Introduction

In the age of technology, nearly every single aspects of humanity have been taken over by ever-changing technologies. This rapid evolution is felt the most in finance and payment sector with cryptocurrency being seen taking an ever more centre stage in our lives.

One of the most well-known types of cryptocurrency is undoubtedly Bitcoin. Since its launch in 2009, it has experienced almost exponential growth into a significant currency widely traded around the world reaching an all-time high at US$19,783.6 on 16 December 2017 before a subsequent burst in its value.

Recently, it has reached yet another milestone by surpassing US$28,000 for the first time in history. However, investors should bear in mind certain points before flocking to Bitcoin so as not to allow history repeat itself. Conversely, investors should also be mindful of their legal rights when making purchase and make sure that they will retain the necessary legal recourse should events turn sour.

Considerations for investors

It goes without saying that risk tolerance is always one of the most important considerations that investors should take into account before investing in cryptocurrencies. That said, putting the basics aside, what’s really worth your attention is perhaps the issue of legality. There is no governing body behind Bitcoins. Therefore, notwithstanding how prevalent it sounds, bitcoin trading is actually illegal in many states including China. In Hong Kong, whilst trading bitcoin has not been expressly condemned by the Government, the authorities have always had a conservative attitude towards cryptocurrency trading. Back in 2018, the Securities and Futures Commission (“SFC”) has already alerted investors to the risks of dealing with cryptocurrency exchanges and investing in initial coin offerings.

Another point to note is that Bitcoin is, contrary to what many people perceived, not anonymous. In fact, every transaction made by investors over Bitcoins can be viewed by people who have access to the blockchains. Even an investor’s current account balance is transparent on the relevant platforms. Investors who are aiming for anonymous transactions may find themselves taken aback by this feature of Bitcoin. One must therefore know the difference between pseudo-anonymity vs pseudo-identity.

Moreover, it is not uncommon for Bitcoins to become subject of fraud and scams. We had handled cases where the victims thought that they had invested in Bitcoins through an investment company or a trading platform but turned out that it was a sham with false record of the Bitcoins holding. The Hong Kong Monetary Authority does not consider Bitcoin as legal tender but a virtual commodity. 

As it is not backed by any physical items or real economy, it has no fixed value and therefore fall outside the regulatory ambit of the authority. This poses obvious security risks to investors given the lack of regulation over cryptocurrency trading platforms in Hong Kong, which permits cyber-security loopholes to trap investors.

Investors should also evaluate their choices of trading platforms and online wallets to ensure adequate security over their Bitcoins. Instances of insider hacking or cryptocurrency losses due to software malfunction are not unheard of. Exchange Scams is another unfortunately common feature in Bitcoin trading. As most cryptocurrencies are bought and sold at exchanges, scammers often make use of the lack of governmental oversight over these exchanges as gateway of fraud. In December 2017, several exchanges of South Korea were exposed to be traps, leaving many investors penniless. Therefore, investors should think twice before diving into the Bitcoin market or pretty much any cryptocurrency market.

Crypto funds

For investors who do not want to put all their eggs in one basket, crypto funds may be the way out. Crypto fund is a relatively new type of investment vehicle. In fact, Hong Kong only launched its first regulated crypto fund in April this year. As with traditional hedge funds, crypto funds allow investors to diversify their investment over a portfolio of digital assets. The fund manager will deploy strategies to make the crypto fund resistant to or even profitable despite the high volatility of cryptocurrency markets.

Given how crypto funds work, an inevitable risk for investors is that they have to put their trust over fund managers who could bring in both fortune and bad news. In this regard, research becomes extremely important. Investors must look into the track record of the fund managers, which includes not merely how much they have managed to earn for their clients but also the way they do things, such as the amount of information they share with their clients.

Moreover, investors who wish to invest in crypto funds must bear in mind one fundamental feature, that is, investors do not hold the private keys to the invested cryptocurrencies. This means that investors have virtually zero control over the cryptocurrencies. If they get stolen or misused, investors are often the last one to know. Therefore, even though crypto funds could sound like the one-stop shop for investors who are not experienced enough to make their own investment choices over individual types of cryptocurrencies, the risks behind must not be taken lightly.

Legal recourse for “investors” / subscribers

Due to the uniqueness and decentralised state of cryptocurrencies, legal recourse is often difficult, if not impossible, when things go wrong. That said, there are still legal actions that investors can pursue.

Seeking assistance from regulators: For instance, securities law often provides for civil remedies available to security holders. Some cryptocurrencies trading in Hong Kong are classified as securities and can therefore be regulated by the SFC. As such, when such investments go sour, aggrieved parties may be able to seek assistance from regulators in Hong Kong. Similarly, these cryptocurrencies may be regulated under the existing security laws and investors may be able to claim remedies accordingly.

Contract Claim: Another possible civil action is to make a claim for breach of contract. Trading of cryptocurrencies is normally subject to certain terms and conditions, which may ultimately provide basis to make a claim under contract law. If an investor suffered loss by reason of the other party failing to fulfil a certain obligation or warranty in the terms and conditions, this will allow the investor to claim compensation for his or her loss.

Claim of misrepresentation: In situation where the cryptocurrency was being advertised, in case if an investor was misled or deceived by the advertisement, the investor should be able to make a claim in that regard. Whilst Hong Kong does not have a comprehensive piece of legislation for regulating advertisement, investors might be able to rely on the Trade Description Ordinance (Cap. 362) to seek recourse.

Negligence Claim: Last but not least, investors may have a claim for general breach of fiduciary duty or negligence against certain parties. For instance, a crypto fund manager who acted without prudence may be liable for negligence, subject to the Court’s interpretation of the legal relationship between investors and fund managers.

Key takeaways

Cryptocurrency trading has always been sitting in a grey area in many places including Hong Kong. Whilst the growth of Bitcoin seems to suggest an almost miraculous way to fortune, investors must be aware of the risks behind. Unexperienced investors eyeing on crypto funds should also remember they are two-edged swords that may sometimes lead to more losses than gains. Whilst there are possible legal recourses in case if things took a wrong turn, investors are still reminded to exercise care when making their investment choice and seek legal opinion when necessary.