Reading the risk in a digital-asset fund structured through Hong Kong and the CIS

A digital-asset fund that sits across Hong Kong and the Commonwealth of Independent States (CIS, the post-Soviet regional grouping comprising states including Kazakhstan, the UAE-adjacent jurisdictions, and the Russian Federation) does not face one regulatory question. It faces two systems that move at different speeds, measure risk by different criteria, and assign licensing obligations through bodies that rarely speak to each other. The fund manager who treats the Hong Kong leg and the CIS leg as parallel administrative tasks – rather than as a single cross-border compliance problem – is the one who learns the difference at the worst possible moment.

A digital-asset fund structured through Hong Kong and the CIS must satisfy distinct licensing and anti-money-laundering obligations in each jurisdiction simultaneously. In Hong Kong, the governing instrument is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, under which the Securities and Futures Commission administers a mandatory licensing regime for centralised virtual-asset trading platforms that commenced on 1 June 2023. In the CIS, the position depends on the specific member state, and several have moved from permissive registration to active licensing frameworks in the period since 2022. The interaction between those two sets of rules – not either set alone – is where the structural risk resides.

This analysis works through four questions: what is actually at stake commercially; how the governing rules in each system create a cross-border interface; where the comparative read between Hong Kong and the CIS sits today; and where, in our view, the risk concentration has shifted. It is written for the fund principal, the general counsel, and the compliance officer who already know the basic landscape and need a practitioner's read on the pressure points.

What is commercially at stake, and why the structure matters

The commercial logic is straightforward. Hong Kong provides a credible regulated domicile, common-law contract certainty, and access to institutional-grade banking. The CIS – and Kazakhstan in particular, through the Astana International Financial Centre (AIFC, a common-law financial zone operating under English-based law within Kazakhstan) – provides origination flow, investor capital, and increasingly, a licensing pathway that runs on rules designed to attract digital-asset business that cannot easily land in the European Union or the United States.

For a fund manager, the appeal is structural. A Hong Kong-licensed entity can hold the portfolio management and trading functions. A CIS-domiciled entity – whether an AIFC vehicle, a Kazakhstani company, or an entity in another CIS state with a permissive digital-asset regime – can hold the investor relationships, carry the local distribution licence, and manage the onboarding of investors whose banking relationships sit in the CIS corridor. The fund itself may hold assets in neither jurisdiction: the custodian may be offshore, the assets may sit on a public blockchain, and the operating agreement may be governed by a third system's law entirely.

That is precisely where the exposure concentrates. Each layer of the structure touches a different regulatory authority, and no single authority has a complete picture of the whole. That opacity is sometimes described as a feature of the structure. In our cross-border practice, it is more often a liability – because when a regulator in either jurisdiction begins a review, it looks at the totality of the fund's activity, not only the slice visible to it locally.

The stakes are not abstract. A failure to maintain a compliant licensing posture in Hong Kong exposes the fund to enforcement by the Securities and Futures Commission, which has demonstrated a willingness to issue restriction notices, freeze trading, and refer matters for criminal investigation. A compliance failure in the CIS leg – particularly around customer due-diligence standards or the application of sanctions lists – exposes the fund's principals personally, and may trigger a regulatory referral that affects the Hong Kong entity through correspondent banking relationships or reputational channels.

How does the Hong Kong regulatory regime apply to this structure?

The Hong Kong regime applicable to a digital-asset fund turns on two instruments operating in parallel, and the fund manager must be clear about which activities each instrument governs. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance, as amended to introduce the virtual asset trading platform (VATP) licensing regime, governs centralised platforms that offer trading services in virtual assets to the public. The Securities and Futures Ordinance governs any virtual asset that constitutes a "security" or "futures contract" under Hong Kong law.

For a digital-asset fund, the second instrument is almost always engaged. Where the fund holds tokens that qualify as securities – including tokens that carry profit-sharing rights, that represent interests in a collective investment scheme, or that are structured to replicate the economic characteristics of a conventional security – the fund manager requires authorisation from the Securities and Futures Commission under the Securities and Futures Ordinance. That is not a new position. What has changed since the VATP regime commenced on 1 June 2023 is that a fund operating a platform through which investors trade or redeem fund interests in virtual assets may also need a VATP licence, depending on how the mechanics of investor access are structured.

The practical question our desk sees most frequently is this: does the fund's redemption and subscription mechanic constitute "offering trading services in virtual assets" within the meaning of the VATP regime, or does it fall within the fund-management carve-out that the Securities and Futures Commission has articulated in its guidance? The answer is fact-specific. It depends on whether the fund holds fiat-referenced stablecoins that are caught by the separate HKMA regime, whether investors interact with the fund's assets through an intermediary that itself requires licensing, and whether the fund's custody arrangements involve a platform that the Commission would characterise as offering a trading service.

The governing instrument for customer due diligence, source-of-funds verification, and the FATF travel rule (the requirement that originator and beneficiary information accompany virtual-asset transfers) is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. VATPs are subject to full customer due-diligence obligations and the travel rule for virtual-asset transfers. For a fund whose investors include CIS-based principals – many of whom present source-of-funds files that mix business income, real-estate disposals, and digital-asset appreciation across multiple jurisdictions – the practical burden of satisfying Hong Kong's AML standards is significant. It is not sufficient to have a policy. The policy must produce documented, verifiable conclusions about each investor's source of funds and wealth.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

To discuss how the VATP and Securities and Futures Ordinance licensing requirements apply to your fund's structure across Hong Kong and the CIS, contact info@lockhartyip.com.

What does the CIS regulatory position look like, and where is it moving?

The CIS is not a single regulatory jurisdiction. That point is frequently missed by Hong Kong-side advisers who treat "the CIS" as a monolithic block. For a fund structure, what matters is the specific member state in which the CIS entity is incorporated, the applicable local digital-asset law, and whether that state has signed and ratified the relevant mutual-assistance instruments that would allow a regulatory or enforcement action to reach across the border.

Kazakhstan presents the most developed position for international fund managers. The AIFC operates a financial regulation that is explicitly modelled on English common law and administered by the AIFC Court and the Astana Financial Services Authority (AFSA). AFSA has issued rules governing digital-asset trading platforms, fund management involving digital assets, and custody. An AIFC-incorporated fund entity can, in principle, obtain an AFSA licence that is recognisable to institutional investors and that operates under a legal framework that has a genuine relationship with Hong Kong's common-law environment. The AIFC Court's judgments are enforceable in Kazakhstan through a domestic mechanism, and the AIFC has entered into recognition arrangements with several international bodies.

The structural appeal is real. But the compliance burden inside the AIFC is also real. AFSA's customer due-diligence standards have converged substantially with FATF recommendations, including the travel rule. A fund that meets Hong Kong's AML standards will generally find the AIFC standards familiar in shape, if not identical in administrative form. The documentation requirements, the beneficial-ownership registers, and the source-of-funds policies must be maintained separately in each system, and each regulator will ask for its own format of evidence.

Outside the AIFC, the position in other CIS states is more variable and, in several cases, more volatile. Several states have moved from a broadly permissive approach – in which digital assets were neither licensed nor prohibited – toward active licensing regimes with enforcement teeth. The pace and completeness of that transition varies considerably by state. For a fund with investor relationships or operational activity in a CIS state outside Kazakhstan, the compliance question is not "do the rules apply?" but "which version of the rules is currently being enforced, by which authority, and with what extraterritorial reach?"

What our desk consistently observes is that CIS regulatory authorities are increasingly willing to engage with the Hong Kong licensed entity directly – through mutual-assistance channels, through correspondent bank inquiries, and through informal regulatory dialogue – when they form a view that a fund's CIS-side activity is improperly structured. The assumption that the CIS leg is isolated from the Hong Kong regulator, or vice versa, does not survive scrutiny in our cross-border practice.

How does the cross-border interface between Hong Kong and the CIS actually bite?

The cross-border interface produces three distinct risk categories, and each operates through a different mechanism. Understanding the mechanism is the prerequisite for addressing the risk.

The first category is the AML/sanctions nexus. Hong Kong implements United Nations sanctions and does not give domestic effect to unilateral measures of other states. Several CIS states occupy a position in which they are neither a primary target nor a consistent enforcer of the UN framework. For a fund whose investor base includes principals from states in that intermediate position, the Hong Kong-side AML file must document not only the source of funds but also the applicability or non-applicability of relevant sanctions designations at the time of each onboarding and each subsequent material transaction. The Securities and Futures Commission and the HKMA expect that documentation to be current, not merely collected at the time of initial onboarding.

For a fund with CIS investors who have business interests in sectors that are subject to UN sanctions designations – extractive industries, certain financial institutions, state-adjacent entities – the screen is not a one-time exercise. It is a continuous obligation. A failure to update the screen in response to a new designation, and a consequential receipt of funds from a newly designated person, is the kind of structural gap that enforcement actions in Hong Kong have turned on.

The second category is the licensing gap. A fund that holds a Securities and Futures Commission authorisation in Hong Kong for managing a fund of securities-tokens has not thereby obtained a licence to solicit investors in the CIS, to manage CIS-sourced capital, or to operate a distribution platform accessible to CIS investors. Those activities require authorisation in the CIS jurisdiction where they occur. A fund that operates the distribution relationship through a CIS entity that is unlicensed – or that holds a licence that does not cover the specific activity – is exposed to enforcement in the CIS and, through the correspondent-banking and AML-referral channels, to regulatory attention in Hong Kong.

The third category is the custody and settlement interface. Where a fund's assets are held in custody by an entity that is neither Hong Kong-licensed nor AFSA-regulated – an offshore custodian, a self-custody arrangement, or a platform operating in a third jurisdiction – the regulatory status of the assets in each jurisdiction depends on a characterisation that neither regulator has formally made. In the event of a dispute, an insolvency, or a regulatory freeze, the question of which legal system governs the rights of the fund and its investors in the custodied assets is not answered by the contract alone. It is answered by the conflict-of-laws rules of whichever court first seizes the question.

A mid-market digital-asset fund managed by a Hong Kong-licensed entity came to our desk in the latter part of a recent year with a CIS investor base and an offshore custodian. The fund had operated for two years under the assumption that the Hong Kong licence covered the entirety of the structure. A compliance review identified that the investor-solicitation activity in Kazakhstan required an AFSA registration that the fund had not obtained, and that the source-of-funds files for three investors were inadequate under both Hong Kong and AFSA standards. We assisted in restructuring the distribution pathway through an AIFC-incorporated entity, rebuilding the AML files to the standards of each regulator, and preparing a voluntary disclosure to the Securities and Futures Commission. The matter was resolved without formal enforcement action. That outcome is not guaranteed; the early identification of the gap was the decisive factor.

If an earlier filing, structure or enforcement attempt produced an adverse or stalled result, a second read can identify the strategic error and the routes still open. Write to info@lockhartyip.com.

Where does the comparative read between the two systems sit?

The comparison between the Hong Kong and CIS regulatory environments for digital-asset funds is not a simple ranking of permissiveness. It is a comparison of two systems at different stages of institutional maturity, with different enforcement cultures and different relationships to the international standards they have formally adopted.

Hong Kong's Securities and Futures Commission is a mature regulator with decades of enforcement experience, well-developed case law through the Court of First Instance and the Court of Appeal, and a licensing regime that institutional investors and prime brokers treat as a credible quality signal. The VATP regime, which commenced on 1 June 2023, is comparatively new in its digital-asset-specific form, but it is administered by an authority that has not been reluctant to act. Restriction notices, licensing refusals, and public censures have all issued in the digital-asset space since the regime's commencement. The enforcement machinery is real.

The AIFC / AFSA environment is younger as a regulatory body but has moved quickly. AFSA's rules are drawn from international models, and the AIFC's common-law legal framework provides a dispute-resolution environment – through the AIFC Court and the AIFC International Arbitration Centre – that is more familiar to international fund managers than the civil-law or hybrid frameworks that govern the ordinary courts of Kazakhstan. The practical gap between AFSA's formal standards and the consistency of their enforcement is narrowing, but it has not closed. A fund principal who assumes that AFSA enforcement is notional is reading the current position incorrectly.

Outside the AIFC, the comparative read is more difficult. Enforcement in several CIS states remains irregular, and the rule-of-law conditions that fund managers and institutional investors require are absent in some of the jurisdictions that have marketed themselves as digital-asset-friendly. For a fund that genuinely needs CIS exposure – because the investment opportunity is there, because the investor base is there, or because the operational infrastructure is there – the AIFC framework is the most defensible structure available in the region. The alternative is to manage the exposure through a Hong Kong entity alone and restrict CIS activity to the minimum that does not trigger local licensing requirements, a position that is fact-specific and requires ongoing monitoring as the CIS regulatory environment continues to develop.

Our desk sees the Hong Kong / AIFC combination used most effectively when the fund manager invests in the compliance infrastructure of both entities from inception, rather than treating the CIS entity as a shell that routes capital to the Hong Kong manager. Regulators in both jurisdictions have developed the analytical tools to distinguish a genuine dual-licensed structure from a conduit arrangement. The consequences of the latter characterisation are worse than the cost of building the former.

What does a well-constructed structure actually require?

A well-constructed digital-asset fund structure through Hong Kong and the CIS requires four elements operating simultaneously, not sequentially. The failure mode our desk sees most often is a fund that has addressed one or two of the four and assumed the others will follow later.

The first element is licensing clarity. Each entity in the structure must hold the licence required for the activity it performs in its jurisdiction. The Hong Kong entity's Securities and Futures Commission authorisation must cover the specific asset classes the fund holds. If the fund holds fiat-referenced stablecoins, the HKMA's stablecoin issuer licensing regime – which commenced in 2025, and whose current commencement date and precise perimeter should be verified before reliance – may also be engaged. The CIS entity must hold the AFSA or local licence required for its distribution or management activity. Gaps in the licensing matrix are not administrative oversights; they are the primary trigger for regulatory action.

The second element is a unified AML programme. The AML policies of the Hong Kong entity and the CIS entity must be designed together, not in isolation. The customer due-diligence files must satisfy the standards of both regulators. The sanctions screening must be current, documented, and applied at the level of the fund as a whole, not only at the level of each entity separately. The FATF travel rule must be applied to virtual-asset transfers within the fund structure as well as between the fund and external counterparties.

The third element is legal-system mapping. The fund documentation – the fund agreement, the investment management agreement, the custody agreement, the subscription documents – must address the choice-of-law and jurisdiction questions that the cross-border structure creates. Which court governs a dispute between the fund and an investor? Which law governs the validity of a transfer restriction? If the custody arrangement breaks down, which legal system determines the rights of the fund in the custodied assets? These are not questions that can be answered by a single governing-law clause. They require a deliberate cross-border analysis at the documentation stage.

The fourth element is enforcement-route awareness. If the fund or its investors need to pursue a claim – against a counterparty, against a custodian, against a defaulting investor – the enforcement route must be navigable from the fund's documentation and structure. A fund whose assets are custodied offshore, whose investors are CIS-based, and whose management agreement is governed by Hong Kong law has at least three potential enforcement fora and three potential bodies of applicable law. Knowing in advance which route produces the most effective relief, and structuring the documents to support that route, is a decision that must be made before the dispute arises.

For a second scenario: a European family-office principal established a digital-asset fund through a Hong Kong entity in the early part of a recent year, with a distribution relationship managed through a CIS-based entity that had not sought AFSA registration. The investor base was concentrated in Kazakhstan and two neighbouring states. When the first large redemption request came, the CIS entity's banking relationships were disrupted because its correspondent bank had identified the entity as unlicensed for digital-asset activity under local rules. We assisted in rebuilding the structure, obtaining the AFSA registration, and re-documenting the investor relationships to reflect the restructured entity. The redemption was completed, with delay. The lesson was the same as in the first scenario: the compliance infrastructure must precede the commercial activity, not follow it.

Where does the risk sit now, and where is it heading?

Our view on the current risk concentration in a Hong Kong / CIS digital-asset fund structure is that it has shifted from the licensing layer to the AML/sanctions nexus and the cross-border enforcement interface. That is a change from the position of two or three years ago, when the primary risk for most fund managers was simply that the Hong Kong VATP regime would come into force and they would not have a licence. That risk has not disappeared – unlicensed activity remains the single fastest route to a Securities and Futures Commission restriction notice – but the managers who are in the market today have, in most cases, addressed or are addressing the licensing question.

What they have addressed less consistently is the AML quality of their investor files and the robustness of their sanctions-screening process for a CIS investor base. The FATF grey-listing process (the formal identification of jurisdictions with strategic AML deficiencies by the Financial Action Task Force, the inter-governmental standard-setter for AML/CFT) has touched several CIS states in recent years. A fund whose investor base includes nationals or entities from a FATF grey-listed jurisdiction is required to apply enhanced due diligence. That obligation is not discretionary, and it is not satisfied by a policy statement that enhanced due diligence will be applied. It is satisfied only by documented, evidenced conclusions about each investor's source of funds and wealth, reviewed at a frequency appropriate to the risk level.

The cross-border enforcement interface is the second area of increasing pressure. Regulatory cooperation between the Securities and Futures Commission and financial regulators in the CIS region has developed through bilateral memoranda of understanding and through the multilateral framework of the International Organisation of Securities Commissions (IOSCO). That cooperation is not comprehensive, and it is not perfectly symmetric. But it is real. A fund that has a regulatory problem in the CIS – a customer complaint, an unlicensed activity finding, an AML referral from a correspondent bank – should expect that the Securities and Futures Commission will be aware of it, directly or through market intelligence channels, more quickly than fund managers assume.

The direction of travel is toward greater convergence of enforcement posture. The CIS states that have adopted serious digital-asset regulatory regimes – Kazakhstan foremost among them – have an institutional interest in demonstrating that their frameworks produce compliant outcomes. That interest creates an incentive to take enforcement action against structures that are visible failures of the regulatory model. A Hong Kong / CIS fund structure that is visibly non-compliant is more likely to be the subject of action in both jurisdictions than it was three years ago. That is not a prediction of any specific outcome; it is a read of the regulatory direction that our desk considers well-grounded in the current environment.

For international counsel on the risk position of a digital-asset fund structured through Hong Kong and the CIS, the Tech & Web3 practice at Lockhart & Yip is the appropriate starting point. Our analysis of cross-border technology agreements involving offshore structures and our work on Cayman-domiciled digital structures address adjacent questions that frequently arise in fund structures of this kind.

The objection handler: common assumptions that do not survive cross-border scrutiny

A number of assumptions circulate among fund managers and their domestic advisers that do not survive cross-border scrutiny. Addressing them directly is more useful than restating the rules.

The first assumption is that a Hong Kong Securities and Futures Commission authorisation for fund management is sufficient to run the fund globally. It is not. The Hong Kong licence authorises the activity of the Hong Kong entity within the scope of the authorisation. It does not authorise the solicitation of investors in the CIS, the operation of a distribution platform in Kazakhstan, or the management of assets under a CIS regulatory framework. Each of those activities requires its own local authorisation.

The second assumption is that the CIS entity can be structured as a bare holding entity or a conduit, with no genuine substance, and that regulators will look only at the Hong Kong-licensed entity. Both the Securities and Futures Commission and AFSA have developed analytical approaches to substance. A CIS entity that holds no staff, conducts no genuine management activity, and exists only to route capital is likely to be characterised as a sham structure – a characterisation that affects the licence status of the Hong Kong entity and the personal liability of the fund's principals.

The third assumption – and it is the one our desk encounters most frequently among managers with a CIS investor base – is that source-of-funds documentation can be satisfied by a self-declaration from the investor. It cannot. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance requires customer due diligence that is proportionate to the risk of the relationship. For a CIS investor whose source of funds includes business interests in sectors associated with elevated money-laundering risk, a self-declaration is the starting point of the due-diligence process, not the conclusion. The documentation must support an independent assessment of the plausibility and adequacy of the declared source.

The fourth assumption is that sanctions compliance is a binary question: either the investor is on a list or they are not. In practice, sanctions compliance for a CIS investor base requires an analysis of the investor's ownership and control structure, their business relationships, and the sectors in which they operate – because designations can apply to entities owned or controlled by designated persons even where the entity itself is not directly listed. That analysis must be documented and must be repeated when the investor's circumstances change.

Practical self-assessment: is the structure where it needs to be?

The following questions are not exhaustive. They are the questions that our cross-border practice uses to identify where a Hong Kong / CIS digital-asset fund structure has material gaps. A "no" or "uncertain" answer to any of them warrants immediate attention.

• Does every entity in the structure hold the licence required for the activity it performs in its jurisdiction – specifically including distribution, management, custody, and platform operation?
• Does the fund's AML programme address the specific enhanced due-diligence requirements applicable to investors from FATF grey-listed jurisdictions, and is that programme documented in a form that each regulator would accept?
• Have the sanctions-screening results for each investor been updated since the investor's initial onboarding, and do those results reflect the current state of applicable UN designations?
• Does the CIS entity have genuine substance – staff, management activity, decision-making – proportionate to the activity it is licensed to perform?
• Do the fund documents address the choice-of-law and jurisdiction questions created by the cross-border structure, including the governing law of the custody arrangement and the enforcement route available to the fund and its investors?
• Has the fund's compliance officer mapped the FATF travel-rule obligations for all virtual-asset transfers within and outside the fund structure?
• Is the fund's legal and compliance team aware of the current regulatory status – including any FATF grey-list designation – of each CIS state in which the fund has investor relationships or operational activity?

Related practices

• Sanctions & AML – cross-border sanctions compliance, AML programme design, and source-of-funds analysis for international funds
• Holding Structures – offshore and Hong Kong holding-entity design for digital-asset and conventional funds

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.