Hong Kong Issues Strict New Crypto Custody Rules for Cold Wallets

Hong Kong has introduced sweeping new crypto custody rules, placing a firm ban on smart contracts for cold wallets and tightening security standards for custodians. The Hong Kong Securities and Futures Commission (SFC) released a circular on Friday that immediately enforces these standards, reshaping how virtual assets are stored in one of Asia’s fastest-growing financial hubs.

Stronger Custody Standards Take Effect

The SFC now requires licensed custodians to follow strict safety rules. They must use approved hardware security tools, allow withdrawals only to approved addresses, and run a 24/7 security center to watch over networks, systems, wallets, and other setups.

The guidance further requires that private key environments remain air-gapped and physically secured, with keys generated and held completely offline.

Additionally, custodians must implement strict multi-factor physical access controls to reduce insider risks and unauthorized breaches.

“These standards will also constitute core expectations for providers of Virtual Asset Custodian Services, and help to foster a consistent framework for virtual asset custody across the industry,” the circular stated.

Industry Reactions: Higher Barriers, Fewer Entrants?

Chen Wu, co-founder and CEO of Hong Kong–licensed exchange Ex.io, welcomed the move, describing it as a critical step in raising custody standards. However, she also warned that the heightened compliance requirements could become a barrier for smaller entrants, possibly leading to greater market concentration.

“Hong Kong’s stricter, institution-focused approach enhances its competitive positioning for global investors but must balance innovation and compliance costs to remain a preferred venue over Singapore, Japan, and South Korea,” Wu explained.

Ban on Smart Contracts in Cold Wallets

Perhaps the most striking development is the outright ban on smart contracts in cold wallet implementations. The SFC stated that cold wallets “should not include smart contracts on public blockchains to minimise potential online attack vectors.”

This marks a big change, since major custodians like BitGo and Safe (formerly Gnosis Safe) often use smart contracts for both hot and cold wallets. Experts believe this rule could cause pushback from companies that depend on contract-based multisig systems, some of which protect assets worth tens of billions.

Bernard Mueller, lead security engineer at blockchain security firm Sherlock, said:
“The main issue is the trade-off between the smaller risk area of a simple private key and the stronger, flexible smart contract wallets. The regulator’s doubts are reasonable.”

Hong Kong’s Positioning in Asia’s Crypto Race

This latest move comes as Hong Kong continues to cement its reputation as a regional crypto hotspot. Recently, regulators not only approved spot Bitcoin and Ether ETFs in April 2024, but they also launched the ASPIRe roadmap to widen institutional access. Furthermore, they passed a stablecoin law, effective August 2024, which includes a public registry of licensed issuers. Together, these steps highlight Hong Kong’s ongoing effort to balance growth with stricter safeguards.

However, the balance between regulatory safeguards and industry innovation remains a delicate one.

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