Digital currency is a form of money that is available only in digital or electronic form and, as such, can only be accessed with computers or mobile phones connected to the internet or the designated networks. It is a balance or a record stored in a distributed database on the internet, in an electronic computer database, within digital files, or a stored-value card. They exist in the form of crypto currencies, virtual currencies, central bank digital currencies, and e-cash.

Digital currencies have become more popular because of online communities like gaming sites, gambling portals, or social networks.

 

The Difference between Digital Currency and Crypto currency

  • All crypto currencies are digital currencies, but not all digital currencies are crypto currencies
  • Digital money exists only in digital form. It does not have any physical equivalent in the real world as much as it has all the characteristics of traditional money. While a crypto currency is an asset used as a means of exchange.
  • Digital currencies are stable and are traded with the markets, whereas crypto currencies are traded via consumer sentiment and psychological triggers in price movement.
  • They are centralized. There is a group of people and computers that regulate the state of the transaction in the network. Crypto currencies are decentralized, and the majority make the regulations of the community.
  • Digital currency requires user identification like a photo of oneself and documents issued by the public authorities, while crypto currencies do not require any of that. 
  • Crypto currencies are transparent, everyone can see any transactions of any user since all the revenue streams are placed in a public chain, but it is not so with digital currencies.

 

Hong Kong and Digital Currency

Hong Kong is working on the adoption of cross-border digital currency transactions using Central Bank Digital Currencies (CBDCs). Hong Kong Monetary Authority (HKMA) and the Bank of Thailand launched Project LionRock-Inthanon (a joint research project) to study a blockchain-backed cross border payment platform in November 2019. The project addresses, among other issues, the traditional cross-border payment difficulties faced by cash-strapped Small and Medium-Sized Entrepreneurs (SMEs).

The city’s de facto central bank has the initial phase of the project in cross-border payments. Digital currencies have the potential to make the movement of money more efficient within their areas. The digital currencies are to streamline the layer of banks that are traditionally involved in foreign exchange. This move will ultimately help their clients achieve real-time settlement and reduce settlement risks, thereby saving costs.

HKMA now wants to invite more banks to take part in the next stage of the project, which is real-world testing to the digital currency in cross-border payments. They will select some real bilateral trades as part of the further examination of the network to look into how these payments and cross border fund transfers are made. Currently, 10 banks are participating in the project. Participating banks are ZA Bank Ltd of Hong Kong, Hongkong, and Shanghai Corp. Ltd, Bangkok Bank Pubic Co. Ltd, Siam Commercial Bank Public Co. Ltd., Standard Chartered Bank (Thai) Public Co. Ltd. and Krung Thai Bank Public Co. Ltd.

Many foreign investors are keen to move their money into Hong Kong. These foreign investors aim to capitalize on the low tax rates and relaxed regulations, without having to physically be in Hong Kong. This contributes to the rise in popularity of digital currency in Hong Kong among foreigners.

We have experience in the financial sector for over 12 years, and have been helping many international companies navigate through various complicated financial regulations. If you want to ensure that your digital business meets the regulatory requirements of Hong Kong, contact our corporate specialists at Paul Hype Page & Co.

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Hong Kong protests and Digital Currency

As protests surge, so does the demand for crypto currency. As protest broke out aroundSince mid-June, bitcoin traded at about a USD 160 premium on TideBit, a Hong Kong-based exchange. As protests have worn on, that premium persists, with the latest price of Bitcoin on TideBit at USD 11477.34, about USD 80 higher than the current rate on Coinmarketcap. Crypto currencies were built to address several of the most pressing points in the Hong Kong protests, which are at the forefront of what it means to protest against a state equipped with all of the sophisticated technologies of the 1st century and the unrestrained ability to weaponries those capabilities against its citizenry.

Protests result in elevated deposit rates as some clients may opt to open accounts elsewhere as a precaution.

Protests in Hong Kong also resulted in the mistrust of government. Together with its great flexibility, Digital Currency is also now on a rising trend for most Hong Kong citizens.

 

Understanding Digital Currency

Digital currencies have all intrinsic properties like physical currency, and they allow for instantaneous transactions that are low-cost.

Digital currency can exist in unregulated form. When a central bank of a country issues digital currency in a controlled manner, it is called the “Central Bank Digital Currency (CBDC).

 

Strengths of Digital Currency

  • Because of its centralized structure, transaction mistakes can be reversed upon a request made to the company.
  • They are instantaneous and low-cost.
  • They are not restricted to physical locations like banks or clearing houses.
  • Without having to physically meet, businesses can still carry out transactions.
  • Using certain digital currency for business transactions, there are no bank requirements or prerequisites needed to be met.(e.g. Bitcoin and other cryptocurrencies)

 

Weaknesses of Digital Currency

They require a client’s confidential information during a transaction; thus, there is no anonymity. 

The data could fall into the wrong hands, be hacked, or be sent to law enforcement agencies (upon request).

 

Regulations associated with digital currency in Hong Kong

Crypto currencies and blockchain technology (Distributed Ledger Technology) have created a new economy which opened a market of new opportunities. The first of such is the Bitcoin, followed by Ethereum, all of which have resulted in the growth of the economy as private, and public enterprises have formed in Hong Kong to take advantage of the opportunities created by these technologies and Hong Kong’s unique position in business technology and law. 

The Basic Law of Hong Kong enshrines various free-market principles safeguarding its position as an international financial center. However, enforcement actions are being taken under the existing legislation and new regulatory regimes being introduced to protect investors’ interest.

HKMA stated in 2015 that Bitcoin and other similar currencies were not legal tenders but “virtual commodities,” and because Bitcoin has no backing-in physical form or by the issuers-it cannot be qualified as a means of payment or electronic money. However, the SFC (Securities and Futures Commission) statements later gave a glimpse that the government may take an improved stand on this issue in the future.

The offering of the security tokens is (is to be) conducted in compliance with the SFO and in a similar manner as the offering of traditional securities products, including but not limited to the requirement of dealing through intermediaries that are licensed with the SFC and the requirement of publishing an offering memorandum.

The applicable legislation and regulations on the trading of crypto currencies will depend on each crypto currency’s actual features. Where a firm only manages a “portfolio,” which invests solely in Non-SF Virtual Assets, it is not required to be licensed or registered for Type9 regulated activities, but where a firm manages a fund of funds, the firm is required to be registered for Type9 license.

There are no capital gains tax payable from the sale of financial instruments in Hong Kong. Thus, any Hong Kong-sourced income from frequent crypto currency trading in the ordinary course of business may be treated as income in the case of individual clients. And profits in case of a corporation, and subject to income tax and profits tax respective regardless of whether the trading is made in exclusive crypto currency or fiat –to crypto currency exchanges.

As of now, no specific regulations are governing the mining of crypto currencies. And there are no requirements to report crypto currency transactions of any amount.

As the HKMA has classified Bitcoin as a virtual commodity, it does not fall within the definition of CBNI (Currency or bearing Negotiable Instruments), border restrictions, and declarations to disclose and declare such movement to CED does not apply to it.

If you are interested in crypto currency and require assistance in the regulation surrounding it, write in to our consultants in Paul Hype Page, and we will be happy to help you in any way we can.