Hong Kong issues guidance for banks on custody and sale of tokenized products

In February 2024, the Hong Kong Monetary Authority (HKMA) issued new guidance for banks regarding the provision of digital asset custodial services and the sale and distribution of tokenized products. This guidance is part of Hong Kong’s ongoing efforts to regulate the digital asset ecosystem and establish itself as a leading innovation hub.

Here are the key points from the HKMA’s guidance:

1. Provision of Custodial Services for Digital Assets (Custody Circular):
   • This guidance is directed at banks interested in holding digital assets for clients. It outlines the HKMA’s expectations for banks to demonstrate their ability to comply with the requirements set out in the Custody Circular before engaging in such activities.
2. Sale and Distribution of Tokenized Products (Tokenized Products Circular):
   • This circular provides standards for banks looking to carry on dealing activities in tokenized products, which are digital representations of real-world assets. Banks are expected to follow the guidance to ensure regulatory clarity and consumer/investor protection.
3. Regulatory Momentum and Clarity:
   • The guidance continues the momentum of digital asset regulation in Hong Kong, following other rules and consultations recently published by Hong Kong regulators. The aim is to provide more certainty for banks and securities firms seeking to capitalize on developments in digital assets and tokenization.
4. General Principle for Tokenized Products:
   • The HKMA will apply the same supervisory requirements and consumer and investor protection measures to the tokenized form of a product as it does to the underlying product. For example, banks distributing a tokenized non-SFO-regulated structured investment product are expected to adopt measures applicable to the selling of that product as set forth by the HKMA.
5. Additional Risks of Tokenized Products:
   • The HKMA acknowledges that tokenized products come with additional risks related to how the products are structured and arranged in the tokenization process. Banks are expected to evaluate and understand the terms, features, and risks of each tokenized product to implement adequate systems and controls.
6. Exclusions:
   • The guidance does not apply to stablecoins. For tokenized deposits placed by customers, banks should comply with the standards set out in the circular.
7. Regulatory Clarity for Innovation:
   • By providing this guidance, the HKMA aims to give the banking industry regulatory clarity to support continued innovation and the realization of benefits that may be brought by tokenization while ensuring appropriate safeguards from a consumer/investor protection perspective.

This guidance is a significant step in Hong Kong’s approach to regulating digital assets and tokenization, providing a clear framework for banks to engage in these activities responsibly and in compliance with regulatory expectations.

This article was made with assistance from The Tokenizer’s AI service, The Token RegRadar.

If you want to read more about the topic, please go to:

• https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240220e2.pdf
• https://www.regulationtomorrow.com/asia/hkma-issues-new-guidance-on-the-provision-of-digital-asset-custodial-services-and-the-sale-and-distribution-of-tokenised-products/
• https://www.fintechanddigitalassets.com/2024/03/hong-kong-monetary-authority-issues-guidance-for-banks-on-crypto-custody-and-sale-of-tokenised-products/

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