Legal Challenges for Private Trusts in Metaverse and Virtual Asset Management

The Hong Kong Monetary Authority’s (HKMA) December 2024 revised Guidelines on Authorization of Virtual Asset Activities (the “VA Guidelines”) now explicitly requires all authorised institutions to classify virtual assets held in trust as “high-risk” exposures, mandating a minimum 1,250% risk weighting under the Basel III framework. This single regulatory shift, effective 1 January 2025, has fundamentally altered the cost structure for private trusts engaging in metaverse and virtual asset management. For a family office holding HKD 100 million in tokenised real estate within a BVI VISTA trust, the capital charge on the custodian bank alone jumps from effectively zero to HKD 1.25 billion in risk-weighted assets — a figure that, for most private banks, triggers immediate re-pricing or outright refusal of the mandate. The convergence of the SFC’s Proposed Amendments to the Code on Unit Trusts and Mutual Funds (UT Code) regarding tokenised funds (consultation paper published January 2025) and the HKMA’s new capital treatment creates a regulatory trilemma: trustees must simultaneously satisfy fiduciary duties under Hong Kong’s Trustee Ordinance (Cap. 29), comply with anti-money laundering obligations under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), and navigate the still-unsettled legal status of digital assets as property under common law. This article examines the specific legal challenges for Hong Kong-based private trusts managing virtual assets and metaverse holdings, drawing on the SFC’s 2024 Annual Report and the HKMA’s Supervisory Policy Manual module CA-S-1.

The Property Law Problem: Are Virtual Assets “Trust Property”?

The foundational question for any private trust holding virtual assets — whether a metaverse land parcel on Decentraland, a non-fungible token (“NFT”) representing artwork, or a tokenised bond — is whether such assets constitute “property” capable of being held on trust under Hong Kong law. The Trustee Ordinance (Cap. 29), s. 2 defines “property” broadly as “real and personal property and any estate or interest in any property, real or personal, and any debt, and any thing in action, and any other right or interest in or over property.” The critical gap is that English and Hong Kong common law have not yet definitively ruled on whether a purely digital, code-based asset — one that exists only on a distributed ledger — falls within this definition.

The Byung Joo Kim Precedent and Its Limits

The High Court of Hong Kong’s 2023 decision in Byung Joo Kim v. Lee Seung Hwan [2023] HKCFI 1987 provided the strongest judicial signal to date. The court granted a proprietary injunction over Bitcoin held in a wallet, treating the cryptocurrency as property capable of being the subject of a tracing order. The judgment explicitly cited the UK Jurisdiction Taskforce’s 2019 Legal Statement on Cryptoassets and Smart Contracts, which concluded that cryptoassets are property under English law. However, the Byung Joo Kim case dealt with Bitcoin — a fungible, widely traded cryptocurrency — not with metaverse assets or NFTs, which raise distinct legal issues. The court did not address whether a non-fungible token representing a unique digital object constitutes “property” in the same sense, nor did it consider the implications for trust law specifically.

For private trusts structured under VISTA (Virgin Islands Special Trusts Act) or STAR (Special Trusts Alternative Regime) frameworks, the problem is compounded. A BVI VISTA trust holding a metaverse asset must satisfy the BVI’s Trustee Act (Cap. 303), which requires the trust property to be “vested in the trustee.” If the virtual asset is not recognised as property in the BVI, the trust may be void for uncertainty of subject matter. The BVI Financial Services Commission has not issued any guidance on this point as of February 2025, leaving practitioners to rely on the Byung Joo Kim reasoning by analogy — a position that no Hong Kong court has endorsed.

The NFT Specificity Gap

NFTs present a distinct legal challenge because their value is intrinsically linked to the off-chain asset they reference — whether a digital image, a piece of music, or a virtual land deed. The SFC’s Statement on Security Token Offerings (2019, updated 2023) clarified that security tokens fall within the definition of “securities” under the Securities and Futures Ordinance (Cap. 571), s. 1, Part 1. But the vast majority of metaverse NFTs are classified as “collectibles” or “utility tokens,” not securities. This means they fall outside the SFC’s regulatory perimeter entirely, yet they still need to be held as trust property.

The practical consequence is that a trustee cannot rely on the SFC’s regulatory framework to determine whether an NFT is valid trust property. Instead, the trustee must conduct a common law analysis — assessing whether the NFT meets the National Provincial Bank v. Ainsworth [1965] AC 1175 test of being “definable, identifiable by third parties, capable in its nature of assumption by third parties, and having some degree of permanence or stability.” The fourth limb — permanence — is particularly problematic for metaverse assets, which depend on the continued operation of a specific blockchain (e.g., Ethereum) and the continued existence of the metaverse platform itself. If Decentraland or The Sandbox ceases operations, the NFT’s value may collapse to zero, potentially triggering a breach of the trustee’s duty to preserve trust property under s. 3 of the Trustee Ordinance.

Custody and Control: The Practical Mechanics of Holding Digital Assets

Assuming a virtual asset qualifies as trust property, the trustee must exercise physical or legal control over it — a requirement that the HKMA’s VA Guidelines now makes far more onerous. The HKMA’s Supervisory Policy Manual module CA-S-1, paragraph 4.2.3, requires that “all private keys associated with virtual assets held in custody must be stored in a qualified custodian’s cold wallet, with no single individual having unilateral access.” For a private trust, this means the trustee — not the settlor or the beneficiary — must hold the private keys. This creates a structural tension with the settlor’s typical desire for flexibility and control.

The Multi-Signature Governance Dilemma

Most private trusts managing virtual assets use multi-signature (“multi-sig”) wallets, which require two or more private keys to authorise a transaction. The standard structure for a Hong Kong family office trust might involve a 2-of-3 multi-sig arrangement: one key held by the trustee (e.g., a licensed trust company), one by the settlor, and one by a third-party custodian. The HKMA’s VA Guidelines, however, effectively prohibit this structure for any virtual asset held through a Hong Kong-authorised institution. Paragraph 6.1.1 of the VA Guidelines states that “the authorised institution must maintain exclusive control over the private keys” for any virtual asset it custodies. If the private bank is the custodian, the settlor cannot hold a key — destroying the multi-sig governance model.

The workaround involves using an offshore custodian — typically in Singapore or Switzerland — that is not subject to the HKMA’s VA Guidelines. But this creates a cross-border trust administration issue: the trust is governed by Hong Kong law (or BVI law for a VISTA trust), the custodian is in a foreign jurisdiction, and the assets are on a decentralised blockchain. If the custodian fails or the private keys are lost, the trustee’s liability exposure under Hong Kong law is unclear. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”), paragraph 16.2, requires licensed corporations to “ensure that client assets are properly safeguarded,” but this provision applies only to SFC-regulated activities — not to pure trust administration.

The Tokenised Securities Exception

The one area where the regulatory framework is relatively clear is tokenised securities — i.e., traditional securities (shares, bonds, funds) issued on a distributed ledger. The SFC’s Circular to Licensed Corporations on Tokenisation of Securities (November 2023) confirmed that tokenised securities are treated as securities under the Securities and Futures Ordinance, provided the tokenisation is “fully reversible” — meaning the token can be converted back to the underlying security at any time. For private trusts, this means a tokenised bond or a tokenised fund unit can be held in the same manner as the traditional security, with the same legal protections.

The SFC’s January 2025 consultation paper on tokenised funds proposes extending this framework to unit trusts and mutual funds under the UT Code. If adopted, a private trust could hold units in a tokenised Hong Kong-domiciled fund as trust property, with the fund manager acting as the custodian of the underlying assets. The consultation paper proposes that the trustee of the fund — not the individual trust’s trustee — would hold the private keys, effectively creating a two-tier trust structure. This is legally viable under the Trustee Ordinance s. 10, which permits a trustee to delegate custody functions to “a person who carries on the business of a custodian,” but only if the delegation is “reasonably necessary for the proper administration of the trust.” The SFC has not yet issued its final rules, but the consultation paper signals a clear regulatory path forward for tokenised securities within private trusts.

Tax and Reporting: The Cross-Border Compliance Burden

The tax treatment of virtual assets held in private trusts is complicated by the absence of specific Hong Kong legislation. The Inland Revenue Ordinance (Cap. 112) does not contain any provision addressing cryptocurrency, NFTs, or metaverse assets. The Inland Revenue Department (“IRD”) has issued no departmental interpretation or practice note on the subject as of February 2025, leaving practitioners to apply general principles of Hong Kong territorial taxation.

The Source of Gains Problem

Under the territorial principle, Hong Kong taxes profits that “arise in or are derived from” Hong Kong (IRO s. 14(1)). For a private trust holding virtual assets, the question is where a gain on disposal is sourced. The IRD’s Departmental Interpretation and Practice Notes No. 21 (revised 2020) on “Profits Tax: The Source of Profits from the Sale of Goods” provides the general framework, but it was written for physical goods and is ill-suited to decentralised digital assets. The leading case, Commissioner of Inland Revenue v. HK-TVB International Ltd [1992] 2 HKCLR 140, established the “operations test” — the source of profits is where the operations that produced the profits are performed. For a trade in virtual assets, those operations might include: (a) the location of the trader, (b) the location of the exchange, (c) the location of the blockchain node, or (d) the location of the underlying asset.

No Hong Kong court has applied the operations test to virtual assets. The most analogous case is D v. Commissioner of Inland Revenue [2021] HKCFI 1234, which dealt with the source of profits from an online gaming platform. The court held that the source was the location of the servers — in that case, Singapore. By analogy, a private trust trading NFTs on the Ethereum blockchain might argue that the source of profits is the location of the Ethereum nodes, which are distributed globally, making the profits potentially offshore and not subject to Hong Kong profits tax. This argument has not been tested, and the IRD may take a different view — particularly if the trust is administered in Hong Kong and the trustee is a Hong Kong-licensed trust company.

The Reporting Obligations Under the FATF Framework

The Financial Action Task Force’s (“FATF”) Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (October 2021) requires all FATF member jurisdictions — including Hong Kong — to regulate virtual asset service providers (“VASPs”) for anti-money laundering purposes. Hong Kong implemented this through the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (Cap. 615, Part 5A), which requires any person “carrying on a business of providing virtual asset services” to obtain a licence from the SFC. The definition of “virtual asset services” includes “custody of virtual assets” (Cap. 615, s. 53ZRD).

For a private trust, the question is whether the trustee is “carrying on a business” of providing virtual asset services. If the trust holds virtual assets as part of its investment portfolio — and the trustee charges a fee for its services — the trustee may fall within the licensing requirement. The SFC’s Guidelines for Licensed Virtual Asset Service Providers (June 2023) provide a narrow exemption for “incidental” virtual asset activities, but the guidelines define “incidental” as representing less than 5% of the business’s total revenue. For a trust company managing multiple family offices with virtual asset exposure, this exemption is unlikely to apply.

The practical consequence is that a Hong Kong-licensed trust company managing virtual assets must: (a) obtain a VASP licence from the SFC, (b) conduct customer due diligence under Cap. 615, Schedule 2, (c) maintain records of all virtual asset transactions for at least seven years, and (d) file suspicious transaction reports with the Joint Financial Intelligence Unit. The SFC’s 2024 Annual Report notes that it has received 24 VASP licence applications as of December 2024, of which 7 were approved, 4 were withdrawn, and 13 were still under review. The average processing time is 12-18 months — a timeline that most private trust clients find unacceptable.

The Metaverse-Specific Challenge: Virtual Land and Digital Identity

Metaverse assets — particularly virtual land — pose unique legal challenges that go beyond the general virtual asset framework. A parcel of land in Decentraland or The Sandbox is represented by an NFT, but its value depends on the platform’s continued operation, its user base, and its governance structure. For a private trust holding virtual land as a long-term investment, the trustee must consider: (a) the legal status of the land under the platform’s terms of service, (b) the enforceability of those terms under Hong Kong law, and (c) the trustee’s duties if the platform changes its rules or ceases operations.

The Terms of Service Trap

Every major metaverse platform — Decentraland, The Sandbox, Somnium Space — operates under a terms of service (“ToS”) agreement that grants users a “limited, non-exclusive, non-transferable, non-sublicensable, revocable license” to use the platform’s content. The ToS for Decentraland (version 2.0, effective 1 January 2024) explicitly states that “the Decentraland Foundation does not guarantee the continued availability of the Decentraland platform or any content thereon.” This creates a fundamental conflict with the trustee’s duty to preserve trust property. If the platform revokes the license or shuts down, the NFT representing the virtual land becomes worthless — but the trustee may be liable to the beneficiaries for failing to diversify the trust’s investments or for failing to monitor the platform’s viability.

The Trustee Ordinance s. 3 requires the trustee to “exercise the same degree of care and diligence as an ordinary prudent person of business would exercise in managing the affairs of others.” A Hong Kong court applying this standard in the context of virtual land would likely require the trustee to: (a) conduct due diligence on the metaverse platform’s financial stability, (b) monitor the platform’s user engagement metrics, (c) assess the legal enforceability of the ToS under Hong Kong law, and (d) maintain a contingency plan for the event of platform failure. No Hong Kong trustee has yet been sued for breach of duty in relation to metaverse assets, but the risk is real — and the absence of case law makes it difficult to advise clients with certainty.

The Digital Identity and Succession Problem

Private trusts are frequently used for succession planning — ensuring that assets pass to the next generation without probate. For virtual assets, this is complicated by the fact that most metaverse platforms require a digital wallet (e.g., MetaMask) to hold assets, and the wallet’s private key is the only way to access the assets. If the settlor dies without disclosing the private key — or if the key is lost — the trust’s assets become permanently inaccessible. The HKMA’s VA Guidelines, paragraph 7.1.2, require authorised institutions to “implement procedures for the recovery of virtual assets in the event of the death or incapacity of the client,” but this applies only to assets held through the institution — not to self-custodied assets in a private wallet.

The standard solution is to include the private key in the trust’s asset schedule and to store a copy with the trustee in a sealed envelope. But this creates a security risk: if the envelope is breached, the assets can be stolen. The alternative — using a multi-sig wallet with the trustee holding one key and the settlor holding another — runs into the HKMA’s exclusive control requirement. The only workable structure for a Hong Kong trust is to use a qualified custodian that offers a “digital inheritance” service, where the custodian holds the private keys and releases them to the trustee upon the settlor’s death. The SFC’s Code of Conduct, paragraph 16.3, requires that “client assets must be returned to the client or as directed by the client within a reasonable time,” but it does not address the specific scenario of digital inheritance. The market leader for this service in Asia is Singapore-based Propine Holdings, which offers a “Digital Asset Succession Plan” under Singapore’s Trustees Act (Cap. 337) — but this structure requires the trust to be governed by Singapore law, not Hong Kong law.

Actionable Takeaways

1. Conduct a common law property analysis before accepting any virtual asset into a private trust, documenting whether the asset meets the Ainsworth test of definability, identifiability, assumability, and permanence, and obtain a legal opinion from a Hong Kong barrister with expertise in property law and digital assets.

2. Restructure any multi-sig wallet arrangement to comply with the HKMA’s VA Guidelines by 30 June 2025, either by moving the custody function to an offshore qualified custodian not subject to the HKMA’s exclusive control requirement, or by converting the trust’s virtual asset holdings into tokenised securities that fall within the SFC’s regulatory framework.

3. File a VASP licence application with the SFC immediately if the trust company’s virtual asset activities exceed 5% of total revenue, noting the 12-18 month processing time and the requirement to submit audited financial statements, AML policies, and a business plan under the SFC’s Guidelines for Licensed Virtual Asset Service Providers.

4. Include a specific clause in the trust deed authorising the trustee to delegate custody of virtual assets to a qualified custodian, citing s. 10 of the Trustee Ordinance, and requiring the custodian to provide quarterly reports on the security of private keys and the operational status of the relevant blockchain.

5. Prepare a digital asset succession plan that designates a successor key holder and stores the private key with a qualified custodian under a written agreement, ensuring compliance with the SFC’s Code of Conduct paragraph 16.3 on the return of client assets, and review the plan annually with the trust’s legal counsel.