Hong Kong Might Not Cash In on Demand for Digital Currency

Digital Currency

Given digital currency’s rocky relationship with the Chinese government over the past year or so, some observers have suggested that digital currency service providers, investors and consumers might shift their focus to Hong Kong.  The recent bitcoin-related scandal involving MyCoin has challenged this premise, however, and has prompted many – including certain Hong Kong lawmakers – to demand aggressive regulations targeting or banning digital currency.

It is no secret that Chinese consumers’ massive demand for digital currency has propelled China to become a major epicenter for digital currency.  For example, by late 2013, roughly one-third of global bitcoin trading flowed through BTC China.  But on December 5, 2013, the People’s Bank of China (“PBOC”) and government authorities took the first step toward curbing that demand by issuing a notice barring financial and payment institutions from trading in bitcoin.  This notice had major implications, including leading:  (1) BTC China to cease accepting renminbi deposits; (2) certain large Chinese companies to cease accepting bitcoin as payment; and (3) the price of bitcoin to drop precipitously.  The notice, however, permitted consumers to continue engaging in bitcoin transactions at their own risk, and that is precisely what Chinese consumers did.  In fact, Chinese consumers’ demand for bitcoin was resurgent, and fueled in part by two events in February 2014:  (1) Japanese bitcoin exchange Mt. Gox closed its doors, depressing bitcoin prices; and (2) BTC China announced that it would resume accepting Chinese renminbi deposits, albeit through a loophole that evaded the PBOC’s December 5, 2013 directive.  But this resurgent consumer demand again was quelled in April 2014, when Caixin, a Chinese financial publication, reported that the PBOC had directed certain banks to close digital currency exchanges’ accounts.  Although the report never was verified, certain banks did in fact close certain exchanges’ accounts.

In light of the PBOC’s December 5, 2013 notice barring Chinese banks from trading in bitcoin and its perceived April 2014 crackdown on certain digital currency exchanges, several observers have suggested that it might be “natural for exchanges to move to Hong Kong,” in part because Hong Kong has not imposed stringent regulations on digital currency transactions.  See Bitcoin Exchanges Have Struggled to Survive On Mainland, South China Morning Post (Mar. 5, 2015).  But this has yet to happen.  For one thing, China has remained the hub of digital currency transactions:  BTC China is the largest bitcoin exchange by volume.  For another thing, recent events in Hong Kong have left many calling for heightened scrutiny of digital currency.  On February 10, 2015, reports emerged indicating that Hong Kong-based bitcoin exchange MyCoin closed shop and absconded with approximately $390 million, leaving upwards of 3,000 investors without their funds.  Many claim that MyCoin never operated as an exchange – and instead was merely a Ponzi scheme.  Many, however, including Leung Yiu-chung and James To of Hong Kong’s Legislative Council, have responded to the MyCoin scandal by calling for an outright ban on digital currency in Hong Kong.  As Hong Kong authorities consider these pleas, Hong Kong’s ability to supplant China as a digital currency hub – or even cash in on a tiny fraction of Chinese demand for digital currency – hangs in the balance.

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