Hong Kong SFC Strengthens Crypto Custody Rules, Aiming to Build Trust and Avert Security Risks

Hong Kong’s Securities and Futures Commission (SFC) has issued an immediate circular instituting rigorous new custody requirements for licensed virtual asset trading platforms (VATPs). Core mandates include air-gapped cold wallets, certified hardware security modules (HSMs), whitelisted withdrawals, and 24/7 threat monitoring. This move is part of the regulator’s broader ASPIRe strategy to position Hong Kong as Asia’s institutional-grade digital asset hub.

What the New Custody Rules Entail

The the SFC’s updated guidance enforces strict operational standards across custody operations. Platforms must now implement air-gapped cold wallet setups, prohibit smart contracts in cold wallets, and require HSM-backed transaction authorization. All withdrawals must occur only to pre-approved, whitelisted addresses. Institutions must also maintain round-the-clock security operations and deploy multi-factor physical access controls

Catalyst: Global Security Incidents and Review Findings

The regulatory update follows a targeted SFC review identifying vulnerabilities in some local exchanges’ cybersecurity frameworks. These deficiencies, combined with global crypto security breaches that resulted in over $3 billion in losses, underscored the need for a robust custody framework

Strategic Context: SFC’s Long-Term Vision

This new custody framework aligns with the SFC’s ASPIRe roadmap, launched at Consensus 2025. The ASPIRe strategy emphasizes infrastructure resilience, product expansion, and market stability to reinforce Hong Kong’s appeal to institutional investors and differentiate it from rivals like Singapore

Benefits and Trade-Offs

Strengthened custody standards enhance investor trust and institutional appeal by raising the bar for asset protection in digital markets. Some industry analysts, however, caution that the elevated compliance costs and the prohibition of smart contracts in cold wallets may hinder operational flexibility and deter smaller platforms from entering the market