Hong Kong’s Central Bank Issues Guidance on Digital Asset Custody Services to Boost Crypto Hub Aspirations

In a bid to solidify its position as a burgeoning crypto hub, Hong Kong’s central bank, the Hong Kong Monetary Authority (HKMA), has issued comprehensive guidance for authorized institutions seeking to provide custody services for digital assets. The move comes as part of the licensing regime introduced last year, aiming to regulate and streamline the operations of cryptocurrency exchanges within the territory.

The 11-page document titled “Expected Standards,” released on Tuesday, outlines the HKMA’s expectations for authorized institutions entering the digital asset custody space. It emphasizes the importance of a thorough risk assessment, the formulation of appropriate policies, and active oversight by the board and senior management throughout the entire process.

The guidance underscores the need for allocated resources, including manpower and expertise, to manage potential conflicts of interest and to implement effective disaster-recovery arrangements ensuring business continuity. This initiative aligns with Hong Kong’s commitment to creating a secure and regulated environment for digital asset transactions.

The recent collapses of prominent platforms such as FTX, Terra, and Three Arrows have prompted regulatory bodies, including the HKMA, to take proactive measures. The guidance specifically addresses the protection of customers by requiring firms to hold clients’ digital assets in separate accounts, distinct from the company’s own assets, in case of insolvency. The document also prohibits the utilization of client assets for the firm’s accounts.

To further mitigate risks, the HKMA urges institutions to minimize the potential loss of client digital assets due to theft, fraud, negligence, or misappropriation. Additionally, it stresses the importance of preventing delayed access or inaccessibility of client digital assets.

Among the key requirements outlined in the guidance are conducting independent systems audits, storing a substantial portion of client digital assets in cold storage, securing private keys within Hong Kong, and providing all necessary records to the HKMA upon request.

The issuance of this guidance signals Hong Kong’s commitment to fostering a secure and regulated environment for digital asset custody services, showcasing its determination to reestablish itself as a prominent player in the global crypto landscape. Industry participants and stakeholders are expected to work closely with the HKMA to ensure compliance with these standards, ultimately contributing to the territory’s aspirations of becoming a leading hub for cryptocurrency activities.

Digital Assets Desk