Hong Kong must join China to lead the bitcoin revolution, or be left in the dust

The rise of cryptocurrencies is one of the most important trends in global finance this decade. Non-sovereign-backed digital money is rapidly entering the mainstream consciousness, with billions of dollars in capital aimed at building business models based on the core distributive ledger technology that supports cryptocurrencies. Banks and other financial institutions are also investing billions to leverage the blockchain, to generate major cost savings and work efficiency throughout their organisations.

For Hong Kong, the advent of decentralised, virtual currencies is both a threat and an opportunity. While it has made some moves to encourage financial technology (fintech), Hong Kong has thus far limited government policy on cryptocurrencies to warning about their risks. The lack of a major technology incumbent, strong ecosystem or an important home market have Hong Kong lagging behind in innovation and development for e-commerce, social media or deep tech. This makes it all the more important for it to focus on fintech and the revolution in virtual money.

HK expected to be at the heart of blockchain

The appeal of reliable and unfettered cross-border financial transactions, free from regulatory hassle, is fuelling speculative fever for bitcoin and other cryptocurrencies, such as ethereum. Over the course of just five years, the price of bitcoin versus the US dollar has soared by more than 330 times. The combined market cap of the 20 top virtual currencies now exceeds US$150 billion, putting them on the radar of Wall Street firms that see their investment appeal.

Some governments are taking the lead in embracing this phenomenon. Russia’s first deputy prime minister, Igor Shuvalov, said he supports a “cryptorouble” backed by government investment into electronic currency mining, thanks to the nation’s abundant energy resources. Japan has passed a law recognising virtual money as currency, which supports the development of a cryptocurrency ecosystem, including retailers, consumers and fintech firms.

Burger King has launched its own version of bitcoin in Russia: the ‘WhopperCoin’

Hong Kong has done very little, with silence from the legislature, the Monetary Authority and stock exchange. Ironically, the key risk for Hong Kong is an economy that is too reliant on global and regional banks that will be forced to adapt to the rise of the distributive ledger. A vast number of Hong Kong’s highly paid professionals work in back- and middle-office functions involved in the processing and monitoring of financial contracts. Many of these jobs will move into cyberspace. Cryptocurrencies may also challenge the role of the US dollar and other fiat currencies. Hong Kong’s dollar-based currency and role as a financial intermediary could leave us a victim to the forces of technology-led globalisation.

On the other hand, Hong Kong has good reason to strive for leadership in cryptocurrency development. For starters, more than 70 per cent of bitcoin are said to be produced in China, which now controls over 60 per cent of global digital currency. The future of cryptocurrencies depends on the scalability of their acceptance and usage. While technically, cryptocurrency owners can transact seamlessly across borders, they will eventually need to convert some or most of it into hard currency for daily transactions. Hong Kong has an advantage as a natural springboard for outbound Chinese and could become a centre for exchange of cryptocurrencies into fiat money. Also, the city’s strong fiscal position and huge pool of private savings give it the ability to invest in, and push its people to embrace, the use of alternative currencies.

The government should swiftly enact legislation recognising digital money as currency and encourage its use in retail transactions. Secondly, the HKMA could diversify a part of its reserves into cryptocurrencies. The government should add resources to support the stock exchange’s plan to launch a private-financing, market-based blockchain. Lastly, the city could consider sponsoring a regional forum for the discussion of alternative currencies. Coordination among policymakers will be critical and probably easier among Asia’s surplus savings nations. Hong Kong can provide a relatively neutral venue for finding areas of agreement and cooperation.

Jesse Friedlander, CFA, is co-founder and chief investment officer of Des Voeux Partners, a multifamily office that manages intergenerational wealth. His areas of interest include macroeconomics, geopolitics, language and culture