Cryptocurrency exchanges warn Hong Kong’s new rules will drive retail investors onto unregulated platforms

Georgina Lee
·5-min read

Cryptocurrency exchanges are on tenterhooks as they await the outcome of a proposal by Hong Kong’s government to ban retail investors from trading in the city, at a time when digital assets are winning acceptance as mainstream forms of payment and market leader bitcoin rises to a record level.

The city’s Financial Services and the Treasury Bureau published the proposal to limit trading in cryptocurrencies to professional investors back in November. Following consultation with industry bodies and members of the public that ended in January, the government plans to turn the proposal into a bill and introduce it to the city’s legislative council later this year.

The wide-ranging paper also includes a proposal to widen due diligence on politically exposed persons to anywhere outside Hong Kong, bringing officials from mainland China into range amid an ongoing anti-corruption drive across the country.

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If Hong Kong bans retail investors from trading cryptocurrencies, they will turn to unregulated platforms out of reach of the law, said industry body Global Digital Finance that represents cryptocurrency exchanges BitMEX, Huobi, OKCoin, and Coinbase.

The Financial Services and the Treasury Bureau proposed in the consultation paper to widen the scope of the city’s anti-money-laundering and counterterrorist financing ordinance to include crypto exchanges, part of the government’s efforts to comply with recommendations by Paris-based Financial Action Task Force (FATF).

However, Hong Kong’s proposal to limit cryptocurrency trading to professional investors goes further than many other jurisdictions.

“Restricting cryptocurrency trading to professional investors only is different to what we have seen in other jurisdictions such as Singapore, the UK, and the US, where retail investors can buy and sell virtual assets,” said Malcolm Wright, chair of Global Digital Finance’s Advisory Council which has led the industry response to the Hong Kong government. All three countries are also FATF members.

Hong Kong’s securities rules define an individual professional investor as having a portfolio of at least HK$8 million . A survey by Citibank released last September found that there were 504,000 “multimillionaires” with net assets of at least HK$10 million (US$1.3 million), or 7 per cent of the city’s population in mid-2020. Using the survey as a rough proxy of professional investors, this means that cryptocurrency trading would become off-limits to about 93 per cent of the city’s population.

Globally, retail traders have swollen bitcoin’s trading volume since the cryptocurrency’s birth over a decade ago and helped push it to a record high above US$48,800 on Sunday. Its market capitalization is now more than double that of JPMorgan, the world’s largest bank.

Major cryptocurrencies are becoming mainstream methods of payment. Mastercard has recently said that it will start supporting select cryptocurrencies directly on its payment network later this year. Earlier this month, Tesla invested US$1.5 billion in bitcoin and signalled its intent to begin accepting the cryptocurrency as a form of payment.

Arthur Hayes, former chief executive officer of BitMEX. Photo: Bloomberg
Arthur Hayes, former chief executive officer of BitMEX. Photo: Bloomberg

If banned from trading on Hong Kong licensed exchanges, retail investors would trade on overseas exchanges, or trade on unlicensed platforms, said Wright, who joined 100x Group in October, the holding company behind derivatives exchange BitMEX, as its chief compliance officer. He declined to comment on whether BitMEX plans to apply for a licence.

Several of BitMEX’s founders, including former chief executive Arthur Hayes and former chief operating officer Benjamin Delo, were indicted for “wilfully [failing] to establish, implement and maintain an adequate anti-money laundering (”AML”) programme, including an adequate customer identification programme,” in violation of the US Bank Secrecy Act, according to the indictment filed in the Southern District court of New York on October 1 last year. BitMEX, which offers highly leveraged crypto-derivative contracts, has operations in Hong Kong.

A 100X Group spokesman said the company would defend itself against the indictment “vigorously,” adding that 100 per cent of BitMEX’s users are fully verified following the completion of a know-your-customer (KYC) programme in late 2020.

An undated photograph of OKEx’s founder, Xu Mingxing, also known as Star Xu.
An undated photograph of OKEx’s founder, Xu Mingxing, also known as Star Xu.

To be sure, BitMEX was not the only company to run into trouble while operating in a lightly regulated industry, where highly leveraged transactions are commonplace without the investor-protection buffers seen in conventional bourses for equities, currencies or fixed-income financial products.

OKEx, a Malta-based crypto-exchange with operations in Hong Kong, disclosed in October that it had to suspend all its customers’ cryptocurrency withdrawals, after the exchange’s founder Xu Mingxing – also known as Star Xu – who reportedly holds the private key to clients’ crypto assets, had been absent from work and was reportedly under investigation by mainland Chinese police.

There needs to be more justification for why a resident’s dealing in bitcoin should be treated differently from other precious metals, or foreign currency, said the Bitcoin Association of Hong Kong.

“Any barrier put in place to restrict the sale or purchase of bitcoin needs to be reasonable and well justified. Individuals … need to be able to use and accept bitcoin as payment,” the Association wrote in response to the government.

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