Cryptocurrency in Hong Kong – Regulated or Not

With the second-highest engagement after the United States, Hong Kong continues to be a significant market for cryptocurrency. 

Last month the financial services industry breathed a sigh of relief when the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a joint circular which gave them the green light to do crypto business. The new guidance essentially allows banks and brokers to offer digital-asset trading services to professional investors. 

However, it is important to note that the circular did not address the fate of retail customers. Up until now, cryptocurrency has largely been regulated by existing AML and KYC rules. The Legislative Council is expected to pass legislation later this year in relation to retail investors, but at present, there is no specific legislation relating to cryptocurrency in Hong Kong.

Why is regulation and enforcement needed? 
The murky world of money laundering and cryptocurrency has recently made the headlines with the US Department of Justice charging a married couple for allegedly laundering US$4.5 billion worth of stolen Bitcoins. This represents the biggest theft in US history and the largest seizure by authorities. 

Money laundering has also made the headlines in Hong Kong, with the first reported money laundering case involving cryptocurrency in July last year. At the time, Hong Kong Customs arrested four individuals in relation to a suspected money-laundering syndicate involving HK$2.2 billion through a virtual currency exchange trading platform. 

The need for regulation and enforcement is clear but given the constantly evolving nature of cryptoassets it is difficult to predict exactly how this will evolve in the short term. The United States Federal Bureau of Investigation (FBI) recently announced the establishment of a new unit to stop cybercriminals that abuse digital currencies. Many are now wondering to what extent Hong Kong will also develop its enforcement and regulation.     

How are the courts approaching cryptocurrency? 
In Yan Yu Ying v Leong Wing Hei [2021] HKCFI 3160 the court granted a temporary proprietary injunction over 999.9900261 Bitcoins worth HK$328,363,760. In this case the Plaintiff alleged that the Defendant had misappropriated the Bitcoin, an allegation denied by the Defendant. This case shows how the courts may apply their discretion when granting interim-interim injunctions in cryptocurrency disputes in Hong Kong and their willingness to treat Bitcoin as a form of property. 

Similarly, the English High Court has held that cryptoassets can be treated as property and as such the owner of cryptoassets can avail themselves of the proprietary remedies that a court is able to grant (AA v Persons Unknown [2019] EWHC 3556).  

However, it is important to exercise caution when considering judgements involving cryptocurrency disputes due to the highly fact-sensitive nature of judgements and the diverse and fast-evolving nature of cryptoassets. With more judgements related to cryptocurrency expected in the future, legal commentators and investors alike will be closely watching to see how the law develops in this area. 

Summary
For some time, there has been a great deal of uncertainty in Hong Kong surrounding cryptocurrency and what regulation might be forthcoming. Whilst the recent circular by the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority is welcome news by many, it still leaves questions unanswered, particularly in relation to retail investment. 

Hong Kong is likely to continue to be a significant market for cryptocurrency, particularly given its status as a global financial hub, but much will depend on future regulatory changes and what approach other jurisdictions take. For now, it’s a case of watching this space. 

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Patrick, a partner at Charles Russell Speechlys, covers a broad range of civil and commercial litigation, arbitration and mediation matters including shareholder and corporate governance disputes, personal and corporate insolvency, multi-jurisdictional fraud and asset tracing cases, claims for breach of contract and matters related to employment such as immigration issues, terminations, personal injuries and employees’ compensation. He has considerable experience in acting for defendants in a wide range of white-collar crime cases such as HKMA, ICAC and SFC investigations. In addition, Patrick also advises extensively on work on matrimonial law and related matters, including complex and high net worth divorce cases.