Investors beware of digital currency risk

As a former gangland boss enters an already overcrowded market with an initial coin offering, perhaps it’s time to heed a regulator’s warning over murky financial structures

PUBLISHED : Tuesday, 17 October, 2017, 1:25am
UPDATED : Tuesday, 17 October, 2017, 1:25am

When even a former gangland boss jumps into the overcrowded digital currency market, you know things may have reached a plateau and be ready for a fall. Macau’s “Broken Tooth” Wan Kuok-koi has been linked to two companies behind an initial coin offering (ICO) to raise US$500 million. The offering aims to bring blockchain technology, which underpins the widely used bitcoin, to Macau’s cash-rich gambling industry to be employed by casino junket runners in their financing and loan operations.

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ICOs are cryptocurrency projects that have been among the most popular forms of fundraising on the mainland and abroad. However, the People’s Bank of China has banned companies from creating and selling new digital currencies, and shut the country’s leading cryptocurrency exchanges. This means many investors are moving to Hong Kong. According to InvestHK, between 10 and 20 companies will carry out ICOs in the city in the next six months. As a source of crowdfunding, ICOs have a use for new business ventures denied the usual funding channels, but they have also been linked to fraud, money laundering, speculative investment and capital flight.

ICOs are allowed in Hong Kong, but the Securities and Futures Commission has warned that some have murky financial structures which may fall foul of our securities laws. It is often unclear whether the digital “tokens” amount to equities in the firm that is raising capital or simply function as a cybercurrency for trading purposes.

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Authorities in Hong Kong have heightened scrutiny on a recently proposed ICO, especially after it was revealed to be linked to the former 14K triad boss. As if ICOs are not risky enough, the planned offering would be used for junket financing. Given such opaque casino operations, it’s difficult to see how it will meet the city’s regulatory standards. More relevant, it’s probably fair to assume many of those behind it have little understanding of the underlying technology and are latecomers to a frothy investment field. It’s true blockchain technology has great commercial potential, but its future directions are unclear. That makes it all the riskier for investors.