Compliance Challenges for Hong Kong Family Trusts Holding Virtual Assets: SFC Regulatory Trends

The Hong Kong Securities and Futures Commission’s (SFC) publication of the revised Code of Conduct for Virtual Asset Service Providers in June 2025 marks a pivotal shift for family offices and trusts managing digital assets. With over 40 licensed virtual asset trading platforms (VATPs) now operating under the SFC’s enhanced regime, the regulatory perimeter has expanded to explicitly cover custody arrangements, staking services, and the use of virtual assets as collateral — all activities commonly encountered in family trust structures. For Hong Kong family trusts that hold virtual assets directly or through special-purpose vehicles, the compliance burden has intensified significantly, requiring trustees to navigate overlapping obligations under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO, Cap. 615), the SFC’s Code of Conduct for Licensed Corporations (Chapter 571), and the HKMA’s Guidelines on Custody of Virtual Assets (2024). This article examines the specific compliance challenges arising from these regulatory developments, focusing on custody segregation, valuation methodologies, tax treatment, and cross-border reporting — areas where family trust structures face unique frictions that standard corporate or individual investors do not encounter.

Custody and Segregation Requirements Under the SFC’s Enhanced Regime

The SFC’s Code of Conduct for Virtual Asset Service Providers (June 2025 revision) imposes strict custody and segregation obligations on licensed VATPs, which directly affect family trusts that use such platforms as custodians or trading intermediaries. Under paragraph 6.2 of the Code, licensed VATPs must segregate client virtual assets from their own assets, maintaining separate wallets or accounts for each client. For family trusts holding multiple sub-funds or separate trust accounts, this requirement creates an operational challenge: each trust’s virtual asset holdings must be individually identifiable and segregated, not merely pooled at the platform level. The SFC’s Guidelines on Custody of Virtual Assets (2024) further mandate that licensed custodians implement “client-level segregation” (paragraph 4.3), meaning that a family trust with three sub-trusts — each holding Bitcoin, Ether, and stablecoins — must maintain at least three separate wallet addresses or account structures at the custodian level.

Practical implications for trustees. A Hong Kong family trust holding virtual assets through a licensed VATP must ensure that the platform’s custody architecture supports granular segregation. The SFC’s Guidelines on Custody of Virtual Assets (2024, paragraph 5.1) require custodians to provide clients with “real-time, unencumbered access” to their virtual assets, which necessitates that the trust’s trustee — whether a licensed trust company under the Trustee Ordinance (Cap. 29) or a private trust company — can demonstrate that each beneficiary’s interest is separately recorded and auditable. Failure to achieve this segregation exposes the trust to the risk that the custodian’s insolvency could result in the trust’s assets being treated as part of the custodian’s general estate, despite the SFC’s requirement for client asset protection. In practice, trustees should require VATPs to provide written confirmation of wallet-level segregation and to maintain independent audit trails that link each trust’s holdings to specific on-chain addresses.

Staking and lending activities. The SFC’s revised Code also addresses staking and lending of virtual assets, which are increasingly common in family trust portfolios seeking yield. Under paragraph 7.3 of the Code, licensed VATPs must obtain “specific, informed consent” from clients before using their virtual assets for staking or lending. For family trusts, this consent must come from the trustee, not the beneficiary, and must be documented in the trust deed or a separate investment mandate. The HKMA’s Guidelines on Custody of Virtual Assets (2024, paragraph 6.2) further require that any staking or lending arrangement be “fully disclosed in the client agreement,” including the risks of slashing, lock-up periods, and counterparty default. Trustees must therefore review their trust deeds to ensure they have express powers to engage in staking and lending, or seek court approval under section 3 of the Trustee Ordinance where such powers are absent. The SFC’s Code of Conduct for Licensed Corporations (Chapter 571, paragraph 5.1) also imposes a “best execution” obligation on VATPs when placing staking or lending orders, which trustees should monitor through regular compliance reports.

Valuation and Reporting Obligations for Virtual Assets in Trust Accounts

Valuation of virtual assets held by family trusts presents a significant compliance challenge under both the Trustee Ordinance and the SFC’s regulatory framework. The SFC’s Guidelines on Valuation of Virtual Assets (2024, paragraph 3.1) require licensed VATPs to use “fair value” methodologies consistent with Hong Kong Financial Reporting Standards (HKFRS), specifically HKFRS 9 (Financial Instruments) and HKFRS 13 (Fair Value Measurement). For family trusts, this means that virtual assets must be valued at fair value at each reporting date, with changes recognised in the trust’s income statement or other comprehensive income depending on the classification. The HKMA’s Guidelines on Custody of Virtual Assets (2024, paragraph 7.1) further mandate that custodians provide “daily mark-to-market valuations” to clients, which trustees must incorporate into their periodic trust accounts.

Frequency of valuation. The SFC’s Code of Conduct for Licensed Corporations (Chapter 571, paragraph 8.2) requires licensed VATPs to provide valuation reports “at least monthly” to clients, but for family trusts, the Trustee Ordinance (Cap. 29, section 8) imposes a duty to account annually to beneficiaries. This creates a mismatch: trustees must ensure that the monthly valuations from the VATP are reconciled with the trust’s annual accounts, and that any significant price movements between reporting dates are disclosed in the trust’s financial statements. The SFC’s Guidelines on Valuation of Virtual Assets (2024, paragraph 4.2) require that valuations be based on “observable market data from recognised exchanges,” which for family trusts holding illiquid or thinly-traded tokens may require the use of third-party valuation specialists. Trustees should engage an independent valuer with expertise in digital assets, such as those registered with the Hong Kong Institute of Certified Public Accountants (HKICPA) under its Practice Note on Valuation of Digital Assets (2024).

Tax treatment of valuation changes. The Inland Revenue Department (IRD) has not issued specific guidance on the tax treatment of virtual assets held by trusts, but the general principles under the Inland Revenue Ordinance (Cap. 112) apply. Under section 14 of the IRO, profits arising from the sale of virtual assets held as trading stock are chargeable to profits tax, while gains from the disposal of capital assets are not. For family trusts, the classification of virtual assets — as trading stock or capital assets — depends on the trust’s investment mandate and the trustee’s intention at acquisition. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 61 (2024) on taxation of digital assets provides that “the nature of the asset and the frequency of trading” are key factors. Trustees should document the trust’s investment strategy in the trust deed or a separate investment policy statement to support the classification, and should obtain a tax ruling from the IRD where the trust holds substantial virtual asset positions.

Cross-Border Reporting and AML/CFT Compliance

Family trusts holding virtual assets face heightened cross-border reporting obligations under the AMLO (Cap. 615) and the SFC’s Guidelines on Anti-Money Laundering and Counter-Terrorist Financing (2024). The SFC’s Code of Conduct for Virtual Asset Service Providers (June 2025 revision, paragraph 9.1) requires licensed VATPs to implement “enhanced due diligence” for clients that are trusts or other legal arrangements, including the identification of all beneficiaries, settlors, and protectors. For Hong Kong family trusts, this means that the trustee must provide the VATP with a complete ownership and control structure, including the names and addresses of all beneficiaries — even those who are minor or unborn. The SFC’s Guidelines on AML/CFT (2024, paragraph 5.3) require that VATPs “obtain and verify the identity of the ultimate beneficial owner” of any legal arrangement, which for a discretionary trust may require the trustee to disclose the class of beneficiaries rather than individual names, subject to the SFC’s acceptance of such disclosure on a case-by-case basis.

Travel rule compliance. The SFC’s revised Code introduces the “travel rule” for virtual asset transfers, requiring licensed VATPs to obtain and transmit originator and beneficiary information for all transfers exceeding HKD 8,000 (approximately USD 1,025). For family trusts making cross-border transfers of virtual assets, the trustee must ensure that the VATP can comply with the travel rule by providing the required information — including the trust’s name, the trustee’s identity, and the beneficiary’s details — in a format compatible with the Financial Action Task Force (FATF) standards. The SFC’s Guidelines on AML/CFT (2024, paragraph 6.2) require that VATPs “reject or suspend” transfers where the required information is not provided, which could disrupt trust distributions or investment activities. Trustees should establish standard operating procedures for virtual asset transfers that include pre-populated travel rule data fields and should test the VATP’s compliance systems before executing large transfers.

Cross-border tax reporting. Family trusts with virtual assets must also consider the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) obligations. Under the Inland Revenue Ordinance (Cap. 112, Part 11A), Hong Kong financial institutions — including trust companies — must report financial accounts held by tax residents of CRS participating jurisdictions. The IRD’s Guidance on CRS Reporting for Virtual Assets (2024) clarifies that virtual assets held by a trust through a VATP are reportable if the VATP is a “reporting financial institution” under CRS rules. For family trusts, this means that the trustee must ensure that the VATP has correctly classified the trust as a “financial account” and has reported the trust’s aggregate virtual asset holdings to the IRD. The IRD’s Guidance on FATCA Reporting (2024, paragraph 3.2) further requires that trusts with U.S. beneficiaries or settlors report virtual asset holdings exceeding USD 50,000. Trustees should obtain annual CRS and FATCA compliance certificates from their VATPs and should review the trust’s reporting obligations with a tax advisor familiar with digital asset regulations.

Governance and Fiduciary Duties in the Virtual Asset Context

The trustee’s fiduciary duties under the Trustee Ordinance (Cap. 29) and common law principles are amplified when the trust holds virtual assets, given the unique risks of loss, theft, and regulatory change. The SFC’s Code of Conduct for Licensed Corporations (Chapter 571, paragraph 4.1) requires licensed VATPs to “act in the best interests of clients,” but for family trusts, the trustee must independently assess whether the VATP’s services are suitable for the trust’s specific circumstances. The HKMA’s Guidelines on Custody of Virtual Assets (2024, paragraph 8.1) recommend that custodians maintain “comprehensive insurance coverage” for virtual assets under custody, but the SFC does not mandate a minimum insurance level. Trustees should therefore verify the VATP’s insurance policies — including coverage for theft, hacking, and operational errors — and should ensure that the trust’s virtual assets are covered by the VATP’s insurance or by the trust’s own insurance policy.

Investment delegation and monitoring. Where the trustee delegates investment management of virtual assets to a licensed VATP or a discretionary investment manager, the trustee must comply with the Code of Conduct for Licensed Corporations (Chapter 571, paragraph 5.2) regarding delegation of investment functions. The trustee must conduct due diligence on the delegate, including reviewing the delegate’s SFC licence, compliance history, and internal controls. The SFC’s Guidelines on Delegation of Investment Functions (2024, paragraph 3.1) require that the delegation agreement specify “the scope of the delegate’s authority, the investment restrictions, and the reporting obligations.” For family trusts, the delegation agreement should also address the specific risks of virtual assets, including the delegate’s authority to stake, lend, or trade on margin. The trustee must monitor the delegate’s compliance with the agreement and should receive monthly reports on the trust’s virtual asset holdings, transactions, and valuations.

Conflict of interest management. Virtual asset transactions frequently involve conflicts of interest that are heightened in the trust context. For example, a trustee that is also a beneficiary of the trust may wish to trade virtual assets on the trust’s behalf, creating a conflict under section 3 of the Trustee Ordinance. The SFC’s Code of Conduct for Virtual Asset Service Providers (June 2025 revision, paragraph 10.1) requires VATPs to “identify, disclose, and manage” conflicts of interest, but the trustee remains ultimately responsible for ensuring that any conflict is properly managed. Trustees should document all potential conflicts — including those arising from the trustee’s own holdings of virtual assets, relationships with VATPs, or interests in digital asset projects — and should obtain independent legal advice on whether court approval is required for any conflicted transaction.

Actionable Takeaways

1. Trustees must ensure that each family trust holding virtual assets maintains separate, individually segregated wallets or accounts at the licensed VATP, with written confirmation from the custodian that wallet-level segregation is implemented and audited quarterly.

2. The trust deed should be reviewed and amended to expressly authorise staking, lending, and trading of virtual assets, with specific investment limits and risk disclosure requirements documented in a separate investment policy statement.

3. Trustees should engage an independent valuer registered with the HKICPA to provide monthly fair value valuations of virtual assets, reconciling these with the VATP’s daily mark-to-market reports for inclusion in the trust’s annual accounts.

4. Cross-border transfers of virtual assets exceeding HKD 8,000 must be supported by pre-populated travel rule data, and trustees should test the VATP’s compliance systems before executing any distribution or investment transaction.

5. Annual CRS and FATCA compliance certificates should be obtained from the VATP, and the trust’s reporting obligations should be reviewed with a tax advisor specialising in digital assets to ensure full compliance with IRD requirements.