Matter note: a digital-asset fund structured UAE

Digital-asset fund structures rarely sit neatly within a single regulatory perimeter. When a fund draws capital from international investors, deploys into virtual-asset positions managed through two jurisdictions, and must satisfy compliance officers in both, the legal question is not merely which licence to seek. The question is which regulator actually governs each function – and in what sequence the filings, registrations and disclosures must run.

This matter note describes, in anonymised form, the structural and regulatory route taken for a digital-asset fund with management activity in Hong Kong and investor-facing operations in the United Arab Emirates. The governing instruments were the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Hong Kong's primary VATP – virtual-asset trading platform – licensing statute, administered by the Securities and Futures Commission) and the relevant UAE financial-services framework administered by the UAE's financial free-zone regulator. The note identifies where the cross-border interface created unexpected compliance exposure and the sequence of steps that resolved it.

The sections below cover the situation and the constraint, the regulatory issue that emerged, the route chosen, the sequence and turning point, and the transferable lesson for groups considering a similar structure.

The Situation: Two Centres, One Fund

The fund was established by a team with deep experience in digital-asset markets and a track record in both traditional and token-denominated strategies. The principals held existing relationships in the Gulf and wished to market the fund primarily to professional investors in the UAE and the broader Middle East, while conducting portfolio management and risk oversight from Hong Kong, where the core team was based.

On its face, the rationale for the dual-centre structure was sound. Hong Kong offers access to a well-developed common-law system, proximity to Mainland China liquidity, and a maturing regulatory regime for virtual-asset activities administered by the Securities and Futures Commission. The UAE – specifically through its financial free-zone framework – offered a recognised marketing and investor-relations platform for regional institutional capital, together with a regulatory environment that several Gulf-based family offices and sovereign-adjacent funds treat as a preferred counterparty jurisdiction.

The constraint was immediate. The fund's strategy involved active trading in virtual assets, including assets that, in certain market conditions, would qualify as securities or futures contracts under Hong Kong law. That overlap between the virtual-asset regime and the existing Securities and Futures Ordinance framework is not theoretical. In our cross-border practice, we see it create material structuring decisions for almost every fund that moves beyond simple custody or passive holding into active portfolio management.

The principals came to us after an initial structuring exercise had produced a document set that placed all trading activity formally within the UAE entity, on the assumption that this would remove the structure from Hong Kong's licensing perimeter entirely. That assumption required examination.

The Regulatory Issue: Where Does the Activity Sit?

The critical question was not where the fund entity was incorporated, but where the regulated activity – portfolio management, trading decisions, and client-account handling – was actually being carried out. This is a fact-sensitive analysis, and the facts here pointed in a clear direction.

The portfolio managers were physically based in Hong Kong. The trading decisions were made in Hong Kong. The execution instructions were generated from systems operated from Hong Kong. The UAE entity was, on examination, primarily a marketing and investor-relations vehicle: it held the investor relationships, managed subscription documentation, and conducted investor onboarding in accordance with UAE requirements. It did not itself generate or execute trading decisions.

Under Hong Kong's regulatory posture, activity constitutes regulated conduct by reference to where it is actually performed, not by reference to the entity through which it is formally channelled. The mandatory licensing regime for virtual-asset trading platforms commenced 1 June 2023, with the Securities and Futures Commission as the licensing authority. More directly relevant here, where a virtual asset constitutes a "security" or "futures contract" under the Securities and Futures Ordinance, the full scope of that Ordinance's licensing requirements applies regardless of the domicile of the operating entity.

The consequence was that the original structure – while commercially coherent – had not removed the Hong Kong regulatory exposure. It had redistributed formal responsibility without addressing the substance question. A compliance officer at a well-advised Gulf institutional investor, conducting their own counterparty review, would arrive at exactly the same analysis.

The sequence above describes the standard position in outline. The details turn on the specific activity, the specific assets, and the order in which regulatory engagement proceeds – which is where the route is won or lost.

To discuss how the Hong Kong VATP licensing regime and its interaction with the Securities and Futures Ordinance applies to your cross-border fund structure, contact info@lockhartyip.com.

The Route Chosen: Substance Over Form

The structuring route we recommended began with a functional re-analysis of the activity map. Before addressing any regulatory filing, it was necessary to establish clearly which functions were genuinely performed in which jurisdiction, and whether the existing contractual and operational arrangements accurately reflected that reality.

The analysis produced three distinct activity streams. First, portfolio management and trading decisions: these were performed in Hong Kong by the licensed management team, and the structure needed to reflect that honestly. Second, investor relations and marketing: these were performed through the UAE entity, subject to the UAE financial free-zone framework. Third, custody and settlement: these were handled by a third-party institutional custodian operating under its own licensing arrangements.

Once the activity map was honest, the regulatory filing sequence became clear. The Hong Kong-side entity required examination against the VATP licensing framework under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and separately against the Securities and Futures Ordinance for the activities that touched security-type and futures-type assets. The UAE entity required its own regulatory engagement with the relevant free-zone authority, calibrated to the marketing and investor-relations functions it actually performed.

Critically, the AML obligations in both jurisdictions required careful coordination. Hong Kong VATPs are subject to customer due diligence and the FATF travel rule (the Financial Action Task Force requirement that originator and beneficiary information accompany virtual-asset transfers). The UAE framework carries parallel obligations. Where the two entities were interacting – for instance, in the movement of investor funds from UAE-domiciled accounts into portfolio positions managed from Hong Kong – the compliance file needed to document the source-of-funds analysis, the travel-rule mechanics, and the customer due diligence chain at each step.

In our cross-border practice, the failure point in structures of this kind is almost never a deliberate omission. It is the gap between two compliance frameworks that each assume the other has handled the middle ground. A UAE compliance officer assumes the Hong Kong side has its own travel-rule process. A Hong Kong compliance officer assumes the investor onboarding in the UAE has generated a complete due diligence file. The gap sits in between, undocumented and invisible until a regulator or an institutional investor's own due diligence process asks for the cross-border chain.

The Sequence and the Turning Point

The sequence ran in four stages, each contingent on the prior.

The first stage was the regulatory mapping exercise: a written analysis of the activity-to-jurisdiction allocation, identifying which activities attracted Hong Kong regulatory requirements, which attracted UAE requirements, and which involved both. This document served two purposes. It was the foundation for the regulatory engagement strategy. And it became the compliance anchor for the fund's own internal records – the document a compliance officer or auditor would reach for first when a question arose about the fund's licensing basis.

The second stage addressed the Hong Kong position. The management entity reviewed its activities against the VATP licensing requirements and, separately, against the Securities and Futures Ordinance criteria for the asset classes in the fund's strategy. Where activity fell within the licensing perimeter, the appropriate licensing pathway was identified and preparation began. Where activity fell outside the perimeter on a reasoned, documented basis, that analysis was recorded and kept available for regulatory engagement.

The third stage addressed the UAE position. The investor-relations entity engaged with the relevant free-zone authority, providing a clear description of its functions and the regulatory basis on which it operated. The critical point in that engagement was demonstrating that the UAE entity's activities were genuinely limited to the functions described – that it was not, in substance, performing portfolio management or trading that should have been captured by the Hong Kong analysis. That required the activity map from stage one to be precise and defensible.

The turning point came during the third stage. The free-zone authority's review raised a question about a marketing presentation that described the fund's strategy in terms that implied the UAE entity was exercising discretionary investment authority. The language had been drafted without close attention to its regulatory implications. It was inconsistent with the activity allocation that the compliance structure depended on.

We revised the presentation materials and the investor-facing documentation to accurately describe the role of each entity. The UAE entity described its function as investor relations, subscription management, and onboarding – not investment management. The Hong Kong entity was correctly identified as the portfolio manager. That alignment, between the legal structure and the documents seen by investors, was the resolution point.

If an earlier filing, structure or regulatory engagement has produced an adverse or stalled result in a cross-border digital-asset matter, a second read of the activity map and the compliance chain can identify the point of misalignment and the routes still available. Write to info@lockhartyip.com.

The Outcome and the Transferable Lesson

The structure, once correctly aligned, was coherent and defensible. The Hong Kong entity had a documented basis for its regulatory position. The UAE entity accurately described its functions and held the appropriate authorisation for those functions. The AML chain was documented end-to-end, covering the source-of-funds analysis, the travel-rule mechanics, and the customer due diligence records on both sides of the structure.

The fund was able to proceed with investor outreach to Gulf-based institutional investors. Those investors' own compliance teams, conducting counterparty review, found a structure whose regulatory basis was documented, whose activity allocation was honest, and whose AML records were accessible and complete. That was the commercial objective: not merely to have a structure that was technically arguable, but to have one that passed external scrutiny without friction.

The transferable lesson is one we see repeatedly in dual-jurisdiction digital-asset structures. Regulatory form and operational substance must be aligned. A structure that places activity in a particular entity for regulatory purposes but operates it from a different jurisdiction creates a gap that regulators, counterparties and investors will eventually find. The question is not which jurisdiction is more convenient. The question is which jurisdiction's regulatory regime applies to the activity as it is actually conducted – and whether the compliance file accurately reflects that.

Hong Kong's regulatory regime for virtual assets is sophisticated and increasingly detailed. The Securities and Futures Commission administers two overlapping frameworks: the VATP regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance for centralised trading platforms, and the Securities and Futures Ordinance regime for activities involving security-type and futures-type virtual assets. For a fund that operates in both channels, both analyses are required. A structure designed around only one of them carries the other as an unaddressed exposure.

The UAE's financial free-zone framework is a capable and internationally recognised structure for investor-facing fund activities in the Gulf. It is not, however, a substitute for a Hong Kong regulatory analysis where the substantive management activity is performed in Hong Kong. The two regimes address different functions and can coexist cleanly – but only when the activity allocation between them is honest and documented.

For groups building or reviewing a cross-border digital-asset structure involving Hong Kong and the UAE, the compliance foundation sits in the activity map, not the incorporation documents. Counsel on our desk regularly assist groups in building that map and coordinating the regulatory engagement that follows across both jurisdictions.

How This Touches Related Practice Areas

Digital-asset fund structures of this kind rarely engage only one practice area. In our experience, three adjacent issues arise in almost every matter of this type.

The first is the holding structure above the fund entity. Where a fund has principals in multiple jurisdictions and capital drawn from international investors, the holding layer – whether in the BVI, the Cayman Islands, or another offshore centre – introduces its own substance and economic-substance analysis. That analysis runs in parallel with the regulatory positioning, not after it.

The second is the sanctions and AML position. Virtual-asset transfers are subject to the FATF travel rule, and a fund operating between Hong Kong and the UAE must ensure that its transfer mechanics comply with both jurisdictions' implementations of that rule. Hong Kong implements United Nations sanctions and does not give domestic effect to unilateral measures of other states. The UAE has its own sanctions framework. A cross-border fund must understand the posture in both jurisdictions and document its compliance accordingly.

The third is tax. Hong Kong operates on a territorial basis. Profits arising from portfolio management activity performed in Hong Kong are assessable to profits tax if they are Hong Kong-sourced. The foreign-sourced income exemption (FSIE) regime, in force from 1 January 2023 and subsequently amended, imposes economic-substance conditions on certain categories of income. A fund that assumes its offshore elements are automatically outside the Hong Kong tax net without a substance analysis is carrying an unexamined exposure.

Related practices

Tech & Web3 – licensing, AML and regulatory structuring for virtual-asset businesses and funds
Sanctions & AML – FATF travel-rule compliance, source-of-funds analysis and cross-border AML documentation
Holding Structures – offshore holding layers, economic substance and BVI / Cayman structuring above fund entities

Frequently asked questions

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

The first step is an honest activity map: a written analysis of which functions are performed in which jurisdiction and which regulatory regime applies to each. Incorporation documents and contractual structures are the starting point, not the answer. The map identifies whether Hong Kong's VATP licensing requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance apply, whether the Securities and Futures Ordinance is engaged by the asset classes involved, and what the UAE free-zone authority requires for the investor-facing functions. Getting this sequencing right before filing saves material time and avoids having to unwind an incoherent structure mid-process.

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

Timeline depends heavily on the complexity of the asset strategy, the number of regulatory filings required and the completeness of the AML and compliance documentation assembled at the outset. The regulatory engagement with the Securities and Futures Commission for VATP-related activities is a structured process with its own review periods; the UAE free-zone pathway has its own timeline. Dual-jurisdiction structures typically run longer than single-jurisdiction ones because the two regulatory processes do not always move in parallel. Parties should build timeline assumptions around the regulatory engagement stage in their primary management jurisdiction first, then sequence the second jurisdiction accordingly.

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

The cross-border element determines which regulatory regime governs each function and creates an AML compliance chain that must be documented end-to-end across both jurisdictions. Hong Kong applies its regulatory requirements by reference to where activity is actually performed, not where the operating entity is formally incorporated. The FATF travel rule applies to virtual-asset transfers in both jurisdictions. Where the two frameworks overlap – for instance, at the point where investor funds move from UAE-onboarded accounts into positions managed from Hong Kong – the compliance file must document the full chain. Gaps in that chain are the most common source of friction in counterparty due diligence and regulatory review.

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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 the UAE