Hong Kong's Central Bank Issues Guidance for Firms Offering Crypto Custodial Services

Hong Kong's central bank issued guidance for authorized institutions interested in offering custody services for digital assets as the territory attempts to reclaim its title as a crypto hub.

The Hong Kong Monetary Authority (HKMA) guidance issued Tuesday adds to the licensing regime introduced last year that gives crypto exchanges a pathway to operate in a regulated manner.

In the 11-page "Expected Standards" document, the HKMA says it wants authorized institutions to undertake a comprehensive risk assessment followed by appropriate policies to manage identified risks. The entire process should be overseen by the board and senior management.

The central bank also wants the sector to allocate adequate resources, including manpower and expertise, to custodial activities so it can manage conflicts of interest that may arise and implement effective disaster-recovery arrangements to ensure business continuity.

The collapse of FTX, Terra, and Three Arrows have led authorities to frame regulations or guidance to protect customers from inadequacies in the digital asset industry. The HKMA document says firms should hold clients' digital assets in separate accounts segregated from the firm's own assets in the event of insolvency. Companies should prevent the use of client assets for the firm's accounts.

The HKMA also wants the institutions offering custody services to minimize "the risk of loss of client digital assets due to theft, fraud, negligence or other acts of misappropriation, as well as delayed access or inaccessibility of client digital assets."

Some of the other major guidance requirements are to conduct independent systems audits, store a substantial portion of client digital assets in cold storage, ensure that private keys are secured within Hong Kong and provide all records to HKMA whenever requested.

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