Author: Mankiw Blockchain
In the ever-changing financial world, crypto funds are rapidly emerging and becoming the new darling of the investment community. However, choosing which region to set up a crypto fund is crucial. Hong Kong, an international financial center, is attracting more and more attention with its unique advantages and broad prospects.
Choosing to set up a crypto 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 crypto funds in Hong Kong? Bai Qin, a lawyer at Mankiw Law Firm, will take you to uncover the background and far-reaching significance behind this decision.
Advantages of Setting Up a Crypto Fund in Hong Kong
There are many advantages to setting up a crypto fund in Hong Kong, the first of which is 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 Hong Kong Securities and Futures Commission (SFC), which safeguards the operation of crypto funds. This environment provides reliable legal protection for investors and fund managers. At the same time, Hong Kong's financial regulatory system is mutually recognized with the supervision of major developed countries in the world, paving the way for the sale of Hong Kong's financial products under restrictions in other regions.
In addition, Hong Kong's tax incentives are also an important factor in attracting crypto funds. Hong Kong is famous for its low tax rates and partial tax exemption policies, which give funds a clear competitive advantage in tax costs. For crypto 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 crypto funds with broad market opportunities and diversified investment channels. Hong Kong's internationalization makes it an important hub connecting the financial markets of the East and the West.
Requirements for submitting applications to the Hong Kong Securities and Futures Commission
Managing a crypto fund in Hong Kong requires applying for a Type 9 (asset management) license from the Securities and Futures Commission (SFC).
Business
There are two main types of businesses that need to apply for and hold a Category 9 license (asset management):
Securities management. If a fund manages a portfolio that includes securities or futures contracts, it must apply for this license. Securities can include digital tokens that represent equity or debt.
Virtual asset management. The SFC has implemented an expanded licensing regime for managing portfolios of virtual assets such as Bitcoin and Ethereum. This involves additional terms and conditions (Pro Forma T&Cs) on top of existing Category 9 licenses.
It is important to note that for firms that manage a portfolio (or part of a portfolio) if:
Less than 10% of the total portfolio asset value (minimum limit); or
Indirect investment in virtual assets (e.g. funds of funds investing in virtual assets)
The SFC will regulate these fund managers under the existing traditional regime under the Securities and Futures Ordinance, and the terms and conditions attached to the Type 9 license will not apply to such companies. Instead, the virtual asset fund manager terms and conditions will apply if the company falls into any of the following categories:
Category 9 License. Fund managers that manage portfolios invested in securities/futures contracts and portfolios invested in virtual assets.
Category 9 license. A fund manager that manages a portfolio that invests partly in securities/futures contracts and partly in virtual assets.
Type 1 license. To manage a collective investment scheme that invests only in virtual assets other than securities/futures contracts and distributes or plans to distribute such assets in Hong Kong.
Application Materials
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 in detail the business model, target market and strategy.
Compliance Manual. Outlines compliance policies and procedures to ensure adherence to regulatory requirements.
Risk Management Framework. Describe the risk management strategy, 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.
Difficulties in Application
So what are the difficulties in applying for a Category 9 (virtual asset) license?
Applying for a traditional Category 9 license usually takes anywhere from 4-5 months to 12 months from preparing the application to finally obtaining the license. However, when applying to become a crypto fund manager, the time can be very different. Here are the main reasons why the application process may take longer, and the key points to pay special attention to when preparing your application.
First, the SFC will carefully review key personnel to ensure that they have relevant virtual asset fund management experience (preferably 3 years of experience in the past 6 years). In particular, the SFC will focus on the company's senior management, such as department heads, team leaders and key investment personnel.
Secondly, the SFC will pay close attention to the company's proposed operational procedures. The following issues need to be considered:
Is there an appropriate separation of key functions (e.g. portfolio management, risk management, valuation, asset custody)?
Who is involved when transferring assets away from the fund or custodian, and what safeguards are in place?
Who is responsible for reconciling trades and positions, and how often should reconciliation be performed?
What are the pricing methods and who is responsible for them, and how to evaluate the rationality of each virtual asset pricing?
Third, there is no doubt that the company’s information technology will become a focus of the Hong Kong SFC’s attention. The following issues need to be considered:
How will the company ensure proper control and access? For example: a. Private keys to wallets? b. Transferring assets from location X to location Y? c. Maintaining the appropriate proportion of assets in hot and cold wallets at all times?
Does the company self-custody assets? If so, is appropriate insurance in place?
The above are just some of the key considerations. It is also necessary to consider the actual nature of the fund management activities and the trading platforms, custodians and other counterparties involved.
The process of setting up a crypto fund in Hong Kong
In addition to applying for a Type 9 license, the process of setting up a crypto fund in Hong Kong includes the following steps:
Preliminary assessment
Determine regulatory scope. Evaluate whether your fund portfolio contains securities or futures contracts to determine whether you need to apply for a Type 9 license.
Virtual asset classification. Clarify whether digital assets in an investment portfolio are considered securities under Hong Kong law.
Application Preparation
Document preparation. Prepare required documents, including detailed business plan, compliance manual, risk management framework and corporate governance structure.
Consulting. Work with legal and compliance advisors to ensure all filings meet SEC standards.
submit application
Submit your application. Submit your complete application package, including all required documents and application fee, to the SEC.
CSRC review
Review period. The CSRC reviews the application, which may involve multiple rounds of feedback and requests for additional information. This process may take several months.
Licensing Decision
Decision notification. Once the review is passed, the CSRC will grant the license. If conditions are attached, they must be followed to ensure compliance.
Fund establishment
Establishing the fund structure. Create the legal structure of the fund, hire service providers (administrators, auditors, custodians), and set up the necessary operational infrastructure.
Investor opens an account. Start marketing the fund to potential investors and handle the subscription process.
Costs of Setting Up a Crypto Fund
The costs of setting up and maintaining a crypto fund in Hong Kong can vary widely. The specific costs depend on several factors, including fund size, management strategy, and compliance requirements. Typically, legal and audit fees will be required to ensure compliance with local regulations. In addition to this, the costs of license applications and annual fees need to be considered. For operational efficiency and cost-effectiveness, it is recommended to work with a professional service provider who is familiar with the crypto fund market. The following table outlines typical fees:
Attorney Mankiw recommends
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 deep understanding of the unique risks, characteristics, and operational details of crypto funds. By assembling the right team and leveraging expertise, asset managers can effectively navigate the complexities of this innovative asset class and fully tap its potential in evolving financial markets.
Setting up a crypto 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 the associated fees, you can successfully set up and operate a crypto fund in one of Asia's leading financial centers. However, despite Hong Kong's structured regulatory environment, the crypto industry's interest in fund structures domiciled in Hong Kong remains low due to past tax issues. Offshore vehicles are more popular among investors and fund management. Past tax issues have made jurisdictions such as the Cayman Islands or the British Virgin Islands more attractive, highlighting the need for Hong Kong to continue working to enhance its attractiveness as a destination for crypto funds.
In conclusion, although setting up and managing crypto funds is challenging, with proper planning and professional team support, it is possible to gain a foothold in the emerging financial market. Despite the obstacles faced by Hong Kong in some aspects, it still has the potential to become an important center for crypto funds. To achieve this goal, Hong Kong must continue to optimize its regulatory and tax environment and enhance its attractiveness to global asset managers.
