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Hong Kong Journal of Legal Studies – Volume 9 (2015)
Volume 9
Selected and edited by
Lung Yat Cheung Sam Wong Emily Ling Tiffany Tam
Joshua Chan Tiffany Wu Randa Leung Eldon Chan
Arthur Chan Allan Wan Cecilia Choi Natalie Jennifer Chan
Kwan Ping Kan Johnny Han Pak Hei Li Rosa Lee
Patrick Jiang Erica Li Bryan Wan Angel Cheng
Jonathan Ng Marius Chan Peter Lau Koe Cheng
Jane Li Wilson Lui Jonathan Lam
Hong Kong Journal of Legal Studies
Address: Room 403, Cheng Yu Tung Tower, Centennial Campus, The University
of Hong Kong, Pokfulam Road, Hong Kong
This publication may be cited as (2015) 9 HKJLS
Editorial arrangement © Hong Kong Journal of Legal Studies 2015
Individual articles © the several contributors 2015
Cover design © Bryan Wan 2015
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, without the prior
permission in writing of the author(s) concerned and the Hong Kong Journal of
Legal Studies, or as expressly permitted by law, or under terms agreed with the
appropriate reprographics rights organisation. Enquiries concerning reproduction
outside the scope of the above should be sent to the Editorial Board of the Hong
Kong Journal of Studies, at the address above.
Foreword by Professor Michael Hor
The Tree That Was Not Meant to Be - The Quistclose Trust
Moving on from the Twinsectra Model and Why It May
Never Be an Established Transactional Arrangement
Arthur Chan
A Comparative Analysis of Bitcoin and Other
Decentralised Virtual Currencies: Legal Regulation in the
People’s Republic of China, Canada, and the United States
Matthew P. Ponsford
From Paper Promises to Real Remedies: the Need for the
South African Constitutional Court to Adopt Structural
Interdicts in Socio-economic Rights Cases
Emily Ling
Revisiting Kong Yunming: Enforcing Social Welfare Right
for People in Need
Harry Hey Chan
The Umbrella Movement: Language and Power
Josephine Wong
Televising Hong Kong Courts: a Study on Its Legitimacy
and Practicability
Tze Chi Ho
The lawyer has two skills - the spoken word and the written
word. Of the written word, the crown jewel of legal academia is the law
journal article. Good articles identify a real societal problem, describe
how the existing law governs the area, and then provide suggestions on
how the law should be developed or reformed to deal better with the
problem. Great articles do all that so well that the collective conscience is
stirred and legislatures and judges are spurred on to effect the desired
changes. Often the real world effects of academic articles are not direct.
Yet they push new ideas and perspectives into the marketplace of
knowledge, only to be taken from the shelf sometime in the future when
it’s time has come.
Since 1994 the student body of the Law Faculty of the University
of Hong Kong has worked to produce an annual issue of the Hong Kong
Journal of Legal Studies, a journal run and written by students, and a
publication which has become a provider of good and great articles to
Hong Kong and to the world. In this 2015 issue, you will find
contemporary and pressing problems and cutting edge perspectives - from
regulation of virtual currencies to the enforcement of socio-economic
rights, and from a semantic analysis of the Umbrella Movement to the
case for the televising of court proceedings. Exciting stuff. Enjoy!
Professor Michael Hor
Dean, Faculty of Law
The University of Hong Kong
2015 is a special year for the Hong Kong Journal of Legal
Studies as it celebrates its twentieth birthday!
The Journal started off under the name of the Hong Kong
Student Law Review, and has remained the only academic law journal
fully edited, managed and published by students in Hong Kong. Since its
establishment, the Journal has provided a platform for law students to
present their academic research endeavours and discuss legal issues in a
professional manner.
Serving as an editor for the past years and judging from the
article submissions we have received, we observe that there is a trend of
the broadening of legal interest among law students, and their growing
awareness in multi-jurisdictional and global issues. Although this volume
is not a particularly thick one, it covers topics which are most current and
inspiring, including: the Umbrella Movement; Bitcoin regulation;
Quistclose trusts; the protection of socio-economic rights in South Africa;
the right to social welfare in Hong Kong; and the televising of court
We take this opportunity to thank all who have made this volume
a huge success.
First of all, we are most grateful to our senior editors, Joshua
Chan, Tiffany Tam, Emily Ling and Tiffany Wu for their excellent work
throughout the year. Their dedication to the Journal has enabled our work
to progress smoothly, and their comments have always been insightful
and constructive. We must also give a round of applause to our team of
associate editors for contributing to the Journal with professionalism and
passion. Thank you for bearing with us especially when working on rather
mundane tasks.
We would also like to thank all past authors for their contribution
to the Journal and their consent for allowing the articles to be placed on
HeinOnline, the world’s largest image-based legal research database. This
surely boosts the readership base of the Journal, and is a milestone for the
Journal in the digital era.
Before we conclude this Preface, we would like to express our
gratitude to our new Dean, Professor Michael Hor, who has kindly written
the Foreword for this volume. Thanks must also be given to the Faculty of
Law of the University of Hong Kong and our generous patrons for their
continual support throughout the years.
Yat Cheung Lung and Sam Wong
A Comparative Analysis of Bitcoin and Other DVCs
Matthew P. Ponsford*
Bitcoin, also known as a decentralized virtual currency (DVC),
is regulated differently in the People’s Republic of China (PRC),
Canada, and the United States, and represents a vastly
underdeveloped area of the law. No country has currently
backed Bitcoin. Launched in 2009, and founded by Satoshi
Nakamoto, Bitcoin is a ‘decentralized peer-to-peer virtual
currency.’ Other virtual currencies include Litecoin, Namecoin,
Auroracoin, Peercoin, and Dogecoin – about 500 varieties in
total – but this research study primarily focuses on Bitcoin.
This paper serves as a comparative analysis to help discern how
these respective countries classify Bitcoin (e.g., a virtual object,
currency, or potential security), and how three unique
jurisdictions regulate, or intend to regulate, DVCs. Bitcoin is
identified as a ‘currency,’ throughout the paper, but the
classification is heavily contested. Questions for analyses
include: are there appropriate existing legal frameworks to
regulate Bitcoin? What securities regulation challenges does
Bitcoin pose? What are the consumer and investor protection
concerns associated with Bitcoin compared to traditional
financial exchanges? What are the cross-jurisdictional
challenges of virtual currency transactions that operate over the
Internet (e.g., money laundering, or fraudulent activities)?
Research incorporates securities commission reports, social and
political commentary from secondary sources, relevant
jurisprudence and legislation. Findings help situate the current
climate of Bitcoin globally, and assess how its regulation differs
relative to technological, economic, social, financial, and
political forces.
Hong Kong Journal of Legal Studies
(2015) Vol 9
Bitcoin, also known as a decentralized virtual currency (DVC), 1 is
regulated differently in the People’s Republic of China (PRC), Canada,
and the United States, and represents a vastly underdeveloped area of the
law. No country has currently backed Bitcoin. Launched in 2009, and
founded by Satoshi Nakamoto,2 Bitcoin is a ‘decentralized peer-to-peer
virtual currency.’3 Other virtual currencies include Litecoin, Namecoin,
Auroracoin, Peercoin, and Dogecoin – about 500 varieties in total – but
this research study primarily focuses on Bitcoin.4
This paper serves as a comparative analysis to help discern how
these respective countries classify Bitcoin (eg a virtual object, currency,
or potential security), and how three unique jurisdictions regulate, or
intend to regulate, DVCs. Bitcoin is identified as a ‘currency’ throughout
Matthew P. Ponsford is currently an LL.M. (Master of Laws) Candidate at McGill
University’s Faculty of Law in Montréal, Québec, Canada. Previously he worked
with a global law firm. He holds a J.D. (Juris Doctor) from the University of
Ottawa/Université d’Ottawa in Ottawa, Ontario, Canada and completed an
exchange at the University of Hong Kong’s Faculty of Law. He also holds a B.Sc.
(Bachelor of Science, Distinction) from Queen’s University in Kingston, Ontario,
Canada, where he studied as a Queen’s Chancellor’s Scholar and Millennium
Excellence Award National Laureate (awarded by the Government of Canada). He
is the recipient of several awards and honours, including the Governor General of
Canada’s Bronze Academic Medal and the Nova Scotia Lieutenant Governor’s
Medal. He is a member of the Canadian Bar Association and the Ontario Bar
Association. A sincere thank you is extended to the entire HKJLS editorial team for
their feedback, revisions, and professionalism.
Joseph Cook, ‘Bitcoin: Technological Innovation or Emerging Threat?’ (2014)
30(3) John Marshall Journal of Information Technology & Privacy Law 535, 536.
Austin Hill, Bitcoin: Is Cryptocurrency Viable? (CMC Thesis, Claremont McKenna
College, 2014) 1-2.
James Vincent, ‘What is Bitcoin? A quick guide to the virtual currency, how it
works, and its possible future’ (The Independent, 22 April 2014)
accessed 18 May 2015.
United States Government Accountability Office (USGAO), Report to the
Committee on Homeland Security and Governmental Affairs, U.S. Senate, Virtual
Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection
Challenges (May 2014) 10. The total value of each of these additional virtual
currencies was estimated at less than USD$400 million.
A Comparative Analysis of Bitcoin and Other DVCs
the paper, but the classification is heavily contested. Questions for
analyses include: Are there appropriate existing legal frameworks to
regulate Bitcoin? What securities regulation challenges does Bitcoin
pose? What are the consumer and investor protection concerns associated
with Bitcoin compared to traditional financial exchanges? What are the
cross-jurisdictional challenges of virtual currency transactions that operate
over the Internet (eg money laundering, or fraudulent activities)?
The paper begins with an overview of the regulation of Bitcoin
in the People’s Republic of China, including new rules for commercial
banks. Next, Canada’s regulation is highlighted, including new legislation
(Bill C-31) that will regulate Bitcoin as a money services business. The
United States is the final jurisdiction analysed, which includes discussion
of the infamous Silk Road website, and the role of Bitcoin as in-kind
contributions in the electoral process. Finally, Canada and the US are the
primary jurisdictions used in a comprehensive and comparative discussion
related to money laundering, criminal activity, and terrorist financing, and
the European Commission and European Union are discussed in the
context of attempts toward the international coordination of the regulation
of DVCs. Research incorporates securities commission reports, social and
political commentary from secondary sources, relevant jurisprudence, and
legislation. Findings help situate the current climate of Bitcoin globally,
and assess how its regulation differs relative to technological, economic,
social, financial, and political forces.
There are two types of e-money: one denominated in a national currency,
such as PayPal balances and pre-loaded store-value credit cards (eg
MasterCard or Visa), or the ubiquitous Octopus card in Hong Kong, all
managed by a third party. The second, cryptocurrency (eg Bitcoin), is not
denominated by any national currency.5 Transactions also occur without
Carolyn Wilkins, ‘Money in a Digital World’ (Speech delivered by the Senior
Deputy Governor of the Bank of Canada at Wilfrid Laurier University, Waterloo,
Ontario, 13 November 2014) <>
accessed 18 May 2015.
Hong Kong Journal of Legal Studies
(2015) Vol 9
validation from a third party.6 As of August 2014, there were only 21
million Bitcoins in the world; 12 million were in circulation. 7 One
inherent risk is the volatile fluctuation of Bitcoin, which is ten times more
volatile than typical currencies.8 For instance, in 2013 price per Bitcoin
went from USD$13 to USD$1000, and as of April 2014, the price was
around USD$300, with a total estimated worth of USD$3.5 billion. 9
Bitcoin’s price fluctuates rapidly, and a limited population owns the vast
majority of the currency: estimates suggest 47 people own 30% of all
Bitcoins. 10 A May 2014 report estimated 12.6 million Bitcoins in
circulation with an exchange rate of USD$458 each, for a total value of
USD$5.6 billion.11
In addition to its speculative value, there remains debate if
Bitcoin is a currency at all. No central authority controls Bitcoin, and
there are currently no transaction fees during the payment process.
Computer experts use the blockchain method of verifying transactions in
the absence of a central authority. Trades tend to be secure, but the
storage of Bitcoin is not, posing concerns if there are valid securities
interests in the digital currency.12 For instance, 740,000 stored Bitcoins
were lost on Mt. Gox (a Japanese Bitcoin exchange system). A Bitcoin
hacking incident also occurred in Edmonton, Alberta, Canada (March
2014), when Flexcoin, a Bitcoin bank, was robbed of roughly
USD$654,000 worth of currency. Flexcoin subsequently announced it
was shutting down.13
Generally, virtual currencies raise larger consumer protection
issues, especially because of greater anonymity in Bitcoin and other
Vincent (n 3).
Sandra Appel, ‘Can you take a security interest in bitcoin?’ (Davis LLP Banking &
<> accessed 18 May 2015.
Vincent (n 3).
Hill (n 2) 30-33.
USGAO Report 2014 (n 4) 9.
Appel (n 8) 1.
Armina Ligaya, ‘After Alberta’s Flexcoin, Mt. Gox hacked, bitcoin businesses face
sting of free-wheeling ways’ (Financial Post, 5 March 2014)
<> accessed 18 May
A Comparative Analysis of Bitcoin and Other DVCs
virtual currency transactions as compared to traditional financial
exchanges.14 A May 2014 report reiterated concerns:
Because peer-to-peer bitcoin transactions do not require
the disclosure of information about a user’s identity,
they give participants some degree of anonymity. In
addition, computer network communication can be
encrypted and anonymized by software to further hide
the identity of the parties in transactions.15
Note transactions are not perfectly anonymous—sometimes
referred to as ‘pseudonymous’—because the time and amount of each
transaction is recorded in the blockchain. 16 The US Department of
Homeland Security (including the Secret Service), the Department of
Justice, and the Securities Exchange Commission (SEC), have paid
particular attention to these currencies because of potential money
laundering activity, and cross-border criminal financing. 17 Other
associated issues with Bitcoin include: difficulty in reversing transactions,
vulnerability of virtual wallets (including irrecoverable theft),18 lengthy
time to process transactions (requiring Bitcoin validation of the
blockchain sequence), computer hacking of the private component of the
blockchain, and potential fraud where consumers are promised a high per
cent interest rate of return on a Bitcoin investment.
In the US, SEC enforcement extends to virtual-currency-related
securities transactions which require companies offering and selling
virtual currencies, such as Bitcoin, to register an offering with the SEC or
qualify for registration exemption. On the other hand, tracking money
laundering and other criminal activity is also challenging. The increased
anonymity of Bitcoin and other virtual currency transactions means no
personally identifiable information is disclosed prior to, during, or
following a transaction.19 Consumer and investor protection is another
risk. Many users are unaware of the dangers, which include: (1) lack of
bank involvement (eg no Canada Deposit Insurance protections as per
most banks); (2) limits on recourse (ie no consumer liability for
USGAO Report 2014 (n 4) 1.
ibid 6.
ibid 11.
Hill (n 2) 10.
ibid 21.
Hong Kong Journal of Legal Studies
(2015) Vol 9
fraudulent activity as per credit and debit cards); and (3) volatile prices of
virtual currencies.
The SEC’s Office of Investor Education and Advocacy has
issued two investor alerts on virtual currencies.20 The agency has started
to review a registration statement from a company looking to conduct a
public offering of virtual-currency-related securities. 21 In Canada, an
internal Finance Department memo also surfaced, which warned: ‘Virtual
currencies such as Bitcoin have been criticised for their potential to fund
illicit activity, such as money laundering and terrorist financing.’22 The
memo was addressed to Jim Flaherty, the former Minister of Finance.
Although Bitcoin transactions will align with current anti-money
laundering laws, containing a duty to report suspicious activity, Canadian
regulation will be limited to ensure innovative development.23 Presently,
the Bank of Canada considers Bitcoin and other cryptocurrencies an
investment product and not money. The Canada Revenue Agency also
considers cryptocurrencies a commodity that suggests buying and selling
Bitcoin is taxable income. Concerns were raised again recently (13
November 2014) in a speech from Carolyn Wilkins, Senior Deputy
Governor of the Bank of Canada, in which she outlined several
jurisdictions’ plans for developing a new legal framework:
Canada has introduced legislation to require
cryptocurrencies to register and to report suspicious
transactions that may be linked to money laundering
and terrorist financing. Regulators in the state of New
York are proposing to issue a ‘BitLicense’ to protect
consumers, prevent money laundering, and enforce
cyber security. Some countries, like China, have ruled
that financial institutions cannot handle any Bitcoin
US Securities and Exchange Commission, ‘Investor Alert: Bitcoin and Other
Virtual Currency-Related Investments’ (7 May 2014) <> accessed 18 May 2015.
USGAO Report 2014 (n 4) 29.
Jim Bronskill, ‘Internal Finance memo warns of potential for Bitcoin related crime’
(Investment Executive, 29 July 2014) <> accessed 18 May
Wilkins (n 5).
A Comparative Analysis of Bitcoin and Other DVCs
Globally, it is estimated over 2.5 billion people lack access to
bank accounts. Cryptocurrencies offer these individuals a means to
process transactions and micropayments. This convenience and
innovation improves global socioeconomic equality, and narrows the
digital divide, but digital currencies also pose many legal challenges,
including cybercrime.
Before analysing Bitcoin regulation or deregulation in three country
examples, a chart below summarises several regulatory and tax
management approaches:25
China (PRC)
United States
China is currently the second-largest economy in the world.
China initially attempted to regulate digital currencies, including Q coin, a
currency which originated from an online video game and transitioned to
real-world exchange of goods and services. 26 Later China issued a
complete ban in the wake of the popularity arising from Q coin use.27
Most recently, Bitcoins remained outlawed and the ban was extended to
Bitcoin transactions processed through financial institutions and third
parties.28 The People’s Bank of China does not provide Bitcoin with any
Andrew B Macurak, ‘Regulating Bitcoin’ (1 April 2014) 20-21
accessed 18 May 2015.
Cook (n 1) 560-561.
Wu Yiyao and Gao Changxin, ‘Banks not allowed to use Bitcoin’ (China Daily
<> accessed 18 May 2015.
Cook (n 1) 560-561.
Hong Kong Journal of Legal Studies
(2015) Vol 9
legal status, refuses to recognise Bitcoin use as a currency, and remains
concerned Bitcoin is not protected by a central authority. Before the ban,
China accounted for the most Bitcoin exchanges, but now comprises only
7% of all transactions.29 Alibaba has also complied with the ban on DVCs
in January 2014.30 Even though the actions of the Chinese government
substantially curbed the worldwide virtual currency base,31 shutting down
Bitcoin use entirely has proved difficult.
China is lagging behind other jurisdictions that are taxing Bitcoin
exchanges without a wide scale ban. China is missing the opportunity to
help develop and control a rapidly developing area of the law some have
dubbed ‘smart contracts’.32 This concept refers to written virtual script, or
the blockchain, of the Bitcoin network. As a condition to validating a
transaction, the script is computed, read, and verified—an emerging and
developing area of information technology and contract law. The
blockchain history is also stored, which reduces litigation and facilitates
any necessary dispute resolution.33
The strict outlawing of Bitcoin in China has also created large
and volatile Bitcoin price fluctuations in other jurisdictions and markets.
The banning of Bitcoin has created heightened scepticism that influences
the value of Bitcoins globally. 34 For example, in October 2013, an
announcement that Baidu, a large online shopping platform in China,
would accept Bitcoin payment created a large surge in Bitcoin value; two
months later, in December 2013, the Chinese government banned Bitcoin
payments, which conversely saw a huge drop in value.35 In other words,
the US Bitcoin market valuation is directly correlated to the Chinese
Bitcoin regulatory regime. It is suggested that new laws, regulations, and
policies be devised to meet the demands of the innovative technology of
ibid 565.
Hill (n 2) 29.
ibid 37-38.
ibid 38.
PH Farmer Jr, ‘Speculative Tech: The Bitcoin Legal Quagmire & the Need for
Legal Innovation’ (2014) 9(1) Journal of Business & Technology Law 85, 104-105.
Ladislav Kristoufek, ‘What are the main drivers of the Bitcoin price? Evidence
from wavelet coherence analysis’ (2014) Institute of Economic Studies 11
<> accessed 18 May 2015.
Farmer (n 34) 105.
A Comparative Analysis of Bitcoin and Other DVCs
One criticism of China’s strict crackdown on Bitcoin is the
state’s desire to control freedom of speech via the Internet. Bitcoin users
who are also bloggers, outspoken activists, or ‘revolutionaries’ can
sometimes use Bitcoin as a means to fund web publishing or coordinated
message broadcasting. 37 This new technology thus protects users’
identities while challenging the state’s policies and laws. In other words,
dissidents have found Bitcoin payments convenient and safe from the
‘Internet police’ when voicing anti-government views. 38 WordPress, a
popular web-publishing platform hosting sixty million blogs, has recently
announced acceptance of Bitcoin payments. This allows Chinese citizens
challenging authorities to protect their identity via a secure payment
method. However, the Chinese government has quickly adapted to these
new regulatory and tracking challenges. The government is improving
and prioritizing its oversight of websites utilising Bitcoin as a payment
The neutral position of the People’s Bank of China related to
Bitcoin has quickly become hostile, with the Central Bank threatening to
‘censure’ banks that do not cooperate with requests to crackdown on
Bitcoin. Strict regulatory controls have also created a turbulent and
contentious relationship between the Central Bank and the country’s top
five financial institutions. After the Bitcoin ban, Industrial & Commercial
Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of
China Ltd, Bank of China Ltd, and Bank of Communications Co Ltd
allowed Bitcoin accounts in spite of the government’s previous
warnings. 40 A May 2014 meeting coordinated by the Central Bank
scolded senior executives of the big-five banks for their lack of oversight
and cooperation. The banks were instructed to setup special groups to
monitor potential Bitcoin account transactions. According to The Wall
Street Journal, a notice sent to commercial banks on December 4, 2013
[…] the People’s Bank of China said that domestic
financial institutions couldn’t conduct settlement or
Jonathan Turpin, ‘Bitcoin: The Economic Case for a Global, Virtual Currency
Operating in an Unexplored Legal Framework’ (2014) 21(1) Ind J Global Legal
Stud 335, 344.
ibid 360.
ibid 363-364.
Grace Zhu, ‘China Central Bank Warns Banks on Bitcoin’ (The Wall Street
62> accessed 18 May 2015.
Hong Kong Journal of Legal Studies
(2015) Vol 9
payments related to bitcoin. It also barred trust
companies and fund-management firms from making
bitcoin-related investments and advised insurers not to
insure bitcoins.41
Commercial banks were also instructed to notify clients by 10
May 2014 of the new Bitcoin prohibitions. Despite these warnings, digital
currency exchange companies are already identifying creative avenues to
circumvent the government’s strict regulations. One example is BTC
China’s installation of a Bitcoin ATM in Shanghai and the company’s
launch of an online buy-and-sell app. BTC’s ATM is not connected to
China’s commercial banks.42
Although financial institutions are strictly forbidden in engaging
with Bitcoin, as of June 2014, no Chinese laws explicitly state that a
citizen is unable to own Bitcoin.43 The Chinese government’s conflicting
positions has caused great frustration and confusion for Bitcoin users both
within and outside the country. For instance, on 3 December 2013, the
People’s Bank of China defined Bitcoin as a ‘virtual good.’ Financial and
payment companies, as well as third-party processors, were forbidden
from supporting Bitcoin. Bitcoin exchanges were also required to register
with the Ministry of Industry and Information Technology. In addition to
the Ministry of Industry and Information Technology, the December Bank
Notice [2013] No. 289 was jointly released by the People’s Bank of
China, China Banking Regulatory Commission, China Securities
Regulatory Commission, and the China Insurance Regulatory
Commission. The statement read (in part):
It is required that, at this stage, financial and payment
institutions may not use Bitcoin pricing for products or
services, may not buy or sell Bitcoins, may not act as a
central counterparty in Bitcoin trading, may not offer
insurance products associated with Bitcoin, may not
provide direct or indirect Bitcoin-related services to
customers, including: registering, trading, settling,
clearing or other services; accepting Bitcoin or use of
Bitcoin as a clearing tool; trading Bitcoin with CNY or
Armand Tanzarian, ‘Legal Basics: Bitcoin in China’ (CoinTelegraph, 10 June
accessed 18 May 2015.
A Comparative Analysis of Bitcoin and Other DVCs
foreign Bitcoin-related financial products; and using
Bitcoin as a means of investment for trusts and funds.44
Websites serving as Bitcoin trading platforms were also
instructed to register with the Telecommunications Bureau, in accordance
with the Telecommunications Regulations of the People’s Republic of
China and the Internet Information Services Managing Guidelines, and to
comply with PRC’s Anti-Money Laundering Law.45 A spokesperson for
the People’s Bank of China commented on the possibility of additional
regulatory measures, stating (in part):
[…] ordinary people have the freedom to participate [in
buying and selling Bitcoin], provided they assume the
risks themselves. Next, the People’s Bank will work
with the relevant ministries to supervise the financial
institutions, payment institutions and websites that
provided Bitcoin registration, trading and other services
[…] the People’s Bank will continue to pay close
attention to the movements of Bitcoin and associated
risks […]46
On 31 January 2014, BTC China, the largest global Bitcoin
exchange, continued to accept yuan deposits. Later, on 21 March 2014,
following many rumours circulating in the media, all banks were
instructed to close Bitcoin exchanges.
Outlawing Bitcoin entirely, as China has rapidly done, is not a
recommended approach for three reasons.47 First, the vast majority of
countries globally have not made Bitcoin illegal through legal regimes.
BTC China, ‘The People’s Bank of China and Five Associated Ministries Notice:
“Prevention of Risks Associated with Bitcoin”’ Bank Notice [2013] No 289 (3
December 2013) <> accessed 18 May
ibid. The Notice also instructed: ‘In order to prevent the use of Bitcoin and other
“virtual currencies” for use in excessive speculation, posing a risk to the public
interest and the legal status of the Renminbi, “Notice” requires that financial
institutions and payment institutions should, in their daily work, employ the concept
of proper money, focus on strengthening public knowledge of currency, maintain a
proper understanding of currency and of virtual goods and commodities, practice
rational investment, reasonably limit investment risk, safeguard individual property,
and other concepts included in financial literacy activities, and guide the public to
establish a firm understanding of concepts related to currencies and investment.’
Turpin (n 37) 367.
Hong Kong Journal of Legal Studies
(2015) Vol 9
This is important because in order for each country to participate in the
global economy, micropayments must be made as widely available as
possible. For instance, citizens residing in developing countries are
ensured access to banking services through Bitcoin and other DVCs,
which has various socio-economic advantages, including access to the
marketplace and the expansion of local business practices. Second, there
are significant economic benefits to regulating Bitcoin use for both the
financial market and consumers. This includes innovations in investing,
business practices, banking, and retail services, which would not occur in
the absence of DVCs. Consumers benefit from alternative forms of
payment such as Bitcoin processing at in-store cash registers, albeit
lengthy transaction times remain a concern. The financial market and
economy also improves through tax revenues depending on the
jurisdiction. For example, the US taxes Bitcoin as a commodity, and
Canada and China tax Bitcoin as well. Third, the Bitcoin network is very
difficult to target, and most governments, including China, do not have
the capability to mitigate this challenge. Outlawing DVCs is not the most
effective approach to combating potential crime associated with this new
technology because Bitcoin will become both less understood and driven
underground, further supporting and contributing to problems associated
with illicit activities.
Legislation can assist the Chinese government in regulating
Bitcoin without the need to outlaw DVCs entirely. Existing legal
frameworks could also be adapted to control new and rapidly expanding
DVCs without the need to devise new laws. For example, the province of
Québec, Canada, has recently mandated licenses for virtual currency
trading platforms. Licenses are regulated through the Autorité des
marchés financiers (AMF), which amended the Policy Statement to the
Money-Services Business Act.48
It is clear that the Chinese government’s evolving position on
Bitcoin regulation continues to be a very timely and recent development.
In 2015 the government may propose other measures if the current
crackdown is not effective. In the meantime, little information beside the
5 December 2013 news release and 21 March 2014 ban is available to the
public, nor are governments of other countries interested in China’s
regulatory position.
Pete Rizzo, ‘Québec Mandates Bitcoin ATMs, Trading Platforms Obtain Licenses’
(CoinDesk, 13 February 2015) <> accessed 18 May 2015.
A Comparative Analysis of Bitcoin and Other DVCs
As discussed in the introductory remarks, Canada considers Bitcoin more
of a commodity than a currency, and has a similar tax approach to China
before the countrywide ban. The Canadian mint has recently prepared to
test Canada’s own digital currency, coined MintChip.49 In this project,
unlike Bitcoin, the Royal Canadian Mint had the direct support of the
federal government. MintChip creators have lauded the new digital
currency, dubbing the creation of the ‘future of money’, for its potentially
low-cost operations and innovative alternative to traditional currencies.
The need to replace physical coins and bills is reduced. Another
advantage is lower costs for consumers, who pay USD$5 billion per year
in a 3% credit card use fee.50 Additionally, consumers avoid the need for a
bank account or impressive credit score rating. 51 The success of the
MintChip project seems premised on businesses’ and merchants’
acceptance levels of the new digital currency, the public’s perception, and
consumer demand. A major milestone was reached with MintChip’s first
‘proof-of-concept implementation’,52 but the mint has now decided to sell
the business to the private sector.53
Canada was also the first jurisdiction in the world to introduce
concrete legislative measures to regulate Bitcoin under the larger umbrella
of virtual currencies. Bill C-31 legislation received royal assent on 19
John Greenwood, ‘Canadian mint ready to test its own digital money project’
<> accessed 18 May 2015.
Michael Oliveira, ‘Royal Canadian Mint’s digital MintChip passes new milestone’
(The Globe and Mail, 13 January 2014) <> accessed 18 May 2015.
David George-Cosh, ‘Canada Puts Halt to MintChip Plans; Could Sell Digital
(The Wall Street Journal,
<> accessed 18 May 2015.
Hong Kong Journal of Legal Studies
(2015) Vol 9
June 2014, which included sections establishing reporting requirements of
DVCs and Bitcoin, similar to the regulation requirements of other
financial transactions. 54 The new laws regulate Bitcoin as a money
services business, requiring registration with the Financial Transactions
and Reports Analysis Centre of Canada (FINTRAC), suspicious activity
report submission, record keeping, and strict compliance protocols. The
Bitcoin regulations apply to domestic and international Bitcoin operators.
Controversy exists as new reporting requirements may prove onerous and
hinder innovation, especially at a time when the Royal Canadian Mint is
attempting to sell off MintChip for further private-sector development.
The summary of Bill C-31 stated (in part):
Division 19 of Part 6 amends the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act to,
among other things, enhance the client identification,
record keeping and registration requirements for
financial institutions and intermediaries, refer to online
casinos, and extend the application of the Act to persons
and entities that deal in virtual currencies and foreign
money services businesses [emphasis added].55
Legislation that specifically altered the definition of money
services business stated:
(4) If subsection 256(2) comes into force, then on the
latter of January 1, 2015 and the day on which that
subsection comes into force,
‘money services business’ means an entity
(a)(iv) dealing in virtual currencies, as defined by
Other legislative provisions 57 incorporated virtual currency
language, including foreign businesses directing services at a Canadian
Bill C-31, An Act to Implement Certain Provisions of the Budget Tabled in
Parliament on February 11, 2014 and Other Measures, 2nd Session, 41st
Parliament, 2014 (assented to 19 June 2014).
ibid Summary, Part 6, Division 19.
ibid s 244.7(4)(a)(iv).
ibid ss 256(2)(iv), 294(3).
A Comparative Analysis of Bitcoin and Other DVCs
person or entity. Overall, the enacted legislation is a significant
development because: (a) it regulates DVCs as a money services business;
(b) does not specify the meaning of ‘dealing in virtual currencies’; (c)
imposes FINTRAC registration, subsequently requiring an anti-money
laundering regime after successful registration; (d) extends to entities both
inside and outside Canada, or services directed at individuals in Canada
(but does not extend to services directed at entities outside Canada); and
(e) prevents banks from managing money service businesses not
registered with FINTRAC.
77% of all conversions of Bitcoin to a denominated currency are for the
US dollar. Federally, the US does not officially consider Bitcoin a
currency, although a Federal District Court in Texas and the US
Department of Treasury has.58 Thus much regulatory inconsistency exists
amongst states and between state and federal authorities. The country also
has a constitutional guarantee to monopolize the production and
management of its national currency. The trend appears to be defining
Bitcoin as a currency given the wide Internal Revenue Service (IRS) tax
implications associated with its use. 59 Like other jurisdictions, tax
evasion, along with money laundering, and buying and selling
contraband, remain concerns.
The Silk Road website was an infamous case of an online black
market which sold narcotics, forged documents, and other illegal services,
using Bitcoin currency. 60 The US FBI arrested the mastermind and
uncovered almost one million registered users who used approximately
SEC v Shavers, No 4:13-CV-416, 2013 US Dist. LEXIS 110018, 5 (E.D. Tex. 6
August 2013).
Internal Revenue Service, ‘IRS Virtual Currency Guidance: Virtual Currency Is
Treated as Property for US Federal Tax Purposes; General Rules for Property
<> accessed 18 May
Cook (n 1) 557-558.
Hong Kong Journal of Legal Studies
(2015) Vol 9
9.5 million Bitcoins (worth USD$1.2 billion at the time).61 In order to
solve the many complex legal issues associated with Bitcoin, the author of
a recent article suggests outlawing the currency entirely, similar to
China’s approach, and devising a virtual currency regulated by a central
authority. 62 It is estimated over 75% of all Bitcoin-to-US currency
transactions occur through three main Bitcoin exchanges. If those
exchanges were shut down, the volume of transactions would decline
substantially, as experienced in China. Removing intermediaries who
exchange Bitcoins for goods, and prosecuting individuals similar to what
was done to combat illegal music sharing, is also proposed as a viable
solution. Disintermediation also poses significant consumer risks, such as
fraud, in the absence of a functional regulatory legal regime.63
The challenges Bitcoin poses for the US is akin to the case of
A&M Records v Napster Inc,64 where Napster users took advantage of a
decentralized network of users to disseminate illegal, copyrighted works.
The court quickly shutdown the site and found Napster liable for
contributory and vicarious infringement with respect to A&M Records
copyrights, a subsidiary of Universal Music Group. 65 The case was
pivotal because it was the first time copyright law was applied to peer-topeer (P2P) file-sharing services in a significant way. The peer-to-peer
service required certain downloadable software and access to a network
that is similar to accessing Bitcoin’s virtual wallet and address.
Although A&M Records v Napster dealt with intellectual
property rights and Bitcoin involves financial transactions, the
technological architecture is similar: music-sharing users were able to
freely communicate with each other, and upload or download music files
through a centralized system. Similarly, Bitcoin users can disburse or
receive payments to and from other virtual wallets, except the process is
decentralized. Napster had a central authority which made it easier to
track specific users violating copyright agreements. Napster’s
contributory and negligent oversight was also easily detected whereas
Bitcoin operations are more challenging given the currency’s use of
decentralized online networks.
ibid 558.
ibid 559-560.
Isaac Pflaum and Emmeline Hateley, ‘A Bit of a Problem: National and
Extraterritorial Regulation of Virtual Currency in the Age of Financial
Disintermediation’ (2014) 45 Geo J Int’l L 1169, 1193-1194.
A&M Records v Napster Inc, 239 F (3d) 1004 (9th Circuit 2001).
Cook (n 1) 562-563.
A Comparative Analysis of Bitcoin and Other DVCs
Although music and file sharing services have now utilized the
decentralized system post-Napster, a large crackdown ensued and the
most egregious copyright infringers have been prosecuted. Press releases
were also issued to deter illegal behaviour. A similar approach could be
implemented for Bitcoin by investigating intermediaries that facilitate
Bitcoin payment transfers and exchanges despite the absence of a central
authority.66 However, in order for this to be feasible, the US needs to
establish consensus on what constitutes a decentralized virtual currency.
A clear definition should be constructed in order to enforce the ban
through one of the federal agencies.67 In the interim, the US government
has stated those engaging in Bitcoin transactions must comply with the
US Bank Secrecy Act, 1970 (BSA),68 the country’s anti-money laundering
legislation. Similar to Canada’s FINTRAC registration requirements, the
Financial Crimes Enforcement Network (FinCEN) 69 has issued an
interpretive guidance, clarifying the applicability of the BSA to moneyservices businesses.70
Child exploitation may seem a surprising implication of the
prevalence of DVCs, but US authorities and the International Centre for
Missing and Exploited Children (ICMEC) have expressed concern that
the new digital economy, including DVCs, has contributed to the
commercial exchange of sex abuse images, child pornography,71 and sex
and human trafficking.72 DVC payments sometimes facilitate access to
child pornography. The US has also held numerous Congressional
hearings 73 and, in early 2012, the FBI formed the Virtual Currency
Emerging Threats Working Group (VCET). The VCET coordinates and
ibid 563-564.
ibid 564.
Bank Secrecy Act, 1970, 31 USC 310.
US Treasury Department, ‘Application of FinCEN’s Regulations to Persons
Administering, Exchanging, or Using Virtual Currencies’ (18 March 2013)
<> accessed 18
May 2015.
Hill (n 2) 27-28.
Lawrence Trautman, ‘Virtual Currencies: Bitcoin and What Now After Liberty
Reserve, Silk Road, and Mt. Gox?’ (2014) 20 Rich JL & Tech 13, 16.
Stephen Middlebrook and Sarah Jane Hughes, ‘Regulating Cryptocurrencies in the
United States: Current Issues and Future Directions’ (2014) 40(2) Wm Mitchell L
Rev 813, 816.
Matthew Kien-Meng Ly, ‘Coining Bitcoin’s “Legal-Bits”: Examining the
Regulatory Framework for Bitcoin and Virtual Currencies’ (2014) 27 Harv JL &
Tech 587, 605.
Hong Kong Journal of Legal Studies
(2015) Vol 9
helps combat other crimes associated with DVCs across a number of state
and federal government departments, and international law enforcement
Another unexpected implication of Bitcoin’s popular use centres
on the US political process, campaign contributions, and election laws.75
In November 2013, the Federal Election Commission (FEC) originally
released a decision declaring Bitcoins were not considered money and
could not be accepted as campaign contributions.76 Since then, in May
2014, the FEC77 announced Bitcoin contributions could be reported as ‘inkind’ contributions toward political action committees (PACs).78
A FEC memo also provided in-depth legal analysis and strict
reporting requirements for Bitcoin donations, including rules about
receipts, Bitcoin deposits, investments, and refunds.79 Concerns remain
that the use of Bitcoins in the political process could mean certain
donations are untraceable, given the anonymous nature of DVCs. The
FEC allows individuals a maximum donation of USD$100 worth of
Bitcoins per political campaign, the current maximum equivalent to cash
donations. Other in-kind donation limits, in the forms of cheques, bonds,
office supplies, computers, and other types, are much higher.80
Trautman (n 71) 29-31.
Farmer (n 34) 96.
Myles Martin, ‘Alternative Disposition of Advisory Opinion Request 2013-15
(Conservative Action Fund)’ (Federal Election Commission, 25 November 2013)
<> accessed 18
May 2015.
Julian Hattem, ‘FEC allows bitcoins in campaigns’ (The Hill, 8 May 2014)
accessed 18 May 2015.
See also Federal Election Commission, ‘AO 2014-02 (Make Your Laws PAC) –
Draft C’ (7 May 2014), 5 <> accessed 18 May 2015.
Hattem (n 77).
A Comparative Analysis of Bitcoin and Other DVCs
Information technologies such as the Bitcoin exchanges, which facilitate
virtual currency transactions and exchange from Bitcoin to denominated
currencies, have posed unprecedented challenges for law enforcement
personnel. Canada seems to be a leader in this area with the enactment of
Bill C-31.81 After all provisions come into force, DVCs will be considered
money service businesses. This means suspicious financial transactions –
or attempted suspicious transactions – potentially involving money
laundering or terrorist activities, must be reported, irrespective of the
transaction amount. Single transactions involving USD$10,000 or more
must also be reported. Businesses must confirm funding sources from
money transfers sent or received internationally for USD$100,000 or
more, to or from a suspected ‘politically exposed person’ (PEP). PEPs
comprise one of three categories: foreign, domestic, or the head of an
international organization. Money service businesses must complete
regular risk assessments to identify anti-money laundering control
weaknesses and help mitigate those risks and vulnerabilities. A
compliance regime is mandated, including a designated compliance
officer, adequate financial resources and staff, client identification
procedures, terrorist financing and property identification protocols, a
procedure for reviewing the compliance regime, and a comprehensive
record-keeping system.82
The US remains particularly concerned that Bitcoin will pose
added challenges to combating terrorism. The exchange of money via the
Bitcoin network is seen to attract cybercriminals which makes the
detection of illicit funding difficult. 83 If adequate controls are not
implemented, terrorist groups may successfully finance their illegal
operations in the US or elsewhere.84
Bill C-31 (n 54).
Christine Duhaime, ‘Canada implements world’s first national digital currency law;
regulates new financial technology transactions’ (Duhaime Law, 22 June 2014)
<> accessed 18 May 2015.
Jared Kleiman, ‘Beyond the Silk Road: Unregulated Decentralized Virtual
Currencies Continue to Endanger US National Security and Welfare’ (2013) 4(1)
American University National Security Law Brief 59, 74.
ibid 74-75.
Hong Kong Journal of Legal Studies
(2015) Vol 9
Bitcoin and DVCs pose jurisdictional challenges in the context of
transnational crime.85 Law enforcement often faces difficulty in obtaining
customer transaction records. The process is slow even with cooperative
jurisdictions. The personal jurisdiction of defendants accused of illegal
activity associated with DVCs will also continue to present difficulties in
combating this new form of cybercrime.86
The challenges of regulating Bitcoin are larger than the separate
domestic regulations discussed previously in China, Canada, and the US.
In fact, inconsistencies in regulation have posed many challenges for
jurisdictions currently attempting to mitigate regulatory deficiencies. For
example, Germany does not currently require registration for buying,
selling, or exchanging Bitcoin. 87 US regulation through the Treasury
Department and between states means there are state-level inconsistencies
in regulation, which may drive users to possess and exchange Bitcoin in
states with the lowest regulatory burden(s).88 Germany and Canada also
do not collect information about users engaged in Bitcoin transactions,
which means the US cannot benefit from the data nor can other interested
Revenue and taxing implications have also exposed
inconsistencies. For instance, the European Commission and European
Union have not clearly established the legal status of Bitcoin,89 although
the European Central Bank released a preliminary report in October
2012. 90 The European Commission’s E-money Directive does not
Joel Reidenberg, ‘Technology and Internet Jurisdiction’ (2005) 153 U Pa L Rev
ibid 1961-62.
Pflaum and Hateley (n 63) 1195-96.
ibid 1197.
Niels Vandezande, ‘Between Bitcoins and mobile payments: will the European
Commission’s new proposal provide more legal certainty?’ (2014) 22 Int’l JL &
Info Tech 295.
Pflaum and Hateley (n 63) 1200.
A Comparative Analysis of Bitcoin and Other DVCs
encompass Bitcoin currency.91 The United Kingdom issued a Revenue &
Customs Brief on 3 March 2013, outlining levied taxes for Bitcoingenerated income.92 Canada, Germany, and the US seem united with the
UK93 in emphasising Bitcoin transactions are taxable. It is thought that
prosecuting Bitcoin users for tax evasion may be the best and most
effective international approach to combat and regulate DVCs.94
As one scholar stated: ‘the international regulatory landscape for Bitcoin
is a patchwork of inconsistent and incomplete attempts to counter
criminal abuse of the technology.’95 Governments such as China should
not prematurely ban open access technologies like Bitcoin. Jonathan
Zittrain, writing for the Harvard Law Review, states:
Cyberlaw’s challenge ought to be to find ways of
regulating — though not necessarily through direct state
action — which code can and cannot be readily
disseminated and run upon the generative grid of
Internet and PCs, lest consumer sentiment and
preexisting regulatory pressures prematurely and
tragically terminate the grand experiment that is the
Internet today.96
Technological progression and Internet governance has left many
countries conflicted in how best to manage Bitcoin and other DVCs. In
China, Canada, and the US, a growing consensus is that DVCs pose many
economic and criminal regulatory concerns, despite venture capitalist
investments in Bitcoin was expected to total USD$300 million by the end
of 2014. Currently, the US and Canada are the primary investment
platforms. China could once again become a large investment centre for
Bitcoin if the government reverses its decision to outlaw the currency and
Vandezande (n 89) 307.
Pflaum and Hateley (n 63) 1200-01.
Middlebrook and Hughes (n 72) 847.
Thomas Slattery, ‘Taking A Bit out of Crime: Bitcoin and Cross-Border Tax
Evasion’ (2014) 39 Brook J Int’l L 829, 857-860.
Pflaum and Hateley (n 63) 1215.
Jonathan Zittrain, ‘The Generative Internet’ (2006) 119 Harv L Rev 1974, 1979.
Hong Kong Journal of Legal Studies
(2015) Vol 9
instead strategically regulate DVCs. Taking a hostile approach toward
regulation is not recommended since the anonymity of the network poses
challenges in identifying users.97 A creative approach to regulation is
much more effective, which may include the implementation and
regulation of a state’s uniquely owned DVC, such as the now-cancelled
plan to implement MintChip in Canada. DVCs also offer an opportunity
to explore the ‘burgeoning alterative financial sector’, as an ongoing study
in the United Kingdom illustrates.98 Creative regulation of Bitcoin and
DVCs will lower business costs, cut red tape, and enable financial loans
to small companies or individuals. However, tax liability and
enforcement, as well as DVCs introducing competition with national,
centrally regulated currencies, will remain major concerns.
No standard or internationally coordinated framework regulating
DVCs exists, and regulation is unlikely to quickly overcome interjurisdictional challenges. Political, financial, social, and economic forces
in China, Canada, and the US also contribute to the countries’ regulatory
and legal frameworks. The approach taken to regulate Bitcoin and other
DVCs must be tailored to the circumstances and challenges of each
jurisdiction. Unfortunately, today, political agendas can mask otherwise
innovative technological development, under the guise of national
security,99 and attempts to combat money laundering,100 terrorism, and
cybercrime. Reducing anti-money laundering and other criminal activities
Bitcoin technology facilitates will remain a priority. Areas requiring
further knowledge include: potential for ongoing theft of virtual
currencies compared to physical currencies; counterfeiting of Bitcoin and
other DVCs; the possibility of Bitcoin loans; and whether Bitcoin
threatens global currency markets. 101 Over the next decade, a more
coordinated regulatory effort may be necessary, which could include
discussions at the World Economic Forum or the United Nations. The
challenge is striking a balance between developing comprehensive and
effective criminal and financial regulatory regimes and policies, while
limiting impediments to technological innovation and growth.
Turpin (n 37) 367.
Williams James, ‘Britain eyes regulation for virtual currencies’ (Reuters, 6 August
<> accessed 18 May 2015.
Kleiman (n 83).
Danton Bryans, ‘Bitcoin and Money Laundering: Mining for an Effective Solution’
(2014) 89 Ind LJ 441, 447, 455-463.
Trautman (n 71) 83-84.
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