The Hong Kong government has taken a pivotal step toward solidifying its position as a global digital asset hub with the recent release of the Policy Statement on Development of Digital Assets in Hong Kong 2.0. Following this, the Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC) jointly issued a consultation paper titled Proposed Legislative Framework for Regulating Virtual Asset Custody Services. The document outlines a licensing regime for virtual asset trading and custody service providers, with public consultation open until August 29.
As a leading self-custody digital asset solutions provider in Asia, Safeheron has conducted an in-depth analysis of the proposed framework, offering insights into its implications for market participants.
Understanding Custody Models, Regulatory Scope, and Compliance Standards
The consultation paper defines virtual asset custody services through two core activities:
- Holding digital assets on behalf of clients as part of a business operation
- Managing tools that enable asset transfer, including private key management
This definition targets service providers that control or have access to clients’ digital assets—particularly centralized custodians who manage private keys. The proposed regulation focuses on three primary custody models:
- Centralized Custody Services: Exchanges or custodians that fully hold client assets, such as retail users storing funds directly on exchange platforms.
- Third-Party Institutional Custody: Independent custodians offering services to exchanges, payment platforms, or financial institutions to safeguard operational capital.
- Private Key Management Services: Providers that manage clients’ private keys—even without directly holding assets—thus retaining control over transfer authority.
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To obtain a license under the proposed regime, custody providers must meet stringent regulatory requirements, including:
- Fit and Proper Criteria: Senior management and key personnel must pass integrity and competency assessments.
- Capital Adequacy: Minimum capital thresholds to ensure financial resilience.
- Cybersecurity Standards: Implementation of robust technical safeguards, including secure key storage and intrusion detection.
- Asset Segregation: Strict separation between client and firm assets to prevent misuse.
- Risk Management Frameworks: Comprehensive systems addressing operational, technological, and market risks.
- Anti-Money Laundering (AML) Compliance: Adherence to Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance.
- Insurance or Financial Safeguards: Potential requirement for insurance coverage or equivalent financial protection for client assets.
These standards mirror those applied to traditional financial custodians, reflecting Hong Kong’s commitment to the principle of “same activity, same risk, same rules.” The regulatory framework adopts a dual-layer approach:
- SFC as Standard-Setter: Responsible for defining licensing criteria and ongoing supervision of virtual asset custodians.
- HKMA as Frontline Regulator: Oversees banks and stored-value facilities already authorized to offer digital asset services.
This structure ensures consistent oversight while preserving individual users’ freedom to use self-custody wallets. Notably, the regulation targets commercial entities offering custody as a service—not individual or non-commercial use.
Self-Custody Models: Regulatory Nuances and Proactive Compliance
While the consultation primarily targets custodians with direct control over assets, it acknowledges the complexity of modern custody infrastructures. The paper explicitly recognizes that service providers may use third parties—such as affiliated entities or technology partners—to store assets or manage keys via advanced techniques like Multi-Party Computation (MPC) or Trusted Execution Environments (TEE).
The consultation invites feedback on how these models should be treated under the new regime—a clear sign of Hong Kong’s technical sophistication and openness to innovation.
“We understand that virtual asset custody service providers may use third parties… to hold clients’ virtual assets. For example, they may store private key shards across related entities or use MPC technology. We welcome public input on various business models and technological setups.”
This forward-looking stance raises a critical question: How should self-custody providers proactively align with emerging regulatory expectations?
1. Robust Certifications and Security Audits
Even in the absence of formal licensing requirements, self-custody platforms can build trust through internationally recognized certifications:
- ISO/IEC 27001:2022 for information security management
- SOC 2 Type II for data protection and operational integrity
These benchmarks are highly regarded by regulators like the Monetary Authority of Singapore (MAS). Additionally, regular third-party security audits, penetration testing, and public vulnerability disclosure programs enhance transparency and accountability.
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2. Innovation Meets Compliance
Self-custody solutions leverage cutting-edge cryptography—such as MPC and TEE—to eliminate single points of failure. When properly implemented, these technologies offer superior security compared to traditional custodial models by ensuring no single entity can unilaterally access funds.
Compliance should be embedded throughout the development lifecycle:
- Built-in AML/KYT (Know Your Transaction) monitoring
- Multi-layer approval workflows for fund movements
- Distributed key management with audit trails
- DevSecOps practices for continuous security integration
- Zero-trust architecture to prevent internal or supply-chain threats
3. Open-Source Transparency
Unlike traditional finance, blockchain thrives on openness. Open-sourcing core components allows independent verification of security claims, fosters community trust, and helps regulators understand technological underpinnings—even when regulation lags behind innovation.
Global Regulatory Trends: Lessons from Singapore’s MAS
Singapore’s Monetary Authority of Singapore (MAS) offers valuable insights into effective digital asset regulation. Under the Payment Services Act 2019, businesses offering Digital Payment Token (DPT) services—including trading, custody, and exchange—must obtain one of three licenses:
- Major Payment Institution (MPI): Full-scope operations without transaction limits
- Standard Payment Institution (SPI): Limited by transaction volume
- Licensed Banks: Can offer DPT services under existing banking licenses
MAS emphasizes five core compliance pillars:
- AML/CFT Compliance: Robust KYC/KYT processes, sanctions screening, and suspicious transaction reporting (STR).
- Client Asset Protection: Full segregation of client funds; ≥98% cold storage; insurance for hot wallets.
- Technical Security: Secure wallet signing, role-based access control, audit logs.
- Fit-and-Proper Management: Leadership with clean records and relevant expertise.
- Substance Requirements: Physical presence, local staff, and real operational activity—no shell companies.
These priorities closely align with Hong Kong’s proposed framework, reinforcing a regional consensus: custody regulation must prioritize client protection, operational transparency, and systemic integrity.
Impact and Opportunities for the Custody Industry
Hong Kong’s move signals a maturing regulatory environment that balances innovation with investor protection. The proposed licensing regime is expected to:
- Enhance market confidence through standardized oversight
- Drive adoption among institutional investors seeking compliant custody
- Encourage innovation in secure, regulated custody models
- Position Hong Kong as a premier gateway for digital asset markets in Asia
For providers specializing in secure, compliant institutional custody—especially those leveraging MPC, TEE, or hybrid architectures—the path forward is clear: align with emerging global standards, adopt proactive compliance measures, and leverage technology to deliver both security and regulatory readiness.
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Frequently Asked Questions (FAQ)
Q: Does the new Hong Kong regulation apply to self-custody wallet users?
A: No. The proposed rules target commercial service providers who hold or control client assets—such as exchanges or custodians. Individual users managing their own wallets remain unaffected.
Q: What types of businesses need a custody license under the new framework?
A: Any entity offering services involving holding digital assets for clients or managing private keys—especially exchanges, custodial platforms, and key management providers—will likely require licensing.
Q: How does MPC technology fit into the regulatory landscape?
A: While MPC-based self-custody solutions aren’t directly regulated yet, firms using third-party MPC providers may fall under scrutiny if those providers have control over key fragments. Transparency and auditability are key.
Q: Is insurance mandatory for licensed custodians?
A: While not explicitly required in all cases, the consultation strongly suggests that financial safeguards—including insurance—are expected components of a robust risk management framework.
Q: How does Hong Kong’s approach compare to other financial centers?
A: Hong Kong’s model closely mirrors Singapore’s MAS framework, emphasizing client asset protection, AML compliance, cybersecurity, and operational substance—indicating a growing regional regulatory alignment.
Q: When will the new custody regulations take effect?
A: The consultation period ends in August 2025. Final regulations are expected to be published in late 2025 or early 2026, with implementation timelines following thereafter.
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