In December, yours truly wrote that cryptocurrency service providers would be subject to rigorous supervision. Last Friday, the Hong Kong government released details of a related legislative proposal in its consultation conclusions. Given the lack of opposition at the Legislative Council, the proposal is likely to be passed quickly. The implications of the change can be summarized as follows.

1) SFC may have to be renamed

The Securities and Futures Commission (SFC), as suggested by its name, is mainly reasonable for supervising securities and futures and issuing licenses in accordance with the Securities and Futures Ordinance. Virtual assets, which include cryptocurrencies, do not necessarily take the form of securities or futures. Bitcoin is a good example. Now the government wants the SFC to regulate and license cryptocurrency service providers according to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. These are apparently beyond the statutory responsibilities of the SFC. Perhaps the commission should be renamed as SFVAC - Securities, Futures and Virtual Assets Commission - to reflect its added statutory function.

2) Overseas providers can apply for license

The government proposal initially suggested that cryptocurrency service licenses be issued only to local providers. But under the revised proposal, companies founded outside Hong Kong but registered in Hong Kong under the Companies Ordinance are allowed to apply for a Hong Kong Virtual Asset Exchange license. This means big cryptocurrency exchanges abroad, such as Binance and Coinbase, will only have to set up a company in Hong Kong to join the local game. Some people may think the cryptocurrency market may shrink as licensed providers can only offer their service to professional investors. However, such cryptocurrency service providers have for years been struggling and operating in a gray zone. They desperately want to get a proper license and play by clearer rules just to reduce operating risks.

3) No restrictions on P2P trading

In its consultation conclusions, the government does not dismiss the role of private trading platforms. As long as they match buyers with sellers without handling any money or virtual assets, and that the actual transaction takes place outside the platforms, they can still offer their service to retail investors. In case of fraud in a transaction, the platform concerned will not be implicated, given that the license is meant to supervise dealers only. If there is any big problem in a private transaction, one may have to report to the police.

4) Supervision will only get stricter

The consultation conclusions were unveiled shortly after Chinese regulatory bodies including the People’s Bank of China strongly criticized the sharp fall and rise in value of cryptocurrencies, saying such trends are to the detriment of national security and disrupt financial order. Vice Premier Liu He even lashed out at bitcoin trading and mining. Can Hong Kong’s financial sector, which is increasingly in line with its mainland counterpart, be a hub for fluctuating cryptocurrencies? Perhaps cryptocurrency security is already on the national security agenda.

I previously noted that cryptocurrencies carry no intrinsic value. Their asset value hinges upon people’s confidence, and investing in them is a highly risky form of speculation. Their sharp decline of late has caused many people to lose a fortune. Stricter supervision over cryptocurrencies will see people’s confidence nosedive. When that happens, what value is left for these currencies?

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