Fintech is arguably the most vibrant sector among startup activities in Hong Kong these days – not surprising considering the abundance of IT talents with strong financial services knowledge and background. In a roundtable held in Cyberport last week, I had the opportunity to listen to a group of local and overseas academics, lawyers, technologists and entrepreneurs, sharing their views about how to develop the technology and legal infrastructure for a blockchain ecosystem.
Many know bitcoin as the decentralized virtual currency that has taken the world by storm. Blockchain is the public ledger of all the transactions in the bitcoin network, shared by all bitcoin nodes. A full copy of a currency’s blockchain contains all the transactions ever made in that currency—welcome to the brave new world of open source meeting cryptography.
As a ledger system, blockchain applications may extend far beyond from tracking bitcoin-like cryptocurrency transactions to other financial transactions. Imagine applying blockchains to digital content and copyright, real estate and contract management. It can be used to track almost any transactional or property records.
Is the regulator over-regulating?
But bitcoin is getting bad publicity locally. Earlier this year a bitcoin trading portal reportedly scammed 3,000 local investors for as much as HK$3 billion. Although there was no evidence that any bitcoin was traded, the Secretary for Financial Services and Treasury was compelled to relentlessly issue a warning. The statement noted “the high risks involved in exchanging, trading or holding such kind of virtual commodities for speculative purposes.”
Such volatile regulations raise concerns among budding Fintech entrepreneurs. They can’t help but ask the question–should I stay or should I go? On one hand, they long for legal certainty and regulatory clarity. At the same time, they understand that rushing into new laws will be futile, as technologies will quickly render such regulations obsolete. As technology rapidly advances and becomes more complex, it is inevitable that laws will lag behind even more.
So what can be done? The roundtable attendees urge more discussions and engagements with stakeholders and policy-makers. This can help actively explain the technological implications to the government and especially law enforcement agencies.
In return, the government can start sending clear signals to the Fintech market that their innovations are welcomed and supported. The government may also explore the use of blockchain-related technologies for taxation, fraud and crime detection, as part of its smarter government initiatives.
What the government should not be doing is to take such kneejerk reactions and drive heavy-handed enforcement at the slightest sign of a problem. Some bitcoin regulations in New York are already driving many startups away from this top financial city.
But today’s biggest challenge for our Fintech startups, ironically, is access to local banking services. Many banks refuse to service the Fintech startups, claiming that their business models are risky, unstable or volatile. Entrepreneurs are facing similar problems across the world from the US, Australia and Hong Kong. With the lack of availability to close transactions in trusted environments, they are forced to approach other less secure and regulated environments, hence setting off a vicious cycle.
HK lacks payment options
While the Fintech startup community is contemplating its future, traditional banking players find themselves busy fending off market and regulators’ doubts towards the new format of digital payment.
A recent commentary in the People’s Daily Newspaper cited Hong Kong’s Octopus card as outdated and falling behind other digital payments in China like Alipay and WeChat Wallet. The commentator concluded that Hong Kong’s stagnant development of digital payment is a result of its deteriorating political environment.
While I agree with the comment about Octopus card, the article’s conclusion was not well substantiated. Hong Kong has a different market scale and regulatory environment. The Chinese market is not only massive in size, as compared to Hong Kong, it is also free from the baggage of different technology and regulatory legacy. Moreover, in China, one may well explore any new business model that is not explicitly banned–often at the expense of safety or consumer protection.
On the contrary, Hong Kong customers and regulators have much higher expectations in privacy and consumer protection. A simple example is the public outcry a couple of weeks ago, when the Hong Kong Monetary Authority (HKMA) ordered banks to stop issuing credit cards with the contactless payment function after discovering a security loophole in the NFC readers. HKMA stated these NFC readers enable simple downloadable mobile apps to access the cardholders’ sensitive information.
Security VS Innovation
This is where a critical balance is required between protecting customers and nurturing innovation. Authorities should resist the temptation to over-regulate and provide ample room for Fintech startups to create new ideas. But at the same time, they should stay agile and make regulatory adjustments when necessary. Unlike the highly controlled economy in China, Hong Kong is one of the world’s freest economies and the government should not pick winners and protect specific industry players.
This is the model that the UK has adopted lately. It has allowed the country to boost its position in the Global Innovation Index to #2 this year, from being #10 in 2011. London is rising to be a leading Fintech hub and becoming a good role model for Hong Kong.