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GDF & W3H Submission to Hong Kong FSTB & SFC Public Consultation on the Legislative Proposal to Regulate Virtual Asset Custodian Services

Global Digital Finance (GDF) and Web3 Harbour (W3H), (together, the “associations”) welcome the opportunity to respond to the consultation on the proposed legislative framework for the regulation of Virtual Asset (VA) custody services. We strongly support the Hong Kong authorities’ continued efforts to develop a robust, internationally aligned and innovation-enabling regulatory environment for digital assets.

Key points in our submission raised include:

• Scope and definition: While we are supportive of the proposed definition of VA custodian services, we recommend refinements to ensure technology neutrality, avoid capturing non-controlling non-custodial functions (e.g. self-custody, transitory holdings, or technical third-party providers) and provide clear delineation from other licensing regimes such as VATP or SVF regulation.
• Entity vs. individual licensing: We recommend an entity-focused approach to licensing, consistent with international best practice, with only limited oversight for senior responsible officers. Broad individual licensing of operational staff would be disproportionate and inconsistent with global norms.
• Reliance on third parties: We are highly supportive of regulatory clarity in the reliance on third parties, both licensed third-party custodians and third-party technology providers, subject to outsourcing requirements and existing security standards.
• Exemptions and proportionality: We support exemptions for custody ancillary to other regulated activities and recommend explicit recognition of transitory custody, intra-group arrangements and self-custody. Exemptions should be designed to avoid excessive concentration risk by recognising equivalent overseas custodians.
• Cross-border interoperability: The regime should enable recognition of custodians licensed in jurisdictions with comparable standards (e.g. MAS, VARA, MiCA) to avoid market fragmentation, foster equivalence and strengthen Hong Kong’s global positioning.
• Financial and prudential requirements: We support alignment with principles applied to Type 13 regulated activity but emphasise the need for proportionality, calibration to VA-specific risks and avoidance of duplication for existing licensees.
• Operational resilience and governance: We encourage a principles-based and technology-neutral approach to requirements on segregation of assets, key management technologies such as Hardware Security Module (HSM) and Multi-party Computation (MPC), hot/cold wallet ratios, reconciliation, and cybersecurity, with proportional tailoring to business models and risk profiles.
• Transitional arrangements: We strongly recommend the introduction of a structured transitional period of at least 12–18 months, to prevent market disruption and support orderly licensing, recognising existing operators and international custodial infrastructure.
• Supervisory and enforcement powers: We support granting appropriate powers to the SFC and HKMA, along with proportionate sanctions and the establishment of an independent review tribunal to ensure fairness and transparency.