The Hong Kong Monetary Authority (HKMA) has released guidelines for authorised institutions interested in providing staking services for virtual assets (VAs). These measures, introduced via a circular, aim to ensure proper internal controls, transparency, and risk management.
The move is in light of the growing adoption of digital assets and proof-of-stake blockchain protocols.
Staking services involve committing or locking client-owned virtual assets to support blockchain validation processes, generating rewards in return. The HKMA’s guidelines apply to authorised institutions and their locally incorporated subsidiaries offering these services through custodial arrangements.
The HKMA outlined several key requirements for authorised institutions to implement robust policies and controls in their operations.
Firstly, authorised institutions must establish strong internal controls to ensure the possession or control of client virtual assets that are staked. They need to implement effective measures to prevent errors, safeguard staked assets, and address operational risks or conflicts of interest.
Additionally, operational rules governing staking services must be clearly defined and enforced to maintain transparency and efficiency.
Secondly, the banks must also provide clear and comprehensive information about their staking services. This includes details on the virtual assets supported, any third-party involvement, applicable fees, lock-up periods, reward payout processes, and custodial arrangements.
Furthermore, the banks must disclose potential risks to their clients, such as slashing (penalties for validator misconduct), lock-up periods, technical issues, hacking, and legal uncertainties surrounding staking.
Transparency is crucial to ensure clients are well informed about the nature and risks of staking services.
Finally, authorised institutions must conduct thorough due diligence when selecting blockchain protocols for staking services. They must ensure their systems can support the chosen protocols and mitigate any associated risks.
If outsourcing to third-party providers, authorised institutions must carefully evaluate the provider’s expertise, security infrastructure, and track record in blockchain validation to ensure the integrity and reliability of the services offered.
As HKMA issues staking guidelines hereon, these measures become key to ensuring trust and regulatory compliance in the fast-changing virtual asset landscape.
The HKMA has advised authorised institutions to establish robust systems, policies, and controls before offering staking services. The banks are also encouraged to consult with HKMA before launching such operations.
To support testing and compliance, the HKMA’s Supervisory Incubator for Distributed Ledger Technology is available for banks exploring staking-related services.
As HKMA issues staking guidelines, the initiative reinforces Hong Kong’s commitment to fostering innovation in digital finance while ensuring strong regulatory oversight to protect customers and the financial system.
Source of image: Edited from Freepik