Introduction

Apart from being a year of the pandemic, 2020 was also a year of international sanctions. Differing world views and polarization of positioning has led to a number of cross-sanctions between major powers across the globe. For the first time in history, Hong Kong no longer enjoys immunity from the unfolding cross border drama. 

In order for any sanction to be effective, a key feature is the pressure placed upon companies and institutions to stop doing business with sanctioned entities. This is more evident when it comes to banking services (as for banks to be prominent and successful, cross border presence is a must). Where a bank has international reach, they must navigate carefully so as to not contravene any of the laws of their host nations.

Throughout history, where an individual or entity is sanctioned, a common theme is that they will have significant cash on hand (as storing the same in banks is no longer an option). However, unless such sanctioned person has access to a standing army to protect their cash, excessive paper (money) at home can be inconvenient. This article therefore explores whether Bitcoin (or other decentralized virtual assets) might be seen as a solution for individuals with a cash-load problem.

Advantages of decentralization

“Bitcoin is a digital currency, a decentralized system which records transactions in a distributed ledger called a blockchain.”

- Definition of Bitcoin by David Floyd in “How Bitcoin Works”

The concept of decentralization is at the heart of each and every bitcoin. Bitcoin evangelicals have often preached that Bitcoin is the future as it is not subject to the auspices of any centralized institutions (e.g. banks). Centralization does after all equate risks. The ‘risk’ that many bitcoin evangelicals preached may seem prophetic when the recent rounds of non-United Nations sanctions imposed upon Hong Kong officials had resulted in those on the sanctioned list losing their bank accounts despite the fact that the Hong Kong Monetary Authority had attempted to stave off the effects of such sanction via their Circular on 8 August 2020 proclaiming that non-United Nations sanctions will have no legal status in HK. Most banks still opted to mitigate its risk by closing affected accounts with a number of affected individuals complaining about their “cash-load” problem thereafter.  

Bitcoin is a type of decentralized cryptocurrency which are unaffected by any international sanctions because there are no centralized institutions (e.g. banks) which authorities may enforce their sanctions upon. Unlike fiat currency (which are printed by banks), Bitcoin is not issued by any central bank (which have to give consideration to the positions of their host countries) but are instead ‘mined’ by individual miners. Trading Bitcoin involves blockchain technology that records and validates transactions across a decentralized and distributed network of computers (again, no single centralized institution to target). Therefore, a person/entity which may be subject to sanctions may still own and trade Bitcoin on the Mainnet without worrying about doors being closed on them.

Moreover, networks trading Bitcoin has often been interpreted as a “pseudo-anonymous” network. It is anonymous in the sense that you can hold a Bitcoin address without revealing anything about your identity in that address. One person could hold multiple addresses, and in theory, there would be nothing to link those addresses together, or to indicate that the person owned them. Bank accounts on the other hand are the exact opposite. That said, there is of course a downside in that everything that happens in the Bitcoin world is trackable. Due to the way that the algorithm is structured, every Bitcoin-based transaction is logged in the blockchain.

Regulatory protection

Traditional currencies

In Hong Kong, institutions which intend to carry on a business of banking are required to have a banking licence from the Hong Kong Monetary Authority (“HKMA”). HKMA ensures potential banks to be fit and proper in operating banking business. Only licenced banks can operate current and saving accounts and accept deposits of any size and maturity from the public.

Licenced banks are required by statute to be a member of the Deposit Protection Scheme (“DPS”). DPS offers protection towards all cash deposits placed with the scheme member regardless of whether they are in the form of Hong Kong dollars or any other currencies. In case a bank winds up, a depositor is entitled to maximum protection up to HK$500,000.

BTC

For the lay masses, the security of your Bitcoins depends on which wallet service provider individuals opt for. However, due to the fact that this entire sector remains unregulated to date, there is no guaranteed compensation for your loss provided by statute in case the service provider has gone out of business. Trading of Bitcoin is, for the time being, mostly unregulated in Hong Kong or anywhere else in the world. Under the Securities and Futures Ordinance, virtual assets which do not qualify as “securities” and “futures contracts” under the Ordinance are still unregulated by the Securities and Futures Commission (“SFC”).

Normally, if you are trading under any regulated exchanges regulated by the SFC, you may be able to seek assistance from the SFC. Aggravated parties may be able to claim remedies under the relevant securities law. If you are trading Bitcoin on unregulated exchanges, however, your possible remedy is to make a claim for a breach of contract. Often, trading decentralized currencies is no different from trading with other forms of assets and the transacting parties are bound by contractual terms and conditions. Aggravated parties may claim compensation for their loss when other parties fail to fulfil their promises in the contract.

While decentralized cryptocurrencies such as Bitcoin are rising into prominence as a global cryptocurrency, they are still far from being a liquid currency for day-to-day use. In Hong Kong and most countries in the world, you will not be able to buy goods with Bitcoins as local vendors do not recognise the value of Bitcoins. Unlike traditional currencies which the value is guaranteed by banks, the value of Bitcoin depends on the perception of your counter-party in a trade. Until Bitcoin becomes more mainstream, the inconvenience that users will have to deal with is that many of their counter-parties in transactions will not accept Bitcoins or any other forms of cryptocurrencies as payments.

Key takeaway

In the age of international sanctions, whilst the need for banking service may be the Achilles heel for most people/entities that find themselves inadvertently/advertently linked to a sanctioned list (on both sides of the aisle), assets like Bitcoin may seem very attractive as compared to having one assets in banks (which are vulnerable to centralized retaliation). That said, with Bitcoin moving closer and closer towards mainstream and with regulators all vying to regulate this space, it remains to be seen whether Bitcoin will remain as decentralized as it was first envisioned to be. But for now, it will appear that its decentralized nature may be the Achilles heel against international sanctions.