Crypto Asset Management in Hong Kong: SFC Licensing for Virtual Asset Fund Managers

Introduction

The management of funds that invest in virtual assets — cryptocurrencies, tokens, and other digital assets — is a rapidly growing segment of the Hong Kong asset management industry. As the virtual asset market has matured and institutional interest has grown, a number of fund managers have established dedicated virtual asset funds in Hong Kong, ranging from cryptocurrency hedge funds and venture capital funds focused on Web3 companies to diversified digital asset portfolios and crypto-focused multi-strategy funds.

The regulatory framework governing virtual asset fund managers in Hong Kong has evolved significantly in recent years. The Securities and Futures Commission (SFC) has issued detailed guidance on its expectations for fund managers investing in virtual assets, and the licensing requirements applicable to virtual asset fund managers are now well-established. For existing fund managers considering adding virtual asset strategies and for new entrants seeking to establish crypto-focused funds in Hong Kong, understanding the applicable regulatory framework is essential.

This article provides a comprehensive overview of the SFC's licensing requirements for virtual asset fund managers in Hong Kong, the specific conditions and requirements applicable to managers of virtual asset funds, and the key compliance obligations that managers must address in their operations.

The Regulatory Framework for Virtual Asset Fund Management

Virtual asset fund management in Hong Kong is regulated under the Securities and Futures Ordinance (SFO) and the SFC's subsidiary legislation and codes. The key regulatory instrument is Type 9 regulated activity (asset management), which covers the management of portfolios of securities or futures contracts on behalf of others, and which applies to the management of funds that invest in virtual assets to the extent that those assets constitute "securities" or "futures contracts" within the meaning of the SFO.

In practice, many virtual assets — including utility tokens, payment tokens, and certain governance tokens — may not fall within the SFO's definition of securities or futures contracts, meaning that Type 9 licensing may not technically be required for all virtual asset management activities. However, the SFC has taken the position that fund managers who manage funds that invest "largely" (i.e., more than 10%) in virtual assets (regardless of whether those assets constitute securities) are expected to be licensed or registered with the SFC and to comply with the SFC's requirements for managing virtual assets. This position was articulated in the SFC's November 2018 Circular on "Regulatory Standards for Management of Portfolios Investing in Virtual Assets" and has been reinforced by subsequent guidance.

Type 9 Licence: Requirements and Application

A fund manager seeking to manage a virtual asset fund in Hong Kong must apply for a Type 9 licence from the SFC. The key requirements for a Type 9 licence include:

Fit and Proper Requirements

The applicant and its responsible officers must be "fit and proper" — meeting the SFC's standards of integrity, competence, and financial soundness. For virtual asset fund managers, the SFC places particular emphasis on the responsible officers' knowledge of and experience in virtual assets, including their understanding of blockchain technology, the technical characteristics of virtual assets, the virtual asset market structure, and the regulatory frameworks applicable to virtual assets in Hong Kong and key overseas jurisdictions.

Capital Requirements

Licensed Type 9 intermediaries must maintain minimum paid-up share capital and minimum liquid capital in accordance with the Securities and Futures (Financial Resources) Rules. For firms managing funds on behalf of clients, the minimum liquid capital requirement is HK$3 million (or 5% of total liabilities, whichever is higher).

Compliance and Internal Controls

Applicants must demonstrate that they have robust compliance policies and procedures, appropriate systems for managing conflicts of interest, and effective internal controls suited to the specific risks of managing virtual asset portfolios. These include controls relating to cybersecurity, custody of private keys, and operational resilience of trading and settlement systems.

SFC's Requirements for Virtual Asset Fund Managers

In addition to the standard Type 9 licence requirements, the SFC has established specific additional requirements for fund managers investing in virtual assets. These are set out in the SFC's circulars and in a dedicated set of conditions attached to licences granted to virtual asset fund managers.

Investment in Non-Securities Virtual Assets

Where a fund invests in virtual assets that do not constitute securities (such as Bitcoin or Ether), the SFC's conditions require the fund manager to comply with specific safeguards addressing the unique risks of these assets, including: maintaining the fund as a professional investors-only fund (i.e., not available to retail investors); using only licensed or regulated custodians for the safekeeping of virtual assets; implementing robust valuation policies for virtual assets; and having appropriate policies and procedures for managing the technology risks associated with virtual asset investment.

Custody Requirements

The SFC requires virtual asset fund managers to ensure that fund assets are held with custodians that meet the SFC's standards. Virtual asset custodians must have appropriate systems for the secure generation, storage, and management of private keys, and must maintain insurance coverage for the virtual assets under their custody. Fund managers must conduct thorough due diligence on their custodians and must maintain appropriate contractual arrangements with custodians.

Valuation of Virtual Assets

The valuation of virtual assets for fund pricing purposes raises specific challenges, given the fragmented nature of virtual asset markets, the potential for price manipulation, and the illiquidity of certain tokens. The SFC requires virtual asset fund managers to have documented valuation policies that address the specific characteristics of virtual assets, including the use of appropriate price sources, the treatment of illiquid assets, and the independence of the valuation function from portfolio management.

Risk Disclosures

Fund offering documents must contain appropriate risk disclosures addressing the specific risks of virtual asset investment, including high price volatility, technology risk (including the risk of smart contract bugs and blockchain vulnerabilities), custody risk, regulatory risk (including the risk of adverse regulatory action in relevant jurisdictions), and liquidity risk.

Crypto Hedge Funds: Additional Considerations

For virtual asset hedge funds — funds that employ leveraged, long-short, or other complex strategies in the virtual asset space — additional regulatory considerations apply, including compliance with the SFC's Code on Unit Trusts and Mutual Funds or its requirements for hedge funds (for SFC-authorised funds), appropriate disclosure of leverage and risk management policies, and robust systems for monitoring and managing portfolio exposures.

Conclusion

The SFC has developed a well-articulated regulatory framework for virtual asset fund management in Hong Kong that provides fund managers with clear guidance on the licensing requirements and conduct standards applicable to their operations. For fund managers seeking to establish or expand into virtual asset management in Hong Kong, the combination of clear regulatory expectations, an experienced and growing ecosystem of service providers, and Hong Kong's strategic position as an Asian financial hub makes it an attractive platform.

Navigating the SFC's licensing process and complying with the specific requirements for virtual asset fund managers requires specialist legal and regulatory advice. Managers considering virtual asset fund launches in Hong Kong should engage experienced counsel early in their planning process to ensure that their operations are structured and documented in compliance with all applicable requirements.