How to approach a digital-asset fund structured through Hong Kong and Cyprus

Setting up a digital-asset fund across two jurisdictions raises a question that neither a Hong Kong adviser nor a Cyprus adviser can answer alone: which entity does what, which regulator sees the fund first, and which licence travels across the structure. The answer depends on the fund's strategy, its investor base, and the assets it will hold – and those three variables rarely point in the same direction at the outset.

A digital-asset fund structured through Hong Kong and Cyprus typically pairs a Hong Kong entity – operating under the licensing regime administered by the Securities and Futures Commission or, for trading platforms, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance – with a Cyprus investment vehicle that accesses European Union passporting and a favourable corporate tax environment. The gate at each step of the structure is regulatory: which assets are securities, which regulator has jurisdiction over the fund manager, and whether the Cyprus vehicle needs its own authorisation. Under the virtual-asset trading platform (VATP) licensing regime, which commenced on 1 June 2023, centralised trading operations in Hong Kong require a licence from the Securities and Futures Commission regardless of where the fund entity sits.

This guide sets out the decision the structure forces on counsel, the sequence from entity selection through to operational compliance, the mistake that most often derails a dual-jurisdiction fund, and a checklist to confirm readiness before engaging the regulators.

What decision does a dual-jurisdiction digital-asset fund force on counsel?

The first question is not "where do we incorporate?" – it is "which entity is the regulated entity?" In a Hong Kong–Cyprus structure, one vehicle will face the Hong Kong Securities and Futures Commission or the Anti-Money Laundering and Counter-Terrorist Financing Ordinance regime, and the other will face the Cyprus Securities and Exchange Commission (CySEC, the competent authority for investment firms and alternative investment fund managers in Cyprus) or the Central Bank of Cyprus. Counsel must identify that split before any incorporation steps.

The split turns on three factual points. First, are the fund's target assets "securities" or "futures contracts" under the Securities and Futures Ordinance? If yes, the fund manager in Hong Kong needs a Type 9 licence (asset management, the Hong Kong licence category for portfolio management involving securities or futures). If the assets are virtual assets that are not securities, the VATP framework under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance may apply instead – or, if the manager does not operate a platform but merely manages a pool, neither may apply directly to the management function. That analysis is the first gate.

Second, who are the investors? If European Union investors are in the fund, Cyprus as an EU member state brings the Alternative Investment Fund Managers Directive (AIFMD, the EU regulatory regime for managers of alternative investment funds) into scope. A Cyprus-authorised fund manager can passport into other EU states; a Hong Kong manager cannot, without additional steps. The investor profile therefore shapes which entity takes the AIFMD obligation.

Third, what assets will be held by which entity? Segregation of token holdings, fiat reserves, and any securities positions across two SPVs – or concentrating them in one – has direct consequences for where the net asset value calculation sits and which regulator can examine it.

In our cross-border practice, the most common error at this stage is treating the two entities as interchangeable and leaving the regulatory question until the structure is already incorporated. That sequence reverses the correct order entirely.

How should the structure be sequenced from entity selection to fund launch?

The correct sequence runs through five gates, each of which must be cleared before the next opens. Skipping a gate does not accelerate the timeline; it creates a fault that surfaces at the licensing stage and requires remediation work that is almost always slower than the original step.

Gate 1 – Asset and investor classification. Before any corporate document is drafted, produce a written asset classification memo addressing whether each target asset class is a "virtual asset" as defined under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, whether any asset is a "security" or "futures contract" under the Securities and Futures Ordinance, and whether the fund will accept EU-domiciled investors. This memo drives every subsequent decision. It is not optional and should not be delegated to a single jurisdiction's counsel.

Gate 2 – Structural design. Once the classification is clear, map the entity architecture: the Hong Kong entity's function (manager, sub-adviser, platform, or purely operational), the Cyprus entity's function (the fund vehicle proper, the management company, or both), and the flow of fees, carried interest, and advisory income between them. The double tax treaty between Cyprus and Hong Kong (an agreement for the avoidance of double taxation in force between the two jurisdictions) affects that income flow, as does the Hong Kong foreign-sourced income exemption (FSIE) regime, which subjects certain passive income – dividends, interest, disposal gains – to Hong Kong profits tax where economic substance conditions are not met. At this gate, counsel should also confirm whether the VATP licence will sit in Hong Kong or whether the Hong Kong entity will be a non-platform manager only.

Gate 3 – Regulatory pre-engagement. Engage the relevant regulators before submitting formal applications. In Hong Kong, the Securities and Futures Commission operates a pre-application process for new applicants, and its published guidance on virtual-asset fund managers is the starting point. In Cyprus, CySEC's licensing pathway for an Alternative Investment Fund Manager (AIFM) under the Cyprus law transposing AIFMD has defined timeframes and defined pre-application steps. Running both pre-engagements in parallel – rather than sequentially – saves time at Gate 4.

Gate 4 – Parallel licensing applications. Submit the Hong Kong and Cyprus applications in parallel, with coordinated documentation. The substance requirements for each are different. Hong Kong's Securities and Futures Commission examines the responsible officers, the management structure, and the risk-management systems of the manager. CySEC examines the AIFM's governance, its depositary arrangements, and its liquidity-management procedures. Both require an Anti-Money Laundering and Counter-Terrorist Financing programme that meets the relevant jurisdiction's standards – and those standards, while compatible, are not identical. The fund's AML programme must address both the Hong Kong obligations (including customer due diligence, the FATF travel rule for virtual-asset transfers, and beneficial-ownership identification) and the EU's Fourth and Fifth Anti-Money Laundering Directives as transposed by Cyprus law.

Gate 5 – Operational readiness before launch. A licence in hand is not a launchable fund. Before the first investor subscribes, the fund needs: a depositary or prime broker arrangement (required under AIFMD and advisable under the Hong Kong position), a fund administrator able to handle virtual-asset net-asset-value calculations, a technology stack that captures the FATF travel rule data for each transfer, and a documented policies-and-procedures manual covering both regulatory regimes. At this gate, the AML obligation in Hong Kong is worth particular attention: VATPs are subject to customer due diligence and the travel rule for virtual-asset transfers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and a fund manager who routes transfers through a non-compliant platform inherits the compliance risk.

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 regulatory classification and the steps applicable to your investor base, write to us at info@lockhartyip.com.

What does the cross-border interface between Hong Kong and Cyprus actually look like in practice?

The two jurisdictions are legally distinct and the interface between them requires active management, not assumption. Cyprus is an EU member state operating under the AIFMD, the Markets in Financial Instruments Directive (MiFID II, the EU regulatory regime for investment firms providing investment services), and EU AML directives. Hong Kong operates a common-law system with its own licensing architecture, its own AML ordinances, and a regulatory stance on virtual assets that has evolved materially since the VATP regime commenced in 2023.

In practice, two interface points require the most attention.

The first is the management fee and carried-interest flow. If the Hong Kong entity provides investment management services to the Cyprus fund and receives a fee, that arrangement must be structured so that it does not create an unintended licensed-manager relationship in Cyprus (which would require CySEC authorisation for the Hong Kong entity) or an unintended platform relationship in Hong Kong (which would engage the VATP licensing requirement). Delegation models under AIFMD permit an AIFM to delegate portfolio management to a non-EU manager, but delegation does not dissolve the AIFM's regulatory responsibility: the Cyprus entity remains accountable to CySEC for the delegated function.

The second is the reporting and data-sharing obligation. An AIFM in Cyprus with EU investors is subject to periodic reporting to CySEC and, potentially, to the EU's Annex IV reporting regime for managers above certain asset-under-management thresholds. That data requirement covers portfolio composition, leverage, and liquidity – information that may include positions held in the Hong Kong entity. Coordinating the data supply chain between the two entities before the fund launches, not after, avoids the situation where an EU reporting deadline arrives and the Hong Kong entity's systems cannot produce the required data fields in the required format.

A mid-market digital-asset manager came to our desk in late 2026 with a structure already partially incorporated: a Cyprus vehicle with a pending AIFM licence application and a Hong Kong entity that had been registered as a company but not yet engaged with the Securities and Futures Commission. The classification memo had not been produced. The structure had allocated all virtual-asset trading to the Cyprus entity, but the Cyprus entity was accepting orders from Hong Kong investors through the Hong Kong entity in a way that, on analysis, engaged the Type 1 licence category (dealing in securities) in Hong Kong. The application sequence was reordered, the delegation arrangement was restructured, and the Hong Kong entity submitted a pre-application enquiry to the Securities and Futures Commission before the Cyprus licence was granted. The matter progressed once the correct sequencing was in place.

For a discussion of how the VATP and AIFM licensing requirements interact in structures of this kind, our practice page on Tech & Web3 – Licensing, AML and Regulatory Engagement sets out the broader regulatory context.

What is the most common mistake in a Hong Kong–Cyprus digital-asset fund structure?

The most common mistake is treating the licensing question as a step that can follow the corporate structure, rather than a variable that defines it.

Teams that incorporate first and plan the regulatory architecture second regularly encounter one of three problems. First, the entity type selected – a private company in Hong Kong, a Société en Commandite (a limited partnership form) in Cyprus, an open-ended fund vehicle in the Cayman Islands sitting above both – may not be the structure the regulator expects for the licensed entity. Changing entity type after incorporation is possible but adds delay and cost. Second, the ownership and governance structure of the entities may not satisfy the "fit and proper" requirements applied by the Securities and Futures Commission in Hong Kong or the CySEC governance requirements for an AIFM – and those requirements are examined at the individual-shareholder and individual-director level, not just the entity level. A shareholder with an adverse regulatory history in any jurisdiction will attract scrutiny. Third, the AML programme for the fund is often drafted after the structure is fixed, at which point the client-facing procedures – onboarding, beneficial-ownership identification, source-of-funds documentation – have already been designed around a technology stack that may not capture the data the FATF travel rule requires.

The route that avoids this mistake is the one set out at Gate 1 and Gate 2 above: classification before incorporation, regulatory design before entity formation. That order costs no more time if the pre-application engagement with the Securities and Futures Commission and CySEC is run in parallel with the structural planning, rather than after it.

A second mistake, less common but more costly, is assuming that a Cyprus AIFM licence is sufficient for the Hong Kong investor-facing function. It is not. Where the fund accepts subscriptions from Hong Kong investors, or where the Hong Kong entity carries out activities that amount to dealing, advising, or managing in relation to securities or futures contracts, Hong Kong licensing obligations apply independently of the Cyprus authorisation. The two regimes do not cross-recognise each other's licences. This is the point that foreign counsel – accustomed to EU passporting – most frequently misjudge when first encountering the Hong Kong regulatory architecture.

If an earlier filing, structure or regulatory engagement produced a stalled result, a second read of the classification and sequencing analysis can identify the step that needs to be addressed and the routes still open. Write to us at info@lockhartyip.com to discuss the position.

For broader context on regulatory engagement with the Securities and Futures Commission and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance requirements for fintech and digital-asset entities, our briefing on fintech entity regulatory engagement in Hong Kong addresses the pre-application process in detail.

How does the AML obligation run across a Hong Kong–Cyprus digital-asset fund?

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance in Hong Kong and the EU AML directives as transposed by Cyprus law are built on the same FATF (Financial Action Task Force, the international standard-setter for AML/CFT) recommendations, but they are not identical in their operational requirements. A fund that treats one jurisdiction's AML programme as sufficient for both will almost certainly fail at the first examination in the other.

In Hong Kong, the key obligations for a licensed entity or a VATP fall under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and cover: customer due diligence at onboarding and on a risk-triggered basis thereafter; enhanced due diligence for politically exposed persons (PEPs) and high-risk counterparties; ongoing transaction monitoring; and the FATF travel rule for virtual-asset transfers, which requires originator and beneficiary information to accompany each transfer above the applicable threshold. The Securities and Futures Commission's AML guidelines for licensed corporations set out the specific expectations for virtual-asset managers.

In Cyprus, the AML framework for an AIFM is administered by CySEC in coordination with the Unit for Combating Money Laundering (MOKAS, the Cyprus financial intelligence unit). The substance of the obligation tracks the EU framework: risk-based customer due diligence, beneficial-ownership identification to the ultimate natural person, and transaction monitoring calibrated to the fund's investor profile and strategy. For a digital-asset fund, the EU's transfer-funds regulation – which extends to certain crypto-asset transfers – will apply to transfers involving the Cyprus entity from the applicable effective date under the relevant EU regulation.

The practical implication is that the fund needs two distinct but compatible AML programmes: one drafted to the Hong Kong standard and approved by the responsible officer in Hong Kong, and one drafted to the CySEC/MOKAS standard and approved by the compliance officer of the AIFM. They should share the same core risk taxonomy and client data model, so that information captured at onboarding in one jurisdiction is usable – with appropriate data-transfer safeguards – in the other. Our analysis of data transfer and privacy terms for Asia-facing platforms addresses the cross-border data-sharing constraints that affect this coordination step.

The tax dimension reinforces the substance point. Under Hong Kong's FSIE regime, foreign-sourced passive income received by the Hong Kong entity is subject to profits tax unless the entity meets the economic-substance conditions. A management entity with staff, decision-making, and systems in Hong Kong is well-positioned on substance. A letterbox entity is not. The FSIE regime has been in force from 1 January 2023. The Pillar Two minimum top-up tax, applicable to MNE groups with consolidated revenue at or above EUR 750 million, is effective for fiscal years beginning on or after 1 January 2025, but most early-stage digital-asset funds will not be in scope. Counsel should confirm the group revenue position at the outset.

What does a pre-launch decision checklist look like for this structure?

Before the fund accepts its first subscription, the following questions should each have a documented answer. This is not a legal-compliance sign-off list: it is a diagnostic tool to identify the questions still open and the professional engagements still required.

• Has a written asset-classification memo confirmed the regulatory status of each target asset class under both the Securities and Futures Ordinance and, for the Cyprus entity, the applicable EU virtual-asset regulation?
• Has the structure identified which entity is the regulated entity in each jurisdiction and who holds the relevant licence or authorisation?
• Has the delegation arrangement between the Cyprus AIFM and the Hong Kong manager been documented in a written delegation agreement that satisfies both the AIFMD delegation conditions and any Hong Kong licensing conditions applicable to the delegatee?
• Has a pre-application engagement been completed with the Securities and Futures Commission in Hong Kong and with CySEC in Cyprus before formal applications are submitted?
• Do the fit-and-proper profiles of all proposed responsible officers, directors, and material shareholders satisfy the requirements of both regulators?
• Has an AML programme been drafted to the standard required by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the EU AML framework, including travel-rule procedures for virtual-asset transfers?
• Is there a depositary arrangement in place for the Cyprus fund vehicle that meets the AIFMD depositary requirements?
• Has the fund administrator confirmed its ability to calculate net asset value for the specific asset classes held by the fund, including non-fungible or illiquid virtual assets?
• Has the income-flow between the Hong Kong entity and the Cyprus entity been analysed under the Cyprus–Hong Kong tax arrangement and the FSIE regime?
• Is the data supply chain between the two entities able to produce the data required for AIFMD Annex IV reporting and for the Securities and Futures Commission's periodic reporting requirements?
• Has a legal opinion been obtained confirming that the fund's marketing activities in each target investor jurisdiction do not trigger additional licensing or registration obligations?

A "no" or "not yet" against any of these questions identifies the next action. Counsel should treat each open item as a gate: the fund does not advance past it until the item has a documented answer.

Related practices

• Sanctions & AML – AML programme design, customer due diligence, and FATF travel-rule compliance across cross-border structures
• Holding Structures – entity architecture, offshore vehicle selection, and FSIE substance analysis for cross-border fund groups

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