20 November 2017

BY SHAUN KOH

With the growing global acceptance of digitalisation and artificial intelligence in the 21st Century - from automatic cars to location tracking and digital currencies (cryptocurrencies), comes greater implementation of regulations to further ensure the safety, security and awareness of these generalised concepts.
This brings to light questions on the next steps surrounding the implementation of digitalised currencies and the regulation of these currencies that hold no association to any country or region.

The fundamental basis of Cryptocurrencies lies in the use of Blockchain technology, a method of storing information in a decentralised manner that relies on a consensus between participants to make any changes, which is both cryptographically verifiable and unalterable .
The shift towards the adoption of cryptocurrencies took on different forms - from companies integrating cryptocurrencies as a payment option to people buying cryptocurrencies “anonymously” to attain illegal goods off the dark web. This eventually led to a rise of value in the Bitcoin (the main currency used) and the inclination towards cryptocurrencies, followed by the creation of many alternative coins dubbed Altcoins - each with their own value and currency icon and used indiscriminately across different web services and offerings.

The creation of Altcoins and the blockchain technology involved were not easily attainable nor were they affordable, leading many of these companies and entrepreneurs to engage in Initial Coin Offerings (ICOs), a crowdfunding campaign offering “Tokens” in exchange for the blockchain technologies these companies possess. Ethereum coin is an example of a company that provides such a service to their “investors”, offering them a token called Ether in exchange for the blockchain technology (Ethereum) that they possess.
The growth of ICOs drew the attention of venture capitalists and investors alike, leading to the inevitable rise of fraudulent ICOs and companies providing misleading information to gain funding for their own “campaigns” – something that would never take off. In recent news, a former triad leader who was highly involved in illegal fraud and money laundering schemes, was seen participating in one of Asia’s largest cryptocurrency deals for an ICO bid in Hong Kong , leading many to question the authenticity of ICOs in Asia, a problem that China would not sit on.

Noticing the growing problem of fraud and unregulated services, the Chinese government (People’s Republic of China) has recently announced a series of policies in hopes of weeding out any corruption practices. This includes a nationwide ban on cryptocurrencies to prevent illicit financial cashflows entering into unregulated markets, which has resulted in huge ramifications within the cryptocurrency industry and the Cryptocurrency exchanges across the world. ICOs were banned, Crypto-Exchanges in China were shut down, and the use of cryptocurrencies or any involvement in it were since considered illegal until further notice .

China’s decision to ban cryptocurrency hinged on the fact that cryptocurrencies are not regulated, and its services provided a means of anonymity for those who siphoned money out of the country across unregulated areas under legal requirements. However, cryptocurrencies may yet be welcomed again the moment regulation starts kicking off in the future.

Despite being a part of China after its transfer of sovereignty in 1997, Hong Kong operates differently from China and the ban has not affected its Cryptocurrency exchanges nor the growing ICOs promoted along with it. On the 25th of October, a white paper published by the Hong Kong Monetary Authority (HKMA) focused on regulating the use of cryptocurrencies through the implementation of AML and Counter-financing terrorism issues by increasing cyber security and having extra governance control in compliance related fields. While the implementation of such regulations may require time and the technological audits of such crypto-related platforms involve highly complex and challenging methods, this certainly paves the way for many opportunities within the region’s AML and KYC sectors .
However, the bigger question is, will this suffice?
Unlike China’s decision to ban cryptocurrencies completely, Hong Kong chooses to weight out the pros and cons through its own regulatory efforts despite its own share of crypto-related problems - distinguishing itself as an international gateway of trade and finance between the Eastern and Western in the process.

Nevertheless, cryptocurrencies will continue to grow despite the setbacks laid before it. China’s move to crack down on cryptocurrencies may inject strong unwelcoming undercurrents at the present, but this may well set the stage for future better success and the path towards good crypto-governance. Conversely, Hong Kong’s current congenial attitude towards cryptocurrency may eventually be faced with greater regulatory changes in the long-term and may potentially lose out on investor confidence due to inconsistencies. With continued growing acceptance across the world and with governments enforcing stronger, tighter regulations in the form of AML and KYC concepts, the future of Cryptocurrencies is here to stay.

References:

https://www.forbes.com/sites/chancebarnett/2017/09/23/inside-the-meteoric-rise-of-icos/#2d5dddba5670
http://www.scmp.com/news/hong-kong/law-crime/article/2112789/former-macau-gangland-boss-enters-multibillion-dollar
https://www.economist.com/news/finance-and-economics/21729795-after-bans-exchanges-and-initial-coin-offerings-bitcoin-miners-fear-they-are
http://www.hkma.gov.hk/media/eng/doc/key-functions/finanical-infrastructure/infrastructure/20171024e1.pdf