- The Hong Kong Monetary Authority (HKMA) issued guidance for firms offering crypto custody services in Hong Kong, requiring comprehensive risk assessments and appropriate risk management policies.
- The guidance aims to set minimum standards around governance, cybersecurity, AML/CFT, liquidity, insurance and sub-custody to protect consumers and Hong Kong’s reputation.
- While welcomed by industry, some feel the requirements could be onerous for smaller firms, and that comprehensive regulation is premature given crypto’s nascency.
The Hong Kong Monetary Authority (HKMA) wants authorized institutions to undertake a comprehensive risk assessment followed by appropriate policies to manage identified risks.
Details of the Guidance
The HKMA guidance requires firms to conduct a comprehensive risk assessment before launching crypto custody services. This includes evaluating risks related to cybersecurity, anti-money laundering and counter financing of terrorism (AML/CFT), market integrity, liquidity, insurance coverage, and sub-custody arrangements.
Firms will need to implement appropriate systems and controls to manage the risks identified in the assessment. This includes having robust governance arrangements, effective cyber resilience measures, and comprehensive AML/CFT policies.
The HKMA also recommends that firms start by supporting a limited number of crypto assets, with proven track records and clear regulatory status. New or complex crypto assets should only be supported after firms gain experience.
Reasons for the Guidance
The HKMA wants to balance financial innovation and risk management. By issuing guidance, they aim to set minimum standards and expectations for firms entering this emerging area.
The measures are meant to protect consumers and maintain Hong Kong‘s reputation as a financial center. At the same time, they want to provide regulatory clarity so firms can confidently develop crypto custody services.
Industry Response
The crypto industry has welcomed the guidance, viewing it as an endorsement of crypto’s potential. Some however feel the requirements could be too onerous for smaller firms. Others argue comprehensive regulation is premature given the nascency of the asset class.
Overall the guidance provides much-needed clarity, paving the way for regulated crypto custody services in Hong Kong. How firms adapt to the new requirements will be key to wider adoption.
Conclusion
The HKMA guidance signals Hong Kong’s intent to enable crypto innovation within a risk-based regulatory framework. As one of the world’s leading financial centers, Hong Kong’s standards could influence custody requirements globally. While regulation poses challenges, it also inspires confidence – an important step for mainstream crypto adoption.
