On August 15, 2025, the Hong Kong Securities and Futures Commission issued comprehensive guidance establishing stringent standards for virtual asset custody. Licensed custodians of digital assets are barred from incorporating smart contracts into cold wallet solutions. The new directive mandates use of certified hardware security modules, implementation of preapproved withdrawal address controls and operation of a dedicated security operations center active twenty-four hours a day.
The prohibition of on-chain programmable code within offline key storage reflects concerns over smart-contract vulnerabilities. Previous multisignature frameworks deployed by institutional custodians relied on blockchain-based scripts for transaction validation. The SFC guidance requires key signing procedures to occur within physically secured, air-gapped environments to minimise exposure to remote exploitation attempts.
Custodians must enforce multi-factor physical access controls at secure sites. Entry and exit protocols are required to utilise tamper-evident mechanisms, with access logs maintained for audit purposes. Hardware security modules must comply with international certifications such as FIPS 140-2 and undergo periodic external reviews. Strict documentation of all key management processes is also prescribed.
Withdrawal functions must be restricted to whitelisted blockchain addresses approved through internal governance procedures. All transaction requests are subject to dual validation by separate operational teams. Continuous monitoring of network traffic, system events and wallet activity is to be conducted by the security operations center, with incident response protocols defined for suspected anomalies.
Industry feedback highlights potential challenges for smaller custodians facing increased compliance costs. Larger providers possessing existing infrastructure may adapt more effectively, possibly leading to consolidation within the custody service market. Analysts suggest that standardisation of requirements could also foster greater interoperability across regional custody frameworks.
The regulatory initiative follows Hong Kong’s approval of spot Bitcoin and Ether exchange-traded funds in April 2024 and implementation of a comprehensive stablecoin regime in early August 2025. Hong Kong’s approach contrasts with risk-based schemas adopted by other jurisdictions, such as Australia and the United Kingdom, which allow smart-contract architectures under defined security controls.
Adoption of the guidance is mandatory for custodians authorised under the Virtual Asset Service Provider licensing regime. Enforcement measures include periodic inspections and potential sanctions for noncompliance. The SFC indicated that future revisions may extend criteria to include hot wallet protocols and cross-border custody operations.
Market participants anticipate that the heightened security framework will bolster confidence among institutional investors seeking regulated custody solutions. The SFC guidance is expected to influence global best practices, contributing to broader adoption of standardized controls and reinforcing Hong Kong’s competitive position in virtual asset markets.
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