Hong Kong is Doing Nothing to Regulate Crypto, and It's Working Great
Could ignoring cryptocurrency entirely be the best way to regulate it?
Around the world, governments have been eager to either support or reject cryptocurrencies -- with the exception of Hong Kong. Hong Kong has done nothing. Yet the city’s inactivity has not harmed its status as an attractive place to raise funds and trade crypto.
Bitcoin first blipped onto the radar of Hong Kong regulators on December 1, 2013, when the Bitcoin price had shot up five-fold to over US$1,000 in the span of a month. Then Financial Secretary John Tsang wrote a blog post explaining its basic functionality and encouraging young people to code more. Two weeks later in the Legislative Council, the city’s de facto parliament, Bitcoin was defined as a virtual commodity, and the government appears to be happy enough with that definition that it has done virtually nothing since.
To date, there have been no attempts to redefine Bitcoin as money or impose restrictions on its trade in Hong Kong. While know your customer (KYC) and anti-money laundering requirements also apply to commodities trading, the Hong Kong police have not gone after any single Bitcoin trader as part of an anti-money laundering investigation.
In its Money Laundering and Terrorist Financing Risk Assessment Report, released April 2018, the Hong Kong Financial Services and Treasury Department identifies the threat from Bitcoin (conspicuously now called a virtual currency, rather than a virtual commodity) as "low." The Hong Kong Police Force notes that they see “no apparent sign of organized crime or ML/TF concerning trading of cryptocurrencies” outside of pretexts for Ponzi schemes.
No license is needed to operate a cryptocurrency exchange, act as a broker, or administer a Bitcoin ATM in Hong Kong. About 30 such machines are currently running in roughly 20 locations. The number of exchanges is more difficult to measure, as different kinds of exchanges have different relationships with the jurisdiction.
Traditional banking troubles affect crypto trading
Following large scale money laundering and tax scandals in Hong Kong, bank accounts have been increasingly difficult to obtain. Anybody in finance, especially remittance companies, traders, and tech startups have seen barriers raised to maintain banking relationships, and many have been forced to bank overseas.
Large over the counter (OTC) desks, however, have found it easier to comply with banking requirements. Exchanges such as Octagon Strategy and Circle maintain a large presence in Hong Kong together with about a dozen smaller outlets. These large OTC desks trade up to US$1 billion, typically against the US dollar.
To cope with a hostile banking environment, small cryptocurrency exchanges have been forced to accept and dispense primarily cash in exchange for Bitcoin, often charging as much as 3% for deposits. Even at moderate volumes this can present a very attractive income stream, though the cryptocurrency exchanges that gained the most volume and customers were those that eliminated bank accounts entirely.
Binance, Bitfinex, CoinEx, HitBTC, Huobi, KuCoin and OKEX are all frequently cited as being based in Hong Kong, although it is unclear exactly what this means. In the absence of corporate bank accounts and headquarters, cryptocurrency exchanges often perceive themselves as globally distributed entities that prefer not to be locked down to a single jurisdiction.
Instead of bank accounts, most cryptocurrency exchanges rely on Tether (itself a Hong Kong-registered entity) for fiat-denominated trading pairs. These trading pairs consistently amount to a total of US$2 billion of trades per day, second only to Bitcoin.
While Hong Kong regulators have not come out against Bitcoin, cryptocurrencies, or Tether, the city’s securities regulator, SFC, is concerned about tokens it deems to be securities or collective investment schemes.
Hong Kong Exchanges and Clearing Limited has a statutory monopoly on operating the city’s stock market, meaning that any Hong Kong-based cryptocurrency exchange may not provide a market for securities.
This could spell trouble in the future for cryptocurrency exchanges if some of the tokens they list are considered securities by the SFC. Licenses are also required for trading and offering futures contracts and leveraged products, a market few want to miss out on.
But so far, Hong Kong’s inaction on crypto regulation has proven to be a big boon for Bitcoin. There are no capital gains or value added taxes in Hong Kong, which helps traders keep more of their profits. And while existing licenses such as the Money Service Operators license are difficult to obtain by those handling cryptocurrencies, they are not explicitly required for exchanges, brokers or remittance services dealing in Bitcoin.
Hong Kong’s regulators have earned themselves a reputation for predictable and slow-moving action, which is a quality highly appreciated in the fast-moving crypto environment. Even as public sentiment swings forth and back, Hong Kong-based traders can be relatively confident they needn’t fear the kind of knee-jerk bans or crackdowns that we’ve seen elsewhere (particularly in Hong Kong’s next-door neighbor, China).
That’s a big part of why crypto firms are betting big on Hong Kong. Derivatives exchange BitMEX, while formerly based in the Seychelles, just rented a full floor in one of Hong Kong’s priciest skyscraper, pre-paying almost US$4 million for a single year of rent. The location, right next to Hong Kong’s Securities and Futures Commission, belies the overall mood in the crypto industry: in a world of uncertainty over regulation, Hong Kong’s hands-off approach makes it an attractive safe harbor.
Leo Weese is president of the Bitcoin Association of Hong Kong.