Bitcoins – is the next big thing in the cards?
By Luo Weiteng – China Daly
Major industry players unnerved as HK drags its feet in curbing freewheeling in virtual currency
The Bitcoin industry is looking out for more measures from the Chinese mainland authorities toregulate the freewheeling virtual currency and warn that Hong Kong authorities’ laid-backapproach could leave the business in limbo.
The digital currency Bitcoin had a roller-coaster start to 2017 following an eventful 2016.
The legendary but short-lived bull run for the blockchain currency in the first week of this yearcame to an abrupt halt as double-digit percentage drops wiped out more than a fifth of itsvalue after the mainland’s regulators stepped in.
The ups and downs highlighted the notorious volatility of thecryptocurrency. But, more importantly, the fickle performanceunderlines the regulatory uncertainties that have weighed on thelightly governed virtual currency.
China has become the key factor in Bitcoin’s price. Exchanges in thecountry account for approximately 95 percent of Bitcoin tradingactivity worldwide. China is also home to the most powerful “miners”, responsible for helping manage Bitcoin transactions and creating newunits.
People active in the industry are paying close attention to prospectiveaction by mainland regulators. Amid intensified pressure from theyuan’s depreciation and a fresh bout of capital exodus, policymakersmay tighten their grip on Bitcoin trading with clear regulations.
In self-administered financial hub Hong Kong, however, the digitalcurrency remains in a regulatory limbo – authorities repeatedly warnof the high risks involved in exchanging, trading or holding the virtualcommodity for speculative purposes but have no clear plans forbringing the business under supervision.
When Aurlien Menant founded Gatecoin, an online trading platformfor cryptocurrency and blockchain assets, in 2013, there were noexplicit guidelines from any regulatory body in Hong Kong regardingthe legal and regulatory status of virtual currencies.
“Now, three years later, there is still an absence of explicit guidelines from regulators in HongKong with regard to the compliance requirements of exchanges and other businesses dealingwith cryptocurrencies and blockchain assets,” Menant told China Daily.
“In contrast, Japan remains on track to become the first jurisdiction around the world toregulate cryptocurrency exchanges under the newly drafted guidelines, while Australia is likelyto follow suit this year,” Menant noted.
The former banker managed to set up Gatecoin in Hong Kong by following the practice in theUnited States at that time. The federal financial services regulator requires digital currencyexchanges in the US to register as a Money Service Business (MSB) or Money TransmitterBusiness (MTB).
By acquiring a Money Service Operator license – the Hong Kong equivalent of an MSB or MTB – Gatecoin sent a strong message to banks, prospective clients and regulators that it wasconducting due diligence and adhering to compliance requirements as part of a commonapproach taken by most peer exchanges in the city, he said.
A Hong Kong-based financial technology company Anx International said: “In Hong Kong, the (Hong Kong Monetary Authority) has clarified that Bitcoin is not legal tender, but a ‘virtualcommodity’. So far, Bitcoin and other similar virtual commodities are not currently regulated bythe HKMA or the Securities and Futures Commission (SFC).”
George Harrap – co-founder and chief executive of Bitspark, another Hong Kong-based Bitcointrading platform – said: “Basically, Bitcoin is not something regulated in Hong Kong orsomething a regulatory authority will even issue any approval or license for. “The landscape forBitcoin regulation in the territory is essentially that there’s none.” Regulators’ equivocal attitudeand a less “forward-thinking mentality” are hampering the city’s bid to sharpen its edge as afintech hub, Harrap warned.
The HKMA may claim that a dearth of rules was meant to make Hong Kong open for anyonestarting their business. But what worried Harrap was that promising companies, beset withHong Kong’s out-of-date regulations and zero flexibility, may vote with their feet and migrate tomore appealing jurisdictions.
Such a concern seems not to be merely alarmist rhetoric.
Xu Mingxing, founder and chief executive of OKCoin – one of the mainland’s largest bitcoinexchanges – doubted his business would thrive in Hong Kong in the next few years despite thecompany’s Hong Kong office having been set up in August last year. Xu founded his businessin Beijing three years ago.
“Everything concerning fintech moves at a relatively slower pace in Hong Kong, compared withthe mainland and other oft-cited rival cities. While mainland regulators take the attitude of ‘letting the bullet fly for a while’ toward fintech innovations, Hong Kong policymakers are knownfor their prudence and conservativeness in giving fintech a shot,” Xu told China Daily.
“Unseen regulatory hurdles really have our hands and feet bound in Hong Kong, where I couldhardly see regulators map out a clear regulatory landscape for the Bitcoin business. For now, Ihave no idea how to play the game here,” he added.
The SAR’s financial regulators, including the HKMA, SFC, the Office of the Commissioner ofInsurance and the Customs and Excise Department, have reiterated they would like to remainsober-minded about the highly sought-after fintech business before having a full picture of thefintech’s characteristics, potential and risks and setting up a clear regulatory framework.
Charles Ma, a consultant at one of the “Big Four” accounting firms in Hong Kong, said it wasdefinitely no easy task to put digital assets into a regulatory framework. As a cluster ofscandals have rocked the local Bitcoin scene, the lingering concerns about the unit’s security, transparency and price volatility have continued to cast a shadow over the sector, he noted.
In 2015, Hong Kong-based Bitcoin trading platform MyCoin was abandoned by its owners whoallegedly ran a Ponzi scheme that defrauded nearly 3,000 Hong Kong and mainland investorsof about HK$3 billion.
Ma believed discouraging local people from engaging in speculative activities or transactionswithout considering the risks involved was not enough. The tricky part was that if regulatorshesitated to play a part, the chaotic market may overshadow the potential of the possible “nextbig thing” as investors fall prey to frauds and market confidence was dampened.
Hong Kong’s Secretary for Financial Services and the Treasury Ceajer Chan Ka-keung hassaid Bitcoins do not pose a significant threat to the city’s financial system since they are notwidely accepted and circulation is limited. Thus, he said, there isn’t any need at present fornew legislation to regulate trading in such virtual commodities.
Such a mindset may explain why market players could not expect too much regulatory change. “Given that the much-coveted Stored Valued Facility License came about in Hong Kong almosttwo decades after similar licenses in Europe, we doubt the HKMA will change its stance onblockchain assets anytime soon,” said Menant.
“I don’t think anything will happen again until either there is a knee-jerk reaction to somethingbad happening or where notable businesses leave to go elsewhere,” he noted.
But the clamor for guidelines from such a self-regulated industry is always there.
ANX International warned: “The question of regulation of digital assets and blockchain isproving as challenging for Hong Kong as it has in other jurisdictions. However, without a clearregulatory framework for fintech businesses, Hong Kong may find it difficult to encourage theuse of innovative technology in financial services or business structures and there’s a risk ofunscrupulous or inexperienced businesses damaging the industry generally.”