Volatility of bitcoin ‘means more regulation’ of virtual currencies is on the way

Cryptocurrency communities in Hong Kong and around the world will have to brace for greater regulation, as governments monitor the impact of digital currencies on the stability of financial systems, according to Bart Chilton, the former commissioner of the US Commodity Futures Trading Commission.

Speaking on the first day of Hong Kong Fintech Week 2017 on Monday, Chilton cited the volatility of the benchmark virtual currency, bitcoin, as a key worry.

In mid August, one bitcoin was worth less than US$3,000. By September 1 it was worth nearly US$5,000, but by September 14 the price had dropped back to US$3,200. Just over a month later, it surged to more than US$6,000.

“Look at what has happened to the price of bitcoin in the last few months. That is not a level of stability with which I would be comfortable as a regulator,” Chilton said. “If the fintech community doesn’t step up, that will compel regulators to take action.”

Hong Kong fast developing as a cryptocurrency centre

Chilton also said that greater regulation could be on the way for initial coin offerings, or ICOs, a popular means by which cryptocurrency projects raise funds.

“No one has come up with a regulatory regime that works yet,” said Chilton. He added that key concerns for ICOs included know-your-customer regulations and anti-money-laundering rules.

Regulators have already started taking steps to restrict ICOs. The People’s Bank of China banned them outright in September, saying that 90 per cent of ICOs carried out in China were fraudulent, while South Korea’s Financial Services Commission prohibited South Korean companies and start-ups from taking part in ICOs in late September.

China bans initial coin offerings over concern about financial and social stability

In Hong Kong, where 10 to 20 ICOs are being planned, according to the government’s investment promotion body InvestHK, regulators have taken a more restrained approach, though the market regulator, the Securities and Futures Commission, warned last month that some ICOs may fall under Hong Kong’s securities code and so require appropriate licences.

“It is impossible to underestimate the regulatory risk with an ICO,” Reuben Grinberg, an associate in law firm Davis Polk’s financial institutions group, told a panel discussion at the event later on Monday.

However, greater regulatory involvement would have the potential to deal with another problem of ICOs.

“Whilst many ICOs are implementing best practices like KYC [know your customer] or transparency when it comes to the use of proceeds, some are unfortunately simply looking to make a quick buck,” said Henri Arslannian, fintech and regtech lead for PwC in China and Hong Kong, at the same panel.

“The risk is that those bad apples contaminate the whole ecosystem.”