Training Material

• What is Cryptocurrency?

Source: DBS Bank^[1]

Cryptocurrencies exist primarily on a network of computers, or nodes. “Crypto” refers to the usage of cryptographic methods to secure ownership and validate transactions on this computer network. “Currency” implies that they constitute an electronic system of money, which can  be used  as  a  medium  of  exchange  in  digital  transactions,  as  a  unit  of  account  and  as a  store  of  value. Cryptocurrencies’ success in the currency arena will depend on whether they are as broadly accepted for payments as fiat currencies.

The above definition is not specific and may also apply for other digital currencies that are linked to gold, or the USD. We outline five definitive features for a bona fide cryptocurrency below:

First, ownership records are maintained via a distributed, peer-to-peer digital ledger. Peer-to-peer is a communications model in which each party has equal capabilities and either party can initiate a communication session for the sharing of resources. The dominant method is a distributed blockchain that was first introduced in Bitcoin, and it stands as a major innovation on its own without requiring a currency system. In the blockchain, ownership is linked to a digital address on the cryptocurrency network, with its own private key. All operating nodes keep their own records of transactions stored in the blockchain. This ensures the high availability and robustness of any cryptocurrency network. 

Second, there is a consensus protocol or mechanism which determines whether a transaction is recorded in the digital ledger by nodes in the network. There is no third party involved in verifying bilateral transactions. All transactions are broadcast in the peer-to-peer network, without need for central banks, financial intermediaries or legal enforceability. Owners digitally sign transactions with their private keys, which is verified by the network using the public key and then lodged into the blockchain based on a consensus protocol. Loss of a private key will typically imply the loss of cryptocurrencies at the address.

Third, there is an incentive system to encourage independent nodes to register transactions honestly in the distributed ledger. Untrusted agents are given an incentive to maintain honest records of transactions on the blockchain. This is done by the award of Bitcoins for successfully creating a block of transactions in the Bitcoin network. Other cryptocurrencies could require transaction validators to put up a stake. They will be rewarded with a transaction fee if aligned correctly with others and penalised with a loss if they put forward a dishonest transaction. Cryptocurrencies is a surprising example of an insight first espoused by Adam Smith, where individual agents’ considerations of their own self-interest lead to the provision of a trusted, entirely decentralized system for transactions.

Fourth, cryptocurrency supply is entirely determined by an algorithm. For Bitcoin, a finite number of Bitcoins will be created per block of transactions added to the blockchain. The Bitcoin protocol specifies that the reward per block will be halved every 210,000 blocks, before eventually decreasing to zero at the limit of 21 million bitcoins in existence. Other cryptocurrencies have algorithmic mechanisms to release or create tokens over time, maintaining value by scarcity. Cryptocurrency creation is thus vastly different compared to money creation in the fiat economy, where the central bank fully controls money supply, adjusting it in response to economic needs. 

Fifth, they are highly divisible in comparison to conventional currencies, helped by an entirely digital existence. The smallest amount within Bitcoin is a Satoshi, which equals one hundred millionth of a Bitcoin (or 10^-8of a BTC). In comparison, the smallest physical unit of the US dollar is a cent (or 10^-2of a USD). In digital currency markets, currency quotes are typically given up to one ten thousandth of a unit (10^-4), which is still significantly larger than cryptocurrency divisions.

Cryptocurrencies can be used in various contexts where conventional money accounts are somewhat disadvantaged.  First, given that the cryptocurrency network is borderless, it is straightforward to wire cryptocurrency payments across countries. Secondly, the cost of transactions can be minimized for overseas purchases if the vendor accepts cryptocurrencies, negating the need to convert into foreign exchange. Both factors suggest that cryptocurrencies can play a useful role in cross-border trade of goods or digital services.

Since cryptocurrency holdings are largely anonymous, they can also provide privacy for some who wish to keep their asset holdings known only to themselves.  Lastly, cryptocurrencies provide an insurance against possible operational failures of the financial system. Admittedly, this is a tail risk, but they could pose some concerns for citizens in emerging market countries with underdeveloped surveillance and policy institutions, or where damage from natural disasters can be exceedingly large. Conversely, a cryptocurrency network is expected to function continuously come what may, if they are broadly distributed across geographies and time zones.

• Workings of Bitcoin

Source: DBS Bank^[1]

The Bitcoin network, acting as a distributed server, eliminates the need for a third party to verify transactions and prevent double spending. The server timestamps all transactions, hashing them into an ongoing chain of hash-based-proof-of-work, known as a blockchain. Hashing is the use of a cryptographic hash function that maps data to bits, or hash value. The longest blockchain (among all nodes) serves as the accepted sequence of Bitcoin transactions, and it cannot be changed without redoing all the proof-of-work. A Bitcoin, on its own, is simply a chain of digital signatures recorded as a block. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner, adding to the end of the coin.

The major innovation of the Bitcoin protocol is that it allows the network of untrusted nodes to validate these transactions independently. Nodes must prove that work is done by hash inversion, which is a difficult task that results in a new block added to the blockchain when successful. Nakamoto (2008) shows that if over half of the network’s processing power is controlled by honest nodes, the likelihood of attackers successfully outpacing the honest blockchain is vanishingly small as the number of blocks created increases. The longest blockchain will thus be the honest blockchain, as its length proves that it came from the largest pool of CPU power. This ensures the integrity of Bitcoin transactions lodged in the blockchain. 

There is an incentive mechanism for nodes to operate honestly. Nodes will be rewarded with coins for successfully starting new blocks, which is akin to mining. It is then more profitable to lodge honest blocks rather than engage in dishonest manipulation of previous transactions, since the probability of success is low while the cost of computing resources needed is high. Nodes can also leave and join back the network at will, accepting the longest proof-of-work chain as the correct record of transactions while they are absent. The Bitcoin network’s fully distributed nature with no single point of failure ensures a high degree of fault-tolerance and robustness to attacks.

• Usage of Cryptocurrencies

Source: DBS Bank^[1]

The usage of private cryptocurrencies is not yet significant. In a 2018 survey by “BIS [Bank for International Settlements]”, no central banks reported significant use of cryptocurrencies for payments, with 58% of domestic and 40% of cross-border payments not using cryptocurrencies, and 28% of domestic and 32% of cross-border payments being concentrated in niche groups.  Most central banks also anticipate that usage of cryptocurrencies will remain minimal due to low retail acceptance, bans, compliance issues, and public understanding of the risks involved. Cryptocurrencies can increase the risk of financial crimes such as money laundering and tax evasion, which has prompted governments around the globe to impose regulations. Additionally, cryptocurrencies are not currently widely accepted by retailers or easy to purchase via conventional channels. Cryptocurrencies have been marked by considerable volatility, making them risky to hold.  The market price of Bitcoin, for instance, fluctuated between USD200 and nearly USD20,000 during 2014-2019. The dramatic price changes have so far made it difficult for Bitcoin to function as a stable store of value or a means of exchange.

• Five things to know about bitcoin

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[2]

There have been much interest and news around bitcoin, which saw prices rallying to new highs throughout 2017. The price surge and fluctuation is indeed very drastic. However, savvy investors should not just look at the price gains, nor follow the herd to rush to participate in speculation.

Bitcoin is not a currency but a virtual commodity that is not backed by any issuers nor tangible assets. The usage of bitcoin is limited as it is not widely accepted as a means for payment or as a digital currency. Before making any investment decisions, it is important to understand more about the product. These are the five must-knows about bitcoins:

1. Highly volatile

Bitcoin prices fluctuate a lot. For example, when the Chinese government previously declared ICO as an illegal activity, the price of various cryptocurrencies plunged. The price of bitcoin also dropped sharply by 40%, but soon bounced back by 30%. The volatility is akin to a roller-coaster ride. Bitcoin has posted huge gains since the beginning of the year and the risks involved should not be taken lightly.

2. Divergent market views

The opinion on bitcoin is divided. For example, while some on Wall Street have publicly criticized bitcoin as a scam that would eventually go bust, certain investment banks are optimistic about the market. As for the governments, many regulators remind investors of the risks involved in bitcoins, but some countries, such as Japan, accept them.

3. Constantly evolving

Bitcoin is a novel FinTech product. One could say it is still in the experimental stage and is constantly evolving. For example, disputes over changes in the protocol rules (forking), which emerged as a result of capacity issue, may lead to the creation of another bitcoin-related cryptocurrency. The first forking had already happened in August this year and the next more controversial one which originally scheduled in mid-November, was suddenly suspended. These forking events may directly affect the price of bitcoin.

4. Security is a major concern

Cyber-attacks resulting in the theft of cryptocurrencies are becoming increasingly common. For example, Mt. Gox, once the world's biggest bitcoin exchange, closed down in 2014 because a huge sum of bitcoins that it held for clients were stolen by hackers. Last year, two exchange platforms that carry out bitcoin transactions in Hong Kong also reported hacker invasion and theft of client assets. Thus, a safer way of handling bitcoins is to keep them in your own digital wallet (i.e. mobile phone apps, computer software or hardware used specifically for saving, collecting and sending out bitcoins), but it is not 100% safe either. Digital wallets can also be attacked by hackers (albeit there is a lower possibility), or they could be infected by a virus. Even forgetting the password could result in a permanent lock-out from using the bitcoins in the wallet.

Furthermore, exchange platforms are set up by private companies which may be unregulated or located overseas. If these platforms cease operations, collapse, or are hacked, investors may face the possible risk of losing their entire investments held on these platforms.

5. Risks associated with illegal activities

Due to the relative anonymity and the ease of transfer, bitcoins could be used for money laundering and funding terrorist activities, such as arms trade and drug deals, etc.

Bitcoin and other cryptocurrencies are high risk investments and not suitable for everyone. If you are interested in bitcoin, you may first want to ask yourself these three questions:

1. Do you understand what are bitcoins? How do they work? What are the associated risks?
2. What is your objective for investing in bitcoin? Are you speculating with the crowd? Or do you believe they have a true value following your own research?
3. Can you bear the loss if the bubble bursts, or if the price plunges?

Without full knowledge of the features, operation mechanisms and risks, you are advised not to follow the herd and participate in speculation. Please seek professional advice if in doubt.

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[3]

ICOs are typically online fundraising activities for block-chain technology related products.

A project operator issues digital ‘tokens’ or ‘coins’ to fund the project in exchange for a widely-used ‘cryptocurrency’ (such as Bitcoin or Ether) or cash.

The project operator often sets out the business proposal and usage of raised funds in a so-called ‘white paper’.

People buying the tokens (i.e. investors) can be entitled to certain rights of the prospective blockchain project.

These new digital tokens may be made available to trade in ‘cryptocurrency’ trading platforms after the initial offering to enable secondary market transactions. These tokens are generally regarded as new ‘cryptocurrencies.

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[4]

Blockchain technology is the underlying foundation of ‘cryptocurrencies’, most notably bitcoin. It verifies and records transactions of ‘cryptocurrencies’. For example, with bitcoin, every single transaction that takes place in the bitcoin network is recorded in a shared public ledger. Whenever a new block of transactions is created, it is added to the blockchain. Transactions are verified by other bitcoin users (known as miners) who earn a reward in bitcoins for this service. This verifications and reward process is known as bitcoin mining.

Virtual assets include a digital representation of value which may be in the form of digital token (such as utility tokens, stablecoins or security- or asset-backed tokens) or any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether or not they amount to “securities” or “futures contracts” as defined under the Securities and Futures Ordinance, but excludes digital representations of fiat currencies issued by central banks.

Virtual asset-related products include investment products which: (a) have a principal investment objective or strategy to invest in virtual assets; (b) derive their value principally from the value and characteristics of virtual assets; or (c) track or replicate the investment results or returns which closely match or correspond to virtual assets.

This section provides a (non-exhaustive) summary of the risks of investing in cryptocurrencies.  Prior to entering into any transaction involving cryptocurrencies, you should obtain independent advice so as to understand and be familiar with the risks involved.

1 Investor Suitability

The investor should ensure that he/she fully understands the characteristics of cryptocurrencies and the nature of the risks associated therewith and consider the suitability of this product in the light of his/her personal circumstances and financial condition. In particular, the investor must ensure that he/she is able to withstand the potential financial loss.

2 Market Risk

Changes in the prices of cryptocurrencies can be unpredictable, sudden and large. Such changes may result in the value of the cryptocurrencies moving adversely against the interests of the investor and negatively impacting upon the return. The prices of cryptocurrencies will be influenced by the complex and interrelated global and regional political, economic, financial and other factors such as introduction of government regulations or interventions. 

3 Past Performance

Past performance of cryptocurrencies is not necessarily a guide to future performance.  The value of the investment and the income derived from it can go down as well as up.

4 Worst-case Scenario

In extreme circumstances, the investor may suffer a total loss of the investment amount. 

5 Concentration Risk

The investor should be satisfied that he/she has the risk appetite for, and is not over exposed to, crypto currencies. In considering his/her risk appetite, the investor should also take into account his/her total maximum exposure to cryptocurrencies, whether with DBS or other institutions, under adverse market conditions.

6 Liquidity Risk

There may not be enough active buyers and sellers, and maybe difficult to liquidate.

7 Market Access Risk

Prices of cryptocurrencies change continuously 24 hours throughout the day.  The investor should be aware that he/she may not be able to execute a trade on cryptocurrencies, even if the market price of cryptocurrencies continues to change.

8 Interaction Risk

Different types of risks may interact unpredictably, particularly in times of market stress.

9 Price Volatility

The value of cryptocurrencies is highly volatile and speculative.

10 No Guarantee or Backing

Cryptocurrencies are not backed by any bank, government, issuer nor tangible asset.

11 Bubble Risk

Investors may incur significant loss if the bubbles burst.

12 Hacking Risk

Cyber-attacks resulting in the theft of cryptocurrencies are becoming increasingly common.

13 Exchange Platform

Cryptocurrency exchange platforms are set up by private companies which may be unregulated or located overseas. If these platforms cease operations or collapse, investors may face the possible risk of risk of losing their entire investments held on these platforms.

14 Wallet Security

Digital wallets can be prone to losses arising out of hacking, virus or theft of password etc.

15 Emerging Technology

It is still in the experimental stage and constantly evolving. Globally, the acceptance of the cryptocurrencies remains uncertain.

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[5]

Although certain ICOs have made the headlines by raising millions of dollars within minutes or hours, from an investor’s perspective, participating in an ICO may pose various risks, including:

1 Lack of Due Diligence and Uncertainty

The white papers may simply list out a new concept and the information disclosed may not be sufficient and may not be verified or verifiable. Investors may be buying into a concept only rather than the underlying economic utility of the project. Whether the project can be implemented will depend how it develops in the future.

2 Possible Scams or Frauds

Fraudsters may entice investors by touting an ICO investment ‘opportunity’ as a way to get into this cutting-edge space, or promising high investment returns.

3 Highly Volatile and Speculative

The valuation of digital tokens and ‘cryptocurrencies’ is usually not transparent, and highly speculative. Their prices can fluctuate greatly within a short period of time, and even be rendered worthless.

4 Liquidity Risk

There may not be enough active buyers and sellers in the market. Token holders may not be able to liquidate their investment easily.

5 Cross-border risk

ICOs are likely cross-border in nature and may not be confined to a local jurisdiction. Investors may have difficulty enforcing their rights and interests in case of fraud, default or bankruptcy.

6 Illegal Activities

ICOs are susceptible to money laundering and terrorist financing risks due to the relatively anonymous nature of the transactions and the ease with which large sum of monies may be raised in a short period of time.

Investing in VA and VA-related products involves risks. VA are high risk investment. Trading in VA-related products is subject to the general risks associated with VA. These risks could result in substantial financial loss in transactions involving VA and VA-related products. In the worst case scenario, the investors may lose their entire investment. The general risks associated with VA and VA-related products could include, without limitation to, the following:

1 Legal and Regulatory Risk

All VA transactions are potentially exposed to legal and regulatory risks. The legal and regulatory treatments of the VA vary according to the jurisdiction, they are unsettled and may change rapidly. A VA may or may not be considered as “property” under the law, and such legal uncertainty may affect the nature and enforceability of investors’ interest in such VA.

The effect of regulatory and legal risks is that any VA may decrease in value or lose all of its value due to legal or regulatory change. Changes or uncertainty in the legal or regulatory framework, actions imposed by governmental or regulatory bodies relating to blockchain technology and/or VA may adversely impact the use, storage, transfer, exchange and value of the VA, returns on investors’ investment or even render a previously accepted investment illegal. Investors should seek independent legal, tax and financial advice and continue to monitor the legal and regulatory position in respect of their investment in VA and VA-related products.

2 Risk of Price Volatility

The prices of VA and VA-related products are subject to supply and demand and may fluctuate significantly within a short period of time. The volatile and unpredictable fluctuations in price may result in significant losses.

Any VA may decrease in value or lose all of its value in response to various factors including security concerns, discovery of wrongful conduct, market manipulation, change to the nature or properties of the VA, technological developments, governmental or regulatory activity, legislative changes, suspension or cessation of support for a VA or other exchanges or service providers, public opinions, or other factors outside of our control.

Psychological market risks may have a particular effect on VA and their prices may be adversely affected by global or local economic, political, environmental or other factors.

3 Risk of Potential Price Manipulation

There may not be a robust regulatory framework to govern VA trading, lending and/or dealing platforms. The spot markets for VA (i.e. the underlying assets of VA-related products) are largely unregulated at present. They are more likely to present investor protection issues, ranging from a lack of pricing transparency to potential market manipulation which may contribute to false and misleading appearance of trading activities in or an artificial price for VA. Investors may suffer financial losses arising from buying or selling VA at a false price.

4 Risk of Lack of Secondary Market 

There is the possibility for investors to experience losses due to the inability to sell or convert assets into a preferred alternative asset immediately or in instances where conversion is possible but at a loss. Such liquidity risk in an asset may be caused by the absence of buyers, limited buy/sell activity or underdeveloped secondary markets.

The value of a particular VA may decline, or be completely and permanently lost should the market for that VA disappear. This is because the value of a VA may be derived, among other things, from the continued willingness of market participants to exchange fiat currencies for a VA. There is no assurance that a person who accepts a VA as payment, will continue to do so in the future.

5 Risk of Unregulated Trading, Lending or Other Dealing Platforms and Custodians of VA

Service providers for VA and VA-related products, including custodians, fund administrators, trading platforms and index providers, may be unregulated, or regulated only for anti-money laundering and counter-financing of terrorism purposes or subject to light-touch regulation (e.g. for payment purposes). Thus, they may not be subject to the same robust regulation as service providers or products in traditional financial markets, posing additional counterparty risks for VA-related products.

The offering documents or product information provided by the applicable issuer may not be subject to regulatory approval. Investors should exercise caution in respect of any issuance or offer of such assets.

For any VA that have been authorised by a regulator or traded on a platform authorised by a regulator, such authorisation does not imply any official recommendation or endorsement of the asset and/or platform by the regulator, nor does it guarantee the commercial merits of the asset and/or platform or its performance.

Some VA transactions may be deemed to be executed only when they are recorded and confirmed by a Securities and Futures Commission-licensed platform, which may not necessarily be the time at which the client initiates the transaction.

The protection offered by the Investor Compensation Fund established under the Securities and Futures Ordinance does not apply to transactions involving VA (irrespective of the nature of the tokens).

6 Counterparty Risk

Effecting transactions with issuers, private buyers and sellers or through trading, lending or other dealing platforms (collectively, the “Counterparties”) is subject to counterparty risk. Investors should evaluate the comparative credit risk of the Counterparties and undertake appropriate due diligence before undertaking any transaction.

Investors should read the applicable terms, information and risk disclosures provided by the related VA or VA-related product issuer carefully before entering into a VA or VA-related product transaction. Investors should seek independent professional advice before making any investment decision.

7 Risk of the Loss of VA

Investing in VA is subject to the risk of the loss of VA, especially if the VA is held in “hot wallet” or “hot storage”. A “hot wallet” or “hot storage” describes the practice where the private keys to VA are kept in an online environment. As “hot wallet” or “hot storage” is connected to the internet, it is more susceptible to cyber-attacks. Cyber-attacks resulting in the hacking of VA trading platforms and thefts of VA are common. Victims may have difficulty recovering losses from hackers or trading platforms. This could result in significant loss, loss of investors’ entire investment, and/or other impacts that may materially affect investor’s interests.

8 Hacking and Technology-related Risks

• Cyber-attacks and fraudulent activity

VA and VA-related products’ technologic reliance exposes Customer to the risk of fraud or cyber-attack. VA or VA-related products may be targeted by hackers, individuals, malicious groups or organisations who may attempt to interfere with or steal the VA or fiat currency in various ways, including but not limited to interventions by way of distributed denial of service, sybil attacks, phishing, social engineering, hacking, smurfing, malware attacks, double spending, majority-mining, consensus-based or other mining attacks, misinformation campaigns, forks, and spoofing. Any successful attacks present a risk to the VA, and may result in theft or loss of the VA.

• Reliance on the internet and/or other technologies

VA and VA-related products are reliant on effective and reliable internet and/or other technologies. Either parts or the entire internet may be unreliable or unavailable at any given time, when such happens, interruption, transmission blackout, delayed transmission due to data volume, internet traffic, corruption or loss of data, loss of confidentiality and/or accuracy in the transmission of data, or the transmission of malware may occur when transmitting data via the internet and/or other technologies.

9 Risk of Trading New Type of Asset

VA are relatively new and complex financial instruments, and generally a high-risk asset class. Market participants of VA may engage complex transaction strategies. They may or may not be Securities. Investors should ensure that investors have the knowledge and expertise to understand how the product is structured (which may differ from case to case), the applicable terms and conditions, and exercise caution in relation to the trading of VA, and VA themselves. VA are not legal tender. They may not be backed by physical assets, and are not backed or guaranteed by the government. They may not have intrinsic value. Some of the VA may not circulate freely or widely, and may not be listed or trading on any secondary markets or exchanges.

Transactions involving VA are irrevocable. Lost or stolen VA may be irretrievable. Once a transaction has been verified and recorded on a blockchain, loss or stolen VA generally will not be reversible.

The price of new type assets may fluctuate, sometimes dramatically. Their price may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling VA.

Cryptocurrency Scams

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[6]

When it comes to cryptocurrencies, the first thing that comes to mind is their high volatility, which is typical of emerging virtual products, as well as crypto-related scams. The Hong Kong Police Force logged 496 crypto-related crime cases during the first half of the year, amounting losses of more than HK$200 million – five times the amount in the same period last year!

Criminals are drawn to cryptocurrencies because of their anonymity. In cryptocurrency trading, the trading parties’ personal information or IP address is not recorded in the blockchain, making cryptocurrencies highly anonymous and difficult in tracing the holdings. In ransoms, extortions, online romance or investment scams, criminals now ask for money in cryptocurrency rather than legal tender, as the former allows them to conceal their identities and conduct money laundering activities.

Besides, as cryptocurrencies are emerging products, some people may become overly optimistic without fully understanding their nature, risks, operations and trading methods. Scammers are quick to take advantage of this misconception in fabricating their investment swindles, which often claim to offer high yields with low risks.

Below are some commonly seen crypto-related crimes:

• Online romance scams: After gaining the trust of victims, scammers will then use different excuses, such as investments, gifts or urgent need of cashflow, etc., to ask for money in cryptocurrencies instead of cash to conceal their identities.
• Investment platforms: Scammers set up fake websites that point victims to download a mobile app of a crypto-investment platform through unofficial channels. Cryptocurrencies are then bought through the app, then transferred to designated crypto wallets. From the fake website, the victims may see growth in their deposited money, while in fact their cryptocurrencies are in the hands of the scammers.
• ICO: Initial coin offering, or ICO for short, refers to the initial offering of new cryptocurrencies to fund investment projects. As investors expect huge profits in the future, they are often enticed to enrol in such ICOs, which valuation is of low transparency. What’s worse is that some so-called ICOs are never issued.
• Robbery in a face-to-face transaction: After completing a couple of small transactions with cryptocurrency buyers, the criminals claim to have large sums of cryptos on sale. Victims are then lured to bring cash to meet the criminals at a certain location and make the transaction face-to-face. When the victim arrives, he/she are robbed of his/her cash by the criminals who then flee the scene. Some criminals may impersonate as cryptocurrency buyers and lure the victims into closing a deal physically at a location. Once the criminal receives the cryptocurrency, the large sum of cash is handed to the victim, who will then be robbed by the culprit(s) nearby.
• Ransomware: The outlaws hack into victims’ computer systems or introduce malicious code to their encrypt files and databases. The victims are then forced to pay the ransom in cryptocurrencies.

Scammers have numerous tricks up their sleeves. If you do not want to become the next victim, always stay vigilant – especially when it comes to crypto-related transactions or investments.

Regulations on Cryptocurrencies in Hong Kong

Source: The Chin Family, IFEC: Initial Coin Offerings (ICOs), Bitcoin and other "cryptocurrencies"^[7]

Cryptocurrencies are a type of virtual asset, but not fiat currencies nor generally accepted as a means of payment in Hong Kong. With no regulatory backing or support from any central issuers, cryptocurrencies are easily impacted by market rumors, news, or government actions, causing their prices to fluctuate greatly within a short window of time. Cryptocurrencies are regarded as highly speculative and high-risk products.

One can choose to trade cryptocurrencies through local or overseas cryptocurrency trading platforms, which are also known as crypto exchanges or crypto brokers. However, only a few of them are regulated.

Platforms offering securities virtual assets trading

In Hong Kong, securities tokens (such as stock tokens) may be considered as “securities” under the Securities and Futures Ordinance (SFO) and are subject to the regulatory remit of the Securities and Futures Commission (SFC). Virtual asset trading platforms which offer trading of at least one security token are required to apply for a licence from the SFC for Type 1 (dealing in securities) and Type 7 (providing automated trading service) regulated activities, and subject to regulatory standards comparable to those applied to licensed securities brokers and automated trading venues. According to the concerned licensing requirements, licensed virtual asset platforms can only provide services to professional investors. Due to the high level of risk, licensed virtual asset platforms cannot offer services to retail investors in accordance with the regulatory requirements.

Platforms offering non-securities virtual assets trading

However, virtual asset trading platforms providing crypto trading in non-securities virtual assets, such as Bitcoins and Ethereum, do not come under the purview of the SFC, since the traded products are not defined as “securities” under the SFO. As such, if investors encounter problems withdrawing cryptocurrencies or fiat currencies from their accounts on these platforms, the SFC may not be able to offer any help. Should more serious events take place, such as winding up or ceasing of operations, or if there are incidences of fraud, breaches or theft, investors may suffer a complete loss in cryptocurrencies deposited in these platforms.

Considerations for overseas cryptocurrency trading platforms

It is worth noting that some overseas cryptocurrency trading platforms may be regulated by their local regulators. Should transaction disputes arise, investors may need to seek help from and lodge a complaint with the relevant overseas regulators. However, as investors are physically in Hong Kong, seeking assistance overseas may be extremely difficult and inconvenient. Similarly, if the platform closes or ceases operations, investors may be fighting an uphill battle in submitting claims and seeking legal remedies.

Cryptocurrencies are high-risk products and thus not suitable for everyone. Without fully understanding their features and risks, do not jump on the speculative investment bandwagon. If you intend to use trading platforms for cryptocurrency trading or other related services (such as cryptocurrency debit cards), you should first do your research, make considered choices and understand the relevant risks.