Mongolia -- Custody Regulations Regulatory Overview

Mongolia's regulatory framework for cryptocurrencies and digital assets is still developing, and specific, detailed regulations on digital asset custody are not as comprehensive or granular as in major global financial centers. The primary focus of regulation to date has been on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations for Virtual Asset Service Providers (VASPs).

Here's a breakdown based on available public information:

Overview of Mongolian Crypto Regulation

Historically, the Bank of Mongolia (BoM) has issued warnings regarding the risks of cryptocurrencies, noting that they are not legal tender and their use for payments is discouraged. However, recognising the global trend and FATF recommendations, Mongolia has begun to establish a framework for Virtual Asset Service Providers (VASPs).

The primary regulatory body for non-banking financial services, including virtual assets, is the Financial Regulatory Commission (FRC) of Mongolia.

Key Regulatory Frameworks Affecting Custody

The most relevant legislation currently impacting entities that provide virtual asset custody services in Mongolia is the Law on Anti-Money Laundering and Combating Terrorism Financing (AML/CFT Law), which was updated to include virtual assets and VASPs. This aligns with the Financial Action Task Force (FATF) recommendations for regulating VASPs.

1. Custodial License Requirements

• No specific "custody license" exists distinct from a broader VASP license/registration.

• Entities providing virtual asset services, which would include custody, are generally expected to comply with the AML/CFT Law. This means they are likely classified as Virtual Asset Service Providers (VASPs).

• VASP Registration/Licensing: Under the AML/CFT framework, VASPs are subject to registration or licensing requirements with the FRC and are obligated to implement robust AML/CFT programs. This includes customer due diligence (CDD), record-keeping, and suspicious transaction reporting (STRs).

• Specific Legal Basis: The amendments to the Law on Anti-Money Laundering and Combating Terrorism Financing (date of amendment for virtual assets is generally understood to be around 2020-2021) are the primary source for VASP obligations. Detailed regulations or implementing acts by the FRC would further specify the registration process and requirements.

  • FRC Website (English): https://www.frc.mn/ (While the English site provides general information, specific legislative texts might be more readily available in Mongolian or through legal counsel.)
  • Bank of Mongolia (English): https://www.mongolbank.mn/ (For general warnings and policy statements, though FRC is the VASP regulator).

2. Segregation of Client Assets Rules

• Limited Specificity: Current public information does not indicate highly specific, legally mandated rules for the segregation of client digital assets from the custodian's own assets, such as those found in highly developed jurisdictions (e.g., trust structures, insolvency-remote vehicles).
• General Fiduciary Duty/Best Practice: While not explicitly mandated by crypto-specific law, general principles of financial regulation and good corporate governance would imply that client assets should be clearly identifiable and separated from operational funds. However, specific legal mechanisms to ensure this in the event of custodian insolvency are unlikely to be detailed in the existing AML/CFT-focused framework.

3. Insurance/Bonding Requirements

• No Specific Mandates: There are no publicly known specific regulatory mandates in Mongolia for digital asset custodians to hold insurance or bonding for potential losses or hacks.
• Market Practice: Any such requirements would typically emerge as the market matures and comprehensive prudential regulations are introduced.

4. Cold Storage Mandates

• No Specific Mandates: Mongolian regulations do not currently mandate the use of cold storage (offline storage) for a specific percentage or amount of client digital assets.
• Operational Security: While cold storage is considered a best practice for security in the crypto industry, its specific implementation details are typically left to the operational discretion and risk management policies of the VASP, rather than being a direct regulatory requirement.

5. Qualified Custodian Definitions

• No Dedicated Definition: Mongolia's regulatory framework does not appear to have a specific, separate legal definition of a "qualified custodian" for digital assets, distinct from the broader definition of a "Virtual Asset Service Provider (VASP)" or other regulated financial entities.
• VASP as the Regulated Entity: Any entity providing custody services for virtual assets would fall under the VASP definition and be subject to the corresponding AML/CFT obligations. The FRC would likely assess the fitness and propriety of such an entity during the registration/licensing process.

6. Pending Custody Legislation

• Ongoing Development: The FRC has expressed intentions to further develop the regulatory framework for virtual assets to promote a secure and transparent market environment. This generally implies a continuous process of legislative and regulatory refinement.
• No Specific "Custody Law" Announced: As of now, there is no public announcement of distinct, pending legislation solely focused on digital asset custody, separate from the broader VASP and AML/CFT framework. Any future developments are more likely to come in the form of amendments to existing laws, new implementing regulations issued by the FRC, or a more comprehensive virtual asset law that might include specific custody provisions.
• FATF Influence: Mongolia, as a country subject to FATF standards, will continue to face pressure to align its VASP regulations with global best practices, which could eventually lead to more detailed requirements for custody.

Conclusion

Mongolia's digital asset regulatory landscape is still in its nascent stages, primarily driven by AML/CFT concerns to comply with international standards set by the FATF. While entities performing virtual asset custody functions are expected to operate as VASPs and adhere to AML/CFT requirements overseen by the FRC, there are currently no highly specific, detailed regulations concerning:

• Dedicated custodial licensing distinct from broader VASP registration.
• Explicit rules for the segregation of client assets.
• Mandatory insurance or bonding.
• Specific cold storage mandates.
• A distinct legal definition of a "qualified custodian."

The framework is likely to evolve, potentially introducing more granular requirements as the market matures and regulatory capacity develops. For the most up-to-date and specific information, consulting directly with the Financial Regulatory Commission of Mongolia or legal professionals specializing in Mongolian financial law is recommended.