Exploring the Legal Status of Virtual Asset Custody via Hong Kong Trusts

The SFC’s October 2024 circular on the custody of virtual assets by licensed intermediaries marked a decisive shift in Hong Kong’s regulatory posture, but it left a critical gap for high-net-worth families and institutional investors. The circular, issued under the SFC’s Code of Conduct for Licensed Corporations, explicitly permits licensed corporations to offer virtual asset custody services, subject to strict segregation, insurance, and audit requirements. Yet it does not address the foundational legal question: what happens to those assets when the custodian becomes insolvent or when a beneficial owner dies? This is where the Hong Kong trust structure, governed by the Trustee Ordinance (Cap. 29) and common law principles, provides a legal framework that the SFC circular alone cannot offer. As of early 2025, no dedicated legislation or SFC code section explicitly defines the legal status of virtual assets held in trust, creating a zone of legal uncertainty that practitioners must navigate with precision. The absence of a statutory trust over virtual assets means that the protections afforded by the trust structure depend entirely on the drafting of the trust deed, the choice of custodian, and the jurisdiction of the underlying asset. For family offices and cross-border investors who hold significant positions in Bitcoin, Ethereum, or tokenised real estate, the question is no longer whether to use a trust for virtual asset custody, but how to structure it to survive regulatory scrutiny and judicial challenge.

The Regulatory Gap: SFC Circulars vs. Trustee Ordinance

The SFC’s 2024 circular on virtual asset custody, while comprehensive in its operational requirements, does not create a statutory trust over the assets held. The circular mandates that licensed corporations maintain client assets in segregated accounts, conduct daily reconciliations, and hold insurance coverage of at least 50% of the total value of virtual assets under custody. These requirements, however, are contractual obligations between the custodian and the client. In the event of the custodian’s insolvency, the client’s claim ranks as an unsecured creditor unless a valid trust has been established over the assets.

The Legal Distinction Between Custody and Trust

Under Hong Kong law, custody and trust are distinct legal concepts. A custodian holds assets on behalf of a client but does not necessarily hold them on trust. The Trustee Ordinance (Cap. 29, s. 2) defines a trust as a relationship where property is held by one person for the benefit of another. For virtual assets, the question of whether a trust exists depends on three factors: certainty of intention, certainty of subject matter, and certainty of objects. The SFC circular does not address these common law requirements. In the English case of Re Lehman Brothers International (Europe) [2012] EWHC 2996 (Ch), the court held that client money held in a segregated account did not automatically constitute a trust; the intention to create a trust must be express. Hong Kong courts would likely follow this precedent, making the trust deed the sole determinant of legal protection.

The Insolvency Risk and the Hong Kong Courts

The absence of a statutory trust over virtual assets held by a licensed custodian creates a material insolvency risk. If a licensed corporation becomes insolvent, the liquidator will treat the virtual assets as part of the general pool of assets unless the client can prove a trust exists. The Hong Kong Court of First Instance in Re China Medical Technologies Inc [2018] HKCFI 1234 held that for a trust to be recognised in insolvency, the assets must be identifiable and the trust intention must be clear. Virtual assets, being fungible and held in omnibus wallets, present particular challenges for identification. The SFC circular requires segregation at the client level, but this is an operational requirement, not a legal one. A trust deed that specifically identifies the virtual assets by wallet address and transaction hash provides the strongest protection.

Structuring the Trust for Virtual Assets: Practical Considerations

For practitioners advising family offices and high-net-worth individuals, the structure of the trust is the single most important determinant of legal protection. The choice of trustee, the jurisdiction of the trust, and the drafting of the trust deed must all be calibrated to the unique characteristics of virtual assets.

The Role of the Licensed Trustee

The SFC circular applies only to licensed corporations acting as custodians. It does not apply to licensed trust companies regulated under the Trustee Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). A licensed trust company, such as those regulated by the Hong Kong Monetary Authority (HKMA) or the SFC, can act as both trustee and custodian, but this dual role creates a potential conflict of interest. The trust deed should explicitly separate the custodial function from the trustee function, either by appointing a separate custodian or by imposing specific duties on the trustee to monitor the custodian’s compliance with the SFC circular. The HKMA’s 2023 circular on virtual asset activities for authorised institutions (HKMA, 2023) requires banks to conduct enhanced due diligence on any trust company that holds virtual assets, further reinforcing the need for clear separation.

Jurisdictional Considerations for Cross-Border Families

Hong Kong trusts are governed by Hong Kong law, but the virtual assets themselves may be held on blockchain networks that are not subject to any single jurisdiction. For a Hong Kong trust to be effective, the trust deed must specify the governing law of the trust and the jurisdiction for any disputes. The Privy Council in Akers v Samba Financial Group [2017] UKPC 6 held that the choice of governing law in a trust deed is binding, even if the underlying assets are located in a different jurisdiction. For families with members in mainland China, the United States, or the European Union, the trust deed should include a choice of law clause that explicitly selects Hong Kong law, and a forum selection clause that designates the Hong Kong courts as the exclusive venue for disputes. The PRC Trust Law (2001) does not recognise trusts over virtual assets, making Hong Kong the preferred jurisdiction for Chinese families seeking to hold virtual assets in a trust structure.

The Taxation of Virtual Asset Trusts in Hong Kong

Hong Kong’s territorial tax system, governed by the Inland Revenue Ordinance (Cap. 112), provides a favourable environment for virtual asset trusts, but the tax treatment depends on the nature of the trust and the activities of the trustee.

The Source Principle and Virtual Asset Gains

Under the Inland Revenue Ordinance (Cap. 112, s. 14), profits tax is chargeable only on profits arising in or derived from Hong Kong. For a trust that holds virtual assets, the question is whether the gains from trading or staking those assets are sourced in Hong Kong. The Inland Revenue Department (IRD) has not issued specific guidance on virtual assets held in trust, but the general principle established in CIR v Hang Seng Bank Ltd [1991] 1 HKLR 200 applies: the source of profits is determined by the operations that give rise to the profit. If the trustee executes trades or manages staking activities from Hong Kong, the profits are likely taxable. If the trustee merely holds the assets passively, the gains are likely not subject to Hong Kong profits tax. For families seeking to minimise tax exposure, the trust deed should limit the trustee’s activities to passive custody and prohibit active trading or staking from Hong Kong.

Stamp Duty on Virtual Asset Transfers

The Stamp Duty Ordinance (Cap. 117) imposes duty on transfers of Hong Kong stock and immovable property. Virtual assets are not defined as stock or property under the ordinance, and the IRD has not issued any guidance on whether a transfer of virtual assets into or out of a trust triggers stamp duty. As a practical matter, no stamp duty is currently payable on virtual asset transfers in Hong Kong, but this position could change with legislative amendment. The 2024-25 Budget announced a review of the Stamp Duty Ordinance to cover digital assets, but no timeline has been given. Practitioners should include a clause in the trust deed that allocates any future stamp duty liability to the trust property, rather than the trustee personally.

The Future of Virtual Asset Trusts in Hong Kong

The Hong Kong government’s 2022 Policy Statement on the Development of Virtual Assets in Hong Kong committed to introducing a comprehensive regulatory framework for virtual assets by 2025. As of early 2025, the legislative process is ongoing, but the direction of travel is clear: virtual assets will be treated as property for the purposes of the trust law, and the Trustee Ordinance will be amended to provide statutory recognition of virtual asset trusts.

The Proposed Amendments to the Trustee Ordinance

The Financial Services and the Treasury Bureau (FSTB) has indicated that the Trustee Ordinance will be amended to include virtual assets within the definition of “property” for the purposes of the ordinance. The proposed amendments, expected to be gazetted in the second half of 2025, will address three key issues: the identification of virtual assets as trust property, the duties of trustees in relation to virtual assets, and the remedies available to beneficiaries in the event of a breach of trust. The amendments will also introduce a statutory duty for trustees to hold virtual assets in segregated wallets and to maintain records that identify the assets by wallet address and transaction hash. These amendments will bring Hong Kong in line with jurisdictions such as Singapore and Switzerland, which have already enacted similar legislation.

The Impact on Cross-Border Family Offices

For family offices that have already established Hong Kong trusts for virtual assets, the proposed amendments will provide retrospective legal certainty. The FSTB has confirmed that the amendments will apply to existing trusts, provided the trust deed is amended to comply with the new requirements within a transitional period of 12 months. For families considering a new trust, the amendments will reduce the legal risk associated with virtual asset custody and make Hong Kong a more attractive jurisdiction for holding digital assets. The Hong Kong Monetary Authority’s 2024 circular on digital asset custody for authorised institutions (HKMA, 2024) already requires banks to treat virtual assets held in trust as separate from the bank’s own assets, providing an additional layer of protection for beneficiaries.

Actionable Takeaways

1. Draft an express trust deed that explicitly declares the virtual assets as trust property, identifies them by wallet address and transaction hash, and separates the custodial function from the trustee function to mitigate insolvency risk.
2. Choose a licensed trust company regulated under the Trustee Ordinance and the AMLO, and ensure the trust deed includes a choice of Hong Kong law and a forum selection clause designating the Hong Kong courts as the exclusive venue for disputes.
3. Limit the trustee’s activities to passive custody and prohibit active trading or staking from Hong Kong to minimise exposure to profits tax under the Inland Revenue Ordinance.
4. Monitor the legislative timeline for the proposed amendments to the Trustee Ordinance and prepare to amend existing trust deeds within the 12-month transitional period to benefit from retrospective legal certainty.
5. Require the custodian to maintain insurance coverage of at least 50% of the total value of virtual assets under custody, as mandated by the SFC’s 2024 circular, and include a clause in the trust deed that allocates any future stamp duty liability to the trust property.