Risks associated with virtual commodities
Virtual commodities such as bitcoins have been gaining traction globally due to their highly speculative nature. The recent closure of an overseas bitcoin exchange platform has further alerted consumers and investors the potential risks associated with bitcoins. The Hong Kong Government has also issued a risk warning to the public on virtual commodities in March 2014. These risks include but not limited to the following aspects:
Risk of significant monetary loss
Virtual commodities such as bitcoins are neither “currency” nor legal tender in Hong Kong. The value of virtual commodities is not backed by any physical items or supported by the issuers; and there is no guarantee of their convertibility into currency in the real economy. Further, the price of virtual commodities may be highly volatile due to various speculative activities. Consumers who deal with virtual commodities may have to bear significant losses.
If a virtual commodity collapses or its associated exchange platform ceases to operate, consumers may not be able to obtain a refund of their monies. Also, virtual commodities are not securities, consumers should note that they will not have the same protection of the securities investors under the Securities and Futures Ordinance. In addition, virtual commodity exchange platforms are not banks; if such platforms fail, there is no specific measure in place to protect consumers’ deposits.
Risks of money-laundering
Although the transactions of virtual commodities may be made public, the identities of the trading parties are not. Since these transactions are largely untraceable, virtual commodities may be misused for criminal activities, including money laundering or other scams such as Ponzi Scheme or even terrorist financing. If the trading transactions are deemed to be engaged in criminal activities, law enforcement agencies may decide to close the relevant exchange platforms as necessary, and prohibit the access of funds that these platforms are holding for consumers.
Recently, the Government has also reminded financial institutions, virtual commodity dealers/ operators, or individuals their statutory duty to report suspicious transactions to the Joint Financial Intelligence Unit, should they find any suspicious activities in relation to money laundering or terrorist financing, regardless of whether virtual commodities are involved.
Risks of cyber-crime
According to the risk warning issued by the Government, the Police received about 20 complaints on investment scams, online deception, online blackmail and unauthorised access to computers in relation to the trading or storage of virtual commodities in the past 12 months. Consumers or businesses dealing in virtual commodities may expose themselves to cyber-crime risks and therefore should exercise extra caution.
To conclude, consumers should exercise vigilance and consideration when deciding to use, convert, trade, invest in or hold virtual commodities. As golden rule, you should not invest in any investment products or scheme that you do not know or understand. Always remember to know the risks, understand your responsibilities and think before you invest.