Key Takeaways
- • Simmons & Simmons advises that managers launching crypto funds in Hong Kong or Singapore must first determine whether their digital assets qualify as "securities," because that answer drives licensing, tax treatment, and custody obligations.
- • A Hong Kong Type 9 (Asset Management) licence is required only if the portfolio holds "securities"; holding one also lets managers market directly to family offices and HNW professional investors without paying placement fees to a Type 1 distributor.
- • Digital assets are not designated investments under Singapore's fund tax incentive schemes, so crypto funds there are likely to be taxed at the prevailing rate.
- • Independent custody of digital assets is the hardest service-provider requirement to meet, with institutional custodians largely limited to Bitcoin and Ethereum.
- • Most Hong Kong and Singapore funds are Cayman Islands entities, and open- versus closed-ended structure should follow the liquidity profile of the underlying portfolio.
Summary
Simmons & Simmons, through its Investment Funds teams in Singapore and Hong Kong, has advised a large number of established and start-up managers on crypto-fund establishment. The firm's guidance, published in December 2017, sets out five structuring issues managers should address: licensing, taxation, service providers, structure, and related considerations.
On licensing, the Securities and Futures Commission of Hong Kong (SFC) stated in its September 5, 2017 "Statement on initial coin offerings" that tokens conferring equity, dividend, voting or debt-like rights are likely to be "securities" under the Securities and Futures Ordinance, while utility tokens are treated as "virtual commodities" and fall outside that definition. Whether a fund needs a Type 9 licence therefore depends on an asset-by-asset analysis. Even where one is not strictly required, Simmons notes that a Type 9 licence lets managers market directly to individual and corporate professional investors, the primary target market for such products. In Singapore, the Monetary Authority of Singapore (MAS) said on August 1, 2017 that token offerings fall under the Securities and Futures Act where tokens constitute regulated products, and reiterated this in its "A Guide to Digital Token Offerings" dated November 14, 2017. Simmons advises Singapore managers to obtain registered (RFMC) or licensed (LFMC) fund management status.
On tax, Hong Kong's offshore fund profits tax exemption requires that a fund deal only in "specified transactions," including "securities", so funds holding non-security digital assets may lose the exemption. Singapore's three fund tax incentive schemes exempt specified income from designated investments, but digital currencies are not designated investments and are likely taxable.
On service providers, most auditors and administrators the firm works with have been willing to handle crypto portfolios, and a growing number are building capability. Independent custody is harder to secure. Institutional custodians are generally limited to Bitcoin and Ethereum, and managers often hold private keys in cold storage or with specialist vault providers. Simmons notes that a Hong Kong licensed manager is likely barred from holding client assets, and that the revised Fund Manager Code of Conduct, with consultation conclusions published in November 2017, is expected to take effect by end-2018 and require segregation, safeguarding, independent custody and independent valuation. Singapore imposes similar custody and valuation requirements under the Securities and Futures (Licensing and Conduct of Business) Regulations. Valuation of less liquid tokens remains a practical challenge.
On structure, Simmons attributes the dominance of Cayman Islands vehicles in Hong Kong and Singapore to tax efficiency, investor familiarity and infrastructure. The central test is liquidity matching: closed-ended, PE-style funds suit illiquid assets, open-ended hedge-fund-style funds suit liquid portfolios, and hybrid open-ended funds with hard redemption locks of three to four years can serve in-between cases.
On licensing, the Securities and Futures Commission of Hong Kong (SFC) stated in its September 5, 2017 "Statement on initial coin offerings" that tokens conferring equity, dividend, voting or debt-like rights are likely to be "securities" under the Securities and Futures Ordinance, while utility tokens are treated as "virtual commodities" and fall outside that definition. Whether a fund needs a Type 9 licence therefore depends on an asset-by-asset analysis. Even where one is not strictly required, Simmons notes that a Type 9 licence lets managers market directly to individual and corporate professional investors, the primary target market for such products. In Singapore, the Monetary Authority of Singapore (MAS) said on August 1, 2017 that token offerings fall under the Securities and Futures Act where tokens constitute regulated products, and reiterated this in its "A Guide to Digital Token Offerings" dated November 14, 2017. Simmons advises Singapore managers to obtain registered (RFMC) or licensed (LFMC) fund management status.
On tax, Hong Kong's offshore fund profits tax exemption requires that a fund deal only in "specified transactions," including "securities", so funds holding non-security digital assets may lose the exemption. Singapore's three fund tax incentive schemes exempt specified income from designated investments, but digital currencies are not designated investments and are likely taxable.
On service providers, most auditors and administrators the firm works with have been willing to handle crypto portfolios, and a growing number are building capability. Independent custody is harder to secure. Institutional custodians are generally limited to Bitcoin and Ethereum, and managers often hold private keys in cold storage or with specialist vault providers. Simmons notes that a Hong Kong licensed manager is likely barred from holding client assets, and that the revised Fund Manager Code of Conduct, with consultation conclusions published in November 2017, is expected to take effect by end-2018 and require segregation, safeguarding, independent custody and independent valuation. Singapore imposes similar custody and valuation requirements under the Securities and Futures (Licensing and Conduct of Business) Regulations. Valuation of less liquid tokens remains a practical challenge.
On structure, Simmons attributes the dominance of Cayman Islands vehicles in Hong Kong and Singapore to tax efficiency, investor familiarity and infrastructure. The central test is liquidity matching: closed-ended, PE-style funds suit illiquid assets, open-ended hedge-fund-style funds suit liquid portfolios, and hybrid open-ended funds with hard redemption locks of three to four years can serve in-between cases.
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