With these measures, which were rolled out through a circular, the regulator intends to ensure suitable internal controls, transparency, and risk management. Additionally, the HKMA’s initiative comes amid scaling the adoption of digital assets and proof-of-stake blockchain protocols. Staking services include committing or locking client-owned virtual assets to assist blockchain validation processes, in return creating rewards.
The HKMA’s newly released guidelines apply to authorised institutions and their locally integrated subsidiaries providing these solutions through custodial arrangements.
Authorised institutions are required to develop solid internal controls to ensure the possession or control of client virtual assets that are staked. Also, they need to implement measures to mitigate errors, keep staked assets secure, and address operational risks or conflicts of interest;
Banks must offer clear and comprehensive information about the staking services that they offer, including details on the virtual assets supported, any third-party involvement, applicable fees, lock-up periods, reward payout processes, and custodial arrangements;
Financial institutions are required to disclose any potential risks to their clients, including slashing, lock-up periods, technical issues, hacking, and legal uncertainties regarding staking;
Authorised institutions must conduct due diligence when selecting blockchain protocols for staking services, with them needing to ensure that their systems can facilitate the picked protocols and remove any associated risks.
Furthermore, the HKMA recommended authorised institutions to develop advanced systems, policies, and controls before providing staking services. Also, the regulator encouraged banks to consult with it prior to launching these operations. To facilitate testing and compliance, the HKMA’s Supervisory Incubator for Distributed Ledger Technology can be leveraged by banks to explore staking-related services.
The move highlights the HKMA’s commitment to supporting advancement in digital finance while also ensuring regulatory oversight to safeguard consumers and the overall financial system.
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