Hong Kong's Securities and Futures Commission has issued immediately effective custody rules banning smart contracts in cold wallets and mandating 24/7 security monitoring, responding to over $3 billion in global crypto losses during 2025's first half, including February's record $1.5 billion Bybit hack attributed to North Korean state actors.
Hong Kong's Securities and Futures Commission has implemented strict new cryptocurrency custody standards that prohibit the use of smart contracts in cold wallet implementations, marking one of the most significant regulatory responses to the escalating global crypto security crisis that has seen over $3 billion stolen in the first half of 2025.
The circular, released Friday and taking immediate effect, establishes comprehensive security requirements for licensed virtual asset trading platforms (VATPs) and sets the foundation for the city's broader digital asset regulatory framework under its ASPIRe roadmap.
The move comes as Hong Kong positions itself as Asia's premier cryptocurrency hub while confronting unprecedented security threats that have devastated exchanges worldwide.
Sweeping Security Overhaul Addresses Global Threat Landscape
The SFC's action responds directly to what Dr. Eric Yip, the commission's Executive Director of Intermediaries, described as "heightened risks globally" following a devastating wave of cyber attacks that have fundamentally altered the cryptocurrency threat landscape. Global crypto losses reached $2.47 billion across 344 incidents in the first half of 2025, with wallet-related breaches accounting for $1.7 billion across just 34 attacks.
The regulatory intervention was triggered by the SFC's own targeted review conducted earlier this year, which "revealed inadequacies in some operators' controls" among Hong Kong's licensed platforms. The assessment found critical weaknesses in exchanges' resilience to cyberattacks, including reliance on compromised third-party wallet solutions and insufficient transaction verification processes.
Most significantly, the timing coincides with February's Bybit exchange hack, which resulted in the theft of approximately $1.5 billion in Ethereum tokens by North Korean state actors in what stands as the largest cryptocurrency heist in history. The FBI officially attributed the attack to North Korea's "TraderTraitor" operation, highlighting the sophisticated capabilities of state-sponsored threat actors targeting cryptocurrency infrastructure.
Smart Contract Ban Disrupts Industry Standards
The most striking aspect of the new rules is the explicit prohibition on smart contracts in cold wallet implementations. The circular states that "cold wallet implementations should not include smart contracts on public blockchains to minimise potential online attack vectors associated with on-chain smart contracts."
This requirement directly challenges established industry practices, as smart contracts are widely used by institutional custodians for both hot and cold wallet operations. Major industry players including BitGo utilize Ethereum smart contracts optimized for custody operations, while Safe (formerly Gnosis Safe) has become a dominant smart contract-based custody solution holding $72 billion across over 25 deployed smart accounts as of Q3 2024.
Coinbase, the largest U.S. cryptocurrency exchange, previously called Safe "the leading provider" of multisig services, underscoring the potential industry resistance to Hong Kong's prohibition. The ban forces licensed platforms to redesign their custody infrastructure, potentially requiring significant operational overhauls and technology investments.
The smart contract restriction reflects concerns about on-chain vulnerabilities that have been exploited in recent attacks. The Bybit hack specifically involved manipulation of the Safe{Wallet} user interface, where hackers injected malicious JavaScript code between February 19 and 21, 2025, enabling them to intercept and redirect legitimate transactions.
Comprehensive Security Framework Implementation
Beyond the smart contract prohibition, the new standards establish a comprehensive security framework covering all aspects of cryptocurrency custody operations. Licensed platforms must implement certified hardware security modules, maintain air-gapped environments for private key operations, and establish 24/7 security operations centers for continuous monitoring of systems, networks, wallets, and infrastructure.
The regulations mandate that withdrawals can only be processed to pre-approved whitelisted addresses, with systematic transaction verification processes required for all fund movements. The environment where private keys are used to sign transactions must be air-gapped and physically secured, with keys generated and stored offline under "strict multi-factor physical access control."
Senior management accountability represents another critical component, with executives held directly responsible for safeguarding client assets. The framework requires regular independent third-party security assessments and comprehensive staff training programs to prevent social engineering attacks and other security vulnerabilities.
The standards address specific attack vectors identified in recent incidents, including the rapid movement of funds that characterized the Bybit attack. Blockchain analytics firm Global Ledger revealed that hackers moved funds in 68% of cases before attacks became publicly known, with one-quarter fully laundering stolen assets before any alerts were issued.
ASPIRe Roadmap Drives Competitive Positioning
The custody requirements form part of Hong Kong's broader ASPIRe regulatory roadmap, which stands for Access, Safeguards, Products, Infrastructure, and Relationships. The framework represents Hong Kong's strategy to become Asia's digital asset hub while differentiating itself from regional competitor Singapore, which has taken a more restrictive approach to retail cryptocurrency services.
The safeguards pillar specifically aims to "enable adaptive compliance and product frameworks focusing on security" while building infrastructure that allows traditional finance to "tap into blockchain efficiency." The custody standards will extend beyond exchanges to include over-the-counter desks and standalone custodians under Hong Kong's proposed licensing regime for custody services.
Hong Kong has licensed only 11 virtual asset platforms as of July 2025, with nine additional applications under review, implementing expedited licensing procedures since January. The government has accelerated tokenization efforts with approved products including gold tokens and money market funds, while exploring real estate and private equity tokenization through Project Ensemble infrastructure.
Stablecoin Regulation Completes Digital Asset Framework
The custody rules complement Hong Kong's comprehensive stablecoin regulation that took effect August 1, 2025, under the Stablecoins Ordinance. The regime requires stablecoin issuers to obtain licenses from the Hong Kong Monetary Authority and maintain full reserve backing with high-quality liquid assets.
Over 40 companies have submitted stablecoin license inquiries even before the regulation took effect, with major firms including JD.com, Ant Group, Standard Chartered, and Circle publicly stating application intentions. The stablecoin framework positions Hong Kong to challenge the dominance of U.S. dollar-based stablecoins in Asian markets by allowing Hong Kong dollar and Chinese yuan-backed alternatives.
HKMA Chief Executive Eddie Yue confirmed that only a small number of stablecoin licenses will be granted initially despite engaging with dozens of interested parties, maintaining quality control while building the regulatory foundation for broader market development.
Industry Response and Compliance Challenges
The immediate implementation of custody standards presents significant operational challenges for licensed platforms, particularly the smart contract prohibition that requires fundamental infrastructure changes. Exchanges must develop alternative custody solutions that maintain security while complying with the new restrictions on blockchain-based smart contracts.
The requirements align Hong Kong's standards with traditional financial custodian regulations, including capital adequacy, cybersecurity, and asset segregation standards. However, the cryptocurrency-specific restrictions, particularly around smart contracts, create unique compliance burdens not faced by traditional financial institutions.
Market observers note that while the short-term operational challenges are significant, the long-term benefits include enhanced investor confidence and reduced regulatory arbitrage risks. The clear regulatory framework provides certainty for institutional investors considering cryptocurrency exposure through Hong Kong-licensed platforms.
The rules also create competitive advantages for platforms that can demonstrate compliance with the enhanced security standards, potentially attracting institutional capital seeking regulated cryptocurrency exposure with appropriate safeguards.
Global Context and Regulatory Trends
Hong Kong's action occurs within a broader global trend toward strengthened cryptocurrency regulation following high-profile security incidents. The response parallels regulatory tightening in other jurisdictions, including the U.S. GENIUS Act for stablecoins and the European Union's Markets in Crypto-Assets (MiCA) regulation.
The North Korean threat specifically has prompted coordinated international responses, with U.S. authorities attributing over $1.6 billion or 70% of total cryptocurrency thefts in 2025's first half to DPRK-linked groups. The sophisticated actors typically plan movements to coincide with normal transaction activity, striking during organizational staff shifts when vigilance may be reduced.
Recovery efforts have returned only $187 million through law enforcement, white-hat arrangements, and exchange cooperation, representing just 4.2% of stolen funds. The low recovery rate underscores the importance of preventive security measures rather than post-incident remediation.
Physical violence against cryptocurrency holders has also escalated, with 32 "wrench attacks" reported globally in 2025, putting the year on pace to exceed 2021's record. The concerning trend has reinforced regulatory focus on custody security and institutional-grade safeguards.
Market Impact and Future Implications
The immediate market impact includes operational adjustments for Hong Kong-licensed platforms and potential consolidation as smaller operators struggle with compliance costs. However, the long-term effect aims to solidify Hong Kong's position as a trusted jurisdiction for institutional cryptocurrency investment.
The enhanced standards create barriers to entry that may benefit established platforms capable of meeting the security requirements while potentially deterring less sophisticated operators. This market structure aligns with Hong Kong's goal of attracting high-quality institutional participants rather than facilitating speculative retail trading.
The prohibition on smart contracts in cold wallets may influence global custody practices if other jurisdictions adopt similar restrictions. However, it could also create competitive disadvantages for Hong Kong platforms if the limitations significantly impact operational efficiency compared to less restrictive jurisdictions.
The comprehensive framework positions Hong Kong as having among the world's strictest cryptocurrency custody standards, potentially attracting institutional investors seeking maximum security assurances while deterring less sophisticated market participants.
As Hong Kong continues implementing its digital asset regulatory agenda, the custody standards represent a critical foundation for building institutional confidence in the city's cryptocurrency infrastructure. The success of this approach in attracting institutional capital while maintaining security will likely influence regulatory developments across the Asia-Pacific region and globally.