SFC Regulation of Virtual Asset Funds: Licensing Conditions for Cryptocurrency Fund Managers

The Securities and Futures Commission (SFC) published its finalised regulatory framework for virtual asset fund managers in November 2023, taking effect on 1 January 2024. By mid-2025, over 30 licensed corporations had notified the SFC of their intent to manage virtual asset portfolios under the new licensing conditions. The SFC has since issued two thematic reviews on custody arrangements and valuation practices, signalling a shift from voluntary guidance to enforceable conditions. For fund managers operating in Hong Kong, the choice is no longer whether to engage with virtual assets, but whether to comply with the SFC’s specific licensing conditions or exit that line of business entirely. This article sets out the licensing requirements, operational obligations, and compliance steps for cryptocurrency fund managers under the current SFC regime.

The SFC’s Licensing Framework for Virtual Asset Fund Managers

The SFC regulates virtual asset fund managers under the existing Type 9 (asset management) licence, but with additional licensing conditions that override the standard Code of Conduct for asset managers. The framework applies to any licensed corporation that manages a portfolio investing in virtual assets, whether directly or through derivatives.

Scope of the Licensing Conditions

The SFC’s “Licensing Conditions for Virtual Asset Fund Managers” apply to any Type 9 licensee that invests 10% or more of its gross asset value in virtual assets. The SFC clarified in its November 2023 circular that the 10% threshold is a bright-line test. A fund manager investing below 10% in virtual assets is not subject to the conditions, but must still comply with the general principles of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”).

The conditions cover four core areas: governance and risk management, custody of virtual assets, valuation and pricing, and disclosure to investors. Each condition is a direct amendment to the Type 9 licence. Non-compliance is a breach of the licence conditions and may result in disciplinary action under section 194 of the Securities and Futures Ordinance (Cap. 571).

Who Must Apply

Any corporation currently holding a Type 9 licence and intending to manage virtual asset portfolios must notify the SFC in writing before commencing the activity. The SFC’s 2023 circular states that the notice must include a detailed compliance plan addressing each of the licensing conditions. For new applicants, the Type 9 licence application must include the virtual asset business as part of the proposed business plan. The SFC will assess the application against the same conditions.

The SFC has not issued a separate licence category for virtual asset fund managers. The existing Type 9 licence remains the sole authorisation route. This means that a fund manager without a Type 9 licence cannot manage virtual asset portfolios for third parties, even if it holds a Type 1 (dealing in securities) or Type 4 (advising on securities) licence.

Operational Conditions for Virtual Asset Fund Managers

The SFC’s licensing conditions impose specific operational requirements that go beyond the standard Type 9 obligations. Fund managers must implement these conditions in their day-to-day operations.

Custody of Virtual Assets

The SFC requires that virtual assets be held by a licensed virtual asset service provider (VASP) or by a custodian that meets equivalent standards. The SFC’s 2024 thematic review on custody arrangements found that 70% of surveyed fund managers used a licensed VASP, while the remainder used overseas custodians subject to equivalent regulatory oversight. The SFC stated that it expects fund managers to conduct due diligence on custodians at least annually, including a review of the custodian’s insurance coverage for loss of private keys.

The fund manager must maintain a clear segregation of client virtual assets from its own assets. The SFC’s conditions require that client virtual assets be held in a separate wallet or account, with the fund manager holding no access to the private keys. The fund manager must also implement a policy for the safekeeping of private keys, including multi-signature arrangements and offline storage for the majority of assets.

Valuation and Pricing

The SFC requires that virtual assets be valued at fair value on a daily basis. The valuation must be based on an independent pricing source, such as a regulated exchange or an SFC-approved pricing vendor. The SFC’s 2024 thematic review on valuation practices noted that 85% of surveyed fund managers used a single pricing source for each virtual asset. The SFC stated that this practice introduces concentration risk and recommended that fund managers cross-reference prices from at least two independent sources.

For illiquid virtual assets, the fund manager must apply a valuation methodology that reflects the asset’s fair value, with the methodology approved by the fund manager’s board or a designated valuation committee. The SFC’s conditions require that any material valuation adjustment be disclosed to investors within two business days.

Disclosure to Investors

The SFC requires that fund managers disclose the licensing conditions to investors in the fund’s offering documents. The disclosure must include a clear statement that the fund manager is subject to the SFC’s conditions for virtual asset fund managers, a description of the risks associated with virtual asset investments, and the fund manager’s policies on custody, valuation, and redemption.

The SFC’s 2023 circular specifies that the disclosure must be in plain language and must not be buried in a risk factors section. The SFC expects the disclosure to appear as a standalone section in the offering document. Fund managers must also provide quarterly reports to investors on the fund’s virtual asset holdings, including the total value of virtual assets under management, the names of custodians, and any material changes to the valuation methodology.

Compliance and Enforcement Considerations

The SFC has made clear that it will enforce the licensing conditions through its supervisory and disciplinary powers. Fund managers should expect regular inspections and thematic reviews.

Thematic Reviews and Inspections

The SFC conducted its first thematic review on virtual asset fund managers in 2024, focusing on custody arrangements and valuation practices. The review covered 12 licensed corporations managing a total of HK$4.8 billion in virtual assets as of 31 December 2023. The SFC published its findings in a circular dated 28 June 2024, identifying deficiencies in custody due diligence and valuation cross-referencing. The SFC stated that it would conduct follow-up inspections on all firms identified as having deficiencies.

Fund managers should expect the SFC to conduct similar thematic reviews in 2025 and 2026, likely focusing on disclosure practices and risk management governance. The SFC’s 2024–2025 enforcement priorities, published in its annual report, include virtual asset-related misconduct as a key focus area.

Disciplinary Actions

The SFC may take disciplinary action under section 194 of the Securities and Futures Ordinance (Cap. 571) for breach of licensing conditions. Sanctions include reprimand, fine, suspension or revocation of licence, and disqualification from holding a licence for a specified period. The SFC’s 2024 enforcement record shows that it imposed fines totalling HK$12.3 million on three licensed corporations for breaches related to virtual asset custody.

Fund managers should note that the SFC’s disciplinary committee may also impose conditions on the licence, such as requiring the appointment of an external compliance consultant or restricting the types of virtual assets the fund manager may invest in.

Cross-Border Considerations

Fund managers operating in Hong Kong but managing virtual asset portfolios for overseas clients must comply with both the SFC’s conditions and the regulatory requirements of the client’s jurisdiction. The SFC’s 2023 circular states that it expects fund managers to ensure that their overseas activities do not contravene Hong Kong’s regulatory framework. This means that a fund manager cannot use an overseas regulatory exemption to avoid the SFC’s conditions if the fund manager is licensed in Hong Kong.

The SFC has also issued guidance on the use of overseas trading venues. Fund managers may trade virtual assets on overseas exchanges only if the exchange is licensed or authorised in its home jurisdiction and meets the SFC’s standards for investor protection. The SFC’s 2024 thematic review found that 40% of surveyed fund managers used overseas exchanges that were not licensed in Hong Kong. The SFC stated that it would require those fund managers to justify their use of such exchanges or to transition to licensed Hong Kong exchanges.

Actionable Takeaways

1. Notify the SFC in writing before managing any virtual asset portfolio, even if you already hold a Type 9 licence, and submit a compliance plan addressing all four licensing conditions.

2. Use a licensed virtual asset service provider for custody and conduct annual due diligence on the custodian’s insurance coverage and private key security arrangements.

3. Value virtual assets daily using at least two independent pricing sources and document any valuation adjustments for illiquid assets.

4. Disclose the SFC’s licensing conditions as a standalone section in the fund’s offering documents and provide quarterly reports on virtual asset holdings to investors.

5. Prepare for SFC thematic reviews by maintaining a compliance file with policies on custody, valuation, and disclosure, and ensure that overseas trading venues meet the SFC’s standards.

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