Financial Crime World

Hong Kong Monetary Authority Updates Regulatory Framework for Virtual Assets

The Hong Kong Monetary Authority (HKMA) has issued several announcements and circulars regarding regulatory updates for institutions involved in virtual assets, tokenized products, and digital asset custodial services. The following are key highlights from these announcements:

Revised Regulatory Framework for Virtual Assets

Key Updates:

  • The HKMA aims to finalize revised rules on virtual assets by Q2 2025 and implement them no earlier than July 1, 2025.
  • Cryptoassets will be classified into two groups:
    • Group 1 (stablecoins):
      • Generally follow the existing Basel capital framework
    • Group 2 (other cryptoassets): require more conservative capital treatment

Key Requirements:

  • Institutions must comply with existing regulatory requirements and consumer protection measures when selling or distributing tokenized products.
  • Key requirements include product due diligence, risk disclosure, risk management, and custodial services.

Circular on Sale and Distribution of Tokenized Products

Guidelines for Authorized Institutions:

  • The HKMA issued a circular providing guidelines for authorized institutions (AIs) on supervisory standards for the sale and distribution of tokenized products.
  • AIs must apply these standards regardless of whether they provide custodial services as part of their virtual asset activities or as a standalone service.

Key Aspects:

  • Governance and risk management
  • Segregation of client assets
  • Safeguarding of client assets
  • Delegation and outsourcing
  • Disclosure
  • Record-keeping and reconciliation
  • Anti-money laundering and counter-financing of terrorism
  • Ongoing monitoring

Circular on Provision of Custodial Services for Digital Assets

Expected Standards:

  • The HKMA issued a circular outlining expected standards for the provision of digital asset custodial services by AIs.
  • Completed surveys must be submitted to the SFC by April 19, 2024.

Key Aspects:

  • Governance and risk management
  • Segregation of client assets
  • Safeguarding of client assets
  • Delegation and outsourcing
  • Disclosure
  • Record-keeping and reconciliation
  • Anti-money laundering and counter-financing of terrorism
  • Ongoing monitoring