Hong Kong SFC Imposes Strict Crypto Custody Rules to Boost Security and Attract Institutions

Hong Kong’s Securities and Futures Commission (SFC) has implemented stringent new cryptocurrency custody rules, aiming to enhance the security of client digital assets and reinforce the city’s ambitions as a global digital asset hub. The updated regulations, effective immediately, apply to all licensed crypto exchanges and mandate the use of certified hardware security modules, air-gapped environments for private key management, and 24/7 security operations centers. Additionally, withdrawals must now be directed only to pre-approved, whitelisted addresses, and multi-factor physical access controls are strongly encouraged [1].

A notable restriction under the new framework is the prohibition of smart contracts in cold wallet implementations. This move is intended to minimize potential attack vectors on public blockchains, although it contrasts with industry practices where smart contracts have been used to enhance flexibility and security in cold wallet systems. The decision has generated some debate within the market, with concerns raised about the impact on efficiency and scalability [2].

The SFC emphasizes the responsibility of senior management in enhancing custody controls, as part of broader efforts to address recent global security breaches and attract institutional investment. These rules follow a series of regulatory initiatives in the first half of 2025, including the launch of spot Bitcoin and Ether ETFs, the release of the ASPIRe roadmap, and the implementation of stablecoin legislation. Analysts suggest that while the rules may increase operational costs for exchanges—especially those using decentralized custodial models—they also have the potential to build trust and support institutional adoption [3].

The timing of the regulations is significant, as global cyberattacks on digital assets have surged in recent months. Hong Kong’s proactive approach reflects its commitment to mitigating emerging threats and protecting investors. The SFC has encouraged exchanges to balance security with user control, ensuring that asset protection does not compromise accessibility. The updated framework is expected to influence custody practices globally, setting a precedent for regulatory frameworks that seek to balance innovation with risk mitigation [4].

The SFC remains central in shaping the future of the digital asset landscape, with the new rules reinforcing Hong Kong’s credibility and alignment with international standards. As the regulatory environment continues to evolve, these measures signal a stronger commitment to investor protection and market integrity in the crypto space [5].

Sources:

[1] Hong Kong SFC Tightens Custody Standards for Crypto

(https://www.coindesk.com/policy/2025/08/15/hong-kong-regulator-tightens-custody-standards-for-licensed-crypto-exchanges)

[2] SFC Unveils Robust New Standards for Enhanced Security

(https://www.bitget.com/news/detail/12560604913660)

[3] Hong Kong SFC Tightens Crypto Custody Rules After

(https://cryptonews.com/news/hong-kong-sfc-tightens-crypto-custody-rules-after-global-security-incidents/)

[4] Hong Kong regulator tightens custody standards for crypto

(https://www.coinlive.com/en/news-flash/871802)

[5] Tough New SFC Custody Rules Hit Hong Kong Crypto

(https://blockonomi.com/tough-new-sfc-custody-rules-hit-hong-kong-crypto-exchanges/)