2 Jan 2015
Can Hong Kong Become the World Centre for Crypto Currencies?
Despite mixed fortunes over the last 12 months, Bitcoin has emerged as both a significant financial and technological innovation. Should Hong Kong embrace this crypto currency or risk losing significant ground to London or Singapore?
While many see Hong Kong as ideally positioned to become a global hub for digital currencies and internet finance, the road forward seems far from clear. There is something of a general reluctance among some regulators and the business community to commit fully to such a role, with some warning the city could lose out to other financial centers, notably Singapore and London.
Hong Kong has, undeniably, taken on a key role in the growing global digital economy, which has seen increasing numbers of technology and financial companies striving to reach out to mainstream users. Several of these organisations are already headquartered in Hong Kong.
Bitcoin (BTC), of course, is very much at the heart of this evolution. After a brief moment in the global public spotlight at the beginning of 2014 – following a spike in its value from around US$100 to above US$1,000 – the digital currency has largely stayed out of the limelight, while quietly continuing to make progress.
In March 2014, Bitcoin Group HK established the city's first Bitcoin ATM. It was sited at a restaurant in Central, but was removed in November when the establishment closed. In total, it dispensed around 215 BTC.
ANXBTC, a local Bitcoin exchange, also set up a Bitcoin ATM, while its parent company, ANX, opened a Bitcoin shop in Sai Kung. Another Hong Kong firm, Gatecoin, took the first steps in the nine month process necessary to becoming a licensed digital currency exchange. At the same time, Seedcoin, the Hong Kong-based Bitcoin business incubator, pledged to step up its activities.
Meanwhile, in the background, the price of Bitcoin continued to fluctuate significantly. As of early December 2014, it was down to less than US$400.
These fluctuations, of course, make it difficult to use Bitcoin as a store of value, the most basic attribute of a currency. Despite this, it – and a number of other digital currencies – appear to be gaining traction as the global internet-based economy expands.
Hong Kong, with its transparent legal system and generally open approach to financial regulation, seems ideally positioned to become a center for an internet-based economy. This would be an economy that does not rely on hard cash, but rather on digital technologies and peer-to-peer (P2P) platforms.
Bitcoin first surfaced in 2009, with the currency being based on "block chain" technology. There is no monetary authority and there are no middlemen. Other cryptocurrencies have also emerged, such as Litecoin (LTC) and Ripple, but Bitcoin remains the best-known and most widely used.
Aurelien Menant is the co-founder and Chief Executive of Gatecoin. Speaking during the 2014 Internet Finance Innovation CEO Summit/Global Bitcoin Summit, held in Cyberport in November, he said: "More newly established banks and some of the more innovative existing operators are going to embrace the Bitcoin evolution, such as the Fidor Bank in Germany which is looking to establish a platform specifically for crypto currencies."
Few regulators, however, actually recognize Bitcoin as a currency. Mainland China, for instance, while not officially blocking Bitcoin, asked banks to stop providing financial services geared to the currency. Germany, meanwhile, considers Bitcoin as a unit of accounting.
By contrast, Singapore has basically let the Bitcoin economy evolve as it will, neither taking responsibility for it but nor regulating. Overall, Hong Kong considers Bitcoin to be a virtual currency – or a "kind of a virtual commodity created in the virtual world" as the Secretary for Financial Services and the Treasury put it back in January 2014. At present, it does not regulate it.
Even as Bitcoin, takes slow and tentative steps forward, the technology on which it is based is quietly revolutionising commerce and finance. Explaining its impact, Jehan Chu, a Bitcoin investor and evangelist and a founding member of the Bitcoin Association of Hong Kong, says: "Bitcoin is inherently a blockchain technology, and currency is only one of many potential applications for this technology.
"IBM and Samsung have teamed up to build a test network for the Internet of Things (IOE) which can link everything from your phone to your lights to your air conditioner seamlessly across brands and all with payment technology built in. This is all based on blockchain technology.
"Things like Smart Contracts promise to disrupt the legal and financial worlds and make IPO's available in a purely digital form. Such developments will make Bitcoin and blockchain technology extremely valuable over the next few years."
As a result, many now see both this technology and digital currencies opening the door for a new Internet finance industry, one driven by P2P commerce. One such advocate is Ming Gong. Known as Ballistic Prince Gong among the mainland China's Bitcoin community, he is a founder member of the Bitcoin Foundation.
Assessing the future possibilities, he says: "P2P lending has already greatly impacted traditional microfinance. We can see digital currencies have huge potential. With digital currencies, P2P lending could extend to crowd funding. It would make it possible for small projects to go public when it is impossible for them to secure an IPO via the traditional financing system."
The P2P lending market on the mainland has already developed significantly. In the third quarter of 2014, the country's 1,200 P2P lending platforms had a turnover of Rmb90 billion with 200,000 lenders and 500,000 investors, according to Juan Li, Deputy Secretary-General of Shanghai Information Services Association (SISA). LuFax.com, for example, a subsidiary of Ping'an Insurance, reported a turnover of Rmb6.8 billion in the first eight months in this year, compared with just Rmb928 million in the same period last year.
Other P2P services are also emerging. A prime example here is Didi Dache, a Chinese taxi hailing app that launched in 2012, it is now widely used in most major cities. Cash is not involved at any point of the transaction, rather, any money moves solely via the internet.
The Bitcoin revolution, according to enthusiasts, has moved away from simply lowering the cost of international transactions and bypassing the intermediation of traditional financial institutions towards the creation of a whole new business models.
In line with this view, Koda Chen, Senior Manager of the Capital Market Services at PwC, a big four accountancy and consulting firm, says: "Currently in China, including Hong Kong, internet finance is not competing with traditional banks. The clients of those P2P lending platforms are not the banks' targetted clients. They are those that cannot borrow money from banks and are willing to pay higher rates for P2P platforms."
As a result of these developments, it is widely seen that Hong Kong could offer an ideal environment for this new financial landscape to evolve. This would inevitably involve an increase in the number of Bitcoin businesses that bypass traditional cash.
Assessing the city's possible role, Chu says: "Hong Kong definitely seems to be the jurisdiction of choice for Bitcoin businesses. This is due to Hong Kong's strong rule of law, hands-off approach to Bitcoin regulation, thus far, and high level of professional – especially financial – services," This has created opportunities for everything from Bitcoin derivative exchanges, such as BitMex, to HK/Phillippines remittance systems, notably BitSpark."
According to the Gong, it is the differing legal regimes that a driving the growth of the sector in Asia. He says: "Internet financial services have been developing rapidly in China, but not in the US. This reflects the fact that the Chinese government has strict control over IT innovation, but not financial innovation. That's why there are many innovative financial model emerging in China. It is the other way around in the US, where the government encourages IT innovation but has extremely strict controls on the financial sector. Hong Kong is open in both sectors, which is why many digital currency business have moved here."
It is left to Chu, however, to summarise both the challenges and opportunities that the sector now presents to local businesses. He says: "Hong Kong is the natural centre in many ways, but without a more favorable attitude from the government and business, it will quickly lose out to more aggressive and ambitious cities, notably Singapore and London.
"One of the biggest challenges for Bitcoin businesses in HK – and elsewhere – is that banks do not want to give them bank account services. This is an unnecessarily restrictive stance, especially as these Bitcoin companies are often in good standing with business authorities."
Alfred Romann, Special Correspondent, Hong Kong