A digital-asset fund structured through Hong Kong and the BVI

Foreign principals setting up a digital-asset fund in 2028 face a structural question that neither a pure offshore lawyer nor a single-jurisdiction technologist can answer in isolation: where does the regulated activity actually sit, who regulates it, and how does the holding layer above the operating entity stay legally coherent? The stakes are real. A structure that places the wrong entity in the wrong place triggers licensing obligations the principal did not price in, AML compliance costs that compound quarterly, and enforcement exposure across two distinct legal regimes.

A digital-asset fund structured through Hong Kong and the BVI uses a BVI holding entity above a Hong Kong operating or licensed layer, with the Hong Kong entity carrying the regulatory interface under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and, where applicable, the Securities and Futures Ordinance. The licensing authority for centralised virtual-asset trading platforms in Hong Kong is the Securities and Futures Commission. For fiscal years beginning on or after 1 January 2025, in-scope groups must also assess Hong Kong's minimum top-up tax position under the Pillar Two rules.

The sections below trace the trigger that brings this structure to a head, the route our desk runs from instruction through to operational sign-off, the specific documents the client must own, and the cross-border interface between Hong Kong and the BVI that determines whether the structure holds.

When does a foreign principal need this structure?

The trigger is almost always structural complexity, not scale. A principal who has been running a digital-asset strategy through a simple offshore vehicle reaches a point where counterparties, banks, or institutional co-investors require demonstrable regulatory standing. That moment – when a term sheet or a prime-brokerage application asks for a licensing position – is where the Hong Kong and BVI combination becomes the operative answer for Asian-facing funds.

The BVI provides a well-tested, common-law holding layer. Investors in BVI funds operate under a legal regime they recognise; the BVI Business Companies Act and the associated regulatory environment for professional funds are stable and widely understood by fund administrators, auditors, and legal counterparts in Asia, Europe, and the Middle East. What the BVI does not provide is a domestic regulatory stamp that satisfies Asian institutional counterparties who want to know that the trading or management entity they face is subject to a credible supervisory regime.

Hong Kong fills that gap. The mandatory licensing regime for centralised virtual-asset trading platforms commenced on 1 June 2023 under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the Securities and Futures Commission as licensing authority. Where the fund's digital-asset holdings include assets that qualify as "securities" or "futures contracts" under Hong Kong law, the Securities and Futures Ordinance also applies. The Hong Kong entity is the regulatory contact point; the BVI entity is the investment vehicle above it.

In our cross-border practice, the principals who come to us at this stage typically have one of three profiles: an Asian family office that has been investing informally and now wants institutional infrastructure; a European or Middle Eastern fund manager entering the Greater China market and needing a regulated presence; or a Web3 project founder whose protocol has matured into an asset-management function and whose legal position has not kept pace. Each arrives with a different set of prior documents and a different urgency, but the structural answer follows a consistent pattern.

What is the governing framework for the Hong Kong regulatory position?

The core licensing instrument in Hong Kong for virtual-asset activities is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, as amended to introduce the virtual-asset trading platform regime. The Securities and Futures Commission administers that regime. Where the fund's strategy involves assets that meet the statutory definition of a collective investment scheme, or where the managed assets include securities, the Securities and Futures Ordinance imposes a parallel licensing layer.

The AML and customer due-diligence obligations sit on top of the licensing question. Any Hong Kong entity engaging in virtual-asset activities must satisfy the customer due-diligence and travel-rule requirements that apply to virtual-asset transfers under the FATF-aligned regime. This is not optional compliance: the Ordinance and the Securities and Futures Commission's published guidelines both impose obligations that run from onboarding through to transaction monitoring and suspicious-transaction reporting.

Hong Kong implements United Nations sanctions and does not give domestic effect to unilateral measures of other states. The fund's compliance programme must therefore be built around UN-listed entities and, separately, must document its approach to counterparties who may be subject to the unilateral measures of other states. That distinction matters operationally: a fund manager who applies a blanket policy derived from a non-UN sanctions list without understanding the Hong Kong position creates both legal and commercial risk.

On the tax side, Hong Kong operates on a territorial basis. Profits tax applies to Hong Kong-sourced profits only, with a two-tier rate of 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above that. There is no capital gains tax and no withholding tax on dividends. However, the foreign-sourced income exemption regime – in force from 1 January 2023 – means that passive income flowing into the Hong Kong entity from the BVI holding layer needs to satisfy economic-substance conditions to remain outside Hong Kong tax. Groups with consolidated revenue at or above EUR 750 million must also address the Pillar Two minimum top-up tax for fiscal years beginning on or after 1 January 2025.

How does the cross-border interface between Hong Kong and the BVI actually work?

The Hong Kong–BVI interface is the structural spine of the fund, and it is where the most consequential decisions are made early in the engagement. The BVI entity – typically a BVI Business Company or a BVI-law fund vehicle – sits at the top of the structure as the capital-collection point for investors. Below it, the Hong Kong entity carries the management or trading function and, where required, the regulatory licence.

The two legal systems are both common law. That alignment reduces friction in contract drafting and dispute resolution, but it does not eliminate the structural tensions. The BVI entity's constitutive documents – its memorandum and articles of association, any shareholder agreement, and the fund offering documents – must be consistent with the Hong Kong entity's regulatory obligations. A BVI offering document that does not accurately describe the licensing position of the Hong Kong manager creates a disclosure gap that regulators and investors can exploit.

The flow of management fees, carried interest, and performance allocations between the two entities must be structured to survive both the Hong Kong economic-substance analysis under the foreign-sourced income exemption regime and the BVI's own economic-substance rules. The BVI has operated economic-substance requirements for relevant entities since 2019. A structure that routes income through the BVI without adequate substance in the BVI invites a challenge on both sides of the ledger.

Enforcement is a distinct concern. A judgment or award obtained in Hong Kong against a counterparty whose assets sit in the BVI, or vice versa, runs through the enforcement mechanisms available in each jurisdiction. Hong Kong's common-law enforcement of foreign judgments and the reciprocal recognition arrangements between Hong Kong and the Mainland are well-tested. The BVI, as a UK Overseas Territory with a common-law system, recognises foreign judgments on principles broadly consistent with Hong Kong's approach, though the procedural steps differ. Counsel on our desk regularly map this enforcement route at the outset, before the structure is finalised, rather than after a dispute has arisen.

For principals with any Mainland China investor base or counterparty exposure, the Mainland–Hong Kong mutual enforcement regime is also relevant. The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) came into force on 29 January 2024 and applies to judgments made on or after that date. A Hong Kong-seated fund with Mainland counterparties benefits from that regime; a structure that sits entirely offshore does not.

What do foreign principals get wrong at this stage? The most common error is treating the BVI and Hong Kong entities as legally equivalent for regulatory purposes. They are not. The BVI entity carries the investor relationship; the Hong Kong entity carries the regulatory exposure. Documentation, governance, and internal controls must be allocated accordingly from the start. A governance structure where the BVI directors control decisions that are formally the Hong Kong manager's regulatory responsibility creates a control gap that the Securities and Futures Commission will identify.

The sequence of steps matters too. See our wider Tech & Web3 practice for the licensing and AML context that sits behind this structural note.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how the Hong Kong–BVI interface applies to your fund structure, contact info@lockhartyip.com.

What is the step-by-step route from instruction to operational structure?

The route our desk runs follows a consistent sequence, though the detail at each step varies by the principal's starting position. The engagement typically opens with a regulatory scoping exercise: we identify the activities the fund will conduct, map them against the licensing triggers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Securities and Futures Ordinance, and produce a written analysis of the licensing position. That analysis drives every subsequent structural decision.

Step one is the licensing assessment. This is the document the client owns before any entity is formed. It states whether the fund's activities require a virtual-asset trading platform licence, a type-9 asset management licence under the Securities and Futures Ordinance, or both. It also identifies the AML and compliance obligations that will attach to the licensed entity from the day it commences operations.

Step two is the structure design. The holding layer – typically one or more BVI entities – is designed in conjunction with locally licensed Hong Kong counsel who advise on the Hong Kong corporate and regulatory formalities. Our role at this stage is to advise on the international and cross-border dimensions: the interaction between the BVI constitutive documents and the Hong Kong regulatory requirements, the flow-of-funds analysis, and the economic-substance position under the foreign-sourced income exemption regime.

Step three is the document set. The principal must own and understand four categories of document before the structure is operational: the fund offering documents (prepared under BVI law and reviewed for Hong Kong regulatory accuracy); the management agreement between the BVI fund and the Hong Kong manager; the Hong Kong entity's compliance manual and AML programme; and the regulatory licence application to the Securities and Futures Commission. Each of these is a distinct legal instrument. Each has a different author, a different review process, and a different timeline.

Step four is the licensing application itself. The Securities and Futures Commission operates a review process for virtual-asset trading platform licences that is more intensive than the equivalent process for traditional asset managers. The application requires a detailed business plan, a description of the technology and custody arrangements, a risk management framework, and evidence of the key individuals' fitness and propriety. The timeline for this stage is not fixed by statute; the Commission's review can extend well beyond the initial submission, particularly where the applicant's technology or custody model is novel. Principals should plan for a multi-stage process.

Step five is the operational launch. Once the licence is granted and the AML programme is in place, the fund commences operations under the supervision of the licensed Hong Kong entity. The compliance obligations do not stop at launch: ongoing reporting to the Securities and Futures Commission, periodic AML audits, and transaction monitoring continue throughout the fund's life. A structure that is compliant at launch but not maintained will not survive a regulatory review cycle.

A mid-market digital-asset fund with a single BVI holding entity and a Hong Kong management company, instructing us in autumn 2027, completed the regulatory scoping and structure design within approximately eight weeks. The licensing application to the Securities and Futures Commission was filed in the following quarter. The structure was operational within the licensing timeline set by the Commission. The principal's in-house counsel described the value of the engagement as the written regulatory analysis produced at step one, which gave the board a clear decision basis before any entity formation costs were incurred.

If an earlier filing, structure 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 with the background; we will assess the position and respond substantively.

What documents and decisions must the client own?

The documents a principal must own are not the same as the documents the structure requires. Some instruments are drafted by locally licensed Hong Kong firms or BVI counsel and delivered to the client; others must be owned by the client in a deeper sense – meaning the principal and its directors have read them, understood them, and accepted the obligations they impose. Regulatory failure in digital-asset fund structures almost always traces back to a document that was signed but not understood.

The compliance manual and AML programme sit in this second category. These are not standard-form documents. The Securities and Futures Commission's guidelines require that the AML programme reflect the specific risks of the fund's digital-asset activities, the investor profile, the jurisdictions from which funds are received, and the custody and transfer mechanisms used. A compliance manual copied from a traditional asset manager and lightly amended for virtual assets will not satisfy a Commission review. The principal must own this document, meaning its chief compliance officer or equivalent must be able to articulate it in an examination.

The offering documents present a different discipline. A BVI-law fund offering document is prepared by BVI counsel and reviewed by the fund's auditors and administrators. However, the sections of the offering document that describe the fund's regulatory status in Hong Kong – the licensing position, the AML obligations, the conflicts-of-interest policy – must be accurate as a matter of Hong Kong law and must be consistent with the actual licence held. Any discrepancy between the offering document and the licence conditions is a disclosure failure that creates liability to investors and a regulatory breach simultaneously.

The custody arrangement is a structural decision, not just a document. Where does the fund's digital assets sit? Who holds the keys? What is the insolvency position of the custodian? These questions are not answered by the offering document alone. They require a specific custody agreement, a technology due-diligence process, and a legal analysis of the custodian's regulatory standing in its own jurisdiction. For a Hong Kong-regulated fund, the Securities and Futures Commission's position on custody is explicit: the custodian's arrangements must meet specified standards, and the fund's compliance obligations include monitoring those arrangements.

Finally, the principal must own the regulatory correspondence file. Every interaction with the Securities and Futures Commission during the licence application process is a document with legal significance. Representations made in the application cannot be silently inconsistent with the fund's actual operations. The principal – not only its legal advisers – must be aware of what has been represented and what conditions attach to the licence when granted.

What are the most common structural mistakes at this stage?

The most persistent mistake is inverting the regulatory logic of the structure. Principals sometimes design the holding layer first – choosing the BVI because they know it, and because their existing structures already use BVI vehicles – and then attempt to fit the Hong Kong regulatory position around a structure that was not designed to carry it. That inversion produces a structure where the governance lines in the BVI documents conflict with the accountability requirements imposed by the Hong Kong licence conditions.

Consider a specific scenario. A European digital-asset manager, with an existing BVI fund and an investor base in the Gulf and Asia, decides to appoint a Hong Kong management company to access the licensed-manager status that certain institutional investors require. The BVI fund documents give the BVI directors sole authority over investment decisions. The Hong Kong management agreement purports to delegate full discretionary authority to the Hong Kong manager. The Securities and Futures Commission licence requires that the licensed entity exercise genuine independent judgment. Those three instruments, in combination, are internally contradictory. The fix requires amending the BVI constitutional documents and the management agreement before the licence application is filed – not after it is reviewed.

A second common error is under-resourcing the compliance function at launch. The AML programme requires a named, qualified compliance officer. That person must have the authority, the systems, and the time to run the programme. A compliance officer who is also the portfolio manager and the chief financial officer does not have the time. The Securities and Futures Commission's fitness-and-propriety standards and the AML guidelines both contemplate a compliance function that is adequately resourced. The cost of remediation after a regulatory examination is significantly higher than the cost of adequate resourcing at the outset.

The third error is failing to address the cross-border capital flow at the level of the management agreement. The fee flow from the BVI fund to the Hong Kong manager – management fees, performance fees, any expense reimbursements – must be priced at arm's length and documented in a way that satisfies both the economic-substance analysis under the foreign-sourced income exemption regime and the transfer-pricing position of the relevant jurisdictions. A management agreement that is silent on pricing methodology, or that uses a fee structure lifted from an unrelated strategy, will not survive scrutiny. For further context on data and technology-related cross-border agreements, see our matter notes on cross-border agreements touching Singapore and cross-border agreements touching the United Kingdom.

Decision matrix: matching the fund's profile to the structural route

Not every digital-asset fund requires the same Hong Kong regulatory approach. The structure and the licensing route depend on the fund's activities, its investor profile, and its intended timeline.

If the fund's strategy is discretionary asset management in virtual assets that do not constitute securities, and the investor base is professional and non-retail, the primary licensing trigger is the virtual-asset trading platform regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The BVI holding layer above a Hong Kong management company is the standard route. The timeline is set by the Securities and Futures Commission's application process, which is not fixed by statute and should be conservatively estimated.

If the fund holds virtual assets that qualify as securities or interests in a collective investment scheme, the Securities and Futures Ordinance applies in addition. The licensing route is more complex: the Hong Kong management entity needs a type-9 licence, and the offering documents must satisfy the disclosure standards applicable to securities products. The BVI fund vehicle, in this scenario, may itself be subject to registration or filing obligations in the BVI depending on the investor base and the number of investors.

If the fund is a liquid-strategy fund that also runs a stablecoin treasury position, the structure must address the Hong Kong Monetary Authority's licensing regime for fiat-referenced stablecoin issuers, which commenced in 2025. Parties should verify the current commencement date and perimeter of that regime before citing it in offering documents, as the regulatory position was still being clarified at the time of this publication.

If the principal is a Mainland Chinese entity or individual acting as the anchor investor or the fund manager, the cross-border element extends beyond Hong Kong and the BVI. The Mainland–Hong Kong mutual enforcement regime, the foreign-exchange control position, and the cross-border investment rules applicable to Mainland entities all require specific advice from locally licensed Hong Kong firms working alongside international counsel. That configuration is one our desk manages regularly.

Self-assessment checklist before instruction

Before instructing counsel, a principal can usefully work through the following questions. The answers determine the scope of the engagement and the order of priority.

• Has the fund's intended activity been mapped against the licensing triggers under both the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Securities and Futures Ordinance? Has a qualified Hong Kong practitioner confirmed the assessment?
• Is the BVI entity's constitutive documentation consistent with the governance requirements that the Hong Kong licence conditions will impose on the management entity?
• Is there a named, qualified compliance officer with adequate authority and resource to run the AML programme from day one of operations?
• Has the custody arrangement been reviewed for regulatory compliance, insolvency risk, and consistency with the Securities and Futures Commission's standards?
• Has the fee structure between the BVI and Hong Kong entities been priced at arm's length and documented in a management agreement that addresses the economic-substance and transfer-pricing position?
• Have the offering documents been reviewed for consistency with the actual licensing position and the AML obligations of the Hong Kong entity?
• If the investor base includes Mainland Chinese investors, has the cross-border capital-flow and enforcement position been assessed under the Mainland–Hong Kong regime that took effect on 29 January 2024?
• Has the Pillar Two minimum top-up tax position been considered for any group with consolidated revenue at or above EUR 750 million?

These are the questions that determine whether the structure is ready for regulatory submission. A principal who can answer each of them with a documented position is in the right place to file. A principal who cannot is not.

The next move

The licensing and structural position of a digital-asset fund through Hong Kong and the BVI is not a one-time determination. The regulatory environment in Hong Kong has been moving quickly since the mandatory licensing regime commenced in 2023, and the Securities and Futures Commission's published guidance on virtual-asset activities has evolved with each licensing cycle. A structure that was compliant at launch requires periodic review as the regulatory position develops.

Our desk does three things for principals at this stage: we review the existing structure and identify any gaps between the documented position and the current regulatory expectations; we model the holding and licensing options across Hong Kong and the BVI; and we coordinate the implementation steps with locally licensed Hong Kong firms who hold the qualifications to advise on Hong Kong law. We advise on the international and cross-border dimensions; locally licensed firms handle the Hong Kong-law formalities.

What does the first engagement step look like? We review the existing or proposed structure, the key documents if available, and the principal's description of the fund's activities. We produce a written assessment of the licensing position and the structural gaps. That assessment gives the principal a decision basis before any entity formation or licensing expenditure is committed.

Related practices

• Sanctions & AML – AML compliance, counterparty screening and UN sanctions posture for cross-border fund structures
• Holding Structures – BVI and offshore holding-layer design, economic substance and income-flow analysis
• Tax Positions – FSIE regime, profits tax, Pillar Two and cross-border tax-residence planning

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