Hong Kong Investment Immigration New Regulations: Opportunities and Challenges of Using Crypto Assets as Proof of Assets

Recently, the Hong Kong Investment Promotion Agency approved an intriguing case: an applicant successfully obtained investment immigration qualifications using 30 million HKD worth of Ethereum (ETH) as proof of assets. This is not the first occurrence; there was also a successful case last October using Bitcoin for the application. Although this seems to open a convenient pathway for Crypto Assets holders, in practice, many large holders have encountered difficulties in the critical area of Source of Funds (SOF) proof. Let's delve into the reasons behind this phenomenon.

Crypto Assets are Recognized as Proof of Assets

The "New Capital Investor Immigration Scheme" in Hong Kong requires applicants to prove that they (or jointly with their spouse) have assets of at least HKD 30 million, including stocks, bonds, deposits, and real estate. The main reasons why Crypto Assets are accepted as valid assets are twofold:

1. Policies not explicitly prohibiting: The Hong Kong government takes an open attitude towards asset types, as long as accountants can provide reports to confirm the authenticity and ownership of these assets, they generally meet the requirements.

2. There are successful precedents: Industry insiders have stated that there have been multiple successful cases of using Crypto Assets such as Bitcoin and Ethereum as proof of assets. As long as the procedures are compliant, there is no essential difference between Crypto Assets and traditional assets.

However, proving asset ownership and proving the source of funds are two entirely different issues.

Proof of Source of Funds: The Biggest Challenge

There is a common contradiction in the field of Crypto Assets: "Assets are clear, sources are unclear". This is mainly reflected in the following aspects:

• Early participants found it difficult to provide complete records: Many people obtained Crypto Assets through mining, over-the-counter trading, or gifts from friends, often lacking bank statements or transaction records.

• Issues with trading platforms leading to data loss: Some well-known exchanges like FTX and Binance have faced compliance issues, resulting in the loss of some users' historical data or data not being recognized by regulators.

• The anonymity feature has a dual impact: while blockchain has transparency, the connection between wallet addresses and real identities is difficult to establish directly, which increases the difficulty of tracing funds.

For example, an investor invested 1 million HKD to purchase Bitcoin in 2017, and its value has now increased to 10 million HKD. However, if the transaction records from that time have been lost, or if the transaction was completed in cash, proving the legal source of these funds becomes a tricky issue. Without a clear explanation of this, the immigration application is likely to be rejected.

The Dilemmas Faced by Accountants

According to Hong Kong policy, asset verification primarily relies on reports from Certified Public Accountants (CPA). However, accountants face numerous challenges when dealing with applications related to Crypto Assets:

1. Valuation standards are not uniform: Given the significant volatility in crypto asset prices, should the price at the time of application be used, or should an average of the past six months be adopted? Different accountants may have different practices.

2. Anti-Money Laundering Pressure: If the source of the client's funds is unclear, the accountant may face joint liability when issuing a report.

3. High technical threshold: Issues such as verifying the ownership of wallet addresses and distinguishing between self-owned assets and temporarily borrowed assets require specialized knowledge.

Coping Strategies

For holders of Crypto Assets who wish to apply for immigration, it is recommended to take the following measures:

1. Improve the evidence chain: From the initial purchase of Crypto Assets, it is important to keep good records of transfer documents, exchange bills, tax certificates, and other documents. Even handwritten receipts are better than having no evidence at all.

2. Seek professional help: It is crucial to form a professional team that includes lawyers, accountants, and immigration consultants, especially those familiar with Crypto Assets and Hong Kong policies, who can design a compliant application path for applicants.

3. Gradual Compliance: If the sources of early funding are unclear, consider gradually bringing the assets into compliance.

Investment Opportunities of Hong Kong's New Policies

The Hong Kong government's latest "New Capital Investor Entry Scheme" sets the minimum investment threshold at HKD 30 million. Applicants are required to invest at least HKD 27 million in approved financial assets and non-residential real estate, while an additional HKD 3 million should be allocated to a specific "Capital Investor Entry Scheme Investment Portfolio" to support the development of innovative technology and other key industries.

It is worth noting that the scope of permitted investment assets has expanded. According to the published list, the equity of Limited Partnership Funds (LPF) and the Open-ended Fund Companies (OFC) managed by Hong Kong's Type 9 license companies are both recognized as investable assets, providing investors with more options.

This policy change has opened up new avenues for individuals intending to obtain Hong Kong residency through investment, while also injecting new momentum into Hong Kong's financial innovation and technological development.