Hong Kong Tightens Crypto Custody Rules to Bolster Investor Protection

Hong Kong has introduced a comprehensive set of mandatory custody standards for licensed virtual asset trading platforms (VATPs), aiming to address growing concerns over the security of client assets in the wake of high-profile failures and cyberattacks abroad.

The Securities and Futures Commission (SFC) issued the new framework on August 15, outlining stringent governance, infrastructure, and operational requirements designed to safeguard digital assets. The measures follow a targeted review by the regulator, which revealed that many local operators maintained only basic protective measures, leaving vulnerabilities that could expose client funds to theft or loss.

"Multiple incidents overseas have underscored the need for VATPs to rigorously evaluate and strengthen their custody arrangements," the SFC stated. "Our new standards are intended to close critical gaps and ensure resilience against emerging cybersecurity threats."

Key requirements of the framework include:

The regulations take immediate effect, with VATPs expected to evaluate and enhance their custody frameworks accordingly. The move builds on Hong Kong’s recent efforts to position itself as a leading hub for digital assets, which include the implementation of its first stablecoin licensing regime earlier this month and updated policy guidelines for the sector.

By enforcing these new standards, the SFC aims to strengthen investor trust and solidify Hong Kong’s standing as one of Asia’s most crypto-friendly jurisdictions while setting a higher benchmark for operational integrity in the digital asset industry.

• Senior management accountability:Each VATP must appoint a designated Responsible Officer or Manager-in-Charge to oversee custody operations, ensuring strong governance, risk management, and compliance.
• Enhanced cold wallet security:Private keys must be generated offline using certified hardware security modules (HSMs), supported by secure backups, rigorous provider due diligence, and regular certification updates. Public smart contracts are discouraged to minimize attack vectors.
• Withdrawal controls:Asset withdrawals can only be sent to pre-approved addresses, with multiple verification layers, segregation of duties, and the use of air-gapped devices to prevent unauthorized transfers or insider abuse.
• Third-party custody oversight:Platforms relying on external wallet providers must enforce equivalent security standards, supported by code audits, disaster recovery drills, and tightly restricted administrative access.
• Continuous threat monitoring:VATPs must operate a Security Operations Centre capable of real-time incident tracking, balance verification, and adaptive alerting in response to evolving risks.
• Staff training:All personnel involved in custody functions must receive targeted security education, including phishing simulations and safeguards against blind-signing.