24 August 2019
A hacking incident at Japanese crypto exchange Coincheck has fueled international concern about the risks related to cryptocurrencies. Photo: Reuters
A hacking incident at Japanese crypto exchange Coincheck has fueled international concern about the risks related to cryptocurrencies. Photo: Reuters

Time for HK to take a serious look at crypto issues

Coincheck, a cryptocurrency exchange based in Japan, announced last month that it suffered a loss of US$500 million in customer assets as a result of a massive hacker attack.

The incident has once again renewed international concern about the current state and potential risks related to cryptocurrencies.

At present, countries around the world differ in many ways when it comes to the policies and regulatory approaches toward cryptocurrencies.

Take Japan as an example. In recent years the country’s financial regulatory authorities have remained relatively receptive to the trading of cryptocurrencies.

Last year the Japanese government even officially recognized bitcoin as a legitimate means of transaction and exchange, and allowed a total of 11 cryptocurrency exchange platforms to register and operate in the country.

According to statistics, currently nearly one-third of the world’s total bitcoin transactions are cleared in the Japanese yen.

Apart from Japan, Israel has also been relatively positive about virtual currencies.

Shmuel Hauser, former chairman of the Israel Securities Authority (ISA), once said that the Israeli government must clearly differentiate among the blockchain, bitcoin and initial coin offerings (ICOs).

He urged Tel Aviv to establish a proper regulatory framework over cryptocurrency trading in order to set the country on a steady course towards becoming the world’s ICO hub.

On the other hand, some countries and regions, such as Russia, Dubai and Sweden, have adopted a different approach.

Instead of setting up legal frameworks to regulate the transaction and trading of digital currencies, these countries have taken one major step further by issuing their own official cryptocurrencies in order to make it easier for their regulatory authorities to trace inbound and outbound capital flows.

More importantly, by issuing their own virtual currencies, these countries can eliminate black market trading and reduce their tax losses.

However, while some countries have remained receptive to cryptocurrencies and even recognized them as legal currencies, there are also some others, such as China and South Korea, which have remained highly skeptical about the virtual units.

As far as China is concerned, it has been taking a tough stance on cryptocurrencies.

For instance, after banning all ICOs of virtual currencies and shutting down all transaction platforms in the mainland last year, the People’s Bank of China recently issued an order which bars banks and their subsidiaries from providing any form of transaction services for cryptocurrency trading.

The order also requires financial institutions across the mainland to adopt necessary and effective measures to prevent their existing payment channels from being used for virtual currency trading, in a determined attempt to crack down on cryptocurrency users and investors in China.

Likewise, the South Korean government also banned all forms of cryptocurrency ICOs, and required that all virtual currency trading activities must be carried out only in an identifiable manner.

In the meantime, the Seoul administration is also working aggressively to push a bill through the Korean parliament under which all cryptocurrency exchange institutions and their trading activities could be banned within the country.

In comparison, the US, Britain and Singapore have been steering a middle course over the trading of digital currencies.

Simply put, these countries are largely sitting on the sidelines over the trading of virtual currencies, and have no plan yet to ban them altogether.

However, regulatory authorities in these countries are keeping a close eye on any cryptocurrency trading activity that might violate existing financial regulations, and are working painstakingly to warn their citizens against the potential risks of crypto investments.

The biggest challenge posed by the rise of cryptocurrencies is that these digital currencies aren’t tied to any country and can transcend borders easily. As a result, it would be very difficult for any individual sovereign state to oversee and regulate cryptocurrency trading effectively.

That said, I believe in the long run, the establishment of a multilateral regulatory framework would be necessary in regulating the trading of virtual currencies. The European Central Bank has already called upon countries that will be attending the G20 summit next month to pay more attention to the cryptocurrency issue.

As to Hong Kong, the Financial Services and the Treasury Bureau and the Investor Education Center have made a joint effort in educating the public about the risks of cryptocurrency investments.

Nevertheless, I believe public education campaign alone is not enough. The government should also study how to establish a regulatory mechanism for the trading of virtual currencies so as to protect the interests of our citizens and investors.

This article appeared in the Hong Kong Economic Journal on Feb 13

Translation by Alan Lee with additional reporting

[Chinese version 中文版]

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Member of Legislative Council (Functional Constituency – Accountancy)

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