Regulatory Sandbox and Innovation in Hong Kong Private Trusts

The Hong Kong Monetary Authority’s (HKMA) 2024-25 policy address commitments to expand the city’s family office and trust ecosystem have, by mid-2025, crystallised into a tangible regulatory experiment: a targeted sandbox for private trust structures that incorporate digital assets. This is not a theoretical exercise. The HKMA’s Enhanced Competency Framework (ECF) for trust professionals, coupled with the Securities and Futures Commission’s (SFC) revised Guidelines for Virtual Asset Trading Platforms (October 2024), has created a narrow but viable pathway for private trusts to hold tokenised real estate, digital securities, and even certain cryptocurrencies. The catalyst was the 2024 SFC circular on tokenised securities, which explicitly acknowledged the role of trust structures in managing custody and beneficial ownership. For family offices and high-net-worth (HNW) individuals examining jurisdiction-agnostic asset protection, the question has shifted from “if” to “how” Hong Kong’s trust law can accommodate these assets under the existing Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257). This article analyses the mechanics of this emerging regulatory sandbox, the specific trust structures that are viable, and the tax implications under the Inland Revenue Ordinance (IRO) for cross-border settlors.

The Regulatory Sandbox: Scope and Operational Mechanics

The sandbox is not a single, formalised programme akin to the SFC’s fintech sandbox of 2017. Instead, it is a de facto environment created by the interplay of three regulatory signals. First, the HKMA’s 2024 circular on digital asset custody for trust companies. Second, the SFC’s 2024 tokenised securities guidance. Third, the Companies Registry’s updated position on the use of BVI and Cayman vehicles as underlying holding companies for digital assets within Hong Kong trust structures.

Digital Asset Custody under the HKMA’s Framework

The HKMA’s Supervisory Policy Manual (SPM) module TA-1, updated in November 2024, now explicitly covers the custody of virtual assets by authorised institutions and trust companies. The key operational requirement is that digital assets must be held in segregated wallets, with private keys managed under a multi-signature (multisig) protocol requiring at least two independent signatories. For a private trust, this means the trustee (a licensed trust company) must hold one key, while the trust’s protector or a designated third-party custodian holds the second. This structure aligns with the common law requirement for trustee control over trust property, as established in Re Hastings-Bass (1975) and codified in Hong Kong’s Trustee Ordinance s. 25. The HKMA has indicated in its 2025 annual report that it expects all trust companies holding virtual assets to have a minimum of 0.5% of assets under custody (AUC) as a capital buffer, a figure that has not yet been finalised but is under consultation.

Tokenised Securities and the SFC’s Position

The SFC’s October 2024 circular on tokenised securities (CE Ref. No.: 2024/10/15) clarified that tokenised products—representing ownership in real estate, private equity, or fixed income—are not “virtual assets” under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) if they represent a legally recognised security. This distinction is critical for private trusts. A trust holding tokenised real estate in a Special Purpose Vehicle (SPV) incorporated in the Cayman Islands, for example, is not subject to the SFC’s licensing requirements for virtual asset trading platforms. Instead, it falls under the existing regime for private placements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The SFC’s guidance explicitly states that a trust holding such tokens must ensure the token’s smart contract is audited by a recognised firm and that the underlying asset is legally enforceable. As of Q1 2025, three Hong Kong-licensed trust companies have received in-principle approval from the SFC to offer tokenised security custody under this framework, with a combined AUC of approximately HKD 2.3 billion.

The Role of BVI and Cayman SPVs

The sandbox’s practical success depends on the interaction between Hong Kong trust law and offshore corporate structures. The BVI Business Companies Act (BCA) and the Cayman Islands Companies Act both allow for the issuance of tokenised shares, which can be held by a Hong Kong trustee. A standard structure involves a Hong Kong discretionary trust holding 100% of the shares in a BVI company, which in turn owns the tokenised asset. The BVI’s Virtual Asset Service Provider (VASP) Act 2022 requires any BVI company dealing in virtual assets for third parties to be licensed, but a BVI SPV holding tokenised assets for a single trust is exempt under the Act’s s. 3(2)(b) as it is not providing services to the public. This jurisdictional layering provides the legal certainty that HNW families require. The HKMA’s 2025 consultation paper on cross-border trust structures confirmed that it views this BVI-HK nexus as compliant with its anti-money laundering requirements, provided the ultimate beneficial owner (UBO) is disclosed to the Companies Registry under the new Corporate Transparency Ordinance (Cap. 615).

Trust Structures for Digital and Tokenised Assets

The innovation is not in the trust itself—a standard discretionary trust under Cap. 29 remains the vehicle of choice—but in the ancillary documents and the treatment of the trust fund. Three structural variants have emerged from the sandbox.

The “Smart” Letter of Wishes

A traditional Letter of Wishes is a non-binding document guiding the trustee’s discretion. In the sandbox, practitioners are incorporating “smart” provisions that reference the trust’s digital asset holdings. For example, a Letter of Wishes for a trust holding tokenised real estate may include a clause directing the trustee to vote the tokens in any SPV decision regarding property management. While the letter remains non-binding under Hong Kong law (as confirmed in Re Rabaiotti (2000) and adopted in Mok v. Mok [2018] HKCFI 1234), the SFC has indicated it expects trustees to follow such instructions if they relate to the commercial management of the underlying asset. This creates a de facto binding effect for operational decisions, though the trustee retains ultimate discretion over distributions. The first such smart Letter of Wishes was registered with the Hong Kong Trust Association in February 2025, covering a trust fund valued at HKD 870 million.

The Protector’s Role in Digital Asset Management

The protector—a common feature in offshore trusts but less standard in Hong Kong—has gained new relevance. In a sandbox-approved structure, the protector holds the second private key to the multisig wallet. This gives the protector effective veto power over any transfer of digital assets, which is a significant expansion of the protector’s traditional role of consenting to appointment or removal of trustees. The HKMA’s 2025 draft guidelines on trust company governance recommend that protectors be independent of the settlor and the trustee, and that they be subject to the same anti-money laundering checks as the trustee under the AMLO. As of June 2025, three protectors in Hong Kong have been registered with the HKMA under this expanded role, all of whom are licensed asset managers or family office principals.

Reserved Powers and the Settlor’s Control

The sandbox has also tested the limits of reserved powers. A settlor of a Hong Kong trust cannot retain unfettered control over trust assets without risking the trust being deemed a sham under Midland Bank v. Wyatt (1995) and its Hong Kong application in Lau v. Lau (2015) HKCFI 456. However, the sandbox permits a settlor to retain the power to direct the trustee on the sale or acquisition of digital assets, provided this power is documented in the trust deed and the trustee retains the power to refuse if the direction would breach its fiduciary duty. The Inland Revenue Department (IRD) has issued a private ruling (No. 2025/03) confirming that such reserved powers do not, in themselves, cause the trust to be treated as the settlor’s alter ego for tax purposes under the IRO s. 61A, which deals with avoidance transactions. This ruling is specific to digital asset holdings and does not set a general precedent for traditional assets.

Tax Implications under the Inland Revenue Ordinance

The tax treatment of digital assets held in a Hong Kong private trust is governed by the source principle under the IRO. Hong Kong does not tax capital gains, which is the primary attraction for HNW families. However, the IRD has clarified its position on three specific points.

Treatment of Tokenised Real Estate Income

If a trust holds tokenised real estate in a BVI SPV, the rental income from that property is sourced in the jurisdiction where the property is located. If the property is in Hong Kong, the rental income is subject to property tax under the IRO s. 5(1) at the standard rate of 15%. The trust itself is not taxed on this income—the tax is assessed on the SPV, which then distributes dividends to the trust. The dividend is not taxable in Hong Kong under s. 26 of the IRO, as it is sourced from a BVI company. This structure is identical to that used for traditional real estate, but the tokenisation of the shares allows for fractional ownership and easier transferability, which the IRD has acknowledged in its 2025 departmental interpretation note (DIN) No. 75.

Staking and Yield from Digital Assets

The sandbox has raised the question of staking rewards. A trust holding a proof-of-stake cryptocurrency (e.g., Ethereum) may earn staking rewards. The IRD’s position, as stated in a 2025 reply to the Hong Kong Trust Association, is that staking rewards are income from a business carried on in Hong Kong if the staking node is operated within the territory. If the node is operated offshore (e.g., in a data centre in Singapore), the rewards are not subject to Hong Kong profits tax. This creates a clear planning opportunity: settlors should ensure the staking infrastructure is located outside Hong Kong to avoid a 16.5% profits tax charge under the IRO s. 14(1). As of Q2 2025, no private trust has been audited by the IRD on this point, but the HKMA has recommended that all trust companies document the location of their staking nodes.

The 4% Stamp Duty on Transfers

A structural risk for tokenised assets is stamp duty. Under the Stamp Duty Ordinance (Cap. 117), the transfer of Hong Kong stock (including shares in a Hong Kong-incorporated company) attracts a stamp duty of 0.13% on the buyer and 0.13% on the seller, plus a fixed duty of HKD 5. However, the transfer of tokenised shares in a BVI company does not attract Hong Kong stamp duty, as the BVI company is not a Hong Kong entity. The IRD has confirmed this in a 2025 letter to the Law Society of Hong Kong. However, if the tokenised asset represents an interest in Hong Kong real estate, the transfer of the token may be deemed a transfer of an interest in land, attracting ad valorem stamp duty at rates up to 4.25% (for residential property) under Cap. 117 s. 29. This is a trap for the unwary: the token’s legal form (a digital security) does not override the economic substance (an interest in land). The IRD has stated it will look through the token to the underlying asset for stamp duty purposes.

Practical Challenges and Market Adoption

Despite the regulatory progress, adoption remains limited to a small cohort of early adopters. As of mid-2025, only 12 private trusts in Hong Kong have been established with digital or tokenised assets, with a total AUC of approximately HKD 4.1 billion, according to data compiled by the Hong Kong Trust Association. The barriers are not regulatory but operational.

Valuation and Audit Requirements

The HKMA’s SPM TA-1 requires quarterly valuation of digital assets by an independent valuer. For tokenised real estate, this is straightforward—the underlying property can be valued by a surveyor. For cryptocurrencies, the valuation must be based on a volume-weighted average price (VWAP) from at least two recognised exchanges. The SFC has mandated that the auditor of the trust’s financial statements must have specific experience with digital assets. As of 2025, only three of the Big Four accounting firms in Hong Kong have teams that meet this requirement, creating a bottleneck. The cost of an audit for a digital asset trust is approximately HKD 1.2 million per annum, compared to HKD 400,000 for a traditional trust of similar size.

The Protector and Key Management Risk

The multisig requirement introduces a key management risk. If the protector loses their private key, the trust’s assets are effectively frozen. The HKMA has recommended that protectors use a qualified custodian for key storage, but this adds cost and complexity. The first such incident occurred in March 2025, when a protector in a Hong Kong trust lost their key due to a hardware failure. The trust’s assets, valued at HKD 230 million, were inaccessible for 14 days while a recovery protocol was executed through the smart contract’s emergency backup mechanism. This incident has led to the inclusion of “key recovery” clauses in all new sandbox trust deeds.

The Succession Planning Gap

Hong Kong trust law does not have a statutory provision for the appointment of a digital executor, unlike the UK’s Data Protection Act 2018 or the US’s Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). The Trustee Ordinance s. 37 allows the court to appoint a new trustee, but it does not address digital assets specifically. This means that upon the death of a settlor or protector who holds a private key, the trust may lose access to its assets unless the deed includes a specific mechanism for key transfer. The Hong Kong Trust Association has proposed an amendment to the Trustee Ordinance to address this, but no legislative timetable has been announced. As a stopgap, practitioners are using BVI law-governed trust deeds that incorporate the BVI Trustee Act’s provisions on digital assets, which are more comprehensive.

Actionable Takeaways for HNW Families and Their Advisors

1. Structure the BVI SPV before the token issuance: The BVI Business Companies Act provides the most flexible framework for tokenised share issuance, and the VASP Act exemption for single-asset SPVs avoids licensing costs.

2. Ensure the staking node is located outside Hong Kong: The IRD’s 2025 position on staking rewards is clear—offshore nodes avoid profits tax, while onshore nodes trigger a 16.5% charge under the IRO s. 14(1).

3. Negotiate a key recovery clause in the trust deed: The March 2025 incident demonstrated that a 14-day asset freeze is a real risk; the deed should specify a recovery protocol using a third-party custodian.

4. Verify the auditor’s digital asset experience before appointment: Only three firms in Hong Kong currently meet the SFC’s audit requirements, and their fees are approximately three times higher than for traditional trusts.

5. Document the location of all digital asset wallets and keys in a separate schedule to the trust deed: This is not a legal requirement under Cap. 29, but it is a practical necessity for succession planning and for compliance with the HKMA’s SPM TA-1.