Hong Kong Bids to Strengthen Crypto Security With Cold Wallet Restrictions and 24/7 Monitoring Mandate

Hong Kong’s Securities and Futures Commission (SFC) has introduced immediate new custody requirements for digital asset platforms, banning the use of smart contracts in cold wallets and mandating continuous monitoring systems to enhance security and investor protection. The updated compliance standards, issued as a response to global cybersecurity threats, apply to all licensed virtual asset trading platforms operating in the region. The rules require real-time reconciliation of client assets, whitelisted withdrawal addresses, and stringent controls over cold wallet transactions to mitigate the risk of unauthorized access and asset loss [1].

The SFC highlighted that the move follows a review identifying significant gaps in cybersecurity preparedness among virtual asset service providers. It cited international incidents where custody vulnerabilities led to substantial investor losses, emphasizing that client asset protection remains a top priority for the development of Hong Kong’s digital asset ecosystem [1]. Key weaknesses identified include compromised third-party wallet solutions and inadequate access controls over approval devices.

Under the new framework, cold wallet implementations are now restricted from using smart contracts, which the SFC described as potential online attack vectors. The regulator also made it mandatory for platforms to implement unauthorized access detection systems and to subject any changes to cold wallet whitelists to rigorous oversight. Each transaction must be systematically verified to ensure only authorized transfers occur, with platforms required to maintain real-time reconciliation of on-chain client assets with ledger balances [1].

The policy shift reflects a broader strategy by Hong Kong to position itself as a regional hub for digital assets. Earlier this year, the Hong Kong Monetary Authority introduced supervisory arrangements for banks exploring blockchain technology, while the territory passed the Stablecoin Ordinance in May, requiring licensing for all entities issuing stablecoins pegged to the Hong Kong dollar. In June, the SFC announced plans to allow digital asset derivatives trading for professional investors, further expanding the fintech landscape [1].

These developments are underpinned by the “Policy Statement 2.0 on the Development of Digital Assets in Hong Kong,” released in June, which outlined the LEAP framework to promote stablecoin regulation and asset tokenization while ensuring comprehensive oversight of virtual asset service providers. Hong Kong officials have stressed that the enhanced regulatory scrutiny supports the long-term growth of the industry rather than hindering it [1].

Virtual asset trading platforms now face immediate compliance with these new technical mandates. Cold wallets, which store cryptocurrency offline to reduce hacking risks, are central to the updated custody rules. Smart contracts, which are automated programs on blockchains, are prohibited in such environments. The requirement for 24/7 monitoring underscores the regulator’s emphasis on transparency and real-time response to security threats [1].

The regulatory environment in Hong Kong continues to evolve, balancing innovation with risk management. As the global digital asset sector grows, the SFC’s approach highlights a focus on investor protection and infrastructure resilience, reinforcing Hong Kong’s ambition to lead in the digital finance space [1].

Source: [1] Hong Kong Bans Smart Contracts in Cold Wallets, Mandates 24/7 Monitoring (https://coinmarketcap.com/community/articles/68a5852c6f6d3f0f79f5b5ba/)