills and expertise to carry out their responsibilities.

Happy Chinese New Year! May the Year of the Dragon bring health, happiness and prosperity to you and your loved ones! #chinesenewyear #yearofthedragon #prosperity pic.twitter.com/eQu9ZvIid9

— HKMA Hong Kong Monetary Authority (@hkmagovhk) February 10, 2024

Topics covered include governance and risk management, asset segregation, outsourcing, disclosure and anti-money laundering and countering terrorist financing.

Related: Hong Kong regulator issues investment requirements in demand.

The second letter deals with the sale and distribution of tokenized products that are not regulated under the Securities and Futures Ordinance or subject to the requirements of the Securities and Futures Commission. He explained.

“The existing monitoring requirements and consumer/investor protection measures for the sale and distribution of the product also apply in the form described as it has terms, features and risks. […] Same as original product.

It does not apply to stablecoins, which will be licensed under a consultation paper released in December by the HKMA and other regulators. The February 20 letter warned that the nature of the asset could have an impact on the tokenization structure:

“For example, a token arrangement for shared interests in property could be a joint investment scheme.

Due diligence, disclosure, risk management and security services are covered in detail.

“HKMA supports the AIS initiative on tokenization and is encouraged by the progress the industry has made so far,” the letter said.

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