Digital currencies need the right regulator
The Securities and Futures Commission is looking into ways to manage trading platforms, but the Hong Kong Monetary Authority should also explore the new market
If you can’t kill it, regulate it. No government likes to tolerate unauthorised currencies not issued by bona fide monetary authorities, but the creation of cryptocurrencies has created a new reality. Outlawing their use is no longer possible and, acknowledging the inevitable, some places have decided to tame the unregulated trading of such currencies. Hong Kong is confronting the issue, and the Securities and Futures Commission is looking into ways to regulate various cryptocurrency trading platforms operating in the city and to tighten investor protection.
This is a welcome move. Left to their own devices, such platforms are like the Wild West of financial trading. Sophisticated traders may have made them their playground, but more innocent retail investors may end up being the proverbial lamb to the slaughter.
But it is far from clear whether the commission is the best body to do this since its powers are restricted to regulating securities. It is debatable whether cryptocurrencies qualify as securities.
A stronger case may be made for initial coin offerings (ICOs) to be regulated by the commission. They were all the rage in South Korea and the mainland, until Chinese authorities started a crackdown earlier this year. A way for firms to raise funds by using virtual trading tokens, most ICOs look and smell like securities trading.
But if virtual currencies have some key characteristics of a normal currency, then surely a governing monetary body should have as much claim to regulation as any other. It makes sense for both the commission and the Hong Kong Monetary Authority to explore together ways to regulate the new market. In the end, there needs to be a decision as to who should have the power to regulate and whether it may be shared.
Some local as well as overseas trading platforms with operations in Hong Kong have expressed a willingness to cooperate with city regulators. They are being smart. Without an official stamp of approval, it would be hard for such platforms to attract mainstream investment trading. As first movers, they have the advantage over any newcomers by having an input into how the authorities may set up a regulatory regime. The key is to allow financial innovation while offering safeguards to investors.