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

A digital-asset fund using both Hong Kong and Cyprus as structural nodes sits at the intersection of two live regulatory regimes – one in Asia, one in Europe – and a principal who designs the structure without understanding which regulator actually applies to each layer will discover the gap at the worst possible moment: during a licensing review or an investor due-diligence call. The question is not which jurisdiction is more favourable. The question is which activities happen where, and what each jurisdiction requires of the entity performing them.

A digital-asset fund structured through Hong Kong and Cyprus must map each regulated activity – trading, managing, custodying, issuing – to the entity that performs it, then satisfy the licensing and AML regime of the jurisdiction in which that entity operates. In Hong Kong, the mandatory licensing regime for centralised virtual-asset trading platforms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance commenced on 1 June 2023, with the Securities and Futures Commission as the licensing authority; in Cyprus, the EU Markets in Crypto-Assets Regulation applies. The structure works only if both layers are addressed in sequence before capital is raised.

This guide sets out the decision the reader faces, the sequence of steps with the gate at each, the common mistake at each stage, and a decision checklist for principals ready to move.

Why Hong Kong and Cyprus together – and what that pairing actually means for regulation

The combination is not arbitrary. Hong Kong offers access to Asian capital flows, a common-law system with well-tested courts and arbitration institutions, a profits-tax regime on a territorial basis, and a virtual-asset regulatory regime that is now mandatory and operational. Cyprus, as an EU member state, offers a European legal base, access to the EU's passporting architecture under the Markets in Crypto-Assets Regulation (MiCAR – the EU-wide regulation governing crypto-asset issuers and service providers, in force across member states), and a treaty network that many Asian fund sponsors value for investor reporting purposes.

But the combination also creates a compliance question that a purely domestic structure does not: which entity does what, and does the activity trigger a licence obligation in Hong Kong, in Cyprus, or in both? A fund-management entity in Hong Kong that directs trading for a Cyprus-based fund vehicle will face the SFC's analysis of whether it is providing a regulated virtual-asset service or, where the assets are securities, a regulated activity under the Securities and Futures Ordinance. A Cyprus entity performing custody for Hong Kong-based investors may face SFC scrutiny depending on the reach of the activity and where investors are located.

In our cross-border practice, we see principals arrive with a structure that has been designed around tax efficiency alone. Licensing and AML obligations are treated as something to resolve later. They are not. Both regulators now require that a licensed entity be in place before it solicits investors or conducts regulated activities, and the sequencing error – committing capital before the licence is in hand – is costly to reverse.

Step one: Map the activities before choosing the vehicles

The first gate is an activity analysis, not an entity formation. Before incorporating anything, the principal must identify, for each proposed activity, the entity that will perform it and the jurisdiction in which that entity will be based or from which it will operate.

The relevant activities in a digital-asset fund structure typically include: portfolio management (directing investment decisions); trading (executing on a platform); custody (holding or controlling private keys or assets for others); issuance (creating or offering tokens or fund interests); and investor-facing distribution (marketing, subscription processing).

Each of these may be regulated separately. In Hong Kong, a centralised virtual-asset trading platform requires a VATP licence from the SFC under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. Where a virtual asset is a "security" or "futures contract" under the Securities and Futures Ordinance, SFC licensing under that ordinance also applies to the management or trading of that asset. In Cyprus and across the EU, MiCAR imposes authorisation requirements on crypto-asset service providers (CASPs – entities providing services such as custody, exchange, transfer or portfolio management in crypto-assets). An entity that is both a CASP under MiCAR and a VATP operator for Hong Kong clients faces parallel regimes.

The output of this step is a one-page activity map: each activity, the entity performing it, the jurisdiction, and the licensing consequence. Only after this map is complete should the principal begin entity selection.

Step two: Select the entities and their roles with the licence obligations already assigned

The typical structure uses a Cyprus entity as the fund vehicle or the CASP-licensed manager for European investor access, and a Hong Kong entity as the operating entity or adviser for Asian capital flows and local platform access. The holding relationship between the two – whether the Cyprus entity owns the Hong Kong entity, or both are siblings under an offshore holding layer in the BVI or Cayman Islands – has consequences for both the substance (the physical presence and decision-making genuinely located in each jurisdiction) and the tax position.

On substance: Hong Kong requires a VATP licensee to maintain a genuine operational presence in Hong Kong. The SFC's licensing conditions for virtual-asset trading platforms require that the entity be incorporated in Hong Kong or have a registered office here, and that key management functions be performed locally. A paper entity with no staff and no local decision-making will not satisfy the licensing authority.

On substance in Cyprus: MiCAR similarly requires that a CASP be established in the EU and have a real presence there. The European Securities and Markets Authority has issued guidance making clear that letter-box entities will not satisfy the authorisation conditions.

On the offshore layer: if a BVI or Cayman holding entity sits above both operating entities, the economic-substance regimes in those jurisdictions must be addressed. A holding entity that receives dividends from the operating entities will need to satisfy the relevant fund-business substance test in its home jurisdiction. This is not a reason to avoid the offshore layer; it is a reason to plan the substance at each node before incorporating.

The second gate is therefore: is the substance plan for each entity in place before incorporation? If not, the structure is incomplete.

Step three: AML obligations and the FATF travel rule

AML compliance is not a consequence of licensing; it is a precondition. In Hong Kong, virtual-asset trading platforms are subject to customer due diligence requirements and the FATF travel rule (the Financial Action Task Force standard requiring VATPs to pass originator and beneficiary information with virtual-asset transfers) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. In Cyprus, VASPs authorised under MiCAR are subject to the EU's AML directives and the EU's own implementation of the travel rule under the Transfer of Funds Regulation.

For a dual-jurisdiction structure, the AML compliance programme must cover both sets of obligations. In our cross-border practice, we find that AML programmes drafted for one regime frequently fail on the requirements of the other. A Hong Kong-only AML framework will not cover the EU beneficial-ownership reporting obligations that apply to the Cyprus entity. A MiCAR-aligned AML framework may not address the SFC's specific customer due-diligence requirements for Hong Kong retail investors.

The third gate is: does the AML programme cover both regimes, and has it been reviewed by counsel familiar with each? A fund that passes its Hong Kong licensing review but cannot satisfy the Cyprus CASP authorisation on AML grounds has spent its time and fees in the wrong order.

A practical note on investor onboarding: where the fund accepts subscriptions from both Asian and European investors through entities in different jurisdictions, the onboarding process must identify the applicable customer due-diligence standard for each investor cohort. The travel rule applies to transfers from the fund to investors in virtual assets, not just to trades on a platform; the operational infrastructure must be capable of capturing and transmitting the required information at the point of transfer.

Step four: The licensing sequence – which application goes first?

The sequencing of licensing applications across two jurisdictions is a practical question that principals often misjudge. The common assumption is that both applications run in parallel. In practice, the applications are interdependent.

If the Hong Kong entity will provide services to the Cyprus fund vehicle, the SFC will want to understand the structure of the fund, the identity of the regulated counterpart in Cyprus, and whether that counterpart is authorised. An SFC licensing application that describes a Cyprus fund vehicle that does not yet hold a CASP authorisation will face questions it cannot answer. Conversely, a MiCAR authorisation application for a Cyprus CASP that describes a Hong Kong trading entity that is not yet licensed will face the same difficulty.

The practical resolution is to file the applications in the jurisdiction whose licensing review is longer and whose questions will be most sensitive to the other entity's status. In many structures, the Hong Kong VATP licensing process is the longer gate, and the Cyprus CASP application follows once the Hong Kong licensing position is at least advanced to the in-principle stage. But this is a fact-specific assessment; the answer changes if the principal intends to launch in Europe before Asia.

The fourth gate is: what is the correct sequencing of the two licensing applications, and who is coordinating the responses across both processes? Where the same question is answered differently in two applications filed in two jurisdictions, the discrepancy will be identified and will require correction. Counsel coordinating both applications need to ensure consistency in the entity descriptions, the activity scope, and the AML representations.

Step five: Tax position and the interaction with the FSIE regime

The tax position of a dual-jurisdiction digital-asset fund requires separate analysis for the Hong Kong entity, the Cyprus entity, and, where present, the offshore holding layer. This guide addresses only the elements that interact directly with the licensing and structural choices already made.

In Hong Kong, profits tax applies on a territorial basis: only profits sourced in Hong Kong are chargeable. The two-tier rate is 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above that threshold. There is no capital gains tax and no withholding tax on dividends or interest in the general position. For a fund management entity in Hong Kong, the source question – whether management fees and carried interest are Hong Kong-sourced – depends on where the investment decisions are made and where the services are performed.

The foreign-sourced income exemption (FSIE) regime, in force from 1 January 2023 and subsequently amended, imposes economic-substance conditions on entities claiming an exemption for certain categories of passive income received in Hong Kong from offshore sources. Dividends received by the Hong Kong entity from the Cyprus entity or from the offshore holding layer fall within the FSIE perimeter and require the Hong Kong entity to satisfy the relevant substance test. A licensing-compliant Hong Kong entity with genuine staff and local decision-making will generally have the substance to satisfy the FSIE conditions; a thin entity will not.

For Hong Kong in-scope groups within the scope of the Pillar Two minimum top-up tax regime – effective for fiscal years beginning on or after 1 January 2025 for MNE groups with consolidated revenue of EUR 750 million or above – the interaction between the Hong Kong effective tax rate and the global minimum tax rate of 15% requires separate modelling. Most digital-asset fund structures below the EUR 750 million revenue threshold will not be in scope, but principals with institutional investors at that scale should verify their position.

Step six: The cross-border enforcement and governance angle

A digital-asset fund is an ongoing governance obligation, not a one-time structure. The cross-border dimension raises enforcement and governance questions that a single-jurisdiction fund does not face.

Investor disputes in a dual-jurisdiction structure need a clear governing-law and dispute-resolution clause in the fund documents. A Cyprus-law fund agreement with a Cyprus-court jurisdiction clause will be enforceable within the EU under EU rules. A Hong Kong arbitration clause in the same documents creates a different enforcement route: awards from a Hong Kong-seated arbitration are enforceable in a large number of jurisdictions under the New York Convention, and since the Mainland–HK interim-measures arrangement has been in effect since 1 October 2019, Hong Kong-seated arbitrations may also seek interim measures from Mainland courts where Mainland assets are engaged.

Where the fund holds digital assets under custody in Hong Kong and the fund vehicle is a Cyprus entity, the question of which law governs the custody relationship – and which court has jurisdiction over a custody dispute – should be settled in the custody agreement before the fund launches. Leaving this point open creates a gap that will be expensive to close once a dispute arises.

We regularly advise fund sponsors on the governance architecture of dual-jurisdiction structures: the governing-law choice, the dispute-resolution clause, the director-liability position across two legal systems, and the interaction with the ongoing AML reporting obligations of both entities. The governance layer is not separable from the licensing layer; the two need to be designed together.

Common mistakes and how the route avoids them

Three mistakes appear consistently in structures of this kind. Identifying them in advance is more useful than discovering them under regulatory scrutiny.

Mistake one: treating the structure as a tax problem and the licensing as an afterthought. The licensing regime in both Hong Kong and Cyprus is now mandatory and operational. An entity that conducts regulated activities before it is licensed faces enforcement action, not a curable defect. The activity map at step one is designed to prevent this. If the activity map shows that a licence is required before the fund can operate, the licence application is the first item on the critical path, not the last.

Mistake two: using a single AML compliance programme for both entities without adapting it to each regime. The Hong Kong SFC's AML requirements and the EU AML framework share a common foundation in FATF standards but differ in their specific requirements for investor identification, transaction monitoring, and travel-rule implementation. A programme that copies one jurisdiction's requirements into the other entity's documents will fail a compliance review. The AML programme for each entity should be drafted by reference to the specific requirements of the applicable regime, then reviewed for consistency across the two.

Mistake three: filing two independent licensing applications with inconsistent descriptions of the structure. The SFC and the Cyprus regulator will each ask for a description of the corporate structure, the regulated activities, the connected entities, and the AML controls. Where those descriptions are drafted independently and differ in material respects – for example, the characterisation of the management relationship between the Hong Kong and Cyprus entities – the discrepancy creates a compliance problem in both applications. Coordinated drafting, with a single structural narrative reviewed before either application is filed, is the practical solution.

Decision checklist before committing to the structure

The following checklist is not exhaustive. It is the minimum set of questions a principal should be able to answer before proceeding to incorporation and licensing applications.

• Has an activity map been prepared identifying each regulated activity, the entity performing it, and the jurisdiction?
• Is there a genuine substance plan for the Hong Kong entity, including local staff, local decision-making, and a registered office?
• Is there a genuine substance plan for the Cyprus entity, satisfying both MiCAR establishment requirements and the EU AML obligations?
• If an offshore holding layer is used, has the economic-substance regime in that jurisdiction been addressed?
• Has the sequencing of the two licensing applications been determined, with one lead application identified?
• Has a single structural narrative been prepared for use in both licensing applications, reviewed for consistency before filing?
• Does the AML compliance programme cover both the SFC's requirements and the EU AML/travel-rule requirements?
• Have the governing-law and dispute-resolution clauses in the fund documents been determined, with the enforcement consequences of each option assessed?
• Has the FSIE position for the Hong Kong entity been reviewed in light of the income flows expected from the structure?
• Has the Pillar Two position been reviewed for any in-scope investor group?

A structure that can answer all ten questions affirmatively before the first incorporation filing is in a materially better position than one that defers any of them.

For further background on the Hong Kong virtual-asset regulatory regime and the licensing requirements for trading platforms, see our virtual-asset trading platform licence briefing. For the broader Tech & Web3 practice context, including entity structuring and cross-border AML obligations, see the Tech & Web3 practice page. For cross-border agreement structures in related technology contexts, the guide to cross-border SaaS and data agreements touching the UAE addresses parallel drafting and governing-law issues.

Related practices

• Sanctions & AML – AML programme design and cross-border compliance for regulated entities
• Holding Structures – offshore and Hong Kong holding architecture, substance and FSIE planning

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