Hong Kong Imposes New Crypto Custody Standards

Hong Kong’s Securities and Futures Commission (SFC) has enforced stringent new standards for crypto custody focusing on cold wallets for licensed exchanges. The rules mandate using certified hardware security modules and 24/7 security operations centers.

The SFC, led by Dr. Eric Yip, aims to enhance Hong Kong’s digital asset ecosystem by banning smart contracts in cold wallets and imposing rigorous storage and withdrawal practices. Licensed virtual asset trading platforms are required to comply with these standards.

The immediate effects may compel exchanges to shift to compliant security practices, potentially increasing their operational costs. Licensed exchanges in Hong Kong, especially those managing ETH, BTC, and altcoins, are primarily affected by the new custody requirements.

These changes aim to boost confidence among institutional investors, aligning with global security norms. Financial impacts include shifts in liquidity to compliant platforms and pauses in smart contract-based staking products due to non-smart contract storage mandates.

While no immediate funding allocations accompany these rules, the longer-term goal is to attract institutional capital by ensuring custody security. Increased operational costs for exchanges may result in financial implications, impacting market flows.

Potential outcomes include enhanced trust in licensed platforms and a contrast between traditional custody and smart contract reliance. Past regulatory actions prompted by similar custodial challenges in regions like Singapore indicate the possibility of initial disruptions followed by stability.

Dr. Eric Yip, Executive Director of Intermediaries at SFC, stated, “In order for Hong Kong to foster a competitive, sustainable and trusted digital asset ecosystem, client asset protection must always remain a top priority for all licensed VATPs, which can leverage the SFC’s practical guide to step up their custody practices especially amid heightened risks globally.”