The Money Laundering and Terrorist Financing Risk Assessment Report released by the Hong Kong Financial Services and Treasury (FSTB) has concluded that cryptocurrencies are not a tool employed by the island’s criminal fraternity. Hong Kong is currently witnessing stern discourse around whether the city is doing enough to combat financial crime.
Hong Kong a Powerful, Free Economy Struggling With Regulation
As a financial powerhouse, Hong Kong has seen its fair share of cryptocurrency-related turmoil and squabbles, yet is something of a haven for digital coin enthusiasts, post-China’s outright ban on initial coin offerings (ICOs) and trading. In spite of its fintech expertise and well-established criminal syndicates, virtual currency seems mostly left out of illicit activity in the country.
Arrest rates are also falling, but the number of recorded, suspect transactions has been quadrupling over the last six years. Local businesses who either trade or accept bitcoin are also complaining about banking hassles. These include frequent denials of service due to Hong Kong banks’ fear of being implicated in money laundering.
Particularly businesses involved in any way with cryptocurrency have been on the losing end of the tussle, with local banks sticking firmly to representing a welcoming, free economy while at the same time taking a blanket approach by mostly washing their hands of anything crypto-related.
The full report outlines some of the risks the government sees around virtual currencies. With Hong Kong legislators facing the same issues of definition and classification as regulators all over the world, the report acknowledges that no specific legislation exists to govern cryptocurrency trading. Under existing law, a Money Service Operators license has only to be obtained by those dealing with fiat currencies, allowing digital coins to be both very much “money” while also very much unregulated.
As it has been in many countries, Hong Kong regulators are grappling with the fact that some coins act as currency, some as securities – “Stored Value Facilities” akin to Alipay or Paypal – and some as both. The government has allayed fears somewhat by iterating that Hong Kong remains committed to a policy of no capital control and remaining “one of the world’s freest economies.”
In their final analysis, attributing a perceived lack of success of cryptocurrencies to these characteristics of the economy, regulators point out that cryptocurrencies are just not that popular.
Echoes of Giancarlo
Very much as the feted U.S.’s CFTC chairman Christopher Giancarlo said in February 2018, when appearing before a Senate hearing on cryptocurrencies, digital coins are hard to define.
In the flux of a developing ecosystem, most countries are in a watch-and-wait scenario, while also promulgating legislation deemed necessary for a new asset class. The Hong Kong Police Force (HKPF) pointed out that they have seen “no apparent sign of organized crime or ML/TF concerning trading of cryptocurrencies.”
Digital currencies have even been used as bait in some Ponzi schemes. Unlike their Chinese counterparts, the HKPF have only handled some 167 cases of a Bitcoin-related nature, since monitoring began in 2013. Most of the reports concern fraud attempts relating to ransomware like WannaCry. Drug trading or other smuggling offenses are not associated with any of the crypto-crimes reported so far. Police consider the possible entrance of organized crime into the cryptocurrency arena a low risk at present.
The Hong Kong Department of Information Services (ISD) deems the risk of money laundering via virtual currencies to be negligible in comparison to that of more popular storehouses. Police do monitor the emergence of Bitcoin ATMs and exchanges on the island and have stated that some seven distributors exist, alongside four exchanges. The Bitcoin Association of Hong Kong’s information suggests that there may be more ATMs than police have recorded. The report also notes the low level of concern surrounding these developments, as “they are not popularly used by people in Hong Kong.”
Hong Kong Ready but Still Crypto Clean
For a payment system to be targeted by criminals, it has to enjoy a sufficiently critical mass of users. Commonly employed money laundering and terrorist financing trades make use of high-volume exchanges or other tools. The government deems the risk of other better-patronized facilities like Alipay, PayPal and even the locally popular Octopus Card to be far higher in terms of enabling illicit activity.
Social media fraud is a far more common occurrence, however, with users being swindled in their interactions online. Although individual losses are seldom more than a few thousand Hong Kong dollars, the total figure for the years 2015 – 2016 stands at $815,000.
Having taken a caution by the U.S. earlier this year on the possibility of its open stance enabling Pyongyang’s ambitions via money laundering, the government has already enacted sterner legislation to govern the fintech arena. Entities will be subject to new licensing requirements and particularly trusts, and shell companies will face more intense scrutiny to establish themselves.
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