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

Two regulators. Two licensing regimes. One fund. The practical question for a digital-asset manager spanning Hong Kong and the United Kingdom is not simply where to register – it is which authority's rules govern which activity, and whether the structure can satisfy both simultaneously without creating a compliance gap that neither jurisdiction will accept.

A digital-asset fund operating across Hong Kong and the United Kingdom must map each regulated activity to the authority that governs it: the Securities and Futures Commission in Hong Kong and the Financial Conduct Authority in the United Kingdom. Where a virtual asset also qualifies as a security, licensing obligations under both the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Securities and Futures Ordinance apply in Hong Kong, while UK financial-promotion and authorisation rules apply in parallel. The interaction between the two regimes, and the sequencing of filings, is where fund structures most commonly encounter delay.

This matter note describes an anonymised engagement in which those questions arose in the same transaction. It covers the situation, the structural constraint, the route chosen, the turning point, and the lesson that travels to other mandates.

The situation: a fund manager with activity on both sides

The client was a digital-asset fund manager organised under common law in both jurisdictions. Operations had developed incrementally: a Hong Kong entity managed the bulk of the portfolio, while a UK entity handled investor relations and certain discretionary functions for European and Middle Eastern allocators.

The structure had never been reviewed as a whole. Each entity had its own compliance counsel. Neither had produced a joint map of which regulated functions were performed where, by whom, and under which authority's perimeter.

When a prospective anchor investor – a family office undertaking pre-commitment due diligence – asked for a single regulatory-position memo, the manager could not produce one. The diligence process stalled. That stall brought the matter to our desk.

The immediate constraint was time. The investor's investment committee was scheduled to convene within a fixed cycle. Producing a credible regulatory position across two jurisdictions, in a form an institutional investor would accept, required both speed and precision. A review confined to one jurisdiction would not close the gap.

The cross-border issue: which rules governed which activity

The core question was jurisdictional attribution: were the portfolio-management functions performed in Hong Kong subject to the Hong Kong regulatory perimeter, the UK perimeter, or both? The answer depended on where discretion was exercised and where the relevant decisions were booked.

In Hong Kong, the mandatory VATP licensing (virtual-asset trading platform) regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance had been in operation since 1 June 2023. The Securities and Futures Commission is the licensing authority for centralised virtual-asset trading platforms. Where a virtual asset constitutes a "security" or a "futures contract", an additional layer of authorisation under the Securities and Futures Ordinance applies. The fund's Hong Kong entity was performing functions that touched both perimeters: managing a portfolio that included tokens qualifying as securities and tokens that did not.

In the United Kingdom, financial promotion rules and authorisation requirements under the relevant UK financial-services legislation applied to investor-facing activity. The UK entity was communicating financial promotions to UK-based and overseas allocators. Whether those promotions were properly approved, and whether the functions performed constituted regulated activity requiring full authorisation, had not been formally assessed.

The interaction between the two systems added a further layer. An activity authorised in Hong Kong does not carry automatic recognition in the United Kingdom. Conversely, a UK-authorised firm marketing to professional investors is not thereby licensed to operate as a virtual-asset service provider in Hong Kong. The two regimes run in parallel, without a mutual-recognition bridge for digital-asset activities of this kind.

This is a structural point that international counsel on our desk sees with regularity. The instinct of managers who have grown incrementally is to treat the two perimeters as largely equivalent and to assume that compliance with one satisfies the other. In cross-border digital-asset work, that assumption does not hold.

How does the sequence actually run in a matter like this?

The first step was a function-by-function mapping exercise. Each regulated activity – portfolio management, investment advice, dealing, custody, financial promotion – was assigned to the entity that performed it and the authority whose perimeter governed it. This produced a gap matrix: a grid identifying where a function was performed without the corresponding licence or exemption.

The gap matrix in this matter revealed three categories of finding. First, the Hong Kong entity was performing investment-management functions over a mixed portfolio (securities tokens and non-securities tokens) without a clear delineation between the two regulatory tracks. Second, the UK entity was issuing financial promotions to certain categories of investor that required an approved-person sign-off that had not been formally obtained. Third, neither entity had documented its AML and FATF travel rule (the international standard requiring virtual-asset service providers to transmit originator and beneficiary information with transfers) position in a joint group policy. Each had its own policy; neither was consistent with the other.

The route chosen was staged remediation. The Hong Kong position was addressed first, because the investor's primary counterparty was the Hong Kong entity and because the SFC licensing and substance requirements had a longer lead time. The UK financial-promotion gap was addressed in parallel through a more immediate structural fix. The AML gap was closed through a consolidated group policy drafted to satisfy both the Hong Kong guidelines and the UK requirements simultaneously.

An important structural note on timing. The AML and travel-rule obligations for virtual-asset service providers are set by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and its associated guidelines in Hong Kong. These are not optional overlays; they are baseline conditions for any licensed or registrable entity. In our cross-border practice, the travel-rule gap is the one most frequently underweighted by managers who have focused on licensing and treated AML as a secondary step.

For guidance on the UK data-handling and cross-border privacy dimensions that commonly arise alongside regulatory work of this kind, see our briefing at data transfer, privacy terms and the Asia-facing platform.

The turning point

The turning point in this matter was a regulatory-perimeter opinion prepared for the investor's counsel. Rather than a summary of the manager's own position, this document set out, in neutral terms, the applicable instruments in each jurisdiction, the functions performed, the applicable exemptions, and the remediation steps completed or underway.

The document did not overstate the licensing position. Where an exemption was relied upon, the basis for that reliance was stated. Where a filing was pending, the filing was identified as pending, not as complete. Where a risk remained, the residual risk was characterised and a mitigation was described.

Investors conducting institutional diligence on digital-asset managers have become materially more sophisticated. A document that acknowledges uncertainty and provides a structured response to it carries more weight than a clean-hands assertion that cannot survive a follow-up question. The investor's counsel raised seven follow-up questions. All seven were answered by reference to the opinion already produced.

The investment committee convened on schedule. The diligence condition was satisfied.

This practice area's broader scope, covering licensing, AML, regulatory engagement and entity structuring for digital-asset businesses in Hong Kong, is described at our Tech & Web3 practice page.

The qualitative outcome and the transferable lesson

The fund closed its anchor commitment. The remediation work produced, as a by-product, a regulatory position document that the manager now updates on a rolling basis – a practice that did not exist before the matter.

The transferable lesson is not that cross-border digital-asset funds are inherently difficult to structure. They are not. The lesson is that incremental growth across two common-law jurisdictions creates a deceptive appearance of regulatory continuity. Both Hong Kong and the United Kingdom operate common-law systems. Both have sophisticated financial regulators. But "common-law" is not "common-perimeter." Each jurisdiction has its own licensing thresholds, its own financial-promotion rules, and its own AML framework. A structure that performs well against one set does not automatically perform well against the other.

The second lesson concerns sequencing. The instinct when time is short is to focus on the investor-visible element – in this case, the financial-promotion gap – and to defer the deeper licensing review. That instinct should be resisted. In a matter where the counterparty is an institutional investor, the deeper review is the one that determines whether the diligence condition is satisfied. Closing the visible gap while leaving the structural gap open does not clear the condition; it defers the problem to a later stage, where it is more costly to address.

The third lesson is about documentation. A well-constructed regulatory position document – one that is honest about the perimeter, clear about the basis for any exemption, and transparent about pending steps – is a more durable diligence asset than a clean-slate assertion. It also gives the manager a working tool: a document that forces an annual review of whether the regulatory position has changed, which it may, as both the Hong Kong and UK digital-asset regimes continue to develop.

For managers considering a parallel Hong Kong-Mainland structure, the issues of licensing posture and cross-border regulatory interface arise in a different configuration – one we have mapped separately in our guide at digital-asset fund structured through Hong Kong and the Mainland.

If an earlier structuring attempt has produced a regulatory gap or a stalled diligence process, a second read can identify the point of failure and the route still available. For a structured assessment of your fund's cross-border licensing position across Hong Kong and the United Kingdom, write to us at info@lockhartyip.com.

What foreign counsel frequently misread in this structure

Several misreadings recur when non-Hong Kong counsel advise on structures of this kind. The first is the scope of the SFC's virtual-asset perimeter. The Securities and Futures Commission's authority extends to any centralised virtual-asset trading platform, irrespective of whether it handles securities tokens. For a fund manager that uses a centralised platform as part of its execution infrastructure, that perimeter question arises even before the manager's own licensing position is reached.

The second misreading concerns the stablecoin dimension. Where a fund holds, transfers or redeems fiat-referenced stablecoins (tokens designed to maintain a stable value relative to one or more fiat currencies), a Hong Kong Monetary Authority licensing regime for fiat-referenced stablecoin issuers commenced in 2025. Parties should verify the current commencement date and perimeter before relying on this position, as the regime was new at the time of this note. For a fund that is not itself an issuer, the question is whether any issuer in the fund's portfolio or execution chain holds the necessary authorisation.

The third misreading is the assumption that AML compliance is an administrative layer rather than a regulatory condition. In Hong Kong, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance imposes customer due diligence and travel-rule obligations on virtual-asset service providers as baseline requirements, not as additional conditions that can be addressed post-licensing. A fund that is licence-ready but not AML-ready is not licence-ready.

The fourth misreading – and the one most directly relevant to the UK side of the structure – is the assumption that the UK financial-promotion perimeter applies only to retail investors. In the context of digital-asset activity, the UK rules on financial promotions have been extended and the categories of high-net-worth and sophisticated investors qualifying for exemption have been subject to regulatory change. Any financial promotion made to UK-connected investors, regardless of their classification, requires a current assessment against the applicable rules.

Related practices

• Tech & Web3 – licensing, AML, regulatory engagement and entity structuring for digital-asset businesses
• Sanctions & AML – cross-border AML compliance, source-of-funds review and sanctions-neutral contracting

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Related

• Tech Web3
• Data Transfer Privacy Terms Asia Facing Platform Briefing
• Digital Asset Fund Structured Through Hong Kong Mainland 7

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