Hong Kong Establishes Stricter Crypto Custody Regulations Amid Global Security Concerns

By: Eva Baxter

In a proactive move to fortify the security of digital assets, Hong Kong's Securities and Futures Commission (SFC) has unveiled stringent new regulations governing cryptocurrency custody, following a series of international security breaches. These guidelines, which have been put into effect immediately, notably include a ban on utilizing smart contracts for cold wallet management.

The SFC’s latest guidance sets forth rigorous security obligations aimed at licensed custodians managing virtual assets. These measures are part of a comprehensive strategy to bolster security frameworks and mitigate risks associated with the custody of cryptocurrencies. The regulator's requirements mandate the use of a certified hardware security module, ensuring that withdrawals are sanctioned only to predetermined whitelisted addresses. Additionally, custodians are required to maintain an operative 24/7 security operations center designed to vigilantly monitor systems, networks, wallets, and related infrastructure continuously.

The custody environment is expected to maintain an air-gapped and hardened security setting for the handling of private keys, which are used to authenticate transactions. Keys are to be generated and stored offline, thereby deterring unauthorized access and potential cyber threats. The regulator mandates “strict multi-factor physical access control” to further safeguard these critical assets.

These new protocols reflect a vigilant response to the rising number of overseas security incidences affecting digital asset platforms, prompting the SFC to establish clear custody standards. The tightening of these mechanisms emphasizes Hong Kong's commitment to safeguarding investor assets while nurturing a secure and robust virtual asset trading ecosystem.