A Three-Dimensional Analysis of the Hong Kong SFC’s Robust Custody Standards and the Path to Institutional-Grade Compliance and Security
With the recent release of the “Circular to licensed virtual asset trading platform operators on custody of virtual assets” by the Hong Kong Securities and Futures Commission (SFC), the regulatory framework for Hong Kong as a leading global virtual asset hub has entered a new phase. This circular moves beyond general principles, offering a specific, detailed, and actionable set of robust custody standards in direct response to recent security incidents at overseas platforms.
This is more than just a compliance checklist; it’s a profound forecast of the future of security architecture in the industry. For all Virtual Asset Trading Platforms (VATPs) committed to thriving in the Hong Kong market, understanding and exceeding these standards will be paramount to earning client trust and building long-term competitive advantage. As a pioneer in digital asset self-custody security technology, Safeheron wishes to take this opportunity to dissect the deep logic behind these standards and explore how cutting-edge technology can build the security fortress of the future.
The Systematic Framework of the Hong Kong SFC’s “Robust Custody Standards”
“The SFC will explore more technology-neutral, outcome-based standards which prioritise the overall custodial control environment over mandating specific hardware solutions. VASPs may adopt more innovative solutions provided that they can demonstrate robust asset protection and maintain a secure and auditable control environment. This approach highlights the need for comprehensive safeguards…”[2]
The circular has one central objective: to ensure the ultimate security of client assets. To achieve this, the SFC has constructed a comprehensive, interlocking security framework covering governance, technology, processes, and people.
Dimension 1: Governance & People
This dimension focuses on the “human factor” within the security system, extending from top-level governance to the awareness of every employee, emphasizing security accountability and culture.
Top-Down Accountability: Absolute Responsibility of Senior Management
This is the cornerstone of all security measures. The SFC mandates that senior management bears ultimate responsibility for client asset security and must appoint a Manager-In-Charge (MIC) for comprehensive oversight. This signifies that regulatory accountability now penetrates beyond the technical layer to the very core of corporate governance.
Continuous Strengthening of Human Awareness: The Last Line of Defense
Regulators recognize that humans are both the most critical and most vulnerable link in the security chain. Platforms must provide comprehensive, ongoing professional training for all staff, especially transaction signers, and embed a security culture through phishing simulations and other initiatives.
Dimension 2: Technology & Process
This dimension centers on the technical implementation and operational standards of security, requiring a seamless integration from foundational infrastructure to daily operational workflows, creating a dual-loop of technology and process.
Hardened Infrastructure: Eliminating Risks at the Source
Regulators demand absolute security at both the physical and technical levels. Key measures include generating, storing, and backing up private keys in a secure offline environment (e.g., HSMs) and avoiding smart contracts in cold wallets, reflecting a “defense-in-depth” philosophy.
Airtight Operational Loop: Preventing Internal and External Fraud and Errors
Platforms must establish multi-layered, independent verification mechanisms. The requirements are highly detailed, including mandatory whitelisting, eliminating blind signing (by clearly displaying transaction details), and using dedicated devices with restricted functionality and network access for transaction approvals to achieve physical segregation.
Dimension 3: Dynamic Defense & Oversight
This dimension emphasizes that security is not static. It requires continuous monitoring capabilities and adaptability to the external environment to form a dynamic defense system.
24/7 Proactive Monitoring: From Passive Defense to Active Alerts
Security must be a non-stop operation. Platforms are required to establish a professional Security Operations Center (SOC) to perform real-time reconciliation, continuously monitor industry-wide threat intelligence, and establish rapid response and reporting protocols.
Prudent Management of Technology and Vendors: Mastering Supply Chain Risk
Whether using in-house systems or third-party solutions, platforms must conduct rigorous lifecycle management, including in-depth due diligence, regular independent code audits, and cybersecurity assessments to ensure the security of the entire tech ecosystem.
How Self-Custody Technology Empowers VATPs to Build a Future-Proof Security Architecture
“This circular aims to further clarify the standards which the SFC expects of platform operators in safeguarding virtual assets. The requirements set out in this document are prerequisites for transitioning to more advanced custody technologies and are the minimum standards with which platform operators must comply.”[2]
Faced with the SFC’s multi-dimensional regulatory framework, a VATP’s choice of technology becomes paramount. So, can self-custody technology be the preferred path to achieving compliance?
Self-custody is not about “going it alone”; it is a strategic choice to firmly grasp the reins of security by leveraging advanced technological tools. Take Safeheron’s self-custody service as an example: it acts as a modular “Crypto Account” system tailored for VATPs, allowing them to steadily build and independently manage a security framework that meets or even exceeds regulatory requirements.
How does this “Crypto Account” system perfectly align with the Hong Kong SFC’s three dimensions?
Empowering Governance & People
The self-custody model returns ultimate control of assets to the platform. Through a flexible policy engine, a platform can programmatically enforce its corporate governance structure—for example, by setting a policy that “any transfer exceeding 100 USDT requires joint approval from the MICs of Compliance, Finance, and Risk.” Notably, Safeheron’s self-custody service adheres to Zero Trust principles, guiding both Safeheron and institutional users to practice separation of duties and the principle of least privilege. This transforms senior management’s oversight duty from a paper-based policy into executable and auditable technical controls, where every individual has a specific role in every critical operation.
Meanwhile, TEE technology ensures that all preset transaction policies cannot be maliciously bypassed or tampered with, strictly enforcing the team’s agreed-upon distributed approval mechanism. This serves as the best technical safeguard against human error or attacks, providing an unbreakable technological reinforcement for the “human defense line.”
Reshaping Technology & Process
A core component of Safeheron’s self-custody service is its proprietary MPC technology that implements a Threshold Signature Scheme (TSS). This allows an institution’s users to directly hold multiple private key shares. A complete, single private key never exists at any point; even during transaction signing, multiple parties approve and use their key shares to sign off-chain. This fundamentally eliminates the single point of failure of a private key, offering a “technological cornerstone” that is arguably more advanced than traditional HSMs.
Building on this, TEE technology based on Intel SGX provides tamper-proof attestation, ensuring the data displayed on the UI (receiving address, amount) is identical to the on-chain execution result. This technically enforces a “What You See Is What You Sign” (WYSIWYS) principle, perfectly constructing the procedural loop, eliminating discrepancies between transaction intent and actual execution, and mitigating the risks of blind signing.
Supporting Dynamic Defense & Oversight
By integrating industry-leading AML and KYT services, Safeheron enables real-time risk screening for every transaction. If a high-risk address or suspicious activity is identified, the system immediately pushes real-time alerts, empowering users to proactively intercept threats before they materialize.
Furthermore, all transactions are strictly governed by preset policies and require multi-party approval for execution. Meanwhile, every step of the process—from request and approval to final signing—is recorded in a complete and immutable audit log. This provides users with a clear and reliable data source to support real-time reconciliation and anomaly monitoring.
To facilitate vendor due diligence and oversight, Safeheron has not only open-sourced its MPC-TSS protocol library and native Intel SGX TEE framework, but its core platform code has also undergone rigorous audits by world-leading security firms. These measures significantly simplify the complexity and cost for clients when conducting due diligence and continuous assessment of the underlying cryptographic technology.
Compliance is a Start, Security is the Journey
The Hong Kong SFC’s new clarifications have set a new benchmark for the industry, signaling the end of an era of unfettered growth and the dawn of an age of sophisticated, professionalized operations. Compliance is the ticket to enter the race, while a superior, sovereign, and controllable security capability is the engine that will win this long journey.
Safeheron believes that a self-custody solution with MPC technology at its core is the preferred path for VATPs to achieve a balance between compliance, security, and business growth in this new regulatory era. We look forward to working with all industry peers to promote the application of this technology and build an unshakeable foundation of trust for Hong Kong’s virtual asset market.
References
- SFC sets out robust custody standards for virtual asset trading platforms to protect client assets https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=25PR124
- Circular on custody of virtual assets for licensed virtual asset trading platform operators https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=25EC44
- “A-S-P-I-Re” for a brighter future: SFC’s regulatory roadmap for Hong Kong’s virtual asset market https://www.sfc.hk/en/News-and-announcements/Policy-statements-and-announcements/A-S-P-I-Re-for-a-brighter-future-SFCs-regulatory-roadmap-for-Hong-Kongs-virtual-asset-market#anchor_1739872320337
