Hong Kong SFC Introduces Stricter Crypto Custody Rules for Enhanced Security

Hong Kong's Securities and Futures Commission (SFC) has introduced stringent new custody rules for licensed crypto exchanges, with a particular focus on enhancing the security of client assets stored in cold wallets. The updated guidance, effective immediately, mandates rigorous standards for infrastructure, oversight, and third-party custody solutions to mitigate risks associated with recent global security breaches. The SFC aims to establish a baseline for secure and transparent custody practices, reflecting Hong Kong’s broader strategy to position itself as a leading hub for virtual assets [1].

The new framework includes specific requirements such as the use of certified hardware security modules, air-gapped environments for private key management, and the implementation of 24/7 security operations centers. Withdrawals are restricted to pre-approved, whitelisted addresses, and multi-factor physical access control is strongly recommended. These measures are intended to minimize vulnerabilities and respond swiftly to unauthorized activities [2].

A notable feature of the guidance is the ban on smart contracts in cold wallet implementations. The SFC argues that excluding smart contracts from cold storage reduces potential attack vectors on public blockchains. This move contrasts with industry practices, where platforms like BitGo and Safe have integrated smart contracts into both hot and cold wallet systems for enhanced flexibility and security. The decision has drawn attention from market participants, with some viewing it as a potential hindrance to efficiency and scalability [3].

Hong Kong’s regulatory approach aligns with its broader efforts to attract institutional investment and create a robust digital asset ecosystem. In early 2024, the city launched spot Bitcoin and Ether ETFs, and in February, it released the ASPIRe roadmap to expand access while reinforcing safeguards. The recent stablecoin legislation, effective since August 1, further supports the region’s goal of establishing a comprehensive legal framework for virtual assets [4].

Analysts have observed that the new custody rules may increase operational costs for exchanges, especially those relying on decentralized custodial models. However, they also acknowledge that these measures are essential for fostering trust and attracting larger institutional players. The SFC has encouraged exchanges to balance security with user control, ensuring that asset protection does not come at the expense of accessibility [5].

The timing of these regulations is notable, following a series of high-profile cyberattacks that have compromised billions of dollars in digital assets. With the speed of illicit transfers outpacing many platforms' detection capabilities, the SFC’s move to enforce stricter custody controls underscores its proactive stance in addressing emerging threats [6].

Overall, the SFC’s latest custody requirements reflect a growing emphasis on investor protection in the crypto space. As global scrutiny of digital asset security intensifies, Hong Kong’s regulatory approach may serve as a benchmark for other markets aiming to balance innovation with risk mitigation. The updated framework not only strengthens the city’s credentials as a crypto hub but also reinforces its commitment to aligning with international standards [7].

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 Securities Regulator Tightens Crypto Custody

(https://www.blockhead.co/2025/08/15/hong-kong-securities-regulator-tightens-crypto-custody-standards/)

[4] Hong Kong SFC Tightens Crypto Custody Rules After

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

[5] Hong Kong SFC Issues Stricter Custody Standards for

(https://www.cryptotimes.io/2025/08/15/hong-kong-sfc-issues-stricter-custody-standards-for-crypto-platforms/)

[6] Hong Kong regulator tightens custody standards for crypto

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

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

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