The Government, legislators, and industry players have a wide range of carefully nuanced views that make the future of the first 21st century currency hard to discern in Asia’s financial capital. Recognition, legitimisation and (non)regulation show the need for greater dialogue.
Like an illegitimate child unable to inherit his father’s riches, the growing Bitcoin industry in Hong Kong is still waiting for some kind of official status to realise its potential.
Since its invention in 2008, Bitcoin has gone through peaks and troughs in its value. It has inspired applications ranging from life-improving to crime -inducing. Despite its tumultuous beginnings, the virtual currency and the Blockchain technology behind it appears to be here to stay. In Hong Kong, Bitcoin startups have been taking advantage of a deregulated environment and spreading like wildfire, but a lack of regulatory oversight may stop Hong Kong from banking on what some are calling the “next internet”.
A Bad Name
Last week, Bank of China and Bank of East Asia both reportedly saw their websites attacked by hackers. The perpetrators demanded unspecified amounts of ransom — in Bitcoin.
Hackers ask for Bitcoin because it is relatively difficult, although not impossible, to track. This is not the first time Bitcoin has been tied to criminal activity in Hong Kong.
Earlier this year, local Bitcoin exchange MyCoin disappeared with as much as HK$180 million in investor funds. Earlier reports of HK$3 billion proved to be based on exaggerated numbers claimed by the trading platform. The operation was suspected to be a Ponzi scheme that never operated as a genuine Bitcoin business, with investors promised rewards for bringing in more investors. Media reports suggest the exchange may have never held Bitcoin at any point.
The Government: No need for regulation
While supporters of the virtual currency point out that the MyCoin incident had nothing to do with the security of Bitcoin itself, government officials and regulators were quick to caution Hong Kong citizens against it.
A spokesperson for the Hong Kong Monetary Authority (HKMA) said, “We would like to remind the public to exercise extra caution when considering making transactions or investments with Bitcoin,” citing its “highly speculative nature”.
The incident also prompted a call for a complete ban on Bitcoin by legislators including Neighbourhood WorkersService Centre (NWSC) Leung Yiuchung and the Democratic Party’s James To.
In response to their call for a ban, the Secretary for Financial Services & the Treasury Professor KC Chan echoed with the HKMA’s warning, and dismissed Bitcoin as a commodity, not currency, that hasn’t been widely circulated in Hong Kong and “[does] not pose a significant threat to the financial system”.
He added, “The Government and financial regulators will keep a close watch on the development of Bitcoins and other virtual commodities.”
To the general public who may not necessarily understand the technology, the scam gave Bitcoin a bad name. The dismissive demeanour of officials towards the technology didn’t help. The scam revealed how fragile confidence can be in a new innovation without a sound regulatory framework.
It was clear they would need to take the matter into their own hands.
For Dave Chapman, cofounder of Hong Kong based ANX Bitcoin Exchange (ANX), it was clear they would need to take the matter into their own hands.
“When we began ANX in Hong Kong, we were committed to being as regulatory compliant and transparent as possible. We were one of the first Bitcoin exchanges to adopt KYC (Know-yourcustomer) and AML (Anti-money laundering) policies,” said Mr Chapman.
ANX is now among the top 10 Bitcoin exchanges in the world, exchanging 1,000 Bitcoins every 24 hours, which at the time this article was written, equals approximately HK$1.8 million. While users who have spoken to HT have praised the platform’s services for making Bitcoin trading simple, Mr Chapman and his team found it important to self-regulate in order to ensure confidence and stability in the platform.
When asked if current Government policies were enough to enable the industry to grow, Mr Chapman feels the current regulations are “not for purpose”, meaning current regulations do not reflect the needs of the industry. He believes the appropriate change will come eventually. “If we look at the internet in the beginning, there were so many issues with privacy and such, and the regulations were just antiquated, they were too old. Then over the course of 3-4 years the legislation improved and became more appropriate to the times.”
“In terms of financial centres, both Hong Kong and Singapore are equally good. But Singapore edges out Hong Kong in terms of innovation.”
CoinPip, a successful Singapore-based payments company that uses Bitcoin to make payments to remote workers easier and faster, was almost a Hong Kong product. Co-founder Anson Zeall says Hong Kong just lost out due to its support, or lack thereof, for innovation.
“In terms of financial centres, both Hong Kong and Singapore are equally good. But Singapore edges out [Hong Kong] in terms of innovation.” Mr Zeall believes PayPal chose Singapore as its headquarters in 2010 for similar reasons. “Singapore constantly adjusts their regulation to accommodate innovative products. As Chairman of the Association of Cryptocurrency Enterprises and Startups, Singapore, we’re having great dialogue with the relevant authorities here, including the Monetary Authority of Singapore,” said Mr Zeall.
Led by local regulator Infocomm Development Authority (IDA), Singapore announced its ambitions to become the world’s first smart nation last year, tapping into new technologies to “develop sustainable solutions that improve the lives of the local population”. In January this year, the Singapore Government brought investors and startups together, encouraging technology firms to develop new ideas that can be part of the initiative.
“To innovate in the cryptocurrency space, not only do you need the city to be a good host for FinTech (Financial Technology) innovation, you need the environment to be good for startups as well. Singapore is well known to be favourable for startups, especially now with the Smart Nation Initiative.” says Mr Zeall.
To Regulate, or not to regulate?
“The biggest problem now is, people will be building these businesses whether you like it or not. If your laws and policies remain unclear, they would rather move to places like Singapore or London.”
Currently, Hong Kong does not have any targeted regulatory measures on virtual commodities (as the Government def ines Bitcoins) specifically in terms of their safety or soundness, and the trading platforms or operators of such commodities. Professor KC Chan also states that existing laws already provide sanctions against unlawful acts such as pyramid schemes, whether or not virtual currencies are involved, giving no reason for regulating of Bitcoin. Financial regulators, including the Hong Kong Monetary Authority, the Securities and Futures Commission, the ffice of the Commissioner of Insurance, and the Customs and Excise Department are responsible for executing such laws, along with the Joint Financial Intelligence Unit (JFIU) set up by the Police and the Customs and Excise Department (C&ED).
In late March this year, the Hong Kong Government established a FinTech (Financial Technology) steering group headed by Professor KC Chan. It remains unclear whether the group has discussed the regulation of virtual currencies. Responding to HT’s requestfor any updates to the Government’s stance on Bitcoin, a representative replied with a transcript of Professor KC Chan’s speech at LegCo in March.
According to legislator Charles Mok, who represents the Information Technology sector, the group has yet to initiate conversation with the industry. “Many startups are quite confused with regards to whom to speak to. The Government should, in their considerations for regulation, consult with the industry for their views on how to regulate,” suggests Mr Mok.
Charles Mok thinks Government efforts have just not been enough. “It’s just wasted time and opportunity,” Mr Mok told HT , “The biggest problem now is, people will be building these businesses whether you like it or not. If your laws and policies remain unclear, they would rather move to places like Singapore or London. A lack of clarity in local regulations is hindering us. Our opponents are already working on it, regulating exchanges and investors alike.”
“People are risk averse, and a lack of clarity hinders people’s desire to invest in [these businesses],” he added.
Non-regulation is not that bad
“I’m very happy they’ve not done anything.” James Bang, entrepreneur, on government non-regulation.
James Bang, a Bitcoin entrepreneur and enthusiast, thinks the hands-off approach has allowed firms to innovate. “Bitcoin is changing so dramatically,” he says. “The technology is advancing so fast, that to put strict regulation on
it now, would actually hamper the technology and innovation.”
“When you look at Bitcoin technology companies that are innovating different types of Bitcoin wallets, or working on smart contracts, why would you even think of regulating that? They’re just innovating better ways for people to do things, there’s no point regulating that.” says Mr Bang. “I’m very happy they’ve not done anything.”
Besides the lack of regulation targeting the Bitcoin industry, Leonhard Weese, President of the Bitcoin Association of Hong Kong, thinks Hong Kong’s simple legal structure and existing institutions have contributed to the lure of Bitcoin startups, “Hong Kong regulations are mostly quite simple and there aren’t a lot of complicated taxes or rules. In a sense, it’s very easy for a company to understand how rules apply if they use Bitcoin.” Currently, it is legal to accept, own, and trade Bitcoins, and it does not require a money transmitters licence when you transmit Bitcoins, nor any special licenses to run a Bitcoin exchange.
According to Mr Weese, who receives his income in Bitcoin from an American firm, paying income tax is just as easy as being paid in any other currency. “I just need to declare the Hong Kong dollar value at the time of the transaction,” he explains. “There’s also no capital gain tax in Hong Kong, which means if I hold Bitcoins I don’t have to worry about reporting them.”
It is clear government institutions have shown themselves to be willing to experiment with the technology.
While government officials have largely overlooked Bitcoin as a financial tool, scientific institutions in Hong Kong have not ignored potential applications of the digital currency. The Hong Kong Applied Science and Technology Research Institute (ASTRI), founded by the Government in 2000, has had several research projects on Bitcoin.
Professor Dah Ming Chiu, Chairman of the Department of Information Engineering at Chinese University of Hong Kong, confirmed his advisory role on a study that looked into enhancing user control on assets using “Secret Sharing” protocol. Other sources have revealed projects on “smart contracts” and hardware to store Bitcoins.
The Government sits on the Board of Directors of ASTRI. In 2014, the company received HK$204.7 million from the Innovation and Technology fund and HK$129 million from Government subvention, numbers in the past have been similar. A spokesperson with ASTRI told HT that Government policy is “one of the factors to consider” when a project is decided on.
It is clear government institutions have shown themselves to be willing to experiment with the technology. The incubators at quasi-government organisations Science Park and Cyberport have both hosted Bitcoin firms, namely Gatecoin, an exchange, and BitSpark, which helps domestic workers send remittances back home.
The difference should be drawn between the financial and technological Bitcoin firms.
While lack of regulation has been welcomed by entrepreneurs who are building their Bitcoin startups in Hong Kong, some industry players think certain oversight is needed.
Mr Bang believes the difference should be drawn between the financial and technological Bitcoin firms. “Where there could be [more] regulation, would be with the exchanges and especially trading platforms that manage Bitcoin user’s private keys.” Each Bitcoin user is given a public and private key to enable transaction, which are not dissimilar to a conventional account number and password. For centralised Bitcoin exchanges, users give them the authorisation to control the private key, which allows the exchange to carry out transactions on a user’s behalf.
“Technically, when your money is in all these exchanges, you don’t control your Bitcoin anymore, you’re at the mercy of the exchange not shutting down. I do think there should be some regulation there,” explains Mr Bang.
Mr Weese agrees. “If they had a little bit of licensing, something similar to money service operators licence, that would have a positive effect on the Hong Kong Bitcoin startup scene,” he says.
“It would not be ideal if the Government just came up with a decision before speaking to the industry. I feel like at least, they need to begin by changing their attitude in their official stance,” suggests Mr Mok. “Their current stance just doesn’t give firms the confidence or clarity how they may regulate in the future.” A lack of dialogue and regulatory adjustments are exactly what turned startups like CoinPip away towards rival Singapore.
“Now they know you can’t turn a blind eye on the industry anymore.”
Only last year, the HKMA ran a circular highlighting the risks that came with Bitcoin investment, including price volatility and criminal activity, officially referring to the virtual currency for the first time. While the Government might appear to be sending negative messages regarding Bitcoin, Mr Chapman thinks acknowledging the existence of virtual currency is already a step in the right direction. “Up until that point they basically refused to acknowledge the existence of the industry in Hong Kong,” explains Mr Chapman. “Now they know you can’t turn a blind eye on the industry anymore.”
In a report on the MyCoin scam, local magazine iMoney revealed that previous government efforts to regulate the industry was scrapped in fear of legitimising Bitcoins as a viable investment. Charles Mok believes refusing to legitimise the industry is a problem.
Last year, Financial Secretary John Tsang was also quoted saying, “Bitcoin is not a currency. Just like your armour in World of Warcraft, since we don’t regulate those, we won’t be regulating Bitcoin.”
“Innovations are always complicated to handle in the beginning. By refusing to ‘legitimise’ this industry, the Government is making it taboo,” says Mr Mok. “The way they present their stance affects investors [in the Bitcoin industry] and may force them to leave when they see there just isn’t much support.”
“In a way its nice to have Bitcoin unregulated in Bitcoin, but some people would ask for more acceptance, for more recognition” echoes Mr Weese. “It will mostly make a difference to investors in Bitcoin companies, who, right now, don’t feel very comfortable in investing in Hong Kong.”
“If we just view it as a ponzi scheme and refuse to take advantage of it, we’ll probably regret it immensely in the future.”
Charles Mok believes the Government would be making a huge mistake by not taking advantage of the growing local Bitcoin industry. “The effect of Bitcoin as a currency is still unknown, but many investors have already put in a lot of money to develop the industry. The blockchain technology can have a huge impact and innovation in the financial system, or other areas that involve transactions,” explains Mr Mok.
The blockchain is the public ledger which records all Bitcoin transactions and is the engine that enables Bitcoin to be de-centralised and secure. It is open-source and transparent while heavy on encryption, and is able to handle complex transactions and records. The US stock exchange Nasdaq announced recently it would incorporate blockchain technology into Nasdaq Private Markets, it’s pre-IPO trading arm. The body reportedly hopes to “provide extensive integrity, auditability, governance and transfer of ownership capabilities”.
“The Hong Kong Government is still a little bit divided, in terms of people that we’ve talked to. They still heavily associate Bitcoin with illegal activity, and seeing it as the future of money is something they’re really uncomfortable with.” says Mr Weese. “But if they make the right move they can attract a lot of investment in Bitcoin, and a lot more startups.”
“Hong Kong has a chance to be a leader in this industry, and they must strip their negative attitude and begin to engage with the industry earlier,” says Charles Mok. “If we just view it as a ponzi scheme and refuse to take advantage of it, we’ll probably regret it immensely in the future.”
The Verdict: Neuter by Negligence
As industry players have pointed out, the lack of regulation, and inherent clarity of local laws have enabled Bitcoin startups to innovate. Government institutions have also funded and hosted startups themselves. Yet, while rival inancial centres such as London, New York, and Singapore have taken steps to develop the industry, the top brass in Tamar still seem to be unwilling to acknowledge its potential as a financial tool and the currency of tomorrow.
It’s time they do.