Where a digital-asset fund structured Mainland

The question facing any manager running a digital-asset fund with exposure on both sides of the boundary is not abstract. It is commercial and immediate: which regulator actually applies to the fund, which rules govern the assets, and what happens when the two systems produce a different answer? The stakes are high. A mis-characterisation of the regulatory perimeter is not a filing error. It is the ground on which a licence is refused, a fund is wound down, or a manager is barred.

A digital-asset fund structured through Hong Kong and Mainland China operates across two distinct regulatory systems. In Hong Kong, the Securities and Futures Commission and the Hong Kong Monetary Authority govern virtual-asset activities under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Securities and Futures Ordinance. In Mainland China, virtual-asset trading and exchange services remain prohibited for residents, and capital controls limit cross-border movement of proceeds. The cross-border interface is not a compliance nuance – it is the structural fact that decides whether the fund is viable, and in which form.

This analysis works through the commercial position, the governing regimes on each side, the points where those regimes collide, and our read on where the risk sits for a fund active in this space today.

What is actually at stake commercially

The commercial case for structuring through Hong Kong is real. Hong Kong has built a mandatory licensing regime for virtual-asset trading platforms – the VATP regime (the licensing framework for centralised virtual-asset trading platforms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance) – that commenced on 1 June 2023. The Securities and Futures Commission is the licensing authority. That single fact gives managers a regulated hub from which to access international capital markets, issue fund interests to professional investors, and engage counterparties who require a licensed venue.

But the commercial case has a structural tension sitting underneath it. The natural investor base for a Greater China-facing digital-asset fund includes principals based in Mainland China. And Mainland China prohibits virtual-asset trading and exchange services for residents. That prohibition is not softened by the fund being domiciled in Hong Kong or by the manager holding a Hong Kong regulatory authorisation. The prohibition follows the investor's residency, not the manager's address.

The result is a fund that looks coherent on paper and carries a significant cross-border complication in practice. The choice of structure, the investor qualification process, and the AML file all turn on how carefully the manager has mapped the actual exposure. In our cross-border practice, we see funds that have resolved the entity structure but have not resolved the investor-facing position. That is where the risk materialises.

How does the Hong Kong licensing regime actually govern the fund?

The Hong Kong position depends on the nature of the fund's activities and the character of the assets it holds. There are two regulatory tracks, and the wrong characterisation of either produces the wrong compliance programme.

The first track applies where the fund operates a centralised platform through which clients trade virtual assets. That activity requires a VATP licence (virtual-asset trading platform licence granted by the Securities and Futures Commission under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance). The mandatory licensing regime has been in force since 1 June 2023. A platform operating without a licence is operating illegally in Hong Kong, regardless of where its servers sit or where its ultimate holding entity is incorporated.

The second track applies where the virtual assets held by the fund constitute "securities" or "futures contracts" within the meaning of the Securities and Futures Ordinance. Where they do, the fund manager requires authorisation from the Securities and Futures Commission under the Securities and Futures Ordinance as well. The two tracks are not mutually exclusive. A manager running a portfolio of virtual assets that include tokenised securities sits inside both. The failure mode here is common: a manager assumes that the VATP track covers everything and omits the securities-licensing analysis. It does not cover everything.

On top of the licensing question sits the AML and customer due diligence obligation. VATPs are subject to customer due diligence and the FATF travel rule (the Financial Action Task Force's requirement that identifying information accompany virtual-asset transfers) for virtual-asset transfers. For a fund with a mixed investor base, that obligation is operationally demanding. The travel-rule compliance programme must match the transaction flow, and the transaction flow in a cross-border digital-asset fund is rarely clean.

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.

For a structured assessment of your fund's licensing and AML position across Hong Kong and the relevant jurisdictions, write to us at info@lockhartyip.com.

What does the Mainland China position mean in practice?

The Mainland position is more restrictive than many managers initially assume. Virtual-asset trading and exchange services are prohibited for Mainland residents. That prohibition applies to services provided by offshore platforms to onshore residents. The fact that the platform is Hong Kong-licensed and the transactions occur offshore does not, by itself, remove the prohibition from the investor's perspective.

What this means operationally is that a Hong Kong-structured fund cannot simply onboard Mainland investors without a careful analysis of the investor qualification, the channel through which the fund interest is offered, and the mechanism by which proceeds flow. Each of those steps carries a separate compliance risk, and the risks compound. A fund interest sold to a Mainland resident through a channel that does not comply with the relevant cross-border rules is not just a Mainland regulatory problem. It is a Hong Kong AML problem, because the source of funds and the channel of investment are part of the customer due diligence file.

Capital controls add a second layer. Mainland China maintains strict controls on cross-border capital movements. Proceeds from a digital-asset investment held offshore do not automatically become repatriable on demand. The manager who has not mapped the repatriation route at the outset will face a structural problem when an investor seeks to exit.

There is also a question that the cross-border structure raises about the stablecoin perimeter. The Hong Kong Monetary Authority is implementing a licensing regime for fiat-referenced stablecoin issuers (issuers of stablecoins whose value is pegged to one or more fiat currencies). That regime commenced in 2025 – parties should verify the current commencement date and perimeter before acting. Where a fund uses a fiat-referenced stablecoin as a settlement or liquidity mechanism, the stablecoin issuer's regulatory status in Hong Kong becomes a material counterparty consideration. A fund relying on an unlicensed stablecoin issuer for settlement is exposed regardless of its own licensing position.

The comparative read: where the two systems diverge most sharply

The most consequential divergence between the Hong Kong and Mainland systems is not the prohibition on trading. It is the treatment of the AML obligation and the documentation standard that each system applies to cross-border flows.

Hong Kong's AML regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance requires a regulated entity to apply customer due diligence, enhanced due diligence for higher-risk customers and relationships, and ongoing transaction monitoring. For a VATP, the travel-rule obligation adds a transactional data-sharing requirement that is architecturally different from the account-level due diligence standard. A fund that handles both must maintain two distinct compliance programmes that operate on different information sets and different timescales.

The Mainland's AML framework operates on a different enforcement model. Mainland regulators have broad authority to investigate financial flows involving Mainland persons, regardless of where the transaction was executed. A fund manager who believes that an offshore booking shields a Mainland-connected transaction from Mainland AML scrutiny is working from an incorrect premise. The regulatory perimeter follows the person, not the booking location.

The divergence also appears in the treatment of investor documentation. A professional investor in Hong Kong is defined under the Securities and Futures Ordinance by reference to portfolio value thresholds and other criteria. That qualification is not automatically recognised on the Mainland, and a Mainland investor who qualifies as a professional investor in Hong Kong may simultaneously be a Mainland retail investor subject to the prohibitions on virtual-asset trading. The fund's KYC file must address both standards, not just the one applicable in the jurisdiction of management.

Consider a representative scenario. A family-office principal based in Shenzhen with substantial liquid assets approached us in late 2025 about subscribing to a Cayman-domiciled digital-asset fund managed from Hong Kong. The fund held a VATP licence and had prepared investor documentation to Hong Kong professional-investor standards. The problem was that the subscription would have involved a cross-border capital transfer inconsistent with the applicable Mainland controls, and the fund's travel-rule programme had not been configured to capture the transactional data required for the specific transfer route proposed. We re-structured the subscription mechanism, revised the travel-rule programme, and prepared a source-of-funds file that addressed both the Hong Kong and the Mainland-facing AML questions. The fund admitted the investor on the revised terms.

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.

To discuss how the cross-border regulatory interface applies to your fund's investor base and transaction flow, contact info@lockhartyip.com.

Where the enforcement risk actually sits

Enforcement risk in a cross-border digital-asset fund does not concentrate at the point of trade. It concentrates at three specific moments: the onboarding of a new investor, the execution of a transfer that engages the travel rule, and the exit of a Mainland-connected investor from the fund.

At onboarding, the risk is mischaracterisation. A manager who onboards a Mainland resident as a professional investor in Hong Kong without addressing the Mainland-facing prohibition has created a compliance exposure that runs in two directions simultaneously – Hong Kong AML and Mainland regulatory.

At the transfer level, the travel-rule obligation requires that the originating VATP transmit specified identifying information to the receiving entity before or simultaneously with the transfer. Where the receiving entity is not a licensed VATP – or is in a jurisdiction with no equivalent standard – the travel-rule compliance programme breaks down. Counsel on our desk regularly see funds that have adopted a travel-rule policy but have not mapped the policy to their actual transfer counterparties. The gap between the policy and the practice is where enforcement begins.

At exit, the capital-controls question becomes acute. A Mainland-connected investor seeking to repatriate proceeds from a digital-asset fund held offshore faces a route that requires regulatory approval. A manager who has not documented the repatriation route at the outset – and who has not included appropriate representations in the subscription documents – is holding a structural problem that the investor will discover at the worst possible moment.

The enforcement posture also shifts with the stablecoin question. Where the fund uses a fiat-referenced stablecoin for settlement, and the stablecoin issuer is not licensed under the Hong Kong Monetary Authority's developing regime, the fund's exposure extends beyond its own licence. A regulatory action against the stablecoin issuer is a settlement risk for every fund that depends on that issuer for liquidity. Parties should verify the current perimeter of the stablecoin licensing regime before acting.

A second scenario: the BVI holding structure

A second pattern our desk sees frequently involves a BVI holding entity above a Hong Kong management company, with the fund itself domiciled in the Cayman Islands. The BVI and Cayman are common-law holding centres widely used above Hong Kong operating companies, and both have adopted economic-substance regimes. The structure is commercially rational. It creates separation between the management function – licensed in Hong Kong – and the fund vehicle.

The complication arises when the cross-border interface is examined in detail. The BVI holding entity is subject to the BVI economic-substance regime. If the entity carries on a relevant activity – which includes fund management under the BVI rules – it must satisfy the substance test in the BVI. A BVI entity that manages the fund from Hong Kong without satisfying the BVI substance test has a structural deficiency that cannot be cured after the fact.

The Cayman fund is subject to the Cayman regulatory perimeter for investment funds, which is separate from Hong Kong's. A fund that is registered or regulated in Cayman but managed from Hong Kong must map the regulatory requirements in both jurisdictions, not just the one that the manager finds more convenient. In our cross-border practice, we have acted on matters where a fund structure that had been assembled by multiple advisers across multiple jurisdictions had not been reviewed as a whole – and where the review identified inconsistencies between the Cayman registration and the Hong Kong licensing analysis.

The takeaway is straightforward. The multi-jurisdictional structure is not itself a problem. The problem is treating it as a sum of its parts rather than as a system. The licensing analysis, the AML programme, and the investor documentation must work coherently across every jurisdiction in the structure, not just the one where the manager's principal office sits.

Our read: where the risk sits now

The direction of travel in Hong Kong is towards a more defined and more demanding regulatory perimeter. The mandatory VATP licensing regime has been in force since 1 June 2023. The stablecoin licensing regime is in implementation. The travel-rule obligation is operational. The question for a fund active in this space is not whether the regime will tighten further – it will – but whether the fund's current structure and compliance programme will withstand the tightening.

In our assessment, the risk for a cross-border digital-asset fund concentrates in three areas. First, the investor base. A fund that has not rigorously mapped its investor base for Mainland residency and applied the appropriate Mainland-facing analysis to each Mainland-connected investor is carrying an undocumented AML and regulatory exposure. Second, the travel-rule programme. A fund that has adopted a travel-rule policy without mapping the policy to actual transfer counterparties has a gap between documentation and practice that a regulator will identify quickly. Third, the stablecoin dependency. A fund that relies on a fiat-referenced stablecoin for settlement without having assessed the issuer's licensing status under the Hong Kong Monetary Authority's regime is carrying counterparty regulatory risk that its own licence does not protect against.

The Mainland dimension adds a fourth area: capital controls and repatriation. A fund with Mainland-connected investors that has not documented the repatriation route and included appropriate representations in subscription documents is holding a structural problem deferred, not resolved.

What does the decision matrix look like in practice? A fund with no Mainland-resident investors, a fully licensed VATP, a travel-rule programme mapped to actual counterparties, and no stablecoin settlement dependency sits in the strongest position – defined risk, manageable compliance programme. A fund with Mainland-resident investors, a mixed portfolio of virtual assets and tokenised securities, and a settlement dependency on an unlicensed stablecoin issuer sits at the other end. The distance between those two positions is a compliance and structuring exercise, not a commercial concession. The question is whether the manager is willing to do the work before a regulatory event forces the analysis.

We regularly advise cross-border digital-asset structures on exactly this question. The answer is always a function of the specific structure, the specific investor base, and the specific transaction flow. There is no generic safe harbour. What there is, is a method: map the perimeter, identify the gaps, and close them before the regulator does.

The interaction with the Mainland judgments regime and enforcement

A cross-border digital-asset fund that suffers a dispute – whether with an investor, a counterparty, or a technology vendor – faces a choice of forum and enforcement route that is shaped by the cross-border interface. The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), which came into force on 29 January 2024, enables registration of effective Mainland judgments with the Court of First Instance of the High Court in Hong Kong, and provides for Hong Kong judgments to be recognised and enforced on the Mainland by way of a certified copy and certificate process. Non-monetary judgments are within scope.

For a digital-asset fund with a dispute involving a Mainland counterparty or a Mainland-resident investor, that regime matters. A judgment obtained in a Mainland court in favour of the fund may now be registered in Hong Kong without the fund needing to re-litigate the merits. Equally, a Hong Kong court judgment against a Mainland counterparty may be taken to the Mainland courts for enforcement. The old exclusive-jurisdiction requirement that restricted the earlier 2008 regime has been removed. The connection-based test that replaced it is broader.

For arbitration, the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region has been in effect since 1 October 2019. A Hong Kong-seated arbitration may seek interim measures from Mainland courts under that Arrangement. For a fund with assets on both sides of the boundary, the ability to freeze assets in a Mainland court pending a Hong Kong arbitration is a material enforcement tool.

The interaction between the fund's dispute-resolution clause and the enforcement regime is a structural decision, not a boilerplate exercise. A subscription agreement that does not address the enforcement route across both jurisdictions is a document that defers a problem. Parties should verify the current position before acting on the specific enforcement route applicable to their matter.

See also our related analysis on cross-border agreements touching the BVI and our work on data transfer and privacy terms for Asia-facing platforms, which address the adjacent compliance questions for technology-driven structures.

The objection our desk hears most often

The objection is this: "The fund is Cayman-domiciled and managed from Hong Kong. Mainland regulations do not apply to us." This is the most consequential misconception in this practice area.

The offshore domicile of the fund vehicle does not determine the regulatory perimeter applicable to the fund's investors, the fund's manager, or the fund's transactions. The Mainland's regulatory position follows the investor's residency and the nature of the service being provided, not the booking location of the fund. A Cayman fund managed from Hong Kong, with Mainland-resident investors receiving virtual-asset-related services, is not outside the Mainland regulatory perimeter for those investors.

Equally, the Hong Kong VATP licence is not a global regulatory passport. It licences the holder to operate a virtual-asset trading platform in Hong Kong under Hong Kong rules. It does not remove the obligation to comply with the rules of every other jurisdiction in which the fund operates, solicits investors, or executes transactions.

In our experience, this misconception arises because the structure was assembled jurisdiction by jurisdiction rather than analysed as a cross-border system. Each individual component – the Cayman fund, the Hong Kong manager, the BVI holdco – looks compliant in isolation. The problem is at the interfaces. And the interfaces are precisely where cross-border counsel adds the most value.

For a structured assessment of your fund's cross-border position, licensing posture and AML programme, write to us at info@lockhartyip.com.

Related practices

Tech & Web3 – licensing, AML compliance and entity structuring for virtual-asset and technology businesses
Sanctions & AML – cross-border AML programmes, counterparty review and source-of-funds documentation

Frequently asked questions

How does the cross-border element affect a digital-asset fund structured through Hong Kong and Mainland China?

The cross-border element creates a layered regulatory exposure. Hong Kong's mandatory VATP licensing regime – in force since 1 June 2023 – governs the management function and any trading platform activity. Mainland China's prohibition on virtual-asset trading applies to Mainland-resident investors regardless of where the fund is domiciled. Mainland capital controls govern the repatriation of proceeds. The fund's AML programme must address both systems simultaneously, covering the Hong Kong Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the travel-rule obligation, as well as the Mainland-facing source-of-funds analysis for each connected investor. Failure at any of these three intersections produces regulatory exposure that the other jurisdiction's compliance programme does not resolve.

How long does a digital-asset fund structured through Hong Kong and Mainland China usually take?

The timeline depends on the specific structure, the licensing track engaged, and the complexity of the investor base. A VATP licence application with the Securities and Futures Commission involves a multi-stage review process whose duration is not fixed by statute. A fund that simultaneously requires Securities and Futures Ordinance authorisation for its manager extends that timeline further. The investor qualification and AML onboarding process for a mixed investor base – including Mainland-connected principals – adds additional time at the front end. We advise managers to begin the regulatory analysis and the structural review well before the proposed launch date. Parties should verify current processing timelines directly with the relevant regulators.

Which jurisdiction's law applies to a digital-asset fund structured through Hong Kong and Mainland China?

The governing law of the fund documents – typically the law of the Cayman Islands for a Cayman-domiciled fund – determines the law that applies to the fund's constitutional documents and investor relationships. But governing law does not resolve the regulatory perimeter question. Hong Kong's VATP licensing regime applies to the management function and platform activity in Hong Kong. Mainland China's regulatory prohibitions apply to Mainland-resident investors. The AML obligations follow the activity and the parties, not the contractual choice of law. A cross-border digital-asset fund must comply with all applicable regulatory regimes, regardless of the governing law chosen for its documents. Effective structuring maps each obligation to the correct legal system from the outset.

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

Where a digital-asset fund structured through Hong Kong and Mainland China stands now