Hong Kong Tightens Grip on Crypto new Rules for Digital Asset Custody

Hong Kong Tightens Grip on Crypto new Rules for Digital Asset Custody

Feb 20 Tech Standard

Hong Kong's central bank, the HKMA, has issued detailed guidance for institutions offering digital asset custody services. This marks a significant step towards regulating the crypto industry and regaining the city's status as a crypto hub.

The 11-page document outlines strict "Expected Standards" for authorized institutions, emphasizing robust risk management, adequate resources, and effective disaster recovery plans. This comes in the wake of high-profile collapses like FTX and Terra, highlighting the need for stricter oversight to protect investors.

One key requirement is the segregation of client assets. Crypto holdings must be kept in separate accounts, inaccessible to the firm's own finances, even in insolvency. This safeguards against misuse and provides greater security for investors.

Additionally, the HKMA mandates minimizing loss risks. This includes theft, fraud, negligence, and delayed access to assets. Implementing cold storage for a substantial portion of assets and securing private keys within Hong Kong further enhance digital security.

Transparency and accountability are also emphasized. Institutions must be prepared to conduct independent systems audits and provide the HKMA with necessary records upon request. These measures ensure compliance and help regulators monitor potential risks.

This guidance builds upon last year's licensing regime for crypto exchanges, creating a comprehensive framework for regulating the industry. While Hong Kong is not aiming for a free-for-all, it seeks to attract responsible players and establish itself as a trusted center for digital asset activity.

The success of these regulations will depend on effective implementation and enforcement. Nonetheless, this is a positive step towards creating a more secure and robust environment for investors and fostering responsible innovation in the Hong Kong crypto space.


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