Landmark ruling highlights need for Hong Kong’s crypto regulatory framework

The cryptocurrency industry has, at times, been described as a financial “Wild West”, freewheeling, volatile and resistant to regulation.

But the protection of investors and the development of an attractive environment for virtual assets are not mutually exclusive.

Hong Kong, with its aspirations to become a Web3 business hub, should be setting an example. The city has started work on a regulatory framework, intended to boost investor confidence, and is developing new rules.

When disputes arise, the courts also have an important role to play. Earlier this month, a landmark High Court ruling, described as a world first, took a step towards greater transparency and accountability.

The case concerns a battle over the ownership, management and control of a cryptocurrency finance project involving a decentralised autonomous organisation (DAO) that uses blockchain technology.

Plaintiffs who conceived and set up the project claim they delegated management to employees who then “misappropriated” its business and assets.

This is disputed by the defendants, who argue the ultimate decision-making power lies with purchasers of digital tokens, through voting rights, rather than any individual or entity.

The ownership issue is yet to be decided. But the court ruled, with the trial pending, the defendants must make the platform’s financial accounts available. This will be vital to any assessment of damages and preserves the status quo until the case is decided.

But the judge also referred to the importance of proper financial records being kept. This is fundamental to the running of a sound business and necessary to demystify the opaque nature of blockchain.

The ruling provides clarity and is consistent with the principle that new legal entities in the cryptocurrency field must be open to scrutiny.

As the judge said, the courts have little experience in dealing with disputes of this kind. But as the industry rapidly develops, we can expect more such cases in the future.

The ruling has led to a call for the government to regulate blockchain-based entities as part of ongoing efforts to attract investment and talent in the field.

This must be considered as the city moves forward with other regulatory measures, which include issuing licences for cyber currency platforms and amending laws to regulate stablecoins.

There is a need to strike the right balance between protecting investors and appealing to the industry. The scandal involving the JPEX platform, with more than HK$1 billion (US$128 million) in losses, is still fresh in the minds of Hong Kong people.

The city cannot afford to be complacent as it develops a regulatory framework while pushing ahead with efforts to make Hong Kong a centre for virtual assets.