Provision of Custodial Services for Digital Assets

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Authored by: Simon Deane and Kelly Poon

The HKMA has issued guidance on the provision of custodial services for digital assets by AIs in response to the increasing interest in digital asset-related activities on 20 February 2024. The objective of this guidance is to ensure the adequate safeguarding and proper management of client digital assets held by AIs.

For the purposes of the guidance, “digital assets” are defined as assets that primarily rely on cryptography and distributed ledger technology, and include virtual assets as defined in section 53ZRA of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, as well as tokenized securities and other tokenized assets.

Taking inspiration from international standards and practices, the HKMA’s guidance establishes expected standards which allow AIs the flexibility to implement operational arrangements based on the nature, features, and risks associated with relevant digital assets under their custody. These standards apply to AIs regardless of whether client digital assets are acquired through intermediation in virtual asset (VA)-related activities, the distribution of tokenized products, or the provision of standalone custodial services. The expected standards cover the following key areas:-

(i) governance and risk management;
(ii) segregation of client digital assets;
(iii) safeguarding of client digital assets;
(iv) delegation and outsourcing;
(v) disclosure;
(vi) anti-money laundering and counter-financing of terrorism; and
(vii) ongoing monitoring.

AIs and their subsidiaries planning to offer digital asset custodial services must engage with the HKMA in advance and demonstrate compliance with the expected standards. Existing AIs or relevant subsidiaries already involved in such activities should also review their systems and controls and inform the HKMA of their compliance by 20 August 2024.

For more detailed information, please refer to the relevant HKMA circular by clicking here.

Key Contacts

Simon Deane

Consultant | Banking and Finance

Email or call +852 2825 9209