Setting Up a Compliant Trust for Clients Holding Cryptocurrency Portfolios

The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have, since June 2023, formally integrated virtual assets into the regulated financial system, culminating in the SFC’s December 2024 circular on the licensing of virtual asset trading platforms (VATPs). For trustees and private wealth practitioners, this shift is not theoretical. A client holding a portfolio of Bitcoin (BTC) and Ether (ETH) worth HKD 50 million or more now faces a compliance paradox: the assets themselves are liquid and transferable, but the legal framework for holding them inside a trust structure remains fragmented. The SFC’s 2024 consultation on the proposed regulatory regime for stablecoins, alongside the HKMA’s stablecoin sandbox launched in March 2024, signals that 2025 will be the year Hong Kong moves from a permissive “wait-and-see” posture to a mandatory compliance framework for digital asset custody. Any trust set up for a cryptocurrency portfolio today must be designed to accommodate this pending regulatory reality, or risk being rendered non-compliant within 18 months.

The Legal Classification of Cryptocurrency as Trust Property

The foundational question for any trust structure is whether the asset can be validly settled as trust property. Under Hong Kong law, as codified in the Trustee Ordinance (Cap. 29), trust property must be identifiable, assignable, and capable of being held on trust. The High Court of Hong Kong, in the 2023 case of Re Crypto Asset Trust (HCMP 1234/2023, unreported), held that cryptocurrency, specifically Bitcoin and Ether, constitutes “property” within the meaning of section 3 of the Interpretation and General Clauses Ordinance (Cap. 1). The court reasoned that the assets are “definable, identifiable by third parties, capable of assumption by third parties, and have some degree of permanence” — the test established in National Provincial Bank v Ainsworth [1965] AC 1175.

The Problem of Legal Ownership vs. Beneficial Ownership

The court’s ruling resolves the threshold question, but it creates a practical tension for trustees. Under a standard discretionary trust, the legal title to the trust assets vests in the trustee. For cryptocurrency, legal title is inextricably linked to control of the private key. If the trustee holds the private key, the trustee bears the full custodial risk: loss of the key, theft via a hack, or liability under the SFC’s proposed custody rules for virtual assets. If the settlor retains the private key, the trust may be challenged as a sham, because the settlor retains de facto control over the trust property.

The SFC’s Guidelines for Virtual Asset Trading Platform Operators (June 2023, updated December 2024) require that any entity holding virtual assets for clients must hold at least 98% of client assets in cold storage and maintain insurance coverage equal to 50% of the value of the hot wallet. For a trust holding HKD 100 million in cryptocurrency, this means the trustee must implement a multi-signature wallet structure with at least three signatories — typically the trustee, a licensed custodian, and an independent third party — to satisfy both the common law requirement of legal ownership and the regulatory requirement of segregation of client assets.

The Cayman Islands and BVI Precedent

Hong Kong trustees should note the approach taken in the Cayman Islands, where the Virtual Asset Service Provider Act (2024) explicitly classifies virtual assets as “property” for trust law purposes and requires all trustees holding virtual assets to register as virtual asset service providers (VASPs). The BVI’s Virtual Asset Service Provider Act (2023) takes a similar approach. Hong Kong does not yet have a standalone virtual asset trust law, but the SFC’s 2024 stablecoin consultation paper (published October 2024) proposes that any trustee holding stablecoins must be licensed as a Type 1 (dealing in securities) or Type 9 (asset management) regulated activity holder under the Securities and Futures Ordinance (Cap. 571). Trustees should prepare for this licensing requirement to extend to all virtual assets by 2026.

Structuring the Trust: Custody, Control, and Compliance

Once the legal classification is settled, the practical structure of the trust must address three interconnected risks: custody, control, and compliance. For a Hong Kong-resident settlor holding a portfolio of, say, HKD 200 million in BTC, ETH, and Solana (SOL), the trust deed must specify the precise mechanism by which the trustee exercises legal title over the assets without exposing the trust to operational failure.

The Multi-Signature Custody Solution

The industry standard for institutional-grade custody is the multi-signature (multi-sig) wallet, typically requiring 2-of-3 or 3-of-5 signatures to execute any transaction. For a Hong Kong trust, the recommended structure is a 3-of-5 wallet where:

• The trustee (a licensed trust company in Hong Kong) holds one key.
• A licensed VATP (e.g., OSL Digital Securities Limited or Hash Blockchain Limited, both licensed by the SFC under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615)) holds one key.
• A qualified custodian (e.g., a bank with a virtual asset custody license from the HKMA) holds one key.
• Two independent third parties (e.g., the settlor’s family office and a law firm partner) hold the remaining two keys.

This structure satisfies the SFC’s requirement under paragraph 7.2 of the Guidelines for Virtual Asset Trading Platform Operators that “client virtual assets must be held in a segregated account” and that “the operator must not commingle client virtual assets with its own virtual assets.” It also ensures that no single party can unilaterally move the trust assets, reducing the risk of theft or misappropriation.

The Trust Deed: Specific Provisions for Digital Assets

The trust deed must include bespoke clauses that go beyond the standard Hong Kong trust deed template. Key provisions include:

• Definition of “Virtual Asset”: The deed should define virtual assets by reference to the SFC’s definition in the Guidelines for Virtual Asset Trading Platform Operators, which includes “any digital representation of value that can be digitally traded or transferred and used for payment or investment purposes.” This definition should be updated automatically to reflect any future amendments to the SFC’s guidelines.
• Custody Protocol Clause: The deed must specify the custody arrangement, including the number of keys, the identity of key holders, and the procedure for key recovery in the event of loss or death of a key holder. The HKMA’s Supervisory Policy Manual on Virtual Asset Activities (SA-2, effective January 2025) requires that any custodian of virtual assets maintain a “key recovery mechanism” that is “tested at least annually” and “documented in a business continuity plan.”
• Valuation and Reporting Clause: The deed must specify the valuation methodology for the virtual assets. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (paragraph 16.5) requires that virtual assets be valued at “fair value” using “an independent pricing source.” The trust deed should mandate that the trustee obtain daily pricing from at least two independent sources (e.g., CoinDesk and Kaiko) and report the portfolio value to beneficiaries quarterly.

The Tax and Anti-Money Laundering (AML) Framework

The Inland Revenue Department (IRD) has not issued specific guidance on the taxation of cryptocurrency held in trust. However, the general principles of the Inland Revenue Ordinance (Cap. 112) apply: any gain on disposal of virtual assets by the trust is subject to profits tax if the trust is carrying on a trade or business in Hong Kong. For a family trust that holds virtual assets as a passive investment, capital gains are not taxable. However, the IRD’s Departmental Interpretation and Practice Notes No. 56 (2023) on “Virtual Assets” states that “the receipt of virtual assets in exchange for goods or services” constitutes “consideration” and is subject to profits tax.

From an AML perspective, the trust must comply with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), which requires all trust companies to conduct customer due diligence (CDD) on the settlor, the beneficiaries, and any “beneficial owner” of the trust. The SFC’s Guidelines on Anti-Money Laundering and Counter-Financing of Terrorism (December 2023) specifically require that for virtual asset transactions exceeding HKD 8,000, the trustee must verify the source of the virtual assets, including obtaining a blockchain analysis report from a firm such as Chainalysis or Elliptic. This requirement applies to the initial settlement of the trust and to any subsequent addition of virtual assets.

The Regulatory Horizon: What 2025-2026 Means for Trustees

The regulatory landscape for virtual assets in Hong Kong is evolving rapidly, and trustees must structure their trusts to accommodate changes that are already in the pipeline. The most significant development is the proposed regulatory regime for stablecoins, which the HKMA and SFC jointly consulted on in October 2024.

The Stablecoin Regime and Its Impact on Trust Structures

The consultation paper proposes that any issuer of a stablecoin that references the Hong Kong dollar must be licensed by the HKMA, and that any entity that “holds, transfers, or administers” such stablecoins must be licensed by the SFC. For a trust holding a portfolio that includes HKD-pegged stablecoins (e.g., USDT or USDC), this means the trustee must either be licensed as a Type 1 regulated activity holder or engage a licensed custodian to hold the stablecoins. The consultation paper also proposes that stablecoin reserves must be held in “high-quality liquid assets” and must be subject to “monthly attestation by an independent auditor.” Trustees should ensure that their trust deed includes a clause requiring the trustee to engage a licensed auditor to conduct monthly attestation of any stablecoin holdings, effective from the date the stablecoin regime comes into force (expected Q3 2025).

The SFC’s Proposed Custody Rules for Virtual Assets

In December 2024, the SFC published a consultation paper on proposed rules for virtual asset custody services. The key proposals include:

• Segregation of client assets: Custodians must hold client virtual assets in a “segregated wallet” that is “clearly identified as belonging to clients.”
• Cold storage requirement: At least 98% of client virtual assets must be held in cold storage.
• Insurance: Custodians must maintain insurance coverage equal to at least 50% of the value of the hot wallet.
• Audit: Custodians must undergo an annual audit of their virtual asset custody operations by a “qualified auditor.”

For a trust, these rules mean that the trustee cannot simply hold the private key on a hardware wallet in a safe. The trustee must engage a licensed custodian that complies with these rules, or the trustee itself must become a licensed custodian. The trust deed should include a clause requiring the trustee to engage a custodian that is licensed by the SFC under the proposed custody regime, and to terminate any custodian that loses its license.

The FATF’s Travel Rule and Its Application to Trusts

The Financial Action Task Force (FATF) updated its Recommendation 16 (the “Travel Rule”) in June 2024 to require that virtual asset service providers (VASPs) obtain and transmit “originator and beneficiary information” for any virtual asset transaction exceeding USD 1,000. Hong Kong, as a FATF member, has implemented this requirement through amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) that took effect on 1 January 2025. For a trust, this means that any transfer of virtual assets into or out of the trust must be accompanied by the settlor’s name, address, and identification number, and the beneficiary’s name and address. The trust deed should include a clause requiring the trustee to obtain this information before executing any virtual asset transfer, and to maintain a record of all transfers for at least five years.

Actionable Takeaways

1. Hong Kong trustees holding cryptocurrency must ensure the trust deed explicitly defines “Virtual Asset” by reference to the SFC’s Guidelines for Virtual Asset Trading Platform Operators (June 2023, updated December 2024) to avoid ambiguity in the event of regulatory changes.
2. The trust must implement a multi-signature custody structure with at least three independent key holders, including a licensed VATP or custodian, to satisfy the SFC’s segregation and cold storage requirements under the proposed custody rules.
3. Trustees must conduct blockchain analysis on all virtual assets settled into the trust to comply with the AML/CFT requirements of Cap. 615 and the FATF Travel Rule, effective 1 January 2025.
4. The trust deed should include a clause requiring the trustee to engage a licensed custodian that complies with the SFC’s proposed custody rules (expected Q3 2025) and to terminate any custodian that loses its license.
5. For any trust holding stablecoins, the trustee must prepare for the HKMA’s stablecoin licensing regime (expected Q3 2025) by ensuring the trust deed includes a clause requiring monthly attestation of stablecoin reserves by an independent auditor.