A practical guide to a digital-asset fund BVI

The window for a compliant digital-asset fund serving Asian and international investors is open, but its dimensions are set by two regulators operating in two different legal systems. Hong Kong provides the management and distribution layer, with mandatory licensing for managers dealing in virtual assets. The British Virgin Islands provides the fund vehicle itself – a common-law holding and subscription structure that sits above the Hong Kong operation and faces its own economic-substance requirements. Getting the sequence right, and understanding which regulator looks at which entity, is the central practical question.

A digital-asset fund structured through Hong Kong and the BVI uses a segregated legal architecture: a BVI-incorporated fund vehicle subscribed by investors, paired with a Hong Kong-based manager or sub-adviser subject to Securities and Futures Commission licensing and Anti-Money Laundering and Counter-Terrorist Financing Ordinance obligations. The two layers interact at the point of management delegation, fee flows and regulatory notification. The governing instruments include the Securities and Futures Ordinance, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and the BVI Business Companies Act.

This guide walks through the decision, the sequence, and the gating issues at each step.

Why does the Hong Kong / BVI combination matter for a digital-asset fund?

The combination is not cosmetic. Each jurisdiction contributes a distinct legal function, and neither can substitute for the other in the role it plays. Hong Kong is a regulated management hub with a mandatory virtual-asset trading platform licensing regime that commenced on 1 June 2023. It provides regulatory credibility for institutional investors and a common-law enforcement environment. The BVI, operating under its own common-law tradition, provides a well-understood subscription vehicle – the BVI Business Companies Act fund structure – with established primacy broker and custodian relationships, and a lighter ongoing regulatory burden at the fund-vehicle level.

The interface between the two systems is where most structuring errors occur. A manager who treats the BVI entity as merely administrative, or who underestimates the reach of Hong Kong regulation to activities conducted from Hong Kong regardless of where the fund is domiciled, will face problems that begin with the regulator and end with investor claims. Our desk regularly sees structures brought to us after the initial architecture has already created an unlicensed-activity exposure or a substance deficit.

The cross-border dimension also touches enforcement. If a dispute arises between the fund and an investor, the governing law of the subscription documents and the seat of any agreed arbitration determine where the matter is resolved. Hong Kong-seated arbitration under the Arbitration Ordinance, with BVI-law fund documents referring disputes to Hong Kong, is a defensible and commercially accepted pairing.

Step 1: Identify the regulated activities and the licensing gate

The first step is to identify, precisely, which activities will be conducted from Hong Kong and which virtual assets are involved, because those two facts determine the regulatory gate. Hong Kong licensing applies to dealing in, advising on, and managing portfolios of virtual assets. Where a virtual asset is a "security" under the Securities and Futures Ordinance, the Securities and Futures Commission licensing framework applies directly. Where the virtual asset is not a security but the manager operates a centralised virtual-asset trading platform, the dedicated virtual-asset trading platform licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance applies.

Most digital-asset fund managers are not operating a trading platform. They are managing a portfolio – purchasing, holding, and disposing of virtual assets on behalf of the fund. That activity, where it involves virtual assets that are or may be securities, requires SFC licensing as a Type 9 regulated activity (asset management). The SFC has published specific requirements for managers of virtual-asset portfolios. Any Hong Kong entity that provides investment management services to the BVI fund vehicle must assess its licensing position before it moves a single trade.

The gate at this step is therefore: written legal assessment of which activities are licensed, which entity conducts them, and whether any current activity is unlicensed. Do not proceed to entity formation until this analysis is complete and documented.

The sequence above describes the standard position. Your matter turns on the specific virtual assets involved, the structure of the management delegation, and whether any activity has already commenced – which is where the analysis becomes critical.

For a structured assessment of your licensing position across Hong Kong and the BVI, write to us at info@lockhartyip.com.

Step 2: Incorporate the BVI fund vehicle and set the investor architecture

The BVI Business Companies Act provides the standard vehicle for the fund layer. A BVI fund company – typically a company limited by shares, with segregated portfolio capability where multiple strategies or investor classes are needed – is incorporated at the BVI Registry of Corporate Affairs. The constitutional documents (memorandum and articles) must be drafted to accommodate the subscription mechanics, the management delegation to the Hong Kong manager, the fee structure, and the governing-law and dispute-resolution clauses.

Several structural decisions at this step carry long-term consequences. First, the governing law of the subscription documents and the management agreement should be selected deliberately. BVI law governs the corporate mechanics of the fund vehicle. But the management agreement – the document between the BVI fund and the Hong Kong manager – can be governed by Hong Kong law and refer disputes to Hong Kong-seated arbitration. That choice gives the manager a known enforcement environment and aligns the contract with the jurisdiction where the manager is regulated.

Second, the investor-classification architecture matters for both Hong Kong and BVI regulatory purposes. A fund offered only to professional investors avoids certain retail-distribution requirements in Hong Kong. The BVI imposes its own fund-registration requirements for funds making a public offering; a private fund or professional fund structure keeps the registration perimeter narrower.

Third, the economic-substance requirements that apply to BVI entities must be addressed from the outset. A BVI holding or investment entity conducting "relevant activities" must demonstrate substance in the BVI. The nature of the digital-asset fund's activities determines whether a substance requirement attaches at the BVI level, and if so what it requires in terms of local management and staffing.

The gate at this step is: completed fund documents, a confirmed structure for the management delegation, and a preliminary substance analysis for the BVI entity before investors are approached.

Step 3: Build the AML and customer-due-diligence framework

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance applies to the Hong Kong manager. Its obligations are not a formality. They include customer due diligence, ongoing monitoring, record-keeping, and compliance with the FATF travel rule (the requirement that originator and beneficiary information accompany virtual-asset transfers above a threshold). The SFC's AML guidelines set specific requirements for licensed virtual-asset managers, which are more detailed than the standard financial-services obligations.

The practical implication for the fund structure is that investor onboarding is a regulated process, not an administrative one. Every investor in the BVI fund who is a client of the Hong Kong manager must be subject to full customer due diligence. The source-of-funds and source-of-wealth analysis for a digital-asset fund investor is often more complex than for a traditional fund investor: digital-asset wealth may trace through on-chain history, prior exchange accounts, or mixed fiat-and-crypto sources that require a structured approach to document and verify.

A common mistake our desk sees is the separation of the investor-onboarding function between the BVI administrator and the Hong Kong manager, with neither taking clear ownership of the AML file. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance places the obligation on the regulated Hong Kong entity. The BVI administrator's onboarding process supplements, but does not replace, the manager's AML obligations. Clarity of responsibility between the two entities must be documented in the service agreements from day one.

Where a virtual-asset transfer is involved in a subscription or redemption, the travel-rule obligations of the Hong Kong manager apply. The manager must have a technology solution or manual process to capture and transmit the required data for transfers above the applicable threshold. This should be built into the fund's operational procedures before the first subscription is received.

Step 4: Address the tax and substance position across both jurisdictions

Hong Kong taxes profits on a territorial basis. A Hong Kong management company earning management and performance fees from the BVI fund is taxable in Hong Kong on those fees if they are Hong Kong-sourced. The two-tier profits-tax rate applies: 8.25% on the first HK$2,000,000 of assessable profits, and 16.5% above. There is no capital gains tax and no withholding tax on dividends or interest in Hong Kong.

The foreign-sourced income exemption regime, in force from 1 January 2023, may be relevant where the Hong Kong manager receives income that is characterised as foreign-sourced. The exemption is conditional on economic-substance requirements being met in Hong Kong. For a fund manager, the substance requirements are not onerous in principle – management decisions are made in Hong Kong, which is the substance. The practical risk is a structure where the Hong Kong entity is thinly staffed and all decisions are made offshore: that position is vulnerable both to Hong Kong IRD challenge and to BVI substance-regime scrutiny.

For in-scope multinational groups, the Pillar Two minimum top-up tax and income-inclusion rule took effect in Hong Kong for fiscal years beginning on or after 1 January 2025, applying to groups with consolidated revenue of at least EUR 750 million. Most emerging digital-asset fund managers will be below that threshold, but it should be verified if the manager is part of a larger group.

The BVI imposes no income, capital gains, or withholding tax at the fund-vehicle level, which is a primary reason the BVI structure is used. The BVI economic-substance regime, however, requires that entities conducting relevant activities – which can include investment fund management – demonstrate adequate local substance or qualify for an exemption. An investment fund vehicle managed and directed from Hong Kong will need to analyse whether the BVI substance requirement attaches to the fund itself or only to the manager, and on what basis any exemption is available.

What are the common mistakes and how does this structure avoid them?

The most persistent mistake in digital-asset fund structures is a mismatch between the entity that contracts with investors and the entity that holds the regulatory licence. A BVI fund that enters into investment management agreements directly with investors, without a licensed Hong Kong manager as counterpart, may inadvertently conduct regulated activity in Hong Kong. The fix is a clean delegation architecture: the BVI fund appoints the Hong Kong manager under a formal investment management agreement, and all investment decisions are made by the licensed Hong Kong entity.

A second common mistake is treating the AML obligations as a one-time onboarding exercise rather than an ongoing programme. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance requires continuous monitoring. If an investor's source-of-funds profile changes – because of a large redemption request, a change in the underlying asset composition of their declared wealth, or a geopolitical event affecting their home jurisdiction – the manager must have a process to detect and respond to that change. A fund that onboarded investors carefully but then ran no subsequent review will fail a regulatory examination.

A third mistake, visible in our cross-border practice, is a subscription document that chooses BVI law for all purposes without a considered choice of dispute-resolution forum. BVI-law disputes between a Cayman-domiciled investor and a BVI fund managed from Hong Kong can end up in an inconvenient forum. A Hong Kong-seated arbitration clause, with BVI law as the governing substantive law, gives the manager a known procedural environment while preserving BVI corporate-law norms for the fund mechanics.

A fourth area is the regulatory notification obligation when changes occur. The SFC licensing framework requires notification of material changes to the manager's business, including changes to key personnel, the investment strategy, or the fund vehicles managed. Managers who restructure the BVI vehicle or add a new sub-fund without notifying the SFC can find themselves in breach of their licence conditions without having intended any non-compliance.

If an earlier filing, structure, or regulatory engagement produced an adverse or stalled result, a second read can identify the structural error and the routes still open. Contact info@lockhartyip.com to discuss the current position.

How does Hong Kong-seated arbitration protect the fund structure?

A dispute between the BVI fund and an investor – over redemption terms, valuation, or management conduct – needs a resolution mechanism that is enforceable against a counterparty who may be based in the Mainland, Europe, or the Middle East. Hong Kong-seated arbitration under the Arbitration Ordinance, which is modelled on the UNCITRAL Model Law, provides an award that is enforceable under the New York Convention in over 170 contracting states. For a Mainland investor, the relevant enforcement path runs through the mutual-enforcement arrangements between the Mainland and the HKSAR rather than through the Convention – a distinction that matters at the enforcement stage and that should be addressed in the fund documents.

Emergency-relief proceedings under the HKIAC Administered Arbitration Rules – the 2024 Rules, effective 1 June 2024 – allow a fund or a manager to seek urgent interim relief. An emergency arbitrator ordinarily completes proceedings within 14 days of file transmission. For a fund dispute involving a contested redemption or a freeze on assets, that timeline can be decisive.

The BVI courts also have jurisdiction over the fund vehicle as a BVI company. A serious governance dispute – involving the board of the BVI fund, a change in manager, or a compulsory winding-up – may run in the BVI Commercial Court even if the underlying investment management agreement refers disputes to Hong Kong arbitration. Understanding the interaction between the two dispute-resolution layers should be part of the initial document architecture, not an afterthought.

Decision checklist before launch

Before the fund accepts its first subscription, each of the following questions should have a documented answer. This is not a comprehensive compliance programme; it is a gate-review list for the founders and counsel before launch.

Has a legal analysis confirmed which activities in Hong Kong are regulated, and does the manager hold the required SFC licence or licence-in-progress?
Are the virtual assets being managed assessed as to whether they are "securities" under the Securities and Futures Ordinance, and is the licensing category matched to that assessment?
Do the BVI fund documents – memorandum, articles, subscription agreement, management agreement – reflect the agreed governance, fee structure, and dispute-resolution mechanism?
Has the BVI economic-substance position been assessed, and is there a documented position on whether the fund vehicle (as distinct from the manager) requires BVI substance?
Is the AML and customer-due-diligence programme, including a travel-rule process, in place and documented before the first subscription?
Has the profits-tax position of the Hong Kong manager been reviewed, including the application of the foreign-sourced income exemption regime to management and performance fees?
Does the dispute-resolution architecture in the fund documents address the distinction between Mainland investors (mutual enforcement) and non-Mainland investors (New York Convention)?
Is there a SFC-notification protocol in place for material changes to the business, the personnel, or the fund vehicles managed?

Our desk advises on cross-border digital-asset structures of this kind and coordinates with locally licensed Hong Kong firms on matters of Hong Kong law. For a structured assessment of your digital-asset fund's structure and licensing position, write to us at info@lockhartyip.com.

For background on Lockhart & Yip's approach to Tech & Web3 matters, see our Tech & Web3 practice. For a deeper analysis of Web3 business through Hong Kong, see our analysis on structuring a Web3 business through Hong Kong. For cross-border agreement considerations, see our matter note on cross-border SaaS and data agreements.

Related practices

Sanctions & AML – AML obligations, travel-rule compliance and sanctions-neutral contracting
Holding Structures – BVI and Cayman fund-vehicle architecture and economic-substance analysis
Tax Positions – profits tax, FSIE regime and Pillar Two analysis for fund managers

Frequently asked questions

What are the main risks in a digital-asset fund structured through Hong Kong and the BVI?

The principal risks are an unlicensed-activity exposure in Hong Kong, a mismatch between the entity conducting regulated activity and the entity holding the SFC licence, AML-programme deficiencies under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and a BVI economic-substance deficit at the fund-vehicle level. A secondary risk is a dispute-resolution architecture in the fund documents that does not account for the distinction between Mainland and non-Mainland investors at the enforcement stage. Each of these risks is addressable in the initial structure if identified before launch.

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

The BVI incorporation and fund-document preparation can typically be completed within a few weeks. The constraining path is usually the SFC licensing process for the Hong Kong manager, which the regulator conducts on its own timetable and which depends on the completeness of the application and the manager's readiness to demonstrate compliance with the SFC's specific requirements for virtual-asset managers. The AML programme and operational infrastructure must also be in place before the first investor subscription. A realistic total preparation period, from initial assessment to first subscription, is several months. Parties should verify the current position before acting.

Do I need a Hong Kong adviser for a digital-asset fund structured through Hong Kong and the BVI?

Yes. The Hong Kong manager operates in a mandatory licensing environment. The SFC's requirements for virtual-asset portfolio managers – and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance obligations – require counsel who understands both the regulatory perimeter and the fund-document architecture. BVI counsel handles the fund-vehicle formation and BVI legal matters. Hong Kong-qualified counsel, working alongside an international adviser who can coordinate the cross-border architecture, is required for the licensing application and the AML programme. Lockhart & Yip advises on the international and cross-border dimension and coordinates with locally licensed Hong Kong firms on Hong Kong-law matters.

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

A practical guide to a digital-asset fund structured through Hong Kong and the BVI