Compliance of Virtual Asset Exchange Asset Custody: Balancing Security and Regulation

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Compliance Virtual Asset Exchange's Asset Custody: Balancing Security and Regulation

Recently, two virtual asset exchanges received approval from the Hong Kong Securities and Futures Commission for virtual asset service provider licenses, marking that retail investors in Hong Kong can directly trade Bitcoin and Ethereum on these platforms. This move significantly enhances the position of compliant exchanges in the virtual asset field.

Since October last year, Hong Kong regulatory authorities have successively released several measures related to virtual asset trading. Starting from June 1 this year, more virtual asset exchanges can apply for compliance licenses from the Hong Kong Securities and Futures Commission. Against this backdrop, many exchanges hope to obtain licenses in Hong Kong to engage in compliance centralized trading operations.

The Hong Kong Securities and Futures Commission has imposed strict requirements on centralized exchanges, particularly in terms of technical configuration. Among them, customer asset custody is one of the most关注核心领域.

Safe wallet management and asset custody - the core of Hong Kong Compliance virtual asset exchange

The Differences Between Traditional Finance and Virtual Asset Custody

In the traditional financial system, when users purchase stocks through brokers, the funds are actually held in a bank's custodial account. The bank acts as an intermediary, ensuring that brokers can only access the funds after obtaining the client's authorization. This multi-layered custody system provides a high level of security for user assets.

In contrast, the regulatory framework for compliant virtual asset trading in Hong Kong requires exchanges to assume a role similar to that of banks. Customers' virtual assets are directly held in the exchange's cold wallet. This means that exchanges need to integrate the functions of multiple institutions in traditional finance and are responsible for customer assets. Therefore, the requirements for compliant exchanges in terms of software and hardware technology are much higher than those of ordinary brokers, even approaching bank-level standards, and they also need to consider the application of cryptographic technology.

Secure wallet management and asset custody - the core of Hong Kong Compliance virtual asset exchange

Security Challenges of Virtual Asset Trading

Virtual asset trading faces multiple security risks. From a technical perspective, blockchain can be divided into on-chain and off-chain dimensions. On-chain smart contracts may have vulnerabilities and are susceptible to hacker attacks. Off-chain involves multiple aspects such as user authentication, network security, terminal security, and emergency response, requiring the establishment of a complete security system.

From a Compliance perspective, the virtual asset industry is gradually moving from its early stage of barbaric growth towards standardization. In recent years, various countries have successively introduced relevant regulatory policies. Especially after the FTX incident, regulatory agencies realized that they must implement management rules and systems in order to truly protect investors' interests. The virtual asset license regulatory policy released by Hong Kong this year is a typical example.

Secure wallet management and asset custody - the core of compliance for virtual asset exchanges in Hong Kong

Requirements for Asset Custody Compliance

Hong Kong's regulatory policies excel in both logic and comprehensiveness. This is mainly reflected in the following aspects:

  1. It is required that digital asset private keys must be stored locally in Hong Kong.

  2. Considering the current lack of a mature third-party custody regulatory system, applicants for licenses are required to build their own virtual asset security custody systems.

  3. In choosing the technical route, both maturity and an open attitude are emphasized. Preference is given to selecting technical solutions recognized by internationally authoritative security certification bodies.

  4. It is required that an authoritative third-party evaluation agency assess whether the exchange meets regulatory Compliance requirements.

These requirements indicate that the Hong Kong government has taken full consideration of logic, methods, and details when formulating regulatory policies.

Safe Wallet Management and Asset Custody - The Core of Hong Kong Compliance Virtual Asset exchange

Measures to Protect User Asset Security

To protect user asset security, compliant exchanges need to take measures from multiple aspects:

  1. IT Security: Including network security, infrastructure, endpoint security, disaster recovery emergency response, and wallet custody systems, etc. Among them, 98% of assets need to be stored in cold wallets and use internationally recognized cryptographic security devices to form a digital asset vault.

  2. Risk Compensation: Establish a dedicated insurance or risk compensation fund, capable of compensating clients.

  3. Compliance Management: Equip a professional Chief Compliance Officer responsible for anti-money laundering, counter-terrorist financing, and conduct identity verification and fund flow monitoring throughout the entire exchange process.

  4. Risk Control: Manage market manipulation, user fraud, counterparty risk, and credit risk, etc.

  5. Governance System: Establish a sound governance framework, including principles such as separation of main roles, clear financial responsibilities, and separation of duties.

Secure wallet management and asset accomplice - the core of Hong Kong Compliance virtual asset exchange

Future Development Trends

With the continuous advancement of technology and the deepening understanding of the industry, the virtual asset trading sector may see the following development trends:

  1. Application of new technologies: Technologies such as MPC (Secure Multi-Party Computation) may be introduced into custody solutions once they mature.

  2. Personal wallet solutions: More innovative personal wallet solutions may emerge to complement centralized exchanges.

  3. Centralized custody institutions: In the future, it is possible that a few leading custody institutions will be responsible for the asset custody of the entire market.

  4. Improved regulatory system: An independent custody regulatory system may emerge, clarifying how exchanges utilize third-party custody services.

  5. Diversification of Technical Routes: As new technologies mature and gain certification, the technology choices of custodial service providers may become more diversified.

Overall, with technological advancements and a deeper understanding of the market, the virtual asset trading sector will attract more participants, and the market prospects are broad.

Secure wallet management and asset accomplice - the core of Hong Kong Compliance virtual asset exchange

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TokenVelocityTraumavip
· 07-11 04:47
Security upgrade, steady now.
View OriginalReply0
UncleWhalevip
· 07-08 19:53
Compliance is a good thing, the bull run is coming.
View OriginalReply0
AlphaLeakervip
· 07-08 19:53
Take advantage of the regulatory absence and get a license first.
View OriginalReply0
degenonymousvip
· 07-08 19:52
Compliance... safety first
View OriginalReply0
TokenVelocityvip
· 07-08 19:27
Regulation is the future.
View OriginalReply0
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