Mixed feelings: China censures bitcoin while Hong Kong embraces it

by DLA Piper

Last December, bitcoin prices plummeted by nearly half, after Chinese authorities banned all financial institutions and payment processor companies in China from engaging in bitcoin-related business, denominating prices in bitcoins, and providing bitcoin trading, settlement, clearing or other linked financial products and services. The People's Bank of China (PBC) has not discussed its stance on bitcoins since the prohibitive announcement.

Being the most widely circulated cryptocurrency since its invention in 2009, an increasing number ofusers are attracted to the bitcoin network as it allows funds to be transferred from one party to another via the internet in minutes, bypassing any governmental authorities or financial intermediaries such as banks to save transaction time and costs. The bitcoin network is essentially a decentralised payment platform as computers on the network settle transactions amongst users and act as clearing houses on their own.

China has a planned and highly controlled economy. The ability to circumvent capital movement regulations may be one of the reasons for the bitcoin ban. In other jurisdictions, governments are mindful of the consumer protection issues posed by bitcoins and have expressed concerns that bitcoins are difficult to trace and therefore provide a potential platform for money laundering and illegal fund raising.

In a market where foreign exchange and Renminbi transmission are heavily regulated, the reaction of the Chinese authorities is perhaps unsurprising. It is widely understood that an objective of the Chinese Government is to maintain control on the flight of capital out of the country. A rampant and potentially volatile virtual currency could pose a threat to the stability of one of the most powerful economies in the world.

As a result, online marketplace Alibaba.com and China's version of ebay.com - Taobao.com, can no longer accept bitcoins. Initially, some bitcoin exchanges responded to the curb by relying on bitcoin funding vouchers and taking customer deposits directly by their corporate accounts. But major Chinese banking institutions such as the Industrial Bank of China, the Agricultural Bank of China, the China Construction Bank, and China Merchants Bank have now announced they will close accounts related to bitcoin businesses. Some exchanges have halted operations while others are considering using foreign accounts or shifting entire operations elsewhere.

The restrictions imposed by the authorities in China have made bitcoins less accessible. This is in stark contrast to the scene across the border in Hong Kong.

On 28 February 2014, local exchange Asia Nexgen opened the doors of the first physical bitcoin shop in the world, allowing customers to convert cash into bitcoins face-to-face at a counter inside the outlet in Sai Ying Pun on Hong Kong Island. Some two weeks later, Hong Kong's first bitcoin ATM went live amid one of the city's busiest pedestrian districts, just off Central's Mid-levels escalator. But will the atmosphere in Hong Kong lead to it becoming Asia's bitcoin hub?

Hong Kong embraces bitcoins

To date, local Hong Kong authorities have cast a cautious eye on the virtual currency and repeatedly warned the public about its extreme price volatility. However, there is no governmental body in charge of regulating the cryptocurrency, and no indications that there will be any legislation or policies specifically targeting the subject matter in the near future. Indeed, the Hong Kong Monetary Authority (HKMA) has taken bitcoins out of its regulatory agenda.

Similar to mainland China, bitcoin does not qualify as legal currency in Hong Kong because it is not issued by the Financial Secretary, the HKMA, or one of the three note-issuing banks. Instead, the HKMA has addressed bitcoins as a "virtual commodity".

Murky as it seems, the encouraging side in the regulatory vacuum is that in substance, Hong Kong appears to have taken a hands-off approach towards the cryptocurrency. Payments are accepted using bitcoins, legally and validly in the city - from ordering a bouquet of flowers, to buying a new suit or booking a room in a boutique hotel.

The HKMA has reminded all authorised institutions to notify and discuss with the HKMA before offering any product that involves or is linked to a virtual commodity. The Securities and Futures Commission has also alerted licensed corporations and associated entities engaged in regulated activities to the potential risks associated with virtual commodities, such as bitcoins.

Nevertheless, there are no signs that authorities in Hong Kong will be taking a restrictive approach towards regulation of the cryptocurrency as their mainland counterparts have. In fact, Hong Kong has always fostered a welcoming climate for entrepreneurs and innovation.

With an independent legal system and a high level of autonomy with the local currency, Hong Kong is a goldmine of opportunities for tech start-ups and companies in the digital world to venture into bitcoin-related businesses.

Located in an industrial building in Hong Kong, one of Asia's largest bitcoin mines is operating on a 24/7 basis converting customised chips to bitcoins. Bitcoin exchanges are available both online and offline. Entrepreneurs can also conduct trade in bitcoin mining gear, or rent out servers and resources to individuals worldwide who are interested in "mining" bitcoins.

These new business opportunities, however, need to be well supported. While bitcoin miners in Hong Kong get excited about the close proximity to Chinese chipmakers and widely available tech talents and cheap electricity in the city, they are reminded to also consider the more boring but important aspects of doing business with bitcoins. Carefully drafted business terms and conditions are required to accommodate the technological breakthrough brought by virtual currencies and appropriate privacy policies and anti-money-laundering programs should be adopted for bitcoin exchanges.

Hong Kong has an appetite for the bitcoin platform which could potentially change the way people earn, spend and invest in the digital world. Businesses moving into the bitcoin space are well advised to assess their business risks, develop an appropriate business model and ensure that they have ready access to sound legal advice to assist their operations to efficiently and promptly respond to any forthcoming laws or regulations relating to bitcoins.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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