How to approach a digital-asset fund Mainland

A digital-asset fund sitting across the Hong Kong and Mainland China boundary is not a single regulatory problem. It is at least two, running in parallel, under different authorities, with a gate at each stage that the other regulator does not control. The decision the founding team faces – how to structure the vehicle, where to seat the management entity, and which licences to hold before the first capital call – determines whether the fund can operate legally at all.

A digital-asset fund structured through Hong Kong and Mainland China requires the management entity to be licensed or exempt under Hong Kong's virtual-asset trading platform (VATP) and securities-regulatory regimes before managing or marketing the fund, while ensuring that the Mainland-facing elements of the structure comply with the People's Republic of China's separate and restrictive rules on virtual-asset activity. The two regimes do not harmonise, and the sequencing of steps is the point at which most cross-border structures fail.

This guide sets out the options, the sequence in order, the gate at each step, and the one planning mistake that consistently derails structures of this kind. It is written for in-house counsel and principals meeting the question for the first time.

What is the decision actually about?

The founding question is not "where do we incorporate?" It is "where does the management and custody function sit, and who regulates it?" The answer to that question defines everything else – the licensing track, the investor base, the asset universe, and the degree of Mainland-side involvement that is legally sustainable.

Two structural templates appear most often in cross-border practices of this kind. The first is a Hong Kong-managed fund with offshore feeder vehicles, typically British Virgin Islands or Cayman Islands entities, through which investors participate. The second is a structure in which a Hong Kong management entity operates at arm's length from a Mainland-side advisory or research function, with no fund-management discretion exercised on the Mainland. The difference between the two is not cosmetic. It governs which regulatory authority actually applies, what the AML obligation looks like, and whether the structure is viable under PRC law at all.

A third option – seating the management function on the Mainland and managing digital assets – is not a live option under current PRC rules. The Mainland prohibits virtual currency (cryptocurrency) trading and related financial services as a general matter. That prohibition extends to fund management. Any structure that places the discretionary management function within the PRC creates a regulatory exposure that cannot be solved by contractual framing. In our cross-border practice, we see this mistake made most often by groups that have run successful Mainland-based equity or private-credit funds and assume the same architecture transfers to digital assets. It does not.

Step 1 – Identify the applicable Hong Kong licensing track

The first gate in the Hong Kong sequence is licensing. The applicable track depends on what the fund holds and how the management entity operates.

Where the fund invests primarily in virtual assets that are not securities (as defined under the Securities and Futures Ordinance), the management entity may fall within the VATP licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the Securities and Futures Commission as the licensing authority. That regime commenced on 1 June 2023. Where the fund holds virtual assets that do qualify as securities or futures contracts, the management entity requires a licence under the Securities and Futures Ordinance as well. In practice, many digital-asset funds hold a mixed portfolio, and both regimes apply.

The practical point is that the licensing analysis must be completed before the structure is built, not after the first investor commits capital. Operating without the required licence, even temporarily during a setup phase, is itself a regulatory exposure. The SFC has been clear that the commencement of the VATP regime did not create a grace period for existing or new fund managers. Parties should verify the current position on transitional provisions before acting.

The sequence for this step is: (i) map the intended asset universe; (ii) classify each asset class against the applicable definition of "security" and "virtual asset" under the relevant instruments; (iii) identify which licence type is required; (iv) assess whether any existing group licence covers the activity; and (v) engage with the SFC through the appropriate channel before committing the structure.

The contextual bridge here is important. The sequence above describes the standard licensing analysis. Your particular structure will turn on the specific assets, the investor base, and the discretion actually exercised by the management entity – which is where the licensing track is confirmed or revisited.

For a structured assessment of your fund's licensing position across Hong Kong and the relevant offshore centres, write to us at info@lockhartyip.com.

Step 2 – Determine the Mainland-side legal perimeter

The Mainland legal perimeter for a cross-border digital-asset fund is defined by what the PRC prohibits, not by what it permits. That distinction matters because the PRC regulatory position on virtual currencies is not a licensing regime with conditions. It is a general prohibition on cryptocurrency trading, exchange, and related financial services, including fund management, applied through a series of notices and directives issued by the People's Bank of China, the National Development and Reform Commission and other bodies since 2017.

The practical consequence for a cross-border structure is that any Mainland-incorporated entity, any Mainland-resident employee exercising investment discretion over the fund, and any marketing of the fund to Mainland investors through channels that are not compliant with PRC rules on outbound investment creates a regulatory exposure in China that is not mitigated by the Hong Kong entity holding a valid SFC licence.

What is permissible on the Mainland side? Research, general economic analysis, and back-office functions that are clearly separated from the investment-discretion chain are not, on their face, prohibited. But the separation must be genuine and documented. Where a Mainland-side entity or individual is in any position to influence investment decisions, the regulatory exposure is real. In our cross-border practice, the most common structural error is an org-chart separation that does not reflect the actual decision-making flow. The Mainland regulators look at the substance of who decides, not at the entity labels.

The gate at this step is a documented legal-perimeter analysis: which functions are performed in which jurisdiction, by whom, under what contractual arrangement, and which regulatory authority has visibility over each function. That analysis should be reviewed by counsel with knowledge of both the Hong Kong SFC position and the PRC regulatory directives.

Step 3 – Structure the fund vehicle and the offshore layer

With the licensing track confirmed and the Mainland-side perimeter established, the fund structure itself can be assembled. The vehicle and the offshore layer are the third step, not the first. This sequencing reverses the instinct of most corporate counsel, who move to incorporation immediately. Incorporating before the licensing analysis is done creates stranded entities and, in some cases, structures that must be dismantled and rebuilt.

The standard architecture for a Hong Kong-managed digital-asset fund with cross-border exposure places the management entity in Hong Kong (licensed or exempt under the applicable regime), the fund vehicle in a common-law offshore centre – typically Cayman Islands or BVI – and the custody function with a qualified custodian that meets the SFC's requirements for virtual-asset custody. Cayman Islands and BVI economic-substance regimes apply to offshore entities and must be satisfied where management and control is exercised in Hong Kong, not in the offshore jurisdiction. Parties should verify the current substance requirements for their specific vehicle type before acting.

Where Mainland investors participate, the inbound capital route requires analysis under the PRC's outbound-investment rules and under any applicable foreign-exchange control framework. The assumption that capital can move freely from the Mainland into an offshore fund vehicle holding virtual assets is not correct. The route must be mapped and documented before the investor is onboarded.

A mid-market digital-asset fund manager from Central Asia approached our desk in early 2027, having incorporated a Cayman fund vehicle and a Hong Kong management company before completing the licensing analysis. The management company's intended activities overlapped with both the VATP regime and the SFO licensing requirements. We assisted in restructuring the management entity's functions, separating the regulated and unregulated activities, and engaging with the SFC on the licensing sequence. The matter required an additional operational cycle, which would have been avoidable had the licensing analysis preceded incorporation.

What do foreign advisers get wrong at this step?

The question is worth asking directly. The most consistent error is treating the Hong Kong regulatory regime as a proxy for the Mainland. Because Hong Kong is part of the PRC under the one country, two systems framework, some principals and their advisers assume that a Hong Kong SFC licence, or a Hong Kong-based management entity, provides a pathway for Mainland investors or Mainland-side management functions. It does not.

The one country, two systems principle means that the two legal systems – Hong Kong's common-law system and the Mainland's civil-law system – operate separately within the same sovereign state. The SFC's authority stops at the boundary. A licence granted by the SFC gives the management entity no standing in the Mainland regulatory system and creates no permission for Mainland activities. The corollary is equally important: the Mainland's prohibition on virtual-currency activity does not override the SFC's licensing regime within Hong Kong. The two operate in parallel, and compliance with one does not substitute for compliance with the other.

The second common error is underestimating the AML and travel rule obligations that apply to a licensed virtual-asset manager in Hong Kong. Under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, VATPs and virtual-asset managers are subject to customer due diligence requirements and to the FATF travel rule for virtual-asset transfers. Where investors or counterparties have Mainland connections, the source-of-funds analysis requires particular care. The documentation burden is not lighter than for a conventional fund; in many respects, it is heavier, because the on-chain transaction history must be reconciled with the off-chain investor-onboarding file.

If an earlier structure, licensing application, 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.

Step 4 – Complete the AML and investor-onboarding sequence

AML compliance for a digital-asset fund is not a checkbox at the end of the setup sequence. It is an ongoing operational obligation that begins before the first investor is onboarded and continues through the life of the fund. The legal basis is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, which applies to licensed entities in Hong Kong, including virtual-asset managers and trading-platform operators.

The investor-onboarding sequence for a fund with cross-border exposure to Mainland China requires, at minimum: (i) identification and verification of the ultimate beneficial owner of each investing entity, not merely the entity itself; (ii) a source-of-funds analysis that covers the capital chain from the Mainland to the offshore vehicle; (iii) an assessment of whether the investor or any connected party appears on the applicable sanctions lists, applying the United Nations sanctions framework that Hong Kong implements; and (iv) enhanced due diligence where the investor profile, jurisdiction, or asset source indicates higher risk.

The travel rule obligation applies to virtual-asset transfers between the fund and its counterparties. Where the counterparty is a VATP or another licensed virtual-asset service provider, the originator and beneficiary information must accompany the transfer. Where the counterparty is not a licensed provider – which is common in early-stage digital-asset structures – the compliance position requires particular attention.

Hong Kong implements United Nations sanctions and does not give domestic effect to unilateral measures of other states. That is the factual position. The compliance file should record the sanctions screening methodology and the lists applied, so that the rationale for each decision is auditable.

The gate at this step is a documented AML programme that the management entity operates from day one of licensing, not from the date of the first trade. Regulators examine the onboarding file from the inception of regulated activity.

Step 5 – Manage the ongoing cross-border interface

A digital-asset fund structured through Hong Kong and Mainland China is not a static structure. The regulatory position on both sides of the boundary changes, sometimes quickly and without extended notice. The ongoing management of the cross-border interface is itself a compliance function.

On the Hong Kong side, the SFC's supervisory posture toward virtual-asset managers continues to develop. Licensing conditions, conduct requirements, and the perimeter of the VATP regime are subject to guidance and revision. The stablecoin licensing regime under the Hong Kong Monetary Authority – introduced for fiat-referenced stablecoin (a stablecoin whose value is pegged to one or more fiat currencies) issuers – adds a further regulatory layer for funds that hold or transact in stablecoins. Parties should verify the current commencement date and perimeter of the HKMA stablecoin regime before acting.

On the Mainland side, the regulatory directives on virtual-currency activity have been issued and revised over a period of years. The general prohibition has remained constant, but the enforcement posture and the scope of covered activities have shifted. A structure that was operationally compliant at the time of setup may require review as the Mainland enforcement environment evolves.

The practical step is a periodic review – at least annually, and triggered by any material regulatory development on either side – of whether the fund's structure, the management entity's activities, and the Mainland-side arrangements remain within the applicable legal perimeter. Counsel on our desk regularly see structures that were well-designed at inception but that drifted out of compliance as the regulatory environment moved.

See our related guidance on Tech & Web3 practice, on digital-asset fund structuring, and our briefing on structuring a Web3 business through Hong Kong.

Decision checklist: before you commit the structure

The following questions are the practical gate for any team considering a digital-asset fund with Hong Kong and Mainland exposure. They are not exhaustive, but a clear answer to each is a minimum condition of proceeding.

Has the fund's intended asset universe been classified against the definitions of "security", "futures contract" and "virtual asset" under the applicable Hong Kong instruments?
Has the applicable licensing track – VATP regime, SFO licensing, or both – been confirmed by counsel with SFC engagement experience?
Has the Mainland-side legal perimeter been documented in writing, covering every function, every entity, and every individual who touches the investment-decision chain?
Is the fund vehicle and offshore layer being assembled after the licensing analysis, not before?
Has the AML programme – including the travel rule obligation and the source-of-funds methodology – been prepared before the first investor is onboarded?
Has the sanctions-screening methodology been documented, identifying the lists applied and the rationale for the approach?
Is there a trigger for periodic review of the cross-border interface as the regulatory environment changes?
Has custody been arranged with a provider that meets the SFC's requirements for virtual-asset custody?
Where Mainland investors participate, has the inbound capital route been mapped under PRC outbound-investment and foreign-exchange rules?

If any of these questions produces an uncertain answer, the structure requires further analysis before the fund is launched.

Related practices

Sanctions & AML – AML compliance, sanctions screening and counterparty due diligence for cross-border fund structures
Holding Structures – BVI and Cayman vehicle design, economic substance and cross-border ownership analysis

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's constitutional documents (typically a limited partnership agreement or an exempted-company memorandum and articles in the offshore vehicle), the management agreement between the fund and the Hong Kong-licensed management entity, the AML and know-your-customer programme, the travel-rule compliance policy, and the legal-perimeter analysis documenting the separation between Hong Kong and Mainland functions. The SFC will also require regulatory filings specific to the licence type. Each document category serves a specific regulatory purpose; none is purely administrative.

What does the route look like for a digital-asset fund structured through Hong Kong and Mainland China?

The route runs in five stages. First, the asset universe is classified and the licensing track confirmed. Second, the Mainland-side legal perimeter is documented and the prohibited activities identified. Third, the fund vehicle and offshore layer are assembled in the correct sequence – after, not before, the licensing analysis. Fourth, the AML programme and investor-onboarding sequence are established before the first capital call. Fifth, a periodic review mechanism is built into the fund's governance to track regulatory changes on both sides of the boundary. The gate at each stage must be cleared before the next begins.

Which jurisdiction's law applies to a digital-asset fund structured through Hong Kong and Mainland China?

Multiple legal systems apply simultaneously. The management entity's licensing obligations are governed by Hong Kong law, specifically the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and, where applicable, the Securities and Futures Ordinance. The fund vehicle is governed by the law of its jurisdiction of incorporation, typically Cayman Islands or BVI law. Any Mainland-side activity is subject to PRC law, including the general prohibition on virtual-currency financial services. The governing law of the fund documents is a matter of commercial negotiation, but it does not displace the regulatory obligations imposed by the relevant authorities in each jurisdiction.

Speak with Lockhart & Yip

For a scoped view of your matter, contact info@lockhartyip.com. Discuss your matter →

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

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