Matter note: a digital-asset fund structured Mainland

The question arrived in a form we see more frequently now. A cross-border investment group – Mainland principals, assets across jurisdictions, an ambition to run a regulated digital-asset fund – wanted to use Hong Kong as the regulated hub. They had already spoken to counsel in two other cities. Neither had given them a clear answer on the licensing question as it actually applied to their structure.

A digital-asset fund operating through Hong Kong must position its regulated activities within the licensing regime administered by the Securities and Futures Commission and, where its platform handles client orders on centralised infrastructure, within the virtual-asset trading platform regime that commenced on 1 June 2023 under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The Mainland dimension does not remove that obligation – it sharpens it, because the cross-border flow of client instructions and assets creates a jurisdictional interface that both regulators will examine.

This note describes the structure, the problem, and the sequence that resolved it. All identifying detail has been removed.

What was the situation, and what made it complicated?

The group had operated investment vehicles in the Mainland for several years. The principals understood Mainland regulatory norms. They did not yet have the same fluency with Hong Kong's licensing architecture for digital assets, and this gap – rather than any misconduct – was the origin of the difficulty.

The proposed structure placed the fund manager in Hong Kong, with the principal place of fund activity and investor onboarding running through a Hong Kong-registered entity. Investors included both offshore participants and a tranche of Mainland-connected capital. The assets under management would include a mix of virtual assets – some fitting the definition of "securities" or "futures contracts" under the Securities and Futures Ordinance, others sitting outside that perimeter.

The first complication was classification. Not every virtual asset is a regulated product under the Securities and Futures Ordinance, and the regulatory obligation that flows from managing or dealing in it shifts accordingly. The group had structured the fund without formally resolving which assets fell into which regulatory bucket. That ambiguity carried enforcement risk: if the Securities and Futures Commission concluded that certain assets were securities, the management of a collective investment scheme holding them would require authorisation under the Securities and Futures Ordinance. Operating without it is not a technical oversight. It is an offence.

The second complication was the Mainland capital tranche. Mainland investors participating in an offshore digital-asset fund operate within a highly controlled environment. Hong Kong's regulator does not police Mainland outbound investment rules, but the structure of the fund – its documentation, its subscription process, the representations made to investors – needed to be consistent with the position that investors, not the fund manager, were responsible for their own regulatory compliance on the Mainland side. Getting the line right required understanding both systems.

What issue did counsel have to work through first?

The threshold issue was whether the fund, as designed, required a virtual-asset trading platform licence, a Type 9 (asset management) licence under the Securities and Futures Ordinance, both, or neither in its current form.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance requires a person operating a virtual-asset trading platform (a centralised exchange or matching service for virtual assets) to hold a licence from the Securities and Futures Commission. The fund, as described, was not operating a trading platform. It was managing a collective portfolio. That distinction mattered. The platform licensing regime and the securities-and-futures licensing regime are not interchangeable; they address different activities and carry different obligations.

The fund manager's proposed activities – discretionary management of a portfolio of virtual assets on behalf of investors – fell most naturally within the scope of a Type 9 licence. Where those virtual assets met the definition of "securities", that analysis was straightforward. Where they did not, the position required closer review, because Hong Kong had at the time the fund was being structured introduced – and was continuing to refine – conditions under which non-security virtual assets could be held within a licensed fund manager's book.

Our desk worked through the asset classification question asset by asset. The result was a clear split: a subset of the proposed portfolio required a Type 9 licence and fund authorisation as a collective investment scheme; a separate subset could be held under a distinct operational arrangement. The structure was redesigned around that split before any licence application was filed.

What foreign counsel had missed was that filing a licence application for the wrong activity type – or filing before the structure was resolved – would have put the group on the regulator's record in a way that was hard to unwind. In cross-border digital-asset matters, the sequence of steps is not administrative detail. It shapes the regulatory relationship from the outset.

How did the AML and cross-border compliance layer interact with the structure?

Virtual-asset fund managers in Hong Kong operate under the same customer due diligence (the process of identifying and verifying investors and the source of their funds) obligations as other regulated firms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The Securities and Futures Commission's AML guidelines, issued under the Ordinance, apply with full force.

The Mainland capital tranche raised the intensity of that obligation considerably. Investors with Mainland connections are not automatically politically exposed persons (individuals who hold or have held prominent public functions, subject to enhanced due diligence), but the source-of-funds analysis for Mainland-connected capital requires documentation that many investors – particularly those accustomed to domestic Mainland investment vehicles – are not initially prepared to provide.

We advised the group on the form and depth of investor onboarding documentation needed to satisfy the Ordinance and the Commission's guidelines. This was not a cosmetic exercise. The Commission's supervisory focus on virtual-asset fund managers' AML posture has been consistent, and a deficient onboarding file is a material examination risk.

There was also the question of the FATF travel rule (the Financial Action Task Force's requirement that originator and beneficiary information travels with virtual-asset transfers above a defined threshold). The fund's operational flow – transferring virtual assets between custody accounts in the course of portfolio management – needed to be structured so that transfers were handled by service providers already compliant with the travel rule. That meant selecting custody and settlement counterparties with care, not simply on cost.

The cross-border dimension added one further layer. The fund's subscription and redemption mechanics needed to operate in a way that did not constitute a virtual-asset trading or exchange service for Mainland investors inside the Mainland. The distinction between providing regulated services in Hong Kong to investors who are located offshore (permissible, subject to licensing) and providing services into the Mainland (a different regulatory question entirely) had to be documented clearly in the fund's operational terms.

For a deeper read on the licensing framework as it applies to structured digital-asset businesses, our analysis of the virtual-asset trading platform licence in Hong Kong sets out the regime in detail.

What was the turning point in the matter, and how was it resolved?

The turning point came during the regulatory positioning review, before any application had been submitted. The group had drafted a term sheet and a preliminary investor pack on the assumption that the fund would sit entirely within the virtual-asset trading platform licensing category. That assumption was wrong, and proceeding on it would have meant applying for a licence the fund did not actually need for its primary activity, while failing to address the Type 9 question that it did.

Correcting the positioning required three things in sequence. First, a clean legal analysis of each asset class in the portfolio against the definitions in the Securities and Futures Ordinance. Second, a decision by the principals about the composition of the fund – whether to include assets that would require additional regulatory steps or to limit the initial portfolio to a perimeter the Type 9 structure could hold cleanly. Third, revision of the offering documents to reflect the corrected licensing position, the correct description of the fund's regulatory status, and the accurate risk disclosures to investors.

The second step – the portfolio-composition decision – was the hardest. The principals had commercial reasons for wanting to include certain assets. The regulatory analysis showed that including them within the same vehicle, without additional steps, created material licensing risk. The group chose to structure a two-vehicle arrangement: one fund holding the securities-category assets under the Type 9 and collective investment scheme authorisation framework, and a second, separately documented arrangement for the non-securities virtual assets with a distinct operational profile.

That decision avoided a situation in which the entire fund would have been exposed to enforcement risk because of ambiguity about a subset of its holdings. It also gave the group a cleaner basis for expansion: once the first vehicle was licensed and operating, adding further assets through the appropriate vehicle was a defined pathway rather than a one-off regulatory negotiation.

The sequence described above is a pattern our desk has encountered across several cross-border digital-asset matters. The structural decision comes first. The licensing application follows the structure, not the other way around.

If your cross-border digital-asset position is at an early structural stage, or if an existing structure has outgrown its original licensing posture, the right moment to review the position is before a filing is made – not after. Write to us at info@lockhartyip.com to discuss the options.

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

The fund reached a licensing-ready position. The AML documentation, the investor onboarding process, and the operational mechanics were all aligned with the Commission's published requirements. The Mainland capital tranche was handled through a clearly documented onboarding process that addressed source-of-funds requirements without requiring investors to provide documentation that was disproportionate to the risk profile of the matter.

The group went into its regulatory engagement with the Securities and Futures Commission in a position of clarity: a clear description of the activities, a clear legal basis for the licensing category applied for, and a compliance programme that addressed the AML obligations the Commission would expect to examine.

The transferable lesson is not complicated, but it is consistently overlooked by cross-border groups entering the Hong Kong digital-asset space from a Mainland starting point. The lesson is this: Hong Kong's digital-asset regulatory regime is built around activity classification, not asset classification alone. The question is not only "what assets does the fund hold?" but "what does the fund manager do with those assets, and for whom?" The answer to that second question determines which licence is required, which regulator administers it, and which compliance programme must be in place before the first investor is onboarded.

Groups that approach the licensing question in reverse – starting from the product and working backwards to the regulatory obligation – regularly arrive at the wrong answer. The correct sequence starts with a clear legal analysis of the activities the fund manager will conduct, then maps those activities to the applicable licensing categories, then structures the fund accordingly.

A second lesson is specific to the Mainland dimension. Mainland-connected capital entering a Hong Kong-regulated fund does not bring Mainland regulatory norms with it. The fund operates under Hong Kong law, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and under the Securities and Futures Commission's supervision. The fact that the principals are Mainland-experienced does not reduce the compliance obligation – if anything, the cross-border nature of the investor base increases the scrutiny the Commission will apply to the AML file.

The broader practice context for this matter sits within our Tech & Web3 practice, which covers licensing, AML positioning and entity structuring for digital-asset businesses operating through Hong Kong. For groups planning to structure a Web3 business through Hong Kong more broadly, our guide to structuring a Web3 business through Hong Kong sets out the full framework.

If an earlier filing, structure or licensing attempt in the digital-asset space has produced an uncertain or stalled result, a structured second review can identify where the position diverged and what routes remain open. Write to us at info@lockhartyip.com.

Related practices

Tech & Web3 – licensing, AML and entity structuring for digital-asset businesses in Hong Kong
Sanctions & AML – source-of-funds analysis, compliance files and cross-border AML programme design

Frequently asked questions

How long does a digital-asset fund structured through Hong Kong and Mainland China usually take?

The timeline depends on whether the structure is resolved before the licensing application is filed. Where the asset classification and licensing category are clear at the outset, a Type 9 application and collective investment scheme authorisation process typically runs over a period of months, with the Commission's review cycle the primary variable. A structure that arrives at the regulator with outstanding classification questions will take materially longer, because those questions must be answered in the application process regardless. Completing the structural analysis before filing is the most reliable way to control the timeline. Parties should verify the current regulatory processing times with the Securities and Futures Commission before acting.

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

The principal risks fall into three categories. First, activity misclassification: operating as a fund manager or platform operator without the correct licence under the Securities and Futures Ordinance or the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. Second, AML deficiency: an investor onboarding and source-of-funds process that does not meet the Commission's guidelines, which is a consistent supervisory focus for digital-asset fund managers. Third, jurisdictional overreach: allowing the fund's operational mechanics to blur the line between serving investors in Hong Kong and providing services into the Mainland, which engages a distinct and more restrictive regulatory environment. Each risk is manageable if addressed in sequence during the structuring phase.

How does the cross-border element affect a digital-asset fund structured through Hong Kong and Mainland China?

The cross-border element affects the matter in two distinct ways. First, it intensifies the AML obligation: Mainland-connected investor capital requires robust source-of-funds documentation under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Commission's AML guidelines, and a cross-border investor base is a known supervisory risk factor. Second, it requires a clear operational boundary: the fund's subscription, redemption and custody mechanics must be structured so that regulated activities occur in Hong Kong, not in or into the Mainland. Drawing and documenting that boundary is a legal and operational task that must be resolved before the fund is launched, not after the first investor complaint.

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

Matter note: a digital-asset fund structured through Hong Kong and Mainland China