The cryptocurrency industry has sometimes been described as a financial “Wild West,” free, volatile and resistant to regulation.
But protecting investors and developing an attractive environment for virtual assets are not mutually exclusive.
Hong Kong, which aspires to become a Web3 business hub, is expected to lead by example. The city has started work on a regulatory framework to boost investor confidence and is drafting new rules.
In the event of disputes, the courts also have an important role to play. Earlier this month, a landmark High Court decision, hailed as a world first, marked a step forward towards greater transparency and accountability.
The case concerns a battle over the ownership, management and control of a cryptocurrency financing project involving a decentralized autonomous organization (DAO) that uses blockchain technology.
The plaintiffs who designed and implemented the project claim to have delegated management to employees who then “diverted” its activity and assets.
This claim is disputed by the defendants, who argue that ultimate decision-making power rests with the purchasers of digital tokens, through voting rights, rather than with any individual or entity.
The ownership issue has not yet been decided. But the court ruled that, with the trial ongoing, the defendants must make public the platform’s financial accounts. This will be essential to any assessment of damages and will preserve the status quo until the case is decided.
But the judge also stressed the importance of keeping proper financial records. This is fundamental to the proper management of a business and necessary to demystify the opaque nature of blockchain.
The decision provides clarity and is consistent with the principle that new legal entities in the cryptocurrency space should be open to scrutiny.
As the judge noted, the courts have little experience in dealing with this type of dispute. But as the sector is growing rapidly, more such cases can be expected in the future.
The move has led to calls for the government to regulate blockchain-based entities as part of ongoing efforts to attract investment and talent in the field.
This must be taken into account as the city moves forward with other regulatory measures, which include licensing cryptocurrency platforms and amending laws to regulate stablecoins.
There is a need to strike a balance between investor protection and industry attractiveness. The JPEX scandal, which cost more than HK$1 billion (US$128 million) in losses, is still fresh in the minds of Hong Kongers.
The city cannot afford to rest on its laurels as it crafts a regulatory framework while continuing its efforts to make Hong Kong a virtual asset hub.
