A practical guide to a digital-asset fund Mainland

Capital moving into digital assets across the Hong Kong–Mainland China corridor faces a regulatory environment that does not align at every point. The fund manager who assumes that a Hong Kong licensing position automatically resolves the Mainland dimension will find the opposite is true. The two systems operate independently, and the sequence of decisions at each border determines whether the structure holds.

A digital-asset fund structured through Hong Kong and Mainland China requires the manager to satisfy the Securities and Futures Commission (SFC) licensing or exemption position in Hong Kong, address the Anti-Money Laundering and Counter-Terrorist Financing Ordinance obligations that apply to any virtual-asset trading platform (VATP) used in the structure, and separately map the Mainland restriction on retail participation in virtual-asset products. The governing instruments are the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (for VATP licensing), the Securities and Futures Ordinance (where digital assets are securities), and the Mainland's own regulatory perimeter for virtual assets. Since the Hong Kong VATP licensing regime commenced on 1 June 2023, the entry gate for any platform-level activity is mandatory licensing with the SFC.

This guide covers the decision the manager faces before structuring begins, the sequence of steps in order with the gate at each, the common mistake that stalls or invalidates the structure, and a checklist for assessing readiness. The cross-border interface between Hong Kong and Mainland China is addressed at each step.

What decision does the fund manager actually face at the outset?

The first question is not which jurisdiction to incorporate in. It is whether the fund's activity – trading, holding, or managing digital assets – crosses the licensing threshold in Hong Kong, the restriction perimeter in the Mainland, or both simultaneously.

Hong Kong permits the management of digital-asset portfolios within a defined licensing regime, provided the manager and any platform it uses are appropriately licensed or exempt. The Mainland takes a different position: retail participation in virtual-asset trading remains restricted under Mainland regulatory policy, and cross-border product distribution targeting Mainland residents carries real enforcement exposure regardless of where the fund is domiciled.

Three options are typically on the table. First, a Hong Kong-domiciled fund managed by a Hong Kong-licensed manager, investing in digital assets through licensed VATPs, with Mainland-connected investors addressed through the offshore subscription route with independent legal advice on their eligibility. Second, an offshore fund (BVI or Cayman) with a Hong Kong management entity, using Hong Kong as the fund management hub and maintaining a clear separation between the Hong Kong regulatory perimeter and any Mainland investor base. Third, a hybrid approach where the management function sits in Hong Kong and the investment vehicle is offshore, preserving Hong Kong's licensing architecture while reducing the fund's direct interface with Mainland regulatory risk.

Which option applies turns on three variables: the investor base (professional investors only, or retail); the asset mix (whether any digital asset is a security or futures contract under the Securities and Futures Ordinance); and the distribution plan. Each variable changes the licensing obligation and the risk profile of the Mainland interface.

Step 1 – Map the asset mix and the applicable regulatory perimeter

Before any entity is incorporated, the manager must characterise each digital asset in the intended portfolio against the Securities and Futures Ordinance definition of a "security" or "futures contract". Where a digital asset meets that definition, the full Securities and Futures Commission licensing regime applies to the manager and any platform through which it trades, in addition to the VATP licensing layer that applies to centralised trading platforms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

This is the gate most managers underestimate. A fund that holds Bitcoin alongside a tokenised equity instrument in the same vehicle may require the manager to hold both a VATP-related licence and a Type 9 (asset management) or Type 1 (dealing in securities) licence under the Securities and Futures Ordinance, depending on the activity. Getting the asset characterisation wrong at this stage means the licensing application is filed on incorrect assumptions – and the SFC will not licence activity that the applicant has mischaracterised.

The Mainland dimension at this stage is definitional. Mainland regulatory policy treats virtual-asset trading by Mainland residents as restricted. If the fund's portfolio includes assets that are also offered or traded on platforms accessible to Mainland retail participants, the structure carries cross-border distribution risk even if the fund itself is Hong Kong-incorporated. Our desk sees this characterisation step skipped most often in mandates where the manager is experienced in traditional fund management but new to the digital-asset perimeter.

Step 2 – Establish the management entity and its licensing position in Hong Kong

A Hong Kong-incorporated management entity is the conventional centre of gravity for a fund of this kind, because it places the manager within a common-law system, English-language courts, and a licensing regime with defined procedures and a published guidance record from the SFC.

The management entity must determine whether it is operating a centralised virtual-asset trading platform – in which case it requires a VATP licence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the SFC as the licensing authority – or whether it is managing a fund that uses such platforms, in which case the Type 9 licence under the Securities and Futures Ordinance is the primary requirement. The two obligations can overlap. A manager that also aggregates orders across platforms may find the VATP perimeter applies to its own activity.

The SFC has published detailed fit-and-proper requirements, internal-controls expectations, and ongoing reporting obligations for licensed entities in the virtual-asset space. The application process is not a formality. The SFC reviews the manager's senior personnel, systems, and risk-management architecture before granting any licence. Managers who have not engaged experienced cross-border counsel before filing commonly underestimate the documentation burden and the timeline from application to approval.

The sequence above describes the standard position. Your matter turns on the asset characterisation, the investor eligibility assessment, and the completeness of the licensing file – which is where the route is won or lost. For a preliminary read on your fund's licensing position across the relevant jurisdictions, write to us at info@lockhartyip.com.

Step 3 – Design the fund vehicle and address the Mainland investor interface

The fund vehicle choice – Hong Kong-incorporated, BVI, Cayman – is driven primarily by investor preferences, distribution channels, and the tax and regulatory treatment of the vehicle itself. Most institutional digital-asset funds in the Greater China corridor use a Cayman Islands or BVI vehicle as the investment fund entity, with a Hong Kong entity as the management and advisory hub.

The Mainland investor interface is the step most likely to stall a structure. Mainland residents are generally restricted from participating in virtual-asset investment products. This restriction applies regardless of where the fund is incorporated or managed. A fund that accepts subscriptions from Mainland-connected investors without independent legal analysis of their eligibility – and without a documented process for verifying that eligibility – runs enforcement exposure in both jurisdictions.

The practical approach is a two-stage gate. First, the fund documents define the eligible investor class (typically professional investors under Hong Kong law, with explicit exclusions or disclosure requirements for Mainland-resident subscribers). Second, the subscription process includes a representation and warranty from each investor as to their eligibility and the source of the subscription funds. This does not eliminate the risk; it creates a documented record that the manager applied a defined and defensible process.

The offshore vehicle layer also engages the Cayman Islands or BVI economic-substance regime. Funds structured above a Hong Kong management company must verify that the fund entity itself does not trigger substance requirements in the offshore jurisdiction – a matter for allied counsel admitted in the relevant jurisdiction, working alongside the Hong Kong management-entity legal analysis.

What AML obligations apply, and how does the FATF travel rule change the picture?

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance imposes customer due diligence, ongoing monitoring, and record-keeping obligations on all VATPs licensed or operating in Hong Kong. Any centralised platform the fund uses to trade is subject to these obligations. Where the fund manager is itself a VATP, the obligations apply directly to the manager's own operations.

The FATF travel rule (the Financial Action Task Force requirement that originator and beneficiary information accompany virtual-asset transfers above a defined threshold) applies to VATPs in Hong Kong as a condition of their licensing. This has practical consequences for fund operations. A fund that routes transfers through a non-compliant platform – including an offshore platform that has not implemented the travel rule – creates a compliance gap that the SFC will treat as a licensing deficiency in the Hong Kong-licensed entity.

The Mainland AML framework operates independently. Cross-border transfers of value through virtual-asset channels that touch Mainland-connected counterparties engage Mainland anti-money-laundering rules regardless of the Hong Kong licensing position. In our cross-border practice, we regularly see fund structures where the Hong Kong AML file is well-prepared but the Mainland-facing transfer documentation is absent. That gap is the one most likely to attract regulatory attention at the interface.

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 us at info@lockhartyip.com to discuss your position.

How does the stablecoin layer change the analysis?

A fund that holds or settles in fiat-referenced stablecoins faces an additional regulatory layer in Hong Kong. The Hong Kong Monetary Authority (HKMA) has established a licensing regime for fiat-referenced stablecoin issuers in Hong Kong. That regime commenced in 2025; parties should verify the current commencement date and perimeter before relying on this position.

The practical implication for a digital-asset fund is this: if the fund's settlement mechanism or treasury function uses a fiat-referenced stablecoin that is issued or offered in Hong Kong, the issuer of that stablecoin must be HKMA-licensed or operating within any transition provisions. A fund that settles through an unlicensed stablecoin issuer risks a compliance gap that is separate from, and additional to, the VATP licensing question.

This is not a theoretical concern. Stablecoins are widely used as settlement instruments in digital-asset fund structures. The regulatory position is evolving rapidly. We advise managers to build flexibility into their settlement documentation so that the fund can migrate to a licensed stablecoin issuer or a non-stablecoin settlement mechanism without requiring a fundamental restructuring of the vehicle.

What is the common mistake – and how does the correct sequence avoid it?

The most common mistake is sequencing: managers incorporate the fund vehicle and onboard investors before the management entity's licensing position is confirmed. This creates a situation where the fund is operating – receiving subscriptions, executing trades, managing positions – without a settled regulatory basis in Hong Kong. The SFC does not treat this as a curable administrative oversight. It treats it as unlicensed activity.

The correct sequence is: characterise the assets and confirm the licensing gateway first; establish the management entity and file for the required licence or confirm the applicable exemption second; design the fund vehicle and draft the subscription documents third; onboard investors only after the management entity has received its licence or a written confirmation of exemption from the SFC.

A second, related mistake is distributing the fund to Mainland-connected investors without documented eligibility analysis. This is the Mainland-facing dimension of the same sequencing error. The fund documents may be perfectly drafted under Hong Kong law while the distribution process creates Mainland enforcement exposure that the Hong Kong structure cannot resolve.

Consider a practical illustration. An Asian technology group with a treasury allocation to digital assets sought to establish a fund for co-investment alongside its corporate balance sheet, with a Cayman vehicle and a Hong Kong manager, in the second quarter of a recent year. The initial approach was to incorporate and onboard first, then apply for the licence. Counsel on our desk identified the sequencing problem before the first subscription was received. The structure was re-sequenced: the management entity filed its licensing application, the fund vehicle was drafted during the application period, and subscriptions opened only after the SFC confirmed the licensing position. The structure proceeded without the compliance gap that unlicensed operation would have created.

Decision checklist before the fund launches

The following checklist maps the minimum gate at each decision point. It is not a substitute for legal analysis specific to the fund's asset mix, investor base, and distribution plan. Parties should verify the current position before acting, particularly on the stablecoin and re-domiciliation points where the regulatory position continues to develop.

Asset characterisation: Have each digital asset in the portfolio been assessed against the Securities and Futures Ordinance definition of a security and a futures contract? Is the outcome documented?

Licensing gateway: Has the management entity determined whether it requires a VATP licence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, a Type 9 or Type 1 licence under the Securities and Futures Ordinance, or both? Has the application been filed and the position confirmed before subscriptions open?

Platform compliance: Do the trading platforms the fund uses hold the required VATP licences? Have they implemented the FATF travel rule? Is this verified by documentation, not assumption?

Investor eligibility: Are all investors professional investors under Hong Kong law? Has the fund's Mainland investor position been analysed by counsel with cross-border competence? Are the subscription documents clear on eligibility and exclusions?

AML file: Is the customer due diligence process documented for all investors? Does it cover source of funds and source of wealth, not just identity? Does it extend to virtual-asset transfers and the travel rule?

Stablecoin settlement: If the fund settles in a fiat-referenced stablecoin, is the issuer licensed or within the current transition provisions under the HKMA regime? Has this been verified, not assumed?

Offshore substance: Has the fund vehicle in the BVI or Cayman Islands been assessed for economic-substance requirements in the offshore jurisdiction? Is that assessment current?

Mainland interface: Has the fund's Mainland-facing exposure – distribution, investor eligibility, cross-border transfers – been mapped against Mainland regulatory policy, not only Hong Kong law?

A digital-asset fund structured through Hong Kong and Mainland China is achievable within the current regulatory architecture. The architecture is defined and the licensing procedures are published. What determines success is the sequencing, the completeness of the licensing file, and the rigour of the Mainland interface analysis – three elements that require cross-border counsel who work at both the Hong Kong regulatory layer and the Mainland perimeter simultaneously.

Related practices

Sanctions & AML – AML compliance, source-of-funds review and sanctions-neutral contracting for cross-border structures
Holding Structures – offshore and Hong Kong holding-entity design for international groups and fund managers

Frequently asked questions

What documents are needed for a digital-asset fund structured through Hong Kong and Mainland China?

The core document set includes the fund constitutional documents (limited partnership agreement or articles of association depending on the vehicle), the investment management agreement between the fund and the Hong Kong management entity, the subscription agreement and investor eligibility declarations, the SFC licensing application file for the management entity, the AML and customer due diligence procedures manual, and the travel-rule compliance documentation for any VATP used by the fund. Stablecoin settlement adds an issuer-licensing verification layer. The exact set depends on the asset mix, the investor base, and the distribution route.

What is the first step in a digital-asset fund structured through Hong Kong and Mainland China?

The first step is asset characterisation: determining whether any digital asset in the proposed portfolio is a security or futures contract under the Securities and Futures Ordinance. That characterisation controls which licences the management entity requires and which platforms it may use. Establishing the management entity or incorporating the fund vehicle before this step is complete is the sequencing error most likely to create a compliance gap that cannot be remedied after subscriptions have opened.

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

Four risks dominate. First, unlicensed operation – accepting subscriptions or executing trades before the management entity's licensing position is confirmed by the SFC. Second, Mainland investor eligibility exposure – distributing to Mainland-connected investors without documented eligibility analysis under Mainland regulatory policy. Third, platform non-compliance – using a VATP that is not licensed or has not implemented the FATF travel rule, creating a compliance gap attributed to the fund manager. Fourth, stablecoin issuer risk – settling through a fiat-referenced stablecoin issuer that is not licensed under the HKMA regime.

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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 Mainland China