Hong Kong Government issued a statement on 14 March 2014 to warn the public on consumer, money laundering and cyber-crime risks associated with Bitcoin and other virtual currencies, referring to these as “virtual commodities”.
The statement is on a government website, news.gov.hk, but it was not posted on the website of major financial regulators. There also seems to be little media coverage.
Previously, the Government also issued a statement in January 2014 on the risks of Bitcoin and that it was monitoring the use.
The statement last week noted that the Hong Kong regulators have been warning the public on the risks that Bitcoin and similar are highly speculative and are not legal tender.
It was emphasised that such “virtual commodities” are not currencies, and the value is very volatile without backing by physical assets, issuers or the real economy. It was also stated that these are also not securities, and therefore consumers will not have any protection under the Securities and Futures Ordinance, or in other words, under the securities regulatory regime.
From the statements, the position of the Hong Kong government is clear that it does not regard Bitcoin as currencies or securities such that operators are to be regulated by the Hong Kong Monetary Authority or the Securities and Futures Commission, the two main financial regulators in Hong Kong (other than the insurance authority).
However, the Hong Kong government requires any virtual commodity operators whose transactions involve money changing or remittance services to apply to the Commissioner of Customs and Excise for a “money service operator” licence under Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), and highlighted the need for vigilance on any suspicious money-laundering or terrorist financing transactions with regard to Bitcoin or operators. In other words, Hong Kong is mainly regulating Bitcoin from an anti-money laundering perspective.
The statement of the government also warned of the risk of fraud and cyber-crimes, and indicated that the regulators will closely monitor further developments including the usage of virtual commodities in Hong Kong, the evolving international regulatory consensus and regulatory actions of comparable jurisdictions, with a view to taking further actions to ensure proper protection for the public.
While the issue of such statement clarifies the position of the government and is intended to warn the public, it is a question whether there is sufficient circulation of such notice or understanding by the public as to be effective. At the very least, perhaps the government should post this prominently on the website of the Hong Kong Consumer Council or Investor Education Centre.
Further, although the government says it is monitoring the situation, it is not clear from the statement whether the government is aware of the recent activities of Bitcoin operators that are aggressively establishing Bitcoin ATMs and exchanges in Hong Kong, as this New York Times article reveals.
The New York Times article says that Hong Kong has so far remained relatively passive on the regulatory front, in contrast to China that has clearly banned its banks from dealing with Bitcoin. As a result, Bitcoin operators are able to play regulatory arbitrage in Hong Kong.
Yes, the government is taking a step at a time while monitoring the situation. In its January statement, it said that Hong Kong has not implemented measures similar to China because the Monetary Authority has not received any reports from banks or financial institutions in Hong Kong on the development of Bitcoin business, and that neither Bitcoin transactions nor Bitcoin-related investment products have been launched.
Bitcoin does not fall squarely within definition of currency, securities or investment products, and that is what got regulators around the world scratching their heads, and not just Hong Kong.
However, the Hong Kong government clearly recognises the risks. As Bitcoin is increasingly getting onto the streets of Hong Kong, the government should take a more active approach, in order to truly protect the public.