Bitcoin has recently overtaken the Swiss Franc to become the world’s 13th largest currency by market cap. The world’s second most valuable cryptocurrency (“crypto”), Ethereum, is also now among the top 25 fiat currencies by market cap. Though crypto has rocketed to the centre stage in recent times, it is still safe to say that most people still don’t understand the nature of cryptos.
This article explores the contrasting attitudes that various governments had adopted around the world towards crypto and it is no exaggeration to say that the differing stance are bi-polar opposites. From outright banning of cryptos by the Chinese government to warm embrace of cryptos by Putin (not to mention the adoption of Bitcoin as national reserves across various states in Latin America), the people of Hong Kong should also pay attention to current status of crypto in Hong Kong (which is historically the gateway between the East and the West).
Status of cryptocurrencies around the world
Status of cryptocurrencies in China
Ahead of the launch of PBOC’s own digital currency, on 24 September 2021, China’s central bank and nine other government departments issued a joint announcement (“Joint Announcement”) banning all cryptocurrency trading and speculation, and business activities involving cryptocurrencies are categorised as illegal financial activities which are prohibited in China.
The Chinese authorities justified the ban by asserting that the speculative trading of cryptocurrencies constitutes a form of infringement to the safety of the people’s property and causes disruptions to the economic and financial order. Notably, although cryptocurrency trading and initial coin offerings are prohibited in China, it is not illegal for individuals to hold cryptocurrencies.
The Chines authorities noted that the prices of cryptocurrencies have been fluctuating and highlighted the risks of trading cryptocurrencies. In particular, the Chinese authorities highlighted the fact that cryptocurrencies are not supported by anything of real value and do not enjoy the status of legal tender. Crypto euthenists will however also note that traditional fiat currency is also not supported by anything of value as the gold standard is no longer applied.
In addition, contracts governing the trading of cryptocurrencies would not be recognised or protected under Chinese law. Under the Joint Announcement, financial institutions are prohibited from providing any crypto-related services in China, including saving, trust or pledging services of cryptocurrencies or the sale of financial products in relation to cryptocurrencies. Individuals and entities who take part in such financial activities would be criminally liable under the Chinese law.
On the same day, the National Development and Reform Commission of China issued a notice (“Notice”) which explicitly states that it would strengthen regulation on cryptocurrency mining and prohibit cryptocurrency mining projects. The crackdown on cryptocurrency mining is purportedly said to be conducive to the country’s reduction of carbon emission. Crypto-mining activities have since largely shifted to other jurisdiction.
Status of cryptocurrencies in Russia
Whilst Chinese authorities banned cryptocurrency activities altogether, Russian President Vladimir Putin signalled approval of trading in cryptocurrencies. He stated in an interview with CNBC recently that cryptocurrencies have the right to exist and can be used as a medium of exchange. Meanwhile, Deputy Finance Minister of Russia also vouched that there is no plan for a blanket ban in cryptocurrency similar to China’s, and the Governor of the Bank of Russia stated that digital currencies will be the future of financial systems as the economy moves online.
In fact, cryptocurrencies were illegal in Russia until last year and the Bank of Russia has time and again warned that cryptocurrencies are extremely volatile. Nevertheless, Russia changed its stance from a complete ban on cryptocurrencies and crypto-assets to a search for a suitable regulatory framework to govern them. The Federal Law No. 259-FZ on Digital Financial Assets, Digital Currency and Amendments to Certain Legislative Acts of the Russian Federation (“DFA Law”) took effect on 1 January 2021, which defined digital financial assets as digital rights that include monetary claims, the ability to exercise rights under crypto-securities, and interests of digital shares in certain companies, and the right to transfer, issue, circulate and record DFAs by making or amending entries in distributed ledgers etc.
Under the DFA Law, non-qualified investors are subject to certain restrictions set out by the Bank of Russia in acquiring digital financial assets. For instance, only qualified investors are allowed to acquire digital financial assets issued under foreign law or digital financial assets that carry exercisable rights in securities. On the other hand, the Bank of Russia is keen to explore the possibility of introducing its very own central bank digital currency and published a consultation paper on the Russian Ruble in October 2020 and targets to have a prototype ready by the end of this year. Unlike ordinary cryptocurrencies, central bank digital currencies will be issued and controlled by authorities.
It is clear that Russian authorities take a more welcoming approach to crypto-related activities and seeks to minimise the risks inherent in cryptocurrency trading through regulations.
Status of cryptocurrencies in El Salvador
At the final end of the spectrum, in September 2021, El Salvador has made a historic move of becoming the world’s very first government to adopt Bitcoin as legal tender in the country. Apart from El Salvador, it has also been reported that Panama is also considering to follow El Salvador’s lead to adopt Bitcoin as legal tender in their nation. Such attitudes had resulted in crypto enthusiasts predicting that the precedent set by El Salvador may lead other countries to join El Salvador in the trend.
Status of cryptocurrencies in Hong Kong
Despite China’s hostility towards crypto, Hong Kong as a unique jurisdiction operating with free market principles has adopted a relatively milder stance on crypto and related business.
To date, no new laws have been passed by the legislative council in Hong Kong to specifically deal with crypto and crypto business. Under current laws, Hong Kong does not regulate private possession or transfer of crypto between private individuals as long as the crypto was obtained and transferred in good faith. Depending on the nature of the transaction, trading of crypto is regulated by different legislations such as the Sales of Goods Ordinance (Cap.26) and the Trade Descriptions Ordinance (Cap.362) to protect individual consumers.
Unlike the plan by Bank of Russia, the HKMA also stated that it has no plans to issue any central bank-backed crypto.
Over the years, Hong Kong has approached the Virtual Asset Trade with incremental regulatory framework, initially starting with the sand box approach in 2019, opt-in licencing scheme in 2020 and full regulatory intent in 2021. All in all, it has been the SFC’s tradition to announce regulatory intents in respect of crypto at the annual Hong Kong FinTech week. This year’s development will therefore be both exciting and remains to be seen.
Given the ever changing regulatory landscape specifically targeting crypto, any parties including individual traders and businesses in the crypto sphere are encouraged to seek legal opinion in navigating both the opportunities and regulatory risks posed by crypto.
Whilst there is yet to be a clear and universal legal framework in relation to cryptocurrency in Hong Kong and the rest of the world, the cryptocurrency market undoubtedly presents enormous opportunities for market participants who are prepared to shoulder the risks. ONC Lawyers will keep an eye out for any further development and changes in the law and write further on this topic when there are such development and changes.