Updated: 2015-02-16 07:29 By Eddy Li(HK Edition)

Last year, when Hong Kong set up its first Bitcoin ATM and a Bitcoin retail store, I wrote a commentary in this paper, "Treat Bitcoin with caution". This was to warn investors to exercise caution about investing in Bitcoin. Unfortunately, it didn't prevent a recent fraudulent incident. Earlier this month, Legislative Council member Leung Yiu-chung said that about 30 concerned clients of MyCoin, a Hong Kong-based Bitcoin trading company, complained to him that the company had absconded with funds from up to 3,000 investors, stealing HK$3 billion in the process.

The most controversial feature of Bitcoin remains the question of whether or not it is actually a currency. Bitcoin does have three useful qualities of a currency, according to an Economist article published in January 2015: They are "hard to earn, limited in supply, and easy to verify". While Bitcoin, to some extent, meets all these requirements - a store of value, a medium of exchange, and a unit of account, it is its volatility which becomes the most crucial factor in its acceptance. In this case, naturally, its price, or exchange rate, fluctuates based on how it is regarded. Thus if a country forbids Bitcoin transactions, the price drops dramatically. When another economy admits its legal status its price may skyrocket in a short time.

Consensus has yet to be reached as to whether Bitcoin should be a currency in different countries. As of 2014, this cryptocurrency was only illegal in Vietnam and Iceland. In December 2013, China's central bank took its first steps in regulating Bitcoins by prohibiting financial institutions from handling Bitcoin transactions. Within six months of this, the People's Bank of China stated that Bitcoins "are fundamentally not a currency but an investment target", and simultaneously ordered financial institutions to close Bitcoin trading accounts. As for Japan, it was not until the Tokyo-based Bitcoin exchange Mt. Gox filed for bankruptcy that the Japanese government decided to clarify its position on the digital currency. Tokyo said it did not consider Bitcoin a real currency. In other Asian countries, including South Korea, India, Thailand and Indonesia, attitudes toward Bitcoin are generally conservative: They firmly state that it is not a currency.

Nevertheless, the Western world seems to have different attitudes to Bitcoin. Germany and Canada have granted Bitcoin the legal status of a currency, while others have tended not to take a definite position. In the US, experts are working on drafting regulations to cover Bitcoin, but on one occasion the Federal Reserve suggested that people should take responsibility for their own risk when investing in this "convertible decentralized virtual currency".

It is possible that Bitcoin will be an internationally accepted currency in future. But so far it is merely an online payment system generated from "mining" - a computing process. Without any central bank or governmental backing, its value is determined only by the agreement of its users. This makes Bitcoin different from conventional currencies regarding undulation. Since its first real-world transaction in 2010, when a user bought 2 pizzas for 10,000 Bitcoins (valued at less than $0.01), it has peaked at $1250 with intermittent crashes and rebounds. Over the last year, the value of Bitcoin has dropped more than 50 percent.

Such instability has brought it to the attention of both investors and governments. Authorities in Hong Kong have repeatedly warned that Bitcoins are a high-risk investment. But judging from the recent case, such warnings are definitely not sufficient, especially when there are no existing laws regulating virtual currencies like Bitcoin. So the solution is regulation or prohibition.

Given that Bitcoin is an unprecedented financial concept, related regulation needs years to draft and refine. Governments and academics from different countries should work together to set up a generally accepted system of regulation. Until such time I suggest the Hong Kong government prohibits Bitcoin transactions through financial institutions - although individual investments should still be possible.

(HK Edition 02/16/2015 page10)

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