The Hong Kong Securities and Futures Commission (SFC) has immediately released guidance on cryptocurrency custody standards, introducing comprehensive security requirements and prohibiting the use of smart contracts in cold wallet implementations.
In a circular released on Friday, the regulator established detailed control measures for licensed custodians of virtual assets. These measures include the requirement to use certified hardware security modules, allowing fund withdrawals only to whitelisted addresses, and maintaining a 24/7 security operations center to monitor systems, networks, wallets, and infrastructure.
The environment for signing transactions with private keys should also be isolated from the outside world and physically secured, with the generation and storage of private keys conducted offline. The regulator recommends "strict multi-factor physical access controls."
"Looking ahead, these standards will also form the core expectations for virtual asset custody service providers and help establish a consistent virtual asset custody framework across the industry," the circular stated.
One of the most notable changes is the prohibition of using smart contracts in cold wallets. The circular noted, "Cold wallet implementations should not include smart contracts on public blockchains to minimize potential online attack vectors associated with on-chain smart contracts."
Smart contracts are widely used by institutional custodians for both hot and cold wallets. For example, BitGo utilizes Ethereum smart contracts that are optimized for hot and cold wallets and details its smart contract multi-signature model for account-based chains.
Safe, formerly known as Gnosis Safe, is another smart contract-based custody solution, with a report from Messari stating that as of the third quarter of 2024, it holds $72 billion across more than 25 deployed smart accounts.
The U.S.-based publicly listed cryptocurrency exchange Coinbase referred to Safe as "the leading provider of multi-signature services" in March 2024, highlighting the potential industry backlash that Hong Kong's move may provoke.
Hong Kong is becoming a crypto hotspot in Asia by rapidly advancing rules and market access. The regulator approved and launched spot Bitcoin and Ethereum ETFs in April 2024, providing institutions with a compliant exposure method, and established the ASPIRe roadmap in February to enhance custody, product, and market structure safeguards while expanding access.
At the same time, Hong Kong continues to expand its list of licensed exchanges and has implemented a complete regulatory framework for stablecoins. In the second half of 2024, more virtual asset trading platforms are expected to obtain licenses, and the Hong Kong stablecoin law officially took effect on August 1, with a public registry for licensed issuers set to launch soon.
Related: Garantex reportedly prepared "regulatory evasion plans" in response to authorities' shutdown actions
Original article: “Hong Kong Introduces New Regulations for Cold Wallet Crypto Asset Custody, Regulatory Standards Upgraded”
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