Regulation is welcome, but don’t block blockchain entirely

Kai-Lung Hui says recent stern actions by China and South Korea are understandable – the threat of criminal activity or bubbles means blockchain needs the hand of regulators. Along the way, though, we should not forget blockchain’s advantages, and the problems it is uniquely able to solve

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Regulators in countries including South Korea and China have come down hard on cryptocurrencies in recent months, but excessive regulation may prevent us from enjoying the advantages they bring. Photographer: Bloomberg

Published: 3:58pm, 12 Feb 2018Updated: 3:58pm, 12 Feb 2018

The Chinese government has banned initial coin offering (ICO) and blocked all websites related to cryptocurrency exchange and trading. The South Korean government stopped domestic companies from participating in ICO last September. The Securities and Futures Commission of Hong Kong has warned local cryptocurrency exchanges that it would not tolerate listings of digital currencies that are structured like “securities” or “futures”.

The situation now is similar to the dot-com boom (and subsequent crash) in the late 1990s, when people started to promote new business ideas and innovations because of the proliferation of the internet. Back then, the key word advocated was “disintermediation”. Today, the underlying technology is blockchain. The key word becomes “decentralisation”.

Rampant speculation in the cryptocurrency and ICO space is inevitable, with some tokens having multifold gains in value overnight without sound economic basis. Cryptocurrency can also be designed to support anonymous transactions, which makes it an ideal instrument for money laundering and computer crimes such as cyber extortion. With this backdrop, it is reasonable for the government to step in and curb the irrational or illegal selling, trading and use of cryptocurrencies.

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However, we must recognise that some cryptocurrencies are intended to solve real problems. The underlying technology behind cryptocurrency, blockchain, has much more to offer than bitcoin or ICO. It represents a new way of recording information and processing transactions. The data recorded in a blockchain is tamper-proof and traceable. The block-creation process involves distributed processing in a trustless environment. Hence, it can be used to support any collaborative transactions requiring high availability and integrity.

Hong Kong Monetary Authority officials Arthur Yuen and Carmen Chu speak to the press in Central on February 1. The HKMA has written two white papers on distributed ledger technology – of which blockchain is one form – outlining its potential applications and related issues. Photo: Jonathan Wong

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In fact, the Hong Kong Monetary Authority has published two white papers discussing the potential use of blockchain. For example, many banks today perform know-your-customer checks individually, which creates many redundant operations when the same customer opens multiple accounts in different banks. The implementation of such checks using blockchain can eliminate most of these redundant operations. We can envision the benefits in other applications such as product certification, supply-chain coordination and general tracking and goods exchanges.