This post is another in my governmental regulation series. Here I provide example of poorly conceived regulation from a government unaccountable to its people. I wrote this article several weeks back but the information is as relevant as ever. If you would like to check out my other articles in the regulation series please click here for Part 1 & Part 2
The people of Hong Kong on the losing end of this crypto trade.
On Friday May 21st, The Financial Services and the Treasury Bureau (FSTB) of Hong Kong released a press statement concerning its conclusions on legislative proposals to enhance anti-money laundering and counter-terrorist financing regulation in Hong Kong (AMLO). This mouthful of governmental jargon could result in the nascent crypto industry in Hong Kong being chewed up. The FTSB plans to implement this policy into law during the 2021-22 Legislative Council (LegCo) session.
With a paternalistic wave of the hand the government has essentially decided that only those in the city with a portfolio of $1 million USD can engage in cryptocurrency trading. That is only about 7% of the Hong Kong population. AMLO will limit this activity to only the elite of the city and squeeze out retail investors from this sector of the burgeoning market for virtual products. In their wisdom they have decided that the crypto space is just too volatile for the people of Hong Kong, and we must be protected. Under of the pretext of counter terrorism and money laundering who could possibly be opposed?
It is quite true that the “virtual currencies” space is a wild and volatile land, full of nefarious actors, hackers, and swindlers. However, those who do their own research and act with prudence have the potential for great profit. While Bitcoin may catch all the headlines there is a massive shift occurring in this sector. The original vision of the internet; a decentralized and open space; is emerging from the crypto-verse. Unlike Web 2.0 (think Google, Facebook, etc.) Web 3.0 which is emerging from the crypto-sphere has the potential for far greater change and disruption than was ever imagined from Web 2.0. Decentralized finance (DeFi), non-fungible tokens (NFTs), and Decentralized exchanges (DeXs) are just some of the developments in this space that could be revolutionary in the next decade. Web 2.0 brought many great wealth but truly benefitted the elite disproportionately. With crypto currencies the average person has the option of being able to buy in at the ground floor of some of the most promising technological developments of the past decade. This digression is just a window into this crypto-verse and beyond the scope of this article, the point is that the FTSB and the government of Hong Kong are attempting to cut off the people of the SAR from this vibrant opportunity.
Bitcoin and crypto currencies more generally have their genesis in the cypher punk movement of computer experts and hackers. This group distrusted government and believed the traditional financial sectors were corrupt. Bitcoin was born of the great financial crisis of 2008-09. This origin story has created a strong pull in the space for anonymity, a distrust of government, and the ability for people around the world to work for and share in a common cause. This trustless, permission less, censorship resistant, and anti-inflationary nature of Bitcoin has been revolutionary. In a little more than a decade it has become a multi-trillion-dollar industry which is undergoing parabolic growth. All of which will be cut off from the average Hong Konger when AMLO is pushed through the rubber stamp LegCo.
Now let us give a speculative glance as to the why of the current proclamation. Officially the government wants to protect the people of Hong Kong from the volatility of the crypto market, to counter money laundering, and funding for terrorism. As far as the latter is concerned the city’s population is very savvy when it comes to finance, inevitably there will be cases where people are scammed or lose all their money on a meme coin bet, but there will be countless others who could profit handsomely from this emerging financial ecosystem. Second on the list is one of the more realistic areas where regulation is needed, money laundering is a serious problem in Hong Kong, but at the retail level? The average Hong Konger is not going to be involved in all the washing of RMB flooding from across the border to the north. And there are ways to deal with money laundering short of blank bans. Terrorism? Is and will always be a red herring, terrorist financing does happen, just recently with Hamas, but it is such a small fraction of the crypto market it's like using a sledge hammer when a scalpel would be appropriate, but HKSAR government doesn't do subtlety or nuance?
One possibility that the government may offer as a “compromise” is to allow retail trading but only through a “certified” trader who meets their capital requirements. This would in effect create crypto brokerages inserting a buffer between the people and the volatility of the market. While this may appeal to some and would definitely be appealing to the wealthy who could capitalize these brokerages. Crypto enthusiasts would be turned off since this would violate their maxim, “Not your keys, not your crypto.” The “brokerages” would essentially control your crypto and invest it as they see fit. This may work, but who will protect Hong Kongers from the predatory depredations of these new brokerages. The fees, oh the fees, they will have to make money somehow. Crypto experts and noobs alike will say no thank you. One of the key innovations in crypto is to cut out these fee taking middlemen. Of course, this is just speculation, but a plausible reality maybe?
One final reason maybe that China is experimenting in the creation of a Central Bank Digital Currency (CBDC) the digital Yuan. Hong Kong is at an exploratory phase of CBDC development. While the central government constantly reiterates that Bitcoin is not money and is worthless, they are nonetheless moving full speed ahead with a CBDC. This is an extraordinarily complex topic that deserves further exploration but the TL;DR is essentially unlike Bitcoin and other digital currencies CBDCs will allow the government to monitor the complete economic data of the CBDC giving a window into every transaction. This is diametrically opposed to the heart of the crypto movement where permissionless transactions can allow for a certain degree of privacy. Hong Kong will follow the central governments authoritarian policy of control and regulation under the guise of anti-terrorism/crime. Will an eventual digital HKD have any privacy built into it?
Let us examine the timing of this announcement. The SAR’s proclamation came nipping at the heels of yet another ban on crypto currencies from the CCP. Considering that the true Hong Kong government is run from the liaison office it is no surprise to see these two statements drop days apart. The central government would be pleased to see their quislings in Hong Kong dovetailing nicely with their policy direction. While not as drastic as the measures being taken on the mainland there will be significant ramifications for the future of Hong Kong.
While common sense regulations are vital for the industry to thrive, gain legitimacy, and see mass adoption the type of regulation that the FTSB is proposing will create a hostile environment to the crypto-verse. Additionally, this proposal is philosophically antithetical to the core ideology of crypto. Already one exchange based in Hong Kong AAX is considering moving out of the city. AMLO will have a further deterrent effect of stifling innovation in the space and create a perception that Hong Kong is opposed to crypto. Even more disturbing than the FTSB proclamation is the Securities and Futures Commission (SFC) capacity to remove the licenses of authorized exchanges. The SFC wants more oversite of the space as well. Oversite and regulations are necessary; a conversation worth having; but it bodes ill for crypto here in the city given the Hong Kong governments predilection to follow any policy direction from Beijing.
All this leads to the inevitable stagnation of innovation in Hong Kong. Singaporean residents and their government have embraced the crypto sphere more enthusiastically. The government of Singapore is rapidly moving ahead with a CBDC as well. They are laying a solid foundation for the budding industry to bloom. Another Asian giant South Korea is embracing crypto in a dramatic fashion, their government is playing catch up on the regulatory front, but it is not signaling dramatic bans. This will leave Hong Kong behind and uncompetitive, what will happen to the financial sector of this city when it begins to see significant disruption from these technologies as they mature. To draw a succinct analogy from web 2.0, the Hong Kong government is building a bookstore just as Amazon is gaining traction. Conversely AMLO may drive some Hong Kongers to use more risky platforms in the Dex/DeFi space which is beyond the government’s ability and capacity to regulate. Currently the DeX/DeFi space is in early stages and there are significant risks, it is best left to those with considerable experience in the crypto space.
The average Hong Konger will be disadvantaged by the government’s policy, the elite will benefit as usual, and the CCP apparatchiks running Hong Kong from the liaison office will have pleased their masters. Most importantly however, AMLO will deprive the people of Hong Kong of this golden opportunity and furthermore it will indurate the financial sector just as disruption from web3.0 begins to upend the old ways of doing business. The Hong Kong people deserve the benefit of the doubt from the government to make decisions in their own self-interest. It is true that the crypto-verse offers many pitfalls; one must be careful and weary; but it also offers many peaks where one just may catch a glimpse of the moon.
TIME is the most valuable coin and thank you for spending yours reading my post. I hope you have a wonderful day.
>>> Anarchiss <<<
All photographs used in this article were taken by the author.