Boomtown for bitcoin?

With its appetite for entrepreneurship, cryptocurrency experts argue, Hong Kong is uniquely placed to exploit disruptive financial technologies.

By Joanna Chiu and Danny Lee

When 16-year-old Casper Cheng Tsz-chun of the New Territories started creating, or “mining” for, bitcoins two years ago using his father’s computer, he never imagined that the value of the digital currency would reach a high of US$1,242 a piece.

Nor did he foresee that governments the world over would debate the risks and merits of the digital currency that operates free from government regulation .

Cheng is one of a growing number of bitcoin enthusiasts and entrepreneurs who believe that Hong Kong can become the bitcoin capital of the world – despite recent setbacks including restrictions on bitcoin trading imposed by Beijing.

Cheng feels so strongly about the potential for the digital currency that in December he wrote to Financial Secretary John Tsang Chun-wah on behalf of the Hong Kong bitcoin community, asking the government to clarify bitcoin’s status in the city to encourage more bitcoin investment. Tsang’s office acknowledged Cheng’s letter, but has not responded formally.

“I think Hong Kong can set an example for keeping bitcoin clean and encouraging bitcoin businesses,” Cheng says. “I urged Tsang to set regulations to deter money laundering with bitcoins and to clarify the government’s stance on digital currencies so that bitcoin entrepreneurs won’t need to operate in a grey area and can bring investments to the city.”

Bitcoin has boomed as an alternative banking and payment system, attracting the attention of the financial community and governments globally as users lobby for the currency to gain legitimacy. The total value of all bitcoins in the world is currently more than US$7.7 billion.

Advocates say the payment system eliminates the need to funnel money through third parties such as banks or card payment processors, leading some proponents to argue that it’s a replacement for credit cards.

Bitcoin is not controlled by any government or central bank and provides some, although not total, anonymity for users. As a result it has a dark side, attracting criminals who have used it as a payment method for drug and weapons deals.

Hong Kong’s reputation as a potential global bitcoin hub was damaged in October when a locally registered business, operating as a bitcoin trading platform on the mainland, shut down, affecting 4,000 investors who lost US$5 million in funds. The case aroused the suspicion of police, who later arrested three mainland citizens.

Tsang, the finance chief, wrote in a blog post last month that the bitcoin bull run couldn’t last forever because there was “no support from the real economy”. He linked the rise in value to speculation and argued that “the more popular bitcoin is, the risks of a market bubble burst are higher”.

Many are sceptical of the currency’s soundness. Nobel-prize winning economist Paul Krugman has trashed it and former US Federal Reserve chairman Alan Greenspan described bitcoin as a “bubble”. The European Central Bank has compared bitcoin to a Ponzi scheme.

British economist John Greenwood, who designed Hong Kong’s pegged currency regime, says that bitcoin is not credible as a global currency because it fails three fundamental requirements: as an alternative payment for goods and services; as a stable store of value; and as a universal measurement of money.

But a growing number of entrepreneurs in Hong Kong remain undaunted. They are eager to start businesses to make the city a gateway for bitcoin trade and investment with the mainland and the rest of Asia.

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