Advantages, Requirements, Process, Costs

In the rapidly evolving financial world, crypto funds are quickly emerging as new favorites in the investment community. However, choosing the jurisdiction in which to establish a crypto fund is critical.

Hong Kong, an international financial center, is attracting increasing attention due to its unique advantages and broad prospects.Choosing to establish a crypto fund in Hong Kong is not only a strategic decision but also an important step toward future financial innovation.So, why are more and more investors and fund managers choosing to establish crypto funds in Hong Kong? Attorney Bai Zhen of Mankun Law Firm will unveil the background and profound significance behind this decision.

Advantages of Establishing a Crypto Fund in Hong Kong

Establishing a crypto fund in Hong Kong offers numerous advantages, primarily reflected in its robust legal and regulatory environment. Hong Kong boasts a stable legal system and favorable financial regulatory policies, particularly the transparent and stable regulatory framework provided by the Securities and Futures Commission (SFC), which safeguards the operation of crypto funds. This environment provides reliable legal protection for investors and fund managers. Meanwhile, Hong Kong’s financial regulatory system enjoys mutual recognition with major developed countries, paving the way for the sale of Hong Kong financial products in other regions under restricted conditions.Furthermore, Hong Kong’s preferential tax policies are a significant factor attracting crypto funds. Known for its low tax rates and partial tax exemptions, Hong Kong offers crypto funds a distinct competitive advantage in terms of tax costs. For crypto funds seeking to optimize their tax structures globally, Hong Kong is undoubtedly an ideal choice.Finally, as an international financial center, Hong Kong possesses a highly developed financial market and convenient cross-border financial services. This not only promotes capital liquidity but also provides crypto funds with extensive market opportunities and diversified investment channels. Hong Kong’s level of internationalization makes it a crucial hub connecting Eastern and Western financial markets.

Requirements for Submitting Applications to the Hong Kong SFC

To manage a crypto fund in Hong Kong, one must apply to the Securities and Futures Commission (SFC) for a Type 9 (Asset Management) license.

(I) Involved Business Activities

Business activities requiring application for and holding of a Type 9 license (Asset Management) fall into two main categories:

Securities Management.If the fund’s investment portfolio includes securities or futures contracts, this license must be applied for. Securities may include digital tokens representing equity or debt.
Virtual Asset Management.The SFC has implemented an expanded licensing regime for managing investment portfolios involving virtual assets such as Bitcoin and Ethereum. This involves additional terms and conditions (Pro Forma T&Cs) attached to the existing Type 9 license.

It is worth noting that for companies managing investment portfolios (or parts thereof), if:

less than 10%of the total asset value of the portfolio(minimum threshold); or
they invest indirectly in virtual assets (e.g., investing infunds of funds）

that invest in virtual assets), the SFC will regulate these fund managers under the traditional regime of the existing Securities and Futures Ordinance, and the additional terms and conditions attached to the Type 9 license will not apply to such companies. Conversely, if a company falls into any of the following categories,the terms and conditions for virtual asset fund managers：

attached to the Type 9 licensewill apply.
Fund managers managing investment portfolios invested in securities/futures contracts, as well as portfolios invested in virtual assets.Fund managers managing investment portfolios that are partly invested in securities/futures contracts and partly in virtual assets.
Type 1 License.Managing collective investment schemes invested solely in non-securities/non-futures contract virtual assets, and distributing or planning to distribute these assets in Hong Kong.

(II) Application Materials

If the above conditions are met and a license application is imminent, the applying entity or applicant needs to prepare the following main documents:

Business Plan.A detailed description of the business model, target market, and strategies.
Compliance Manual.An outline of compliance policies and procedures to ensure adherence to regulatory requirements.
Risk Management Framework。A description of risk management strategies, including measures to address market, operational, and liquidity risks.
Corporate Governance.Information on the governance structure, including board composition and responsibilities.

(III) Challenges in Application

At this point, where do thechallengeslie in applying for a Type 9 (Virtual Asset) license?

Applying for a traditional Type 9 license typically takes 4 to 5 months up to 12 months from preparation to final approval. However, the timeline may vary significantly when applying to become a crypto fund manager. Below are the main reasons why the application process may take longer, along with key points requiring special attention during preparation.

First, the Hong Kong SFC will carefully review key personnel to ensure they possess relevant virtual asset fund management experience (preferably 3 years of experience within the past 6 years). In particular, the SFC will focus on senior management of the company, such as department heads, team leaders, and key investment personnel.

Second, the Hong Kong SFC will closely monitor the operational processes proposed by the company. The following issues need to be considered:

Is there appropriate segregation of key functions (e.g., portfolio management, risk management, valuation, asset custody)?
Which personnel are involved when transferring assets from the fund or custodian, and what security safeguards are in place?
Who is responsible for reconciling transactions and holdings, and how frequently is reconciliation performed?
What is the pricing methodology, who is responsible for it, and how is the reasonableness of each virtual asset’s pricing assessed?

Third, undoubtedly, the company’s information technology will be a focal point for the Hong Kong SFC. The following issues need to be considered:

How will the company ensure appropriate controls and access? For example: a. Private keys of wallets? b. Transferring assets from location X to location Y? c. Maintaining an appropriate ratio of assets in hot and cold wallets at all times?
Does the company self-custody assets? If so, has appropriate insurance been purchased?

The above are merely some key considerations; one must also consider the actual nature of fund management activities and the counterparties involved, such as trading platforms and custodians.

Process for Establishing a Crypto Fund in Hong Kong

Including the application for a Type 9 license, the process for establishing a crypto fund in Hong Kong involves the following steps:

(I) Preliminary Assessment

Determine regulatory scope. Assess whether your fund’s investment portfolio includes securities or futures contracts to determine if a Type 9 license application is required.
Virtual asset classification. Clarify whether the digital assets in the portfolio are considered securities under Hong Kong law.

(II) Application Preparation

Document preparation. Prepare required documents, including a detailed business plan, compliance manual, risk management framework, and corporate governance structure.
Consultation. Collaborate with legal and compliance advisors to ensure all documents meet SFC standards.

(III) Submission of Application

Submit application. Submit the complete application package to the SFC, including all required documents and application fees.

(IV) SFC Review

Review period. The SFC reviews the application, which may involve multiple rounds of feedback and requests for additional information. This process may take several months.

(V) License Decision

Notification of decision. Upon successful review, the SFC will grant the license. If conditions are attached, they must be complied with to ensure compliance.

(VI) Fund Establishment

Establishfund structure. Create the legal structure of the fund, engage service providers (administrators, auditors, custodians), and set up necessary operational infrastructure.
Investor account opening. Begin marketing the fund to potential investors and handle the subscription process.

Costs of Establishing a Crypto Fund

The costs of establishing and maintaining a crypto fund in Hong Kong can vary significantly. Specific costs depend on multiple factors, including fund size, management strategy, and compliance requirements. Typically, legal and audit fees must be paid to ensure compliance with local regulations. In addition, the costs of license applications and annual fees must be considered. To improve operational efficiency and cost-effectiveness, it is recommended to collaborate with professional service providers familiar with the crypto fund market. The table below outlines typical costs:

Mankun Lawyer’s Recommendations

Crypto funds are revolutionizing the investment landscape, bringing both exciting opportunities and complex challenges. Successfully integrating virtual assets into traditional fund frameworks requires a nuanced approach. Future asset managers must carefully select service providers and legal advisors with deep expertise. This includes a thorough understanding of the unique risks, characteristics, and operational details of crypto funds. By assembling the right team and leveraging professional expertise, asset managers can effectively navigate the complexities of this innovative asset class and fully unlock its potential in the evolving financial market. Establishing a crypto fund in Hong Kong is a complex process requiring careful planning and adherence to regulatory requirements. By understanding licensing requirements, following the outlined process, and budgeting for related costs, you can successfully establish and operate a crypto fund in one of Asia’s leading financial centers. However, despite Hong Kong’s structured regulatory environment, interest in registering fund structures in Hong Kong remains low within the crypto industry due to past tax issues. Offshore vehicles are more popular among investors and fund managers. Past tax issues have made jurisdictions such as the Cayman Islands orthe British Virgin Islandsmore attractive, highlighting the need for Hong Kong to continue efforts to enhance its appeal as a destination for crypto funds.

In conclusion, while establishing and managing crypto funds is challenging, reasonable planning and professional team support can secure a place in the emerging financial market. Although Hong Kong faces obstacles in certain aspects, it still has the potential to become a significant hub for crypto funds. To achieve this goal, Hong Kong must continue to optimize its regulatory and tax environments to enhance its attractiveness to global asset managers.

Special Disclaimer:

This article is an original work of Mankun Law Firm and represents only the personal views of the author. It does not constitute legal consultation or legal advice on specific matters.

How to Establish a Compliant Crypto Fund in Hong Kong? | Mankun Legal Education

Advantages of Establishing a Crypto Fund in Hong Kong