Cryptocurrency funds are rapidly developing and becoming a new choice in the investment circle. What advantages and conditions does Hong Kong have to seize the market? This article is sourced from an article written by Manco Blockchain, compiled and translated by PANews.
(Background:
OSL CFO: Hong Kong will soon launch an “OTC Coin Dealer” licensing system, and security token offerings (STOs) may become the mainstream fundraising model.)
Index of this article:
Advantages of setting up a cryptocurrency fund in Hong Kong
Requirements for submitting applications to the Securities and Futures Commission (SFC) in Hong Kong
Business involved
Application documents
Application difficulties
Process of setting up a cryptocurrency fund in Hong Kong
Preliminary assessment
Application preparation
Submission of application
Licensing decision
Fund establishment
Cost of setting up a cryptocurrency fund
Advice from Manco Lawyers
Cryptocurrency funds are quickly emerging in the ever-changing financial world and becoming the new favorite of the investment industry. However, choosing the right location to establish a cryptocurrency fund is crucial. Hong Kong, as an international financial center, is attracting more and more attention with its unique advantages and broad prospects.
Choosing to establish a cryptocurrency fund in Hong Kong is not only a strategic decision but also an important step towards future financial innovation.
So why are more and more investors and fund managers choosing to set up cryptocurrency funds in Hong Kong? Lawyer Bai Zhen from Manco Law Firm will reveal the background and significance behind this decision.
Setting up a cryptocurrency fund in Hong Kong has many advantages, first of all, in its robust legal and regulatory environment. Hong Kong has a stable legal system and friendly financial regulatory policies, especially the transparent and stable regulatory framework provided by the Securities and Futures Commission (SFC) of Hong Kong, which ensures the operation of cryptocurrency funds. This environment provides reliable legal protection for investors and fund managers. At the same time, Hong Kong’s financial regulatory system has mutual recognition with major developed countries around the world, paving the way for the sale of financial products in Hong Kong under certain restrictions in other regions.
In addition, Hong Kong’s favorable tax policies are also an important factor attracting cryptocurrency funds. Hong Kong is known for its low tax rates and partial tax exemptions, giving funds a significant competitive advantage in terms of tax costs. For cryptocurrency funds that want to optimize their tax structures globally, Hong Kong is undoubtedly an ideal choice.
Finally, as an international financial center, Hong Kong has a highly developed financial market and convenient cross-border financial services. This not only promotes the liquidity of funds but also provides broad market opportunities and diversified investment channels for cryptocurrency funds. Hong Kong’s internationalization makes it an important hub connecting the East and West financial markets.
In order to manage cryptocurrency funds in Hong Kong, it is necessary to apply for a Type 9 (Asset Management) license from the Securities and Futures Commission (SFC).
The businesses that need to apply for and hold a Type 9 license (Asset Management) include two categories:
Securities management: If the investment portfolio managed by the fund includes securities or futures contracts, this license must be applied for. Securities can include digital tokens representing equity or debt.
Virtual asset management: The SFC has implemented an expanded license system for managing investment portfolios of virtual assets such as Bitcoin and Ethereum. This involves additional terms and conditions (Pro Forma T&Cs) added to the existing Type 9 license.
It is worth noting that for companies that manage investment portfolios (or parts of investment portfolios), if:
The total asset value of the portfolio is less than 10% (minimum threshold); or
Indirect investment in virtual assets (such as funds investing in virtual assets)
The SFC will regulate these fund managers based on the existing traditional system under the Securities and Futures Ordinance, and the additional terms and conditions attached to the Type 9 license will not apply to these companies. On the contrary, if the company belongs to one of the following categories, the terms and conditions for virtual asset fund managers will apply:
Type 9 license: Fund managers managing investment portfolios invested in securities/futures contracts, as well as investment portfolios invested in virtual assets.
Type 9 license: Fund managers managing investment portfolios invested in both securities/futures contracts and partially in virtual assets.
Type 1 license: Managers of collective investment schemes that only invest in non-securities/futures contract virtual assets and distribute or plan to distribute these assets in Hong Kong.
If you meet the above conditions and are about to apply for a license, the applicant or applicant needs to prepare the following main documents:
Business plan: Describe the business model, target market, and strategy in detail.
Compliance manual: Outline compliance policies and procedures to ensure regulatory compliance.
Risk management framework: Describe risk management strategies, including measures to address market, operational, and liquidity risks.
Corporate governance: Provide information on the governance structure, including the composition and responsibilities of the board of directors.
Speaking of which, what are the difficulties in applying for a Type 9 (Virtual Asset) license?
Applying for a traditional Type 9 license usually takes 4 to 5 months to 12 months from application preparation to final licensing. However, when applying for a cryptocurrency fund manager, the time may vary greatly. The following are the main reasons why the application process may take longer and key points to pay special attention to when preparing the application.
Firstly, the Securities and Futures Commission of Hong Kong will carefully review key personnel to ensure that they have relevant experience in managing virtual asset funds (preferably 3 years of experience within the past 6 years). In particular, the SFC will focus on senior executives of the company, such as department heads, team leaders, and key investors.
Secondly, the SFC will closely scrutinize the operational processes proposed by the company. The following questions need to be considered:
Is there appropriate separation of key functions (such as portfolio management, risk management, valuation, and asset custody)?
Which personnel are involved in asset transfers from the fund or custodian, and what security measures are in place?
Who is responsible for reconciling transactions and positions, and how often are reconciliations performed?
Who is responsible for pricing methods, and how is the reasonableness of each virtual asset pricing evaluated?
Thirdly, without a doubt, the company’s information technology will be a focus of attention for the SFC. The following questions need to be considered:
How will the company ensure proper controls and access? For example: a. Private keys of wallets? b. Transferring assets from location X to location Y? c. Maintaining the appropriate proportion of assets in hot and cold wallets?
Does the company self-custody assets? If so, have proper insurance been purchased?
The above are just some key considerations, and the practical nature of fund management activities and the trading platforms, custodians, and other counterparties involved need to be considered.
In addition to applying for a Type 9 license, the process of setting up a cryptocurrency fund in Hong Kong includes the following steps:
Determine the regulatory scope: Evaluate whether your fund’s investment portfolio includes securities or futures contracts to determine whether a Type 9 license needs to be applied for.
Classification of virtual assets: Clearly determine whether digital assets in the investment portfolio are considered securities under Hong Kong law.
Document preparation: Prepare the required documents, including a detailed business plan, compliance manual, risk management framework, and corporate governance structure.
Consultation: Work with legal and compliance advisors to ensure that all documents comply with SFC standards.
Submit the application: Submit a complete application package to the SFC, including all necessary documents and application fees.
SFC audit
Audit period: The SFC will audit the application, which may involve multiple rounds of feedback and additional information requests. This process may take several months.
Notification of decision: After the audit is passed, the SFC will grant the license. If there are additional conditions, they must be complied with to ensure compliance.
Establishment of the fund structure: Establish the legal structure of the fund, hire service providers (administrators, auditors, custodians), and establish the necessary operational infrastructure.
Investor onboarding: Begin marketing the fund to potential investors and handle the subscription process.
The cost of setting up and maintaining a cryptocurrency fund in Hong Kong can vary greatly. The specific costs depend on various factors, including fund size, management strategy, and compliance requirements. Generally, legal and audit fees need to be paid to ensure compliance with local regulations. In addition, the costs of license application and annual fees should be considered. To improve operational efficiency and cost-effectiveness, it is recommended to work with professional service providers familiar with the cryptocurrency fund market. The table below outlines typical costs:
Cryptocurrency funds are revolutionizing the investment field, bringing both exciting opportunities and complex challenges. Successfully integrating digital assets into traditional fund frameworks requires a meticulous approach. Future asset managers must carefully select service providers and legal advisors with deep expertise in cryptocurrency funds.
This includes a thorough understanding of the unique risks, characteristics, and operational details of cryptocurrency funds. By assembling the right team and leveraging professional expertise, asset managers can effectively navigate the complexities of this innovative asset class and fully tap into its potential in the ever-evolving financial market.
Setting up a cryptocurrency fund in Hong Kong is a complex process that requires careful planning and compliance with regulatory requirements. By understanding the licensing requirements, following the listed process, and budgeting for related costs, you can successfully establish and operate a cryptocurrency fund in one of Asia’s leading financial centers.
However, despite Hong Kong’s structured regulatory environment, the interest of the cryptocurrency industry in registering fund structures in Hong Kong remains low due to past tax issues. Offshore jurisdictions like the Cayman Islands or British Virgin Islands are more attractive to investors and fund managers. Past tax issues highlight the need for Hong Kong to continue enhancing its attractiveness as a destination for cryptocurrency funds.
In conclusion, setting up and managing a cryptocurrency fund is challenging, but with proper planning and support from a professional team, you can establish a presence in the emerging financial market. Although Hong Kong faces obstacles in some aspects, it still has the potential to become a significant center for cryptocurrency funds. To achieve this goal, Hong Kong must continue to optimize its regulatory and tax environment to enhance its appeal to global asset managers.
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