Matter note: a digital-asset fund structured through Hong Kong and the BVI

A digital-asset fund structured across Hong Kong and the British Virgin Islands presents a specific regulatory problem that neither jurisdiction can resolve in isolation: the Securities and Futures Commission governs the Hong Kong nexus, the BVI Business Companies Act governs the fund vehicle, and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance binds the operators wherever the regulated activity touches Hong Kong. Getting the sequencing wrong costs more than time.

This matter note describes an anonymised engagement from our cross-border Tech & Web3 practice. It is published to illustrate the structural and regulatory logic, not to reproduce any client's position. All identifying details have been omitted or altered. The transferable lesson is in the sequencing – and in recognising which regulator actually applies to the activity, not merely to the entity.

What was the situation, and why did it present a constraint?

A fund principal approached us after a prior structuring attempt had stalled. The intended vehicle was a BVI fund holding a portfolio of digital assets. The manager entity was to be incorporated in Hong Kong. The principal had investors in multiple jurisdictions, a trading strategy executed partly through a centralised platform, and a general counsel who had relied primarily on BVI corporate advice without mapping the Hong Kong regulatory perimeter.

The constraint was not the BVI structure itself. BVI fund vehicles are well-tested above Hong Kong operating entities, and the BVI Business Companies Act is widely understood by fund administrators operating in this corridor. The constraint was the activity occurring in Hong Kong. The manager entity was directing investment decisions, communicating with the centralised trading platform, and managing custody arrangements – all from a Hong Kong base. That activity engaged the regulatory perimeter of the Securities and Futures Commission, and potentially the virtual-asset trading platform (VATP) licensing regime, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

The prior advisers had treated the BVI fund vehicle as the primary regulatory question. In our cross-border practice, we see this pattern regularly. The fund vehicle sits offshore; the management activity sits onshore; and the onshore activity is what determines licensing exposure. Reversing that priority was the first adjustment we made.

What was the regulatory issue, and which route did we take?

The regulatory issue divided into two distinct lines of analysis, which needed to be resolved in sequence before any corporate implementation could proceed.

The first line was whether any of the digital assets in the fund's target portfolio constituted a security or futures contract as defined under the Securities and Futures Ordinance. Where a virtual asset meets that definition, the licensing obligations under that Ordinance apply to the manager alongside any VATP licensing question. This is not an either/or position: both regimes can bite simultaneously. The characterisation exercise required a review of each asset class against the statutory criteria – a step the principal had not completed.

The second line was the VATP licensing regime that commenced on 1 June 2023 under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the Securities and Futures Commission as licensing authority. The question was whether the manager entity's activity – directing trading through a centralised platform – placed it within the perimeter of that regime, or whether it was acting as a client of a licensed (or transitionally operating) VATP rather than operating one. That distinction is not always obvious when the management entity controls the execution infrastructure closely.

We advised that the route to a defensible structure ran through the regulatory characterisation first, the entity architecture second, and the AML and customer due diligence framework third. Reversing that order – building the corporate stack before knowing which licences were required – was the error the prior engagement had made.

For a structured read on the licensing and AML position relevant to Hong Kong-managed digital-asset funds, see our practice overview at Tech & Web3.

The sequence above describes the standard position. Your matter turns on the specific assets, the management activity actually occurring in Hong Kong, and the platform relationships in place – which is where the regulatory analysis is won or lost.

To discuss how the VATP licensing perimeter and the Securities and Futures Ordinance characterisation exercise apply to your cross-border position, contact info@lockhartyip.com.

How did the matter actually run, and where was the turning point?

The engagement ran in four stages, each of which had to close before the next opened.

In the first stage, we mapped the portfolio's asset classes against the Securities and Futures Ordinance criteria. Several assets in the target portfolio required further analysis; a small number were removed from scope after the principal confirmed that the investment thesis did not depend on them. This stage took longer than the principal had anticipated, but it was the stage that determined whether a single licensing pathway was available or whether two concurrent applications to the Securities and Futures Commission would be required.

In the second stage, we reviewed the platform relationships. The manager entity was not operating a centralised trading platform; it was directing trades through one. That distinction placed it outside the VATP licensing perimeter for the activity in question, but it created a separate obligation: the manager needed to satisfy itself that the platforms it used were either licensed under the VATP regime or operating within a transitional arrangement recognised by the Securities and Futures Commission. Using an unlicensed, non-transitional VATP was not a viable option, regardless of where that platform was incorporated.

The turning point came in the third stage. The principal had assumed that custody arrangements handled by a BVI-incorporated service provider were outside Hong Kong's AML perimeter. That assumption was incorrect. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance applies to regulated persons in Hong Kong, and the manager entity's role in directing custody – even where the custodian sat offshore – engaged its obligations as a regulated person. We rebuilt the custody instruction framework to ensure that the manager's AML and customer due diligence (CDD) procedures covered the full scope of its activity, not merely the activity that touched a Hong Kong-incorporated counterparty.

The fourth stage was the BVI corporate implementation. By that point, the regulatory perimeter was mapped, the platform relationships were confirmed as compliant, and the AML framework was in place. The BVI fund vehicle and the fund documents were prepared with the regulatory position already resolved – not as a precondition to be sorted later.

For context on how fintech and digital-asset entities approach regulatory engagement in Hong Kong, see our briefing at Fintech entity regulatory engagement in Hong Kong.

What was the outcome, and what is the transferable lesson?

The fund launched with a defensible regulatory position in Hong Kong and a BVI structure that reflected the actual licensing and AML framework rather than a prior assumption about where regulation ended. The principal's investors received fund documents that addressed the Securities and Futures Ordinance characterisation question directly – a disclosure point that had been absent from the earlier draft documentation.

The qualitative outcome was not merely that the fund launched. It was that the principal could answer, with documentary support, the three questions that institutional investors and their counsel routinely ask of a Hong Kong-managed digital-asset fund: which regulator applies, on what basis, and what AML framework governs the manager's activity. A fund that cannot answer those questions does not attract institutional capital regardless of its investment strategy.

The transferable lesson is about sequencing and about the location of the regulatory question. In this corridor – Hong Kong manager, BVI vehicle – the Securities and Futures Commission and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance govern the management activity. The BVI Business Companies Act governs the corporate vehicle. Those are not competing frameworks; they are layered ones. Treating the BVI layer as the primary regulatory question, and the Hong Kong layer as an implementation detail, is the error that delays or derails structures of this kind.

A second lesson concerns the FATF travel rule – the requirement, adopted under the VATP regime, to transmit originator and beneficiary information for virtual-asset transfers above the applicable threshold. Funds that direct trading through licensed VATPs are indirectly affected by the travel rule because the platforms they use must comply with it. The manager's AML framework needs to account for the information flows that the travel rule creates, and for the due diligence obligations that arise when a counterparty VATP is not compliant.

If an earlier filing, structure or regulatory engagement 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.

For a related cross-border technology and data matter, see our note at Cross-border SaaS or data agreement.

What does this mean for foreign counsel and fund managers considering this structure?

Foreign counsel handling a digital-asset fund with a Hong Kong manager and a BVI vehicle face a jurisdiction-specific gap. The BVI corporate and fund law is familiar territory. The Hong Kong regulatory perimeter – and in particular the interaction between the Securities and Futures Ordinance and the VATP licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance – is not a matter of general fund practice. It requires a cross-border read that holds both layers simultaneously.

What does foreign counsel typically get wrong? Two things, in our experience. First, the assumption that a BVI fund vehicle distances the manager from Hong Kong regulation. It does not. The regulatory question follows the activity, not the corporate domicile of the vehicle. Second, the assumption that the VATP licensing question only arises if the manager is operating an exchange. The perimeter of that regime is drawn around the activity, and the characterisation of "operating" a centralised platform is fact-sensitive. A manager that controls execution closely can find itself inside the perimeter without intending to.

The practical implication for international counsel is to instruct a Hong Kong cross-border adviser before the corporate stack is finalised. The entity architecture should follow the regulatory mapping, not precede it. That sequencing is consistently the difference between a structure that holds on investor due diligence and one that requires remediation after the fund has launched.

Related practices

• Sanctions & AML – AML obligations, customer due diligence and sanctions-compliant contracting for cross-border structures
• Holding Structures – BVI and Cayman holding vehicles above Hong Kong operating entities

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Related

• Tech Web3
• Fintech Entity Regulatory Engagement Hong Kong Briefing
• Cross Border Saas Or Data Agreement Touching United

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