Hong Kong authorities give a giant "meh" to regulating bitcoin

By Michael Carney , written on March 26, 2015

From The News Desk

What the appropriate governmental response when citizens of your country have been scammed out of millions of dollars in wealth in a crypto-currency get rich quick scheme. Well, if you’re Hong Kong, apparently the answer is not much of anything.

As Pando an others have reported, supposed bitcoin exchange MyCoin emerged as a multi-million dollar Ponzi scheme earlier this year. The Commercial Crime Bureau, which puts losses at (a surprisingly modest given early reports) $180 million HKD (US$23.2 million), has thus far arrested six people (two men and four women, between 34 and 55 years old) for conspiracy to defraud, but are still seeking the masterminds behind the scheme. Those arrested individuals have been released on bail. The authorities have also seized computers, tablets, mobile phones, account records, and other evidence in conjunction with the crime.

But despite this fact, and a spate of virtual currency scams in China and nearby Japan, Hong Kong is taking a surprisingly hands off approach. In a public statement today issued in response to a question from Legislative Council of Hong Kong member Leung Yiu-chung, Secretary for Financial Services and the Treasury, KC Chan writes:

The Government does not consider it necessary to introduce at the moment new legislation to regulate trading in such virtual commodities or prohibit people from participating in such activities.
As explanation for this decision, Chan adds that bitcoin has not been widely adopted as a medium of exchange in Hong Kong, thereby limiting the potential adverse impacts it could have on citizens’ wellbeing. He goes on to suggest that this limited circulation makes bitcoin more of a commodity than an “e-currency,” further limiting the threat to Hong Kong’s financial system, and thus the need for regulation.

Like in the US and other nations, Hong Kong has existing laws against money laundering, fraud, pyramid schemes and cyber-crimes that can be applied in cases of fiat or virtual currencies. Further, the Hong Kong Commissioner of Customs and Excise requires any business offering money changing or remittance services to obtain a money service operator license, similar to the Money Transmitters License in the US.

Chan reminds the council that his office has made repeated efforts to educate consumers about the risks of virtual currencies:

We have also sounded relentless warnings of the high risks involved in exchanging, trading or holding such kind of virtual commodities for speculative purposes. The Investor Education Centre and the Consumer Council have reminded the public from time to time that trading bitcoins may result in monetary losses, and that holders may not be able to obtain a refund of their monies should a virtual commodity collapse or those who deal in it cease to operate. We have been discouraging people from engaging in such speculative activities or transactions without considering the risks involved.
No one wants to see consumers defrauded. But as many virtual currency enthusiasts will argue, this scam would have had a very similar result had the currency of choice been government issued, rather than virtual and decentralized. The differences afforded by the use of bitcoin in a Ponzi scheme are twofold. First, the novelty and appeal of novel new financial instrument, combined with the promise of massive returns is surely an effective combination to attract eager speculators. Second, once the criminals have made off with the stolen funds, they can be much more difficult to track and ultimately recover. Then again, the track record of recovering stolen funds in cases of fiat fraud is not great to begin with.

Bitcoin (and blockchain) investors and entrepreneurs have spent the better part of the last three years advocating for this type of levelheaded and anti-alarmist approach to virtual currency regulation, both in the US and abroad. By and large, however, those efforts have fallen on deaf ears as many jurisdictions – most notably New York – have or are in the process of instituting specific regulations to govern the use of virtual currencies.

The prudent answer to regulating virtual currencies is likely somewhere in the middle of “do nothing,” and “create an entirely new category of law” – Intelligently applying existing regulations while amending or supplementing in the select few cases of poor fit. Hong Kong’s response may be surprising in its calmness. But it’s refreshing and serves as a welcome example for the same reasons.