Hong Kong’s Securities and Futures Commission (SFC) has swiftly enacted new directives concerning the secure storage of cryptocurrencies. These updated guidelines introduce strict security protocols and prohibit the use of smart contracts within offline (“cold”) wallet systems.
In a formal communication made public on Friday, the SFC detailed specific mandatory controls for custodians holding digital assets. These stipulations include the use of certified hardware security modules, limiting withdrawals to pre-approved (“whitelisted”) addresses only, and maintaining a round-the-clock security operations center to vigilantly monitor systems, networks, digital wallets, and the underlying infrastructure.
The environment used for private key management for transaction signing should be isolated (air-gapped) and physically protected, with keys created and maintained offline. The SFC advised employing “stringent multi-factor physical access control.”
According to the SFC’s published document, “Moving forward, these regulations will serve as essential benchmarks for Virtual Asset Custodian Service providers, establishing a consistent framework for the safekeeping of virtual assets across the industry.”
Related: Animoca and Standard Chartered Partner on Hong Kong Stablecoin Initiative
Smart Contracts Banned in Cold Storage
A notable alteration involves the prohibition of smart contracts within cold wallet setups. The document explicitly states that “cold wallet infrastructures should avoid incorporating smart contracts on public blockchains to curtail potential online threats originating from on-chain smart contract vulnerabilities.”
Smart contracts are commonly utilized by institutional custodians in both “hot” (online) and “cold” wallets. BitGo, for instance, employs Ethereum-based smart contracts designed to be used with both hot and cold storage solutions, and previously detailed its multi-signature smart contract strategy for account-based blockchains.
Safe, previously known as Gnosis Safe, offers another custody solution built upon smart contracts. A Messari report indicated that Safe held $72 billion across more than 25 deployed smart accounts as of the third quarter of 2024.
Coinbase, a publicly traded cryptocurrency exchange based in the US, acknowledged Safe as the “leading provider” of multi-signature services in March 2024, highlighting the likely industry opposition to Hong Kong’s new regulation.
Related: Hong Kong Stablecoin Market Reacts to New Regulations; Experts Anticipate Adjustment
Hong Kong: A Growing Crypto Hub
Hong Kong is rapidly becoming a premier crypto center in Asia through proactive regulation and market accessibility. Regulatory bodies have authorized and launched spot Bitcoin and Ether ETFs in April 2024, supplying institutions with a compliant pathway to digital asset exposure. The SFC also released the ASPIRe roadmap in February, aiming to broaden access while enhancing protections across custody, product offerings, and market structures.
Concurrently, this special administrative region of China is expanding its list of licensed exchanges and solidifying a comprehensive stablecoin framework. Several new licenses for virtual asset trading platforms were issued recently. Hong Kong’s stablecoin law took effect on August 1st, and a publicly accessible registry of licensed issuers is anticipated.
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