The development of cryptocurrency funds is rapidly growing, becoming a new choice in the investment field. What advantages and conditions does Hong Kong have to seize the market? This article is sourced from an article by Blockman District Blockchain and compiled and translated by PANews.
(Previous summary:
OSL CFO: Hong Kong will soon launch an “OTC Coin Dealer” licensing system, and security token offerings (STOs) may become the mainstream fundraising model.
)
(Background:
Several Hong Kong securities firms have started offering virtual asset trading, with a minimum threshold of only $100.
)
Table of Contents:
Advantages of establishing cryptocurrency funds in Hong Kong
Requirements for submitting applications to the Hong Kong Securities and Futures Commission
Business involvement
Application materials
Application difficulties
Process of establishing cryptocurrency funds in Hong Kong
Preliminary assessment
Application preparation
Submission of applications
Licensing decision
Fund establishment
Cost of establishing a cryptocurrency fund
Suggestions from Mannkind Lawyers
In the ever-changing financial world, cryptocurrency funds are rapidly emerging as a new favorite in the investment industry. However, choosing where 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 establish cryptocurrency funds in Hong Kong? Lawyer Bai Zhen from Mannkind Law Firm will reveal the background and profound significance behind this decision.
There are many advantages to establishing cryptocurrency funds in Hong Kong, first of all, in its stable 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 Hong Kong Securities and Futures Commission (SFC), which safeguards 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 and the regulatory systems of major developed countries in the world achieve mutual recognition, paving the way for the sale of Hong Kong’s financial products in other regions with restricted conditions.
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 fund liquidity but also provides cryptocurrency funds with broad market opportunities and diversified investment channels. Hong Kong’s internationalization makes it an important hub connecting the East and West financial markets.
To manage cryptocurrency funds in Hong Kong, an application for a Type 9 (asset management) license must be submitted to the Securities and Futures Commission (SFC).
Businesses that require application and possession of 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 licensing regime for managing investment portfolios of 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 that manage investment portfolios (or parts of portfolios), if:
The total asset value of the portfolio is less than 10% (minimum threshold); or
Indirect investment in virtual assets (e.g. investment in funds that invest in virtual assets)
The SFC will regulate these fund managers under the existing traditional regime of the Securities and Futures Ordinance, and the additional terms and conditions attached to the Type 9 license will not apply to such companies. On the contrary, if the company falls into one of the following categories, the terms and conditions for virtual asset fund managers will apply:
Type 9 license: Fund managers who manage investment portfolios invested in securities/futures contracts as well as investment portfolios invested in virtual assets.
Type 9 license: Fund managers who manage investment portfolios invested in both securities/futures contracts and partially invested in virtual assets.
Type 1 license: Fund managers who manage 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 files:
Business plan:
A detailed description of the business model, target market, and strategies.
Compliance manual:
An overview of compliance policies and procedures to ensure regulatory compliance.
Risk management framework:
Describes risk management strategies, including measures to address market, operational, and liquidity risks.
Corporate governance:
Provides 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 to become a cryptocurrency fund manager, the time may vary significantly. Here are the main reasons why the application process may take longer and key points to pay special attention to when preparing the application.
First, 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 in 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 Securities and Futures Commission will closely scrutinize the operational processes proposed by the company. The following questions need to be considered:
Are there appropriate key function separations (such as portfolio management, risk management, valuation, and asset custody)?
Which personnel are involved in the transfer of assets from the fund or custodian, and what security measures are in place?
Who is responsible for reconciling transactions and positions, and how often is reconciliation conducted?
Who is responsible for pricing methods, and how is the reasonableness of each virtual asset’s pricing evaluated?
Third, without a doubt, the company’s information technology will be a focal point of the Hong Kong Securities and Futures Commission. The following questions need to be considered:
How will the company ensure proper control 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 wallets and cold wallets?
Is the company self-custodying assets? If so, have appropriate insurance policies been purchased?
The above are just some key considerations, and the practical nature of fund management activities and the counterparties involved, such as trading platforms and custodians, need to be considered.
In addition to applying for a Type 9 license, wanting to establish a cryptocurrency fund in Hong Kong involves the following steps:
Determine the regulatory scope:
Evaluate whether your fund’s investment portfolio includes securities or futures contracts to determine if a Type 9 license needs to be applied for.
Virtual asset classification:
Clearly determine whether digital assets in the investment portfolio are considered securities under Hong Kong law.
File preparation:
Prepare the required documents, including detailed business plans, compliance manuals, risk management frameworks, and corporate governance structures.
Consultation:
Work with legal and compliance consultants to ensure that all documents comply with SFC standards.
Submission of application:
Submit a complete application package to the SFC, including all necessary documents and application fees.
SFC audit
Audit period:
The SFC audits the application, which may involve multiple rounds of feedback and additional information requests. This process may take several months.
Decision notification:
After the audit is passed, the SFC will grant the license. If there are additional conditions, they must be complied with to ensure compliance.
Fund structure establishment:
Establish the legal structure of the fund, hire service providers (administrators, auditors, custodians), and set up the necessary operational infrastructure.
Investor account opening:
Start marketing the fund to potential investors and handle subscription processes.
The cost of establishing and maintaining a cryptocurrency fund in Hong Kong can vary greatly. The specific costs depend on multiple factors, including fund size, management strategies, and compliance requirements. Typically, 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 collaborate with professional service providers familiar with the cryptocurrency fund market. The table below outlines typical costs:
Cryptocurrency funds are revolutionizing the investment field, bringing exciting opportunities as well as complex challenges. Successfully integrating virtual assets into traditional fund frameworks requires a meticulous approach. Future asset managers must carefully select service providers and legal advisors with deep expertise, including a thorough understanding of the unique risks, characteristics, and operational details of cryptocurrency funds. By building the right team and leveraging professional knowledge, asset managers can effectively navigate the complexity of this innovative asset class and fully tap its potential in the ever-evolving financial market.
Establishing 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 processes, 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 such as the Cayman Islands or the British Virgin Islands are more attractive to investors and fund managers. The past tax issues highlight the need for Hong Kong to continue to enhance its attractiveness as a destination for cryptocurrency funds.
In conclusion, establishing and managing cryptocurrency funds, although challenging, can secure a place in the emerging financial market with proper planning and support from a professional team. Despite the obstacles Hong Kong faces 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.
Related Reports
Critics of China’s Bitcoin mining ban “make the United States laugh”, HKUST Vice President: Hong Kong’s web3 needs to reform bureaucracy
Foresight 2024 Hong Kong Summit: Integrating Eastern and Western Web3 Thoughts, a grand event for blockchain culture
Hong Kong Securities and Futures Commission Chairman: Bitcoin has proven the advantages of distributed ledger technology (DLT) and will continue to promote financial innovation through regulation.