Published on 03.04.2014
The legal status of Bitcoin in Hong Kong
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009. The digital currency created and used in the system is alternatively referred to as a virtual currency, electronic money, or a crypto currency because cryptography is used to control its creation and transfer. Because the Bitcoin system is not controlled by a single repository, like a central bank, bitcoin is also regarded as a decentralized currency.
By LEONHARD WEESE - Consultant at KAYRO Solutions Ltd.
Until now Hong Kong does not regulate virtual commodities specifically in terms of their safety or soundness, but existing laws provide sanctions against money laundering, terrorist financing, fraud and cyber-crime.
The Government and financial regulators will closely monitor developments, including the use of virtual commodities in Hong Kong and the evolving regulatory consensus at international platforms, and also regulatory and enforcement actions in comparable jurisdictions, to consider further action in protecting the public.
1) The government’s stance on Bitcoin
The Hong Kong government’s stance on the digital ledger Bitcoin becomes more clear after Legislative Council member Chan Kam-lam (constituency Kowloon East) asks the Secretary for Financial Services and the Treasury, Professor K C Chan about the subject.
The government does not consider Bitcoin an electronic currency because of its instable price. We cannot deduce from this whether Bitcoin will be considered currency in Hong Kong once the price has remained stable, but no additional requirements are being raised so far.
Due to these price fluctuations the government regards bitcoins as “highly speculative” and reminds everyone to use extra caution.
The government describes Bitcoin as virtual currency, which “are by nature a kind of virtual commodities created in the virtual world”. Virtual commodities are something our accounting and taxation standards are relatively familiar with.
The Hong Kong Monetary Authority claims they have not received any reports from banks concerning the development of businesses associated with bitcoins. This is interesting as there are various businesses in Hong Kong that facilitate the trade of bitcoins, all of which have bank accounts. Either the banks are unaware of the activities in such accounts, or they have not filed reports yet with the HKMA.
This does not mean using a bank account to facilitate the trade of bitcoins is illegal, this simply means that the HKMA will not regulate digital currencies preemptively but merely on request by the banks.
The government is aware of a few vendors who accept bitcoins as payments for their services and does not object. According to them there is no need to regulate Bitcoin if it does not pose a threat to the financial stability of Hong Kong.
Unlike other jurisdictions, Hong Kong does not worry about illegal activities that are being conducted with the use of bitcoins as the government recognizes that these activities are illegal already and will still be enforceable even when bitcoins are being used.
Lastly and unsurprisingly the government clarifies they will not do anything before the European Union or the United States have clear policies on Bitcoin.
2) What does this mean for you?
You are still free to hold, buy and sell bitcoins as a person without restrictions, and do so at your own risk.
If you intend to open a bitcoin exchange or enable others to do bitcoin trading, betting or facilitate trading or betting using bitcoins the situation is complicated. Depending on the nature of the Bitcoin business, KYC policies still apply and the application for a Money Service Operators License under the AMLO (Cap. 15) is advisable or even necessary.
If you are a business accepting bitcoins for services and products you are more free than ever to do so.
While the exact legal status remains unclear, it is very clear for most practical purposes around taxation and accounting.
Disregarding of whether Bitcoin is a currency, a commodity, a tangible or intangible asset gains from buying and selling bitcoin are capital gains and therefore untaxed in Hong Kong. If Bitcoin were to be classified a share it might be subject to stamp duties, but such a classification is unlikely given that bitcoins do not entitle the holder to anything at all. Luckily, even the classification as a digital good would not make things difficult given the lack of VAT.
This does not need to be a concern if you are accepting bitcoin payments through a third party or are immediately exchanging your bitcoins at market value to fiat. If you however keep the bitcoins that you accept, additional book keeping will be necessary.
Similarly, if you receive bitcoins as a salary you will need to pay income tax on what these bitcoins were worth at the time at which you received them.
3) Accounting and Taxation
When buying bitcoins as an individual or company we advise you to create a record indicating the amount of BTC, time and price. When accepting bitcoins for a good or service this should also be noted additionally to the market price.
Currently there is more than one market price, but as long as you are consistent in your records that will not be a problem. You can use the market price of your favorite exchange or a basket that weighs the market price of several exchanges.
When selling bitcoins or paying with bitcoins as an individual, you will also need to create a record indicating amount, time, price and if relevant, product purchased.
If you are a business that accepts bitcoin, you will have the option of immediately converting your bitcoins to Hong Kong Dollars when accepting them (some payment providers do this automatically for you). In this case you carry little risk of running a loss of seeing your bitcoins devalue and even less risk of getting into the situation of having to explain a profit from bitcoin trading.
You will be able to book your sales in HKD or USD and use bitcoin merely as a transmitter for these funds.
4) Caution is very important
The volatility of bitcoin means everyone who holds it is subject to the risk of losing all the money invested. One bitcoin might be worth 10 times as much in a year, but it might also have become worthless by then.
So although accepting bitcoins as a means of payment might make transactions cheaper and easier for you or even give you access to new markets, not exchanging them for hard currency immediately exposes you to severe risks that are difficult to comprehend.
If in doubt, talk to a lawyer or accountant of your choice and be aware that the legal situation of bitcoin can change at any time.
Spelling of the word bitcoin:
There are two concepts used in this article. When referring to the protocol the capitalized version ‘Bitcoin’ is used, when referring to the unit of accounting within that protocol the non-capitalized word ‘bitcoin’ or its plural form ‘bitcoins’ is used.
NOTE: This is neither a legal nor scientific document. This is a single person’s opinion and interpretation of the Hong Kong government’s comments on Bitcoin.