A digital-asset fund structured through Hong Kong and Mainland China: a step-by-step guide

Structuring a digital-asset fund across the Hong Kong–Mainland China interface is one of the more technically demanding exercises in cross-border capital formation. The two jurisdictions share a border but operate entirely separate legal systems, separate regulatory authorities, and – critically – separate postures toward virtual-asset activity. Getting the structure wrong does not merely create cost; it can produce a fund that is unlicensed, unenforceable, or inaccessible to its intended investor base before the first subscription closes.

A digital-asset fund that spans Hong Kong and Mainland China requires a Hong Kong-domiciled fund entity licensed or structured to satisfy the Securities and Futures Commission's requirements for virtual-asset activity, combined with a clear and documented decision about the legal treatment of Mainland-connected investors, assets, and service providers – governed primarily by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, the Securities and Futures Ordinance, and the cross-border fund-distribution rules that the Mainland authorities apply separately.

This guide sets out the sequence in the order that practitioners work through it, identifies the gate at each step, and flags the mistake that most commonly stalls or defeats a well-intentioned structure. Readers who have worked through the Tech & Web3 practice overview will find the analysis here applied to this specific cross-border pair.

What decision does the sponsor actually face at the outset?

Before any structural question, the sponsor must resolve a prior and more fundamental one: what does the fund actually do with digital assets, and in which jurisdiction does it do it? The answer determines which regulator applies, which licence is required, and whether Mainland-connected elements are permissible at all.

In our cross-border practice, sponsors routinely arrive with a draft structure that conflates three distinct modes of digital-asset activity. The first is a fund that holds digital assets as portfolio investments, managed by a Hong Kong-licensed manager. The second is a fund that uses a virtual-asset trading platform as its execution venue. The third – and the most sensitive for this jurisdiction pair – is a fund that in some way originates, places, or distributes to Mainland-connected persons or entities.

Each mode attracts a different regulatory answer. Hong Kong operates a licensing regime for centralised virtual-asset trading platforms (centralised exchange-type entities) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the Securities and Futures Commission as the licensing authority. Where the virtual assets in question constitute "securities" or "futures contracts" under the Securities and Futures Ordinance, SFC licensing requirements under that Ordinance also apply in parallel. A fund manager operating in Hong Kong who manages a portfolio of digital assets that qualify as securities is not exempt from the standard securities-regulatory position simply because the assets are tokenised.

The Mainland position is categorically different. The Mainland has, as a general matter, prohibited the offering, trading, and facilitation of most digital-asset activity within its territory. This does not mean a Mainland-connected fund is impossible. It means the sponsor must be rigorous about exactly which elements of the fund touch the Mainland, and in what legal capacity. Mainland investors may be restricted from participating in certain vehicle types. Mainland-based service providers may be unavailable. The gate at this first step is a written analysis of the fund's activity map – what it does, where, and who touches it on each side of the border.

Step one: choosing the fund vehicle and its domicile

A Hong Kong-domiciled fund entity is the standard starting point for a digital-asset fund that wants regulatory recognition in Hong Kong and a defensible posture toward cross-border enforcement. The question is the precise vehicle type.

Most digital-asset fund sponsors working through Hong Kong use an open-ended fund company (OFC), a limited partnership fund, or an offshore entity – typically a Cayman Islands or BVI structure – with the manager sitting in Hong Kong. Each carries different implications for the Mainland-connected elements.

The OFC and the limited partnership fund are Hong Kong-domiciled vehicles governed by Hong Kong company and partnership law respectively. Both can appoint a Hong Kong-licensed investment manager as their discretionary manager. Both carry the advantage of a Hong Kong regulatory home. For a fund with Mainland-connected investors, however, the distributor or placement agent must also be assessed separately: distribution into the Mainland is subject to the Mainland's own fund-distribution rules, and those rules have historically been restrictive for foreign-domiciled funds holding alternative or digital assets.

An offshore vehicle – Cayman or BVI – sitting above a Hong Kong manager remains common in practice. The offshore entity provides the structural flexibility that institutional investors expect, while the Hong Kong manager holds the SFC-regulated status. The downside is an additional layer in the structure and, for a fund with Mainland-connected persons, the additional question of whether the offshore entity itself creates unwanted regulatory exposure in the Mainland. Our desk regularly advises on this layering question, and the answer is fact-specific every time.

The gate at this step is the vehicle selection memo: a written decision that maps the chosen structure against the regulatory posture in both jurisdictions, identifies the entities that will require licensing or registration, and confirms the domicile of each.

Step two: identifying which licences and registrations apply

Licence mapping is the step most commonly compressed or deferred. That compression is the single most frequent structural error our team encounters in this practice.

In Hong Kong, the relevant regulatory axes are: (a) whether the fund manager is conducting Type 9 regulated activity (asset management) under the Securities and Futures Ordinance; (b) whether any virtual asset in the portfolio is a "security" or "futures contract" triggering SFC licensing; and (c) whether the fund itself, or any execution venue it uses, falls within the mandatory licensing regime for virtual-asset trading platforms, which commenced on 1 June 2023. A manager who manages a discretionary portfolio that includes digital assets qualifying as securities requires an SFC licence for Type 9 regulated activity. A manager who operates a centralised platform for trading virtual assets requires a virtual-asset trading platform (VATP) licence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

These are not alternative licences. A fund structure that involves both managed portfolios of security-type tokens and a centralised execution arrangement may require both. Getting this wrong at launch is not merely a compliance failure. It is a structural defect that may require the fund to suspend operations, return capital, or restructure the management arrangement entirely.

The Mainland does not issue equivalent licences for digital-asset activity in the conventional sense. The practical implication for the cross-border structure is that the Mainland-facing elements of the fund – investor agreements, placement arrangements, service-provider contracts – must be designed on the assumption that they will be assessed under the Mainland's restrictive approach, and that any Mainland entity in the chain must be able to demonstrate it is not conducting licensed digital-asset activity in the Mainland.

The gate at this step is a completed licence matrix: a document that identifies each regulated activity, the entity performing it, the jurisdiction of regulation, and the current status of any application or registration.

The sequence above describes the standard position. Your matter turns on the specific assets the fund holds, the jurisdictions engaged by each counterparty, and the order in which you build the licensing stack – which is where the route is won or lost. To discuss the licence mapping for your structure, write to us at info@lockhartyip.com.

Step three: building the AML and investor-due-diligence architecture

Anti-money laundering compliance for a digital-asset fund is more demanding than the equivalent exercise for a conventional fund, because the source-of-funds and transaction-monitoring obligations extend to the on-chain activity of the fund itself, not merely the KYC file of each investor at subscription.

In Hong Kong, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance applies to designated non-financial businesses and professionals as well as to licensed financial intermediaries. Virtual-asset trading platforms subject to the VATP licensing regime are subject to customer due-diligence requirements and to the travel rule (the FATF standard requiring that identifying information accompany virtual-asset transfers above a threshold). A fund manager who is also SFC-licensed for Type 9 regulated activity is subject to the SFC's AML guidelines, which incorporate substantively equivalent requirements.

For the Mainland-connected elements, the AML analysis runs on a different track. Mainland-connected investors must be assessed under the fund's standard KYC and source-of-funds procedures, but the practical difficulty is obtaining documentary verification of fund origin where Mainland capital-export controls apply. The sponsor must build a source-of-funds procedure that accounts for this. It must also document its assessment of whether any Mainland-connected investor constitutes a politically exposed person under the applicable AML guidelines.

We have acted on fund structures where the AML file was built entirely for the Hong Kong regulatory audience, with no documented consideration of the Mainland-connected investors' source-of-funds position. When those structures were later reviewed – either by the SFC or by a counterparty conducting due diligence before a secondary transaction – the gap in the AML file was the primary problem. The fix, in those cases, required a retrospective remediation exercise that delayed the fund's subsequent capital raise by a full subscription cycle.

The gate at this step is an AML and investor-due-diligence policy that is calibrated to the specific investor types the fund will accept, documents the travel-rule compliance mechanism, and addresses the Mainland-connected source-of-funds question explicitly.

Step four: documenting the cross-border interface – investor agreements, distribution, and enforcement

The fund documents must reflect the cross-border reality, not a generic template adapted from a single-jurisdiction fund. This step is where structural complexity translates directly into legal risk if compressed.

The subscription agreement must state, clearly and specifically, which investor types are eligible, which are excluded, and why. For a Hong Kong–Mainland fund, this means an explicit analysis of whether Mainland-resident individuals, Mainland-incorporated entities, or entities with Mainland beneficial owners are eligible subscribers, and under what conditions. A generic "US persons excluded" boilerplate is insufficient.

Distribution arrangements must be assessed separately. If the fund intends to accept Mainland-connected investors, the distribution or placement agent must have a legitimate legal basis for that activity. The sponsor should obtain a written analysis of the Mainland-law position from counsel instructed in the Mainland jurisdiction. Lockhart & Yip coordinates this analysis with allied counsel admitted in the relevant jurisdiction; we do not hold ourselves out as practising Mainland law directly.

The governing law and dispute-resolution clause in the fund documents is a further cross-border decision point. Hong Kong law and HKIAC arbitration is a standard and well-tested combination for a Hong Kong-managed fund. The Mainland does not recognise all foreign arbitral awards in the same way as Convention states, but the mutual-enforcement Arrangements between the Mainland and the HKSAR provide a specific mechanism for the enforcement of Hong Kong-seated arbitral awards in the Mainland – and, since the 2021 amendment to the Supplemental Arrangement, simultaneous enforcement applications are permitted. This is a material advantage over trying to enforce a foreign court judgment against a Mainland-based counterparty.

The gate at this step is a reviewed set of fund documents – subscription agreement, limited partnership agreement or articles of association, investment management agreement, and distribution or placement agreements – that each address the Hong Kong–Mainland interface specifically.

How does the Hong Kong–Mainland interface typically go wrong?

The most common mistake is structural mischaracterisation at the outset: building a fund that the sponsor believes is "Hong Kong only" but which has Mainland-connected elements that the Mainland authorities would regard as Mainland-facing digital-asset activity. This is not a theoretical risk. It has produced enforcement attention, forced restructuring, and investor exits in structures our team has reviewed.

The mischaracterisation typically arises in one of three ways. First, a Mainland-based promoter or placement agent sources investors and receives a fee, creating a distribution arrangement that has not been assessed under Mainland rules. Second, a Mainland entity in the investment manager's group provides research, technology, or operational support, creating a question about whether the fund's management functions are in substance being performed in the Mainland. Third, a Mainland-resident individual holds a significant interest in the fund GP or manager, and that individual's involvement is characterised as "passive" when in practice they are actively directing investment decisions.

Each of these situations is manageable at the structuring stage. None is easily managed after the fund has launched and investors have subscribed. The correct sequence is to identify every Mainland-connected element before the structure is finalised, assess each element against both the Hong Kong regulatory position and the Mainland's position, document the assessment, and build the structure around the result – not around the result the sponsor hoped for.

A mid-sized Asian asset manager approached our desk in the course of a fund-structuring exercise (mid-2027). The proposed structure placed the investment manager in Hong Kong and routed a portion of the fund's subscriptions through a Mainland-based family-office network. The network's coordinator was characterised in the draft documents as an "introducer" rather than a placement agent. Our review identified that the coordinator's activities, as actually conducted, amounted to solicitation of investments in a fund – a characterisation that, under both the Hong Kong and Mainland regulatory regimes, carried licensing implications the introducer did not have. The structure was revised to route Mainland-connected subscriptions through a properly documented placement arrangement, with appropriate regulatory assessment in both jurisdictions. The fund launched on a later timetable but without the structural defect.

For readers who have structured funds through other jurisdiction pairs, a comparison with the Hong Kong–Singapore approach – which involves different regulatory symmetry and a different investor-base profile – is available at the Hong Kong–Singapore fund structuring guide. The BVI-related considerations are addressed separately at the Hong Kong–BVI briefing.

What are the ongoing compliance obligations once the fund is operational?

A digital-asset fund in Hong Kong is not a "launch and leave" structure. The ongoing compliance obligations are substantive, and in our cross-border practice we see them underestimated at the fundraising stage more often than any other category of risk.

The SFC-licensed manager is subject to ongoing conduct obligations: periodic reporting, maintenance of records, notification of material changes to the fund's structure or investment strategy, and compliance with the SFC's AML guidelines on an ongoing basis. The VATP, if the fund uses one as its execution venue, has its own ongoing licence conditions. These are not static. The SFC has amended its guidelines on virtual-asset managers on multiple occasions since the regime commenced, and the Pillar Two minimum top-up tax – effective for fiscal years beginning on or after 1 January 2025 for in-scope groups – may apply to the manager entity if it sits within a larger multinational group above the revenue threshold.

The AML obligations are also ongoing. The fund's policies must be reviewed and updated as the investor base changes, as new virtual assets enter the portfolio, and as the Mainland-connected elements of the structure evolve. The travel-rule compliance mechanism must be maintained for every virtual-asset transfer above the applicable threshold. Source-of-funds documentation must be kept current.

Counsel on our desk regularly help managers build an ongoing compliance calendar that maps each obligation to its trigger date, the responsible function, and the regulatory consequence of a missed step. This is not a bureaucratic exercise. For a fund with a Mainland-connected investor base, a lapse in the AML file or a missed SFC notification can produce regulatory scrutiny at exactly the moment the fund is trying to raise its next capital round.

If an earlier filing, structure or compliance arrangement has produced an adverse or stalled result, a second read can identify the structural error and the routes still available. For a preliminary assessment of your digital-asset fund's cross-border position, contact info@lockhartyip.com.

Decision checklist: is your structure ready to move?

Before proceeding to the documentation stage, the sponsor should be able to answer each of the following questions clearly and in writing. A "no" or "not yet" at any item is a gate that must be resolved before the next step is taken.

• Have you mapped every digital-asset activity the fund will conduct, and identified which activity is subject to SFC licensing and which (if any) falls within the VATP licensing regime?
• Have you identified every element of the structure with a Mainland connection – investors, service providers, promoters, and beneficial owners of the manager – and assessed each under both the Hong Kong regulatory position and the Mainland's position?
• Has the vehicle domicile been selected with specific reference to the fund's investor base and the distribution arrangements planned for Mainland-connected subscribers?
• Is there a completed licence matrix identifying each regulated activity, the entity performing it, and the current licensing status in each jurisdiction?
• Has an AML and investor-due-diligence policy been prepared that addresses travel-rule compliance, politically exposed person screening, and Mainland-connected source-of-funds verification?
• Do the fund documents – subscription agreement, management agreement, and distribution arrangements – address the Hong Kong–Mainland interface specifically, rather than by reference to generic exclusions?
• Has the dispute-resolution clause been assessed for enforceability in the Mainland, with consideration of the mutual-enforcement Arrangements between the Mainland and the HKSAR?
• Is there an ongoing compliance calendar that maps SFC reporting obligations, AML review cycles, and Pillar Two monitoring to the responsible function within the manager?

A structure that can answer "yes" to each of these items is materially better positioned than one that cannot, at every subsequent stage: regulatory review, investor due diligence, secondary transactions, and enforcement.

Related practices

• Sanctions & AML – cross-border AML compliance, source-of-funds structuring, and travel-rule implementation
• Holding Structures – offshore and Hong Kong holding entity design for fund and investment vehicles

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