Hong Kong SFC Tightens Crypto Custody Rules Amid Rising Security Threats

Hong Kong’s Securities and Futures Commission (SFC) has imposed stricter custody requirements on licensed virtual asset trading platforms (VATPs) in response to rising global security threats and vulnerabilities in the digital asset space. The new rules, issued in late August 2025, focus on improving the security of client assets through enhanced protocols for cold wallet storage, real-time threat monitoring, and oversight of third-party custodians [1]. These measures are part of a broader initiative to establish a robust and transparent digital asset framework in the region.

The SFC’s revised standards require licensed platforms to implement certified hardware security modules, air-gapped private key storage, and continuous monitoring via 24/7 security operations centers. The regulator has also prohibited the use of smart contracts within cold wallet systems, a decision that has drawn mixed reactions from the industry. While smart contracts are often used to automate and streamline operations, the SFC argues that their exclusion from cold storage reduces potential attack surfaces on public blockchains [2]. The regulator has emphasized that these actions are necessary to protect client assets and enhance overall system resilience.

The new custody framework follows a comprehensive review of licensed platforms, which revealed weaknesses in cybersecurity controls. The SFC cited a sharp rise in crypto-related security breaches as a key driver behind the regulatory overhaul. In July 2025 alone, losses from hacks reached $142 million, marking a 27% increase compared to the previous month. The regulator has stressed the importance of continuous vigilance in safeguarding digital assets, particularly in light of recent global incidents involving significant client losses due to inadequate security practices [3].

The timing of the regulations is notable, coinciding with a series of strategic moves to develop Hong Kong’s digital asset ecosystem. Alongside the new custody rules, a licensing regime for stablecoin issuers was launched on August 1, 2025. These efforts are aligned with the broader ASPIRe roadmap aimed at expanding access to digital assets and promoting institutional adoption. The introduction of spot Bitcoin and Ether exchange-traded funds in early 2024 also highlights the SFC’s commitment to fostering a regulated and secure environment for crypto trading [4].

Industry analysts have noted that the stricter custody rules may increase operational costs for exchanges, especially those using decentralized custodial models. However, they also acknowledge that such measures are essential for building trust among institutional investors and encouraging long-term investment. The SFC has reiterated the importance of balancing security with user accessibility, ensuring that enhanced protections do not hinder the usability of digital assets [5].

These developments underscore a growing global focus on investor protection in the digital asset sector. By reinforcing custody standards and aligning with international best practices, Hong Kong aims to solidify its position as a leading center for crypto innovation and regulation. The SFC’s proactive approach reflects its broader strategy to address emerging risks and maintain the integrity of the region’s financial markets [6].

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] Hong Kong Securities Regulator Tightens Crypto Custody

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

[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 SFC Issues Stricter Custody Standards for

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

[5] Hong Kong regulator tightens custody standards for crypto

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

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

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