The Future of Digital Asset Custody: Can a Hong Kong Trust Hold Cryptocurrency Effectively?

Hong Kong’s trust industry is confronting a structural question that was academic five years ago but is now urgent: can a trustee legally and practically hold cryptocurrency as trust property, and if so, under what conditions? The Securities and Futures Commission’s (SFC) December 2024 circular on virtual asset trading platforms and the Hong Kong Monetary Authority’s (HKMA) January 2025 guidance on digital asset custody for authorised institutions have created a de facto regulatory framework. However, the Trustee Ordinance (Cap. 29) — drafted in 1934 and last substantially amended in 2013 — contains no explicit provision for digital assets. The gap between what the market demands and what the statute permits has widened to the point where practitioners must rely on common law principles, bespoke trust deeds, and regulatory comfort letters rather than clear legislative authority. With total global cryptocurrency market capitalisation exceeding USD 3.2 trillion as of March 2025 (CoinGecko data) and an estimated 8-12% of Hong Kong family offices now holding some form of digital asset exposure (KPMG 2024 Family Office Survey), the question is no longer theoretical. This article examines the legal mechanics, practical hurdles, and emerging solutions for using a Hong Kong trust as a vehicle for cryptocurrency custody.

The Legal Framework: Where the Trustee Ordinance Meets Digital Assets

The starting point for any Hong Kong trust analysis is the Trustee Ordinance (Cap. 29), which defines the powers and duties of trustees. Section 3(1) empowers a trustee to invest any trust funds in any form of investment, provided the trustee exercises the standard of care set out in Section 3A — the duty of a prudent person of business. The critical question is whether cryptocurrency constitutes “trust funds” or “property” within the meaning of the Ordinance.

Section 2 of the Trustee Ordinance defines “property” broadly to include “real and personal property, and any estate or interest in any property, and any debt, and any thing in action, and any other right or interest, whether in possession or not.” The Hong Kong Court of Final Appeal has not yet ruled on whether cryptocurrency falls within this definition, but the High Court in Re Gatecoin Limited [2023] HKCFI 691 provided an important signal. In that winding-up proceeding, the court held that cryptocurrencies held on a trading platform were “property” capable of being held on trust for customers, applying the common law test from National Provincial Bank v Ainsworth [1965] that property must be definable, identifiable by third parties, capable of assumption by third parties, and have some degree of permanence. The court found that Bitcoin and Ethereum satisfied all four criteria.

This ruling creates a strong persuasive precedent that a Hong Kong trustee can accept cryptocurrency as trust property. However, three structural gaps remain. First, the Trustee Ordinance does not address the specific custody obligations for digital assets — there is no equivalent of Section 21 (which governs the deposit of trust money at a bank) for private keys. Second, the SFC’s licensing regime for virtual asset service providers (VASPs) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) applies to platforms, not to trustees acting in a fiduciary capacity. Third, the HKMA’s Supervisory Policy Manual module SA-2 on outsourcing requires authorised institutions to maintain control over outsourced functions, which creates complications when a trustee delegates private key management to a third-party custodian.

The Prudent Investor Rule Applied to Digital Assets

Section 3A of the Trustee Ordinance imposes a duty on trustees to exercise “such care and skill as is reasonable in the circumstances,” having regard to the trustee’s special knowledge or experience. For a professional trustee — such as a licensed trust company under the Trustee Ordinance (Cap. 29, Part VIII) — the standard is higher. A professional trustee holding cryptocurrency must demonstrate that it has implemented a custody solution meeting institutional standards.

The practical implication is that a trustee cannot simply hold cryptocurrency in a hot wallet on a consumer exchange. The SFC’s December 2024 circular on virtual asset trading platforms requires licensed platforms to maintain at least 98% of client virtual assets in cold storage (cold wallet requirement, paragraph 12). While this circular directly addresses platform operators, it establishes a market standard that a prudent trustee would be expected to follow. A trustee holding client crypto assets in a hot wallet with less than 98% cold storage would face a difficult argument that it had exercised the required standard of care.

The Delegation Problem: Private Key Management and the Non-Delegation Principle

English trust law, which Hong Kong follows, has a long-standing principle that trustees cannot delegate their discretionary powers — delegatus non potest delegare. The Trustee Ordinance provides limited exceptions: Section 8 permits delegation of investment management to an agent, and Section 25 permits delegation of trustee functions for up to 12 months if the trustee is absent from Hong Kong. Neither provision was drafted with cryptocurrency in mind.

The core custody challenge is that holding cryptocurrency requires control of a private key. If the trustee holds the private key itself, it bears the full risk of loss, theft, or technical failure. If the trustee delegates key management to a third-party custodian — such as Hex Trust, OSL, or a licensed VASP — it risks violating the non-delegation principle unless the trust deed expressly authorises such delegation.

The solution adopted by most Hong Kong trust companies handling digital assets is to include a specific clause in the trust deed authorising the trustee to appoint a qualified digital asset custodian and to limit the trustee’s liability for the custodian’s acts, provided the trustee exercised due diligence in selecting and monitoring the custodian. This approach is consistent with the HKMA’s January 2025 guidance on digital asset custody, which requires authorised institutions acting as custodians to implement policies for “selection, appointment, and ongoing monitoring of any third-party sub-custodians” (paragraph 4.3.2).

Practical Custody Structures: Three Models in Use

Hong Kong trust companies currently employ three principal structures for cryptocurrency custody, each with distinct legal and operational trade-offs. The choice depends on the size of the trust, the type of digital assets held, and the regulatory status of the trustee.

Model 1: The Licensed VASP as Sub-Custodian

The most common structure for trusts holding more than HKD 10 million in cryptocurrency involves appointing an SFC-licensed VASP as sub-custodian. As of March 2025, only two platforms hold Type 1 (dealing in securities) and Type 7 (providing automated trading services) licences with a virtual asset endorsement: OSL Digital Securities Limited and HashKey Exchange. Both are required by their licence conditions to maintain client assets in segregated accounts and to hold at least 98% of assets in cold storage.

Under this model, the trustee opens a custodial account with the VASP in its name as trustee. The VASP holds the private keys, and the trustee retains the beneficial interest for the trust beneficiaries. The trust deed must expressly authorise this arrangement and specify the VASP’s duties. The key risk is that the VASP’s insolvency could result in the trust assets being treated as part of the VASP’s general estate, despite the segregation requirement. The Re Gatecoin decision provides some comfort — the court recognised customer assets as trust property — but the outcome depends on the specific terms of the custody agreement and whether the VASP has complied with its segregation obligations.

Model 2: The Trustee as Direct Holder via Multi-Signature Wallet

For trusts with sophisticated settlors who want maximum control, some Hong Kong trust companies offer a multi-signature wallet structure. The trustee holds one of three private keys, the settlor (or a family office representative) holds a second, and a third-party technical provider — such as a qualified crypto custodian — holds the third. Transactions require two of three signatures.

This structure avoids the delegation problem because the trustee retains control over its key and does not delegate custody to a third party. However, it introduces operational complexity: the trustee must have a secure key management policy, including hardware security modules (HSMs) or qualified custodians for key storage, and must document all signing procedures. The HKMA’s guidance on digital asset custody (January 2025) recommends that authorised institutions implement “multi-signature arrangements where appropriate” (paragraph 5.1.4), which provides regulatory support for this model.

The disadvantage is that this structure is impractical for large portfolios requiring frequent trading. Each transaction requires coordination among key holders, which can take hours or days depending on the parties’ availability. For trusts holding assets as a long-term store of value — such as Bitcoin held for generational wealth transfer — this model works well. For trusts that need to execute trades in response to market conditions, it is too slow.

Model 3: The Trust Company as Licensed VASP Itself

A small number of Hong Kong trust companies have sought to eliminate the third-party risk by obtaining their own VASP licence. As of March 2025, no trust company has yet received an SFC licence for virtual asset dealing, but at least three are in the application process (SFC public register, February 2025 update). If successful, these trust companies would hold client crypto assets directly, subject to the SFC’s full regulatory framework for VASPs.

This model offers the strongest legal certainty — the trustee holds the assets directly under its own licence, and the trust deed can simply reference the trustee’s regulatory obligations. However, the cost is prohibitive for most trust companies. Applying for a VASP licence requires a minimum paid-up capital of HKD 5 million, a fit-and-proper assessment of all directors and officers, and ongoing compliance with the SFC’s Code of Conduct for VASPs. The annual compliance cost is estimated at HKD 3-5 million per entity (industry estimates, 2024). Only the largest trust companies with dedicated digital asset practices can justify this investment.

Tax, Reporting, and Beneficiary Considerations

Holding cryptocurrency in a Hong Kong trust introduces tax and reporting complexities that do not arise with traditional assets. The Inland Revenue Department (IRD) has not issued specific guidance on the taxation of digital assets held in trust, but practitioners must apply existing principles under the Inland Revenue Ordinance (Cap. 112).

Hong Kong Tax Treatment

Hong Kong operates a territorial tax system: only profits arising in or derived from Hong Kong are subject to profits tax at the rate of 16.5% (for corporations) or 15% (for individuals). For a trust holding cryptocurrency, the tax treatment depends on whether the trust is classified as a trading trust or a passive holding trust.

If the trustee actively trades cryptocurrency — buying and selling on a Hong Kong-based exchange — the profits may be subject to profits tax on the basis that the trading activity occurs in Hong Kong. The IRD’s Departmental Interpretation and Practice Notes No. 47 (2020) on the taxation of digital assets provides that “profits derived from the sale of digital assets may be chargeable to profits tax if the person carries on a trade, profession or business in Hong Kong and the profits arise in or are derived from Hong Kong.” For a trust, the question is whether the trustee’s trading activity constitutes a “trade” for tax purposes. If the trust deed restricts the trustee to passive holding — buying and holding for long-term appreciation — the profits are likely capital gains and not subject to profits tax, as Hong Kong does not impose capital gains tax.

The IRD has not issued a definitive ruling on this point for trusts, but the Commissioner of Inland Revenue v. Hang Seng Bank Limited [1991] 1 HKLR 153 principle applies: the characterisation of gains as capital or revenue depends on the frequency, organisation, and intention of the transactions. A trust that trades weekly will face a higher risk of profits tax than one that rebalances annually.

Reporting to Beneficiaries

Section 41 of the Trustee Ordinance requires trustees to keep proper accounts and to provide beneficiaries with information about the trust property upon reasonable request. For cryptocurrency holdings, this creates practical challenges. The trustee must maintain a record of all transactions, including the date, amount, transaction hash, and counterparty address. The trust accounts must be capable of audit, which requires a qualified crypto auditor — a service that remains scarce in Hong Kong.

The Big Four accounting firms have all developed digital asset audit practices, but their fees start at approximately HKD 500,000 for a basic engagement (industry estimates, 2024). For smaller trusts holding less than HKD 5 million in cryptocurrency, the audit cost may be disproportionate to the value of the trust. Some trust companies have responded by limiting cryptocurrency holdings to trusts with a minimum value of HKD 10 million, effectively creating a de facto minimum for digital asset trusts.

Regulatory Outlook: What Changes Are Coming

The Hong Kong government has signalled its intention to update the legal framework for digital assets, but the timeline remains uncertain. The Financial Services and the Treasury Bureau (FSTB) published its “Policy Statement on the Development of Virtual Assets in Hong Kong” in October 2022, committing to a “comprehensive regulatory framework.” As of March 2025, the government has implemented licensing for VASPs under Cap. 615 and has consulted on a new licensing regime for stablecoin issuers, but has not proposed amendments to the Trustee Ordinance.

The Case for Legislative Amendment

The Hong Kong Trustee Association (HKTA) submitted a position paper to the FSTB in June 2024 recommending three specific amendments to the Trustee Ordinance: (1) an express provision confirming that digital assets constitute “property” for the purposes of the Ordinance; (2) a new section permitting trustees to delegate custody of digital assets to a qualified custodian without breaching the non-delegation principle; and (3) a safe harbour for trustees who comply with SFC or HKMA custody standards. The FSTB has acknowledged receipt but has not indicated a timeline for legislative action.

In the absence of legislative amendment, trust companies must rely on common law and bespoke trust deeds. This creates legal risk for both trustees and beneficiaries. A beneficiary who suffers a loss due to a cryptocurrency hack or custodian insolvency could challenge the trustee’s actions on the grounds that the trustee failed to comply with the Trustee Ordinance’s implied requirements, even if the trust deed authorised the arrangement.

The Role of the SFC and HKMA

The SFC and HKMA are likely to fill the regulatory gap through guidance rather than legislation. The SFC’s December 2024 circular on VASPs included a section on “custody of client virtual assets” that applies to licensed platforms, but the SFC has indicated it may issue separate guidance for trustees (SFC Annual Report 2023-2024, page 42). The HKMA’s January 2025 guidance on digital asset custody for authorised institutions provides a detailed framework that trust companies can adopt voluntarily, even though it technically applies only to banks.

Practitioners should monitor the SFC’s consultation paper on digital asset custody, expected in Q2 2025. If the SFC proposes a licensing regime for digital asset custodians — including trust companies offering custody services — this would create a clear regulatory pathway and reduce legal uncertainty.

Actionable Takeaways

1. A Hong Kong trust can legally hold cryptocurrency as trust property, based on the Re Gatecoin [2023] precedent and the broad definition of “property” in Section 2 of the Trustee Ordinance, but the trust deed must include specific authorisation for digital asset custody and delegation to a qualified custodian.

2. The prudent investor standard under Section 3A of the Trustee Ordinance requires a professional trustee to implement institutional-grade custody — at minimum, 98% cold storage per the SFC’s December 2024 VASP circular — and to document all key management and transaction procedures in a written policy.

3. The multi-signature wallet model offers the strongest legal protection against the non-delegation principle but is operationally impractical for trusts requiring frequent trading; the licensed VASP sub-custodian model is more scalable but introduces counterparty insolvency risk.

4. Tax treatment depends on whether the trustee’s cryptocurrency activity constitutes trading or passive holding — the IRD’s DIPN No. 47 (2020) provides guidance, but no specific ruling exists for trusts, and the IRD may treat frequent trading as a taxable trade.

5. Legislative amendment to the Trustee Ordinance is unlikely before 2026; in the interim, trust companies should adopt the HKMA’s January 2025 digital asset custody guidance voluntarily and monitor the SFC’s expected Q2 2025 consultation on digital asset custodians.