Bureaucratic ball throwing: the legal and regulatory status of cryptocurrency trading in Hong Kong
By Boris Au Yeung, Marketing Executive, Gatecoin
The activities of financial services institutions, such as banks, are monitored and regulated by governments to maintain a healthy and safe economic environment. So as an international financial center, is there a need for Hong Kong to regulate cryptocurrency exchanges?
In the beginning of 2017, many cryptocurrency analysts predicted that the price of bitcoin will reach the USD 7,000 mark by the end of 2017. Surprisingly, the price reached USD 10,000 in November without any major obstacles, the bullish market even drove the price to USD 20,000, leaving both investors and bystanders in awe.
The subsequent price pullbacks in the first few weeks of 2018 were also expected and very much needed. However, the general volatility of cryptocurrency markets has generated criticism from many influential figures in finance such as J.P. Morgan CEO Jamie Dimon and BlackRock CEO Larry Fink.
The Financial Services Agency (FSA) in Japan now recognizes bitcoin as a legal method of payment, encouraging the integration of bitcoin into the wider economy. Japan’s FSA has also already issued bespoke virtual currency exchange licenses to two dozen cryptocurrency exchanges in Japan which has fostered the development of a very dynamic and fast growing cryptocurrency market in the country. This bespoke licensing regime has been a positive signal to both banks and the wider public in Japan and is an interesting case study for other nations and jurisdictions across the world.
Other regulators have studied the benefits of Japan’s cryptocurrency exchange licensing regime and called for similar measures. For example the Israel Securities Authority stated that Israel will need to welcome cryptocurrency to develop the startup nation into an international ICO hub. Australia and many more countries are also planning to regulate cryptocurrency exchanges.
So where will will Hong Kong position itself? Will Hong Kong take the progressive step to be ahead of the curve for once? Or as usual take the wait and see approach while other jurisdictions benefit from the development of a new financial market.
Back in 2013, the ex-financial secretary, John Tsang, mentioned in his blog that bitcoin is not legal tender as it is not backed by any entity or precious commodity, and cannot guarantee the exchange of currencies and commodities.
To reinforce John Tsang’s opinion on bitcoin, Hong Kong’s Financial Services and Treasury Bureau gave a statement on bitcoin and other cryptocurrencies during a Legislative Council meeting in January 2014. The Bureau sees bitcoin and other cryptocurrencies as virtual commodities that are generated in the virtual world and are not currencies in any form.
This put all cryptocurrencies outside the jurisdiction of the Hong Kong Monetary Authority (HKMA), which is therefore currently not in a position to regulate cryptocurrency exchange platforms. The Chief Executive of the HKMA, Normal T.L Chan, spoke out publicly on RTHK that Hong Kong has does not need to follow other countries on regulating cryptocurrencies and exchanges.
The irony of this whole situation is that according to HKMA, cryptocurrency as a form of commodity, should be under the jurisdiction of the Hong Kong Customs and Excise Department (HKCED). But the HKCED subsequently released a statement in April 2014 stating that bitcoin and other cryptocurrencies are not “money”, therefore not under their jurisdiction either and they will not act to regulate intermediaries dealing with cryptocurrencies.
Instead of taking proactive steps to bring cryptocurrencies activities under a legal and regulatory purview, traditional bureaucratic risk aversion is taking place where departments are throwing the ball back and forth to avoid responsibilities.
Without clear guidance and regulations, Hong Kong banks and other regulated financial institutions in Hong Kong are reluctant to cooperate with any cryptocurrency related businesses in the SAR, regardless of them possessing any other form of licensing.
We have been very public about our struggles with banks in Hong Kong and the negative effect their preventive behaviours have had on our business. However, the hostility of Hong Kong banks is not limited to cryptocurrency businesses, many have also closed accounts for businesses offering remittance and forex services. If this is to continue, the future development of the cryptocurrency market in Hong Kong will be severely impacted.
Despite the absence of clear principles and regulations directed specifically at cryptocurrency exchanges, Gatecoin will continue to enforce strict know-your-customer (KYC) and anti-money laundering (AML) compliance policies in accordance with the Hong Kong Anti-Money Laundering Ordinance (AMLO) and the guidelines of our MSO license*. We also maintain close relationships with financial and crybercrime law enforcement agencies across the world, including Europol and Interpol and are committed to complying with the relevant laws and regulations in all jurisdictions where we operate.
Ok, so exchanges aren’t regulated, how does Hong Kong’s tax system apply to cryptocurrency trading?
The taxation of bitcoin varies largely by jurisdiction. For example, bitcoin is classified as a type of “property” in the United States of America and the United Kingdom treats bitcoin as a form of “private” money. Despite these differences in classification, profit and losses on cryptocurrencies in these countries are subject to capital gains tax. In Singapore, bitcoin is neither considered as a commodity nor a currency and it is not subject to any form of tax. Hong Kong’s taxation regime is relatively low and simple compared to other countries. There is no value-added tax nor capital gain tax and we can expect the same for bitcoin and other cryptocurrencies. However, if cryptocurrency trading is your primary source of income, your gains may be subject to taxation.
Recent developments
The Securities and Futures Commission (SFC) of Hong Kong recently released a statement warning investors that bitcoin futures have the conventional features of a “futures contract”. Therefore, exchanges that provide bitcoin futures in Hong Kong will be regulated by the SFC and must apply for an appropriate license provided by them. Gatecoin acknowledges the full extent of this statement, and we will not offer any futures products unless we have obtained the appropriate licenses from the SFC.
Looking forward
As we expect to see more ICOs and cryptocurrencies enter the market in 2018, the Hong Kong government must closely monitor and adapt to these fast evolving trends. If it does not review and renew its regulatory regimes accordingly , Hong Kong will never be the fintech hub of Asia. The government must allow fintech startups much more space to grow. Gatecoin does not wish to see criminals taking advantage of cryptocurrencies, therefore we welcome the regulatory bodies in Hong Kong to take a progressive stance on the cryptocurrency market and exchanges based here.
We recommend that the HKMA and SFC establish an independent cryptocurrency supervisory sandbox. This would allow cryptocurrency businesses and exchanges to operate and partner with banks without the need to achieve full compliance with the HKMA’s existing frameworks targeting traditional financial institutions. Such a framework would allow the HKMA and SFC to test possible controls and future legislation.
Regardless of what happens, we remain optimistic in the long term and hope Hong Kong’s financial regulators do not end up on the wrong side of history. Nevertheless we are hedging our bets and actively looking to expand our operations and service offerings into additional jurisdictions with more welcoming crypto environments.
*The foreign exchange business activities of Gatecoin (which we expect to be providing in the near future) are regulated under our Money Service Operator (MSO) license which is issued by the HKCED. The HKCED has made is very clear that bitcoin and other blockchain assets are not “money” and do not fall within their regulatory regime. An MSO License granted by the HKCED does not give any form of approval or recognition to a business related to bitcoin or similar virtual commodities.
