Crypto here to stay, must be regulated: Hong Kong treasury chief

HONG KONG — Hong Kong has decided to let retail investors trade cryptocurrency under its new regulatory regime because "virtual assets are going to stay", the city's minister overseeing financial services said.

Cryptocurrencies have been banned in mainland China since 2021, but the former British colony, which has a separate financial system and regulators, has announced plans to become a major digital asset hub.

From June 1, authorities will begin accepting applications for licenses from cryptocurrency exchanges that will allow them to sell major tokens including bitcoin and ether to individual traders.

"Despite the potential risks involved, (virtual assets) also carries with it fundamental value," Christopher Hui, Hong Kong's secretary for financial services and the treasury, told AFP in an interview.

"So for these positive elements to be harnessed, these activities have to be allowed in a regulated way."

Regulators around the world are examining cryptocurrencies with renewed urgency following the collapse of trading platform FTX last year and other high-profile failures in the sector.

Hong Kong was initially hesitant to allow crypto exchanges to take on retail clients, but Hui acknowledged that there was "considerable interest" in trading.

Asked whether Beijing backed Hong Kong's plans to open up crypto trading, Hui said the finance hub charts its path by following the emerging global consensus.

"Different jurisdictions will adopt the right approach to their own market, and Hong Kong is no exception," he said.

"We are an open market... So while different jurisdictions have different laws and requirements, I think what we should do is based on what we are good at."

The government's pivot toward crypto and fintech coincides with Hong Kong's recent reopening following three years of tough Covid policies that isolated it internationally and drove talent away.

Hong Kong's international business reputation also took a hit as Beijing cracked down on political freedoms after mass democracy protests in 2019.

The promise of fresh crypto exchange regulations has attracted more than 80 enquiries with the city's investment promotion agency, the treasury chief told AFP.

"One thing that has been very obvious is that Hong Kong is back to usual," he said. "We are back to business."

'Right guardrails' 

During a public consultation that ended in March, some crypto firms bemoaned stringent proposals that made compliance potentially costly.

One concession made by regulators was to lower the insurance coverage requirement down to 50 percent for virtual assets held by clients in "cold storage" -- a more secure way of storing crypto offline.

"For technical reasons, of course cold storage presents lesser risk for hacking," Hui said, saying the shift was to reflect risks in a proportional way.

Under the new rules, crypto exchanges must assess a client's risk tolerance and knowledge of cryptocurrencies, and impose risk-exposure limits.

"Investors have to be in the know in terms of what they are going into," Hui said, adding that education is a priority.

But authorities have yet to specify the exact threshold for crypto knowledge needed for a retail investor to trade -- one of several implementation details left up in the air.

Hong Kong's securities regulators will issue guidelines later, Hui said.

Crypto-related scams are a burgeoning problem in Hong Kong, with the city last year recording more than 2,300 such cases with total losses of HK$1.7 billion ($217 million), according to police.

"We understand the risk, we at the same time put in the right guardrails," Hui told AFP.

Agence France-Presse

US regulators warn banks over crypto risks

WASHINGTON — US bank regulators warned Tuesday that crypto assets and exposure present risks to lenders, urging organizations to ensure they manage the dangers.

The joint statement comes after the sudden collapse of cryptocurrency platform FTX -- worth $32 billion before it filed for bankruptcy in November -- which sent chills across the sector.

FTX's disgraced founder Sam Bankman-Fried has since been accused of committing one of the biggest financial frauds in US history, sparking calls for greater oversight.

"It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system," said the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.

They added in a joint statement that events of the past year "have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector."

Banking organizations should be aware of risks such as fraud and scams, along with inaccurate or misleading disclosures, the agencies said.

There is also "significant volatility" in crypto-asset markets, and contagion risk in the sector due to connections between parties -- including through opaque lending, investing or funding.

The watchdogs said they continue to take a "careful and cautious approach" with crypto activities and exposure at banking organizations.

Meanwhile, lenders should "ensure appropriate risk management" such as board oversight and guardrails to identify and manage threats, the statement said.

FTX's implosion was swift following a Nov. 2 media report on ties between it and Alameda, a trading company also controlled by Bankman-Fried.

The report exposed that Alameda's balance sheet was heavily built on the FTT currency -- a token created by FTX with no independent value -- and exposed Bankman-Fried's companies as being dangerously interlinked.

Agence France-Presse

North Korea-tied hackers executed $620 million crypto heist: FBI

WASHINGTON — North Korean-tied hackers were responsible for a $620-million cryptocurrency heist last month targeting players of the popular Axie Infinity game, US authorities said Friday. 

The hack was one of the biggest to hit the crypto world, raising huge questions about security in an industry that only recently burst into the mainstream thanks to celebrity promotions and promises of untold wealth.

Last month's theft from the makers of Axie Infinity, a game where players can earn crypto through game play or trading their avatars, came just weeks after thieves made off with around $320 million in a similar attack.

"Through our investigations we were able to confirm Lazarus Group and APT38, cyber actors associated with (North Korea), are responsible for the theft," the FBI said in a statement.

Lazarus Group gained notoriety in 2014 when it was accused of hacking into Sony Pictures Entertainment as revenge for "The Interview," a satirical film that mocked North Korean leader Kim Jong Un.

North Korea's cyber-program dates back to at least the mid-1990s but has since grown to a 6,000-strong cyber warfare unit, known as Bureau 121, that operates from several countries including Belarus, China, India, Malaysia and Russia, according to a 2020 US military report.

North Korean hackers stole around $400-million worth of cryptocurrency through cyberattacks on digital currency outlets last year, blockchain data platform Chainalysis said in January. 

In the case of the Axie Infinity heist, attackers exploited weaknesses in the set-up put in place by the Vietnam-based firm behind the game, Sky Mavis.

The company had to solve a problem: the ethereum blockchain, where transactions in the ether cryptocurrency are logged, is relatively slow and expensive to use.

To allow Axie Infinity players to buy and sell at speed, the firm created an in-game currency and a sidechain with a bridge to the main ethereum blockchain.

The result was faster and cheaper -- but ultimately less secure.

The attack targeting its blockchain netted 173,600 ether and $25.5 million-worth of stablecoin, a digital asset pegged to the US dollar.

Agence France-Presse

Bitcoin hit with record weekly outflow as rally ebbs: CoinShares data

NEW YORK, United States - Bitcoin posted a record weekly outflow, with overall sentiment on cryptocurrencies turning cautious as the digital asset's searing rally hit a wall, data from digital currency manager CoinShares showed on Monday.

Outflows for bitcoin hit $21 million for the week of April 23, the largest weekly outflow on record. Total weekly inflows for the sector were just $1.3 million, the lowest weekly figure since October 2020.

That said, CoinShares said outflows last week were 0.05 percent of the crypto sector's assets under management, while weekly inflows this year averaged 0.6 percent.

Total assets under management were $54.3 billion as of last week, down from $64.2 billion in mid-April.

"We saw investors shifting funds away from bitcoin amid some idiosyncratic developments last week, prominently including the temporary power outage in mining mecca Xinjiang," said Matt Weller, Global Head of Market Research at Forex.com and City Index.

Amid serious coal mine accidents in China's Xinjiang, Shanxi and Guizhou provinces, the Chinese government directed local coal-based power stations to conduct inspections of security measures. Data centers in Xinjiang, including bitcoin mining farms, had to shut down due to subsequent power cuts, according to media reports.

After hitting a record high just under $65,000 in mid-April, bitcoin has plunged nearly 25 percent. On Monday though, the world's largest cryptocurrency in terms of market capitalization rallied as much as 10 percent and last traded at $54,031, highlighting the asset's extreme volatility.

The second largest cryptocurrency ethereum, meanwhile, showed strong inflows of $34 million. So far this year, inflows were $792 million, or 8 percent of total AUM, reflecting renewed positive sentiment among investors.

"Cryptoasset investors continued to accumulate ethereum as the highly-anticipated July launch of EIP-1559, which will cut the new supply of ETH dramatically, approaches," said Forex.com's Weller, referring to the blockchain's planned upgrade.

Grayscale remains the largest digital currency manager, with $41 billion in assets as of April 23, down from $49.5 billion the previous week. CoinShares, the second biggest and the largest European digital asset manager, oversees about $5.2 billion, slightly down from $5.7 billion in assets as of the mid-April. 

-reuters

Bitcoin slumps 14 percent as pullback from record gathers pace

Bitcoin, the world's biggest cryptocurrency, fell as much as 14 percent to $51,541 on Sunday, reversing most of the big gains it made over the past week.

Bitcoin was last trading down 10 percent at $53,991 as of 1320 GMT, a whopping $12,000 below record highs set on Wednesday. Smaller rival Ether, the coin linked to the ethereum blockchain network, dropped 10% to $2,101.

Data website CoinMarketCap cited blackout in China’s Xinjiang region, which reportedly powers a lot of bitcoin mining, for the selloff.

Luke Sully, CEO at digital asset treasury specialist Ledgermatic, said in an email that people "may have sold on the news of the power outage in China and not the impact it actually had on the network".

"The power outage does expose a fundamental weakness; that although the Bitcoin network is decentralized the mining of it is not," Sully added.

Some widely-followed blockchain analysts on Twitter pointed to a sharp drop in "hash rate" due to the outage.

Hash rate refers to the volatility index that measures the processing capacity of the entire Bitcoin network, and it determines the power required by miners to produce new Bitcoins.

"Typically shocks to hash rate do not cause price drops. A hash rate reduction slows transactions, which ironically makes it harder to move coins to exchanges for sale. The recent price drop is well within the bounds of typical volatility, it is noise not signal," said Edan Yago, co-founder at Bitcoin-based decentralized finance protocol Sovryn.

The retreat in Bitcoin also comes after Turkey's central bank banned the use of cryptocurrencies for purchases on Friday.

Edward Moya, senior market analyst at OANDA, said cryptocurrencies had been ripe for a pullback.

"The market has become overly aggressive and bullish on everything," said Edward Moya. "It could have been any bearish headline that could have triggered this reaction."

Many cryptocurrency markets operate 24/7, setting the stage for price swings at unpredictable hours. Historically, retail and day traders have driven the moves.

Despite the sudden selloff, bitcoin is still up 89% so far in 2021, driven by its mainstream acceptance as an investment and a means of payment, accompanied by the rush of retail cash into stocks, exchange-traded funds and other risky assets.

-reuters