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Hong Kong authorities are gaining experience in disrupting illicit cryptocurrency activities: experts
Experts said the city has accumulated experience in enforcing cryptocurrency laws, to the point that authorities could easily track down money laundering activities using such virtual assets.
Joshua Chu Kiu-wah, a lawyer specializing in technology litigation and cybersecurity, said the focus should be less on new laws and regulations since virtual assets are already covered, and the key is “knowing how to apply existing rules.”
Meanwhile, veteran cryptocurrency investor Louis Li Sze-chung, who is also an advisor to local tech startup association 852Web3, spoke out about the cryptocurrency ransom demand during the foiled kidnapping earlier this month.
After the boy was kidnapped from Tseung Kwan O Plaza shopping mall, his older sister received a ransom demand of 660,000 Tether coins, worth more than HK$5.1 million.
Li said that the stablecoin, also known as USDT, could be easily intercepted.
“USDT is issued by a company that converts U.S. dollars into cryptocurrency. It’s kind of like how Octopus works. You deposit money in exchange for digital currency,” he said.
“When crimes occur, you can ask the company to freeze or even destroy the money deposited in certain accounts.”
Stablecoins are a type of virtual currency whose value is pegged to another currency, fiat money, or a commodity, all managed by a company.
Last November, the Tether platform voluntarily froze $225 million in USDT coins after U.S. intelligence agencies reported that the sum was linked to a human trafficking ring that was running pig slaughter scams, in which victims are defrauded with promises of romance and financial rewards in Southeast Asia.
Tech lawyer Chu said freezing a Tether account could be done in a day, while traditional bank accounts could take months, as the move requires a judge’s approval unless the case requires an emergency court order.
Veteran cryptocurrency investor Louis Li said that suspicious account holders can often be identified when they choose to convert their virtual assets into cash. Photo: Xiaomei Chen
Chu and Li said that suspicious account holders could be identified when they decided to convert their virtual assets into cash.
“This process is likely to involve centralized organizations such as stock exchanges, banks and money exchanges,” Li said.
“Law enforcement can notify these organizations that certain accounts have been involved in criminal activity and ask them to block their accounts when the investments come in.”
Chu added that suspicious cryptocurrency accounts could be flagged on blockchain systems, which means all related “wallets” and exchanges could also be flagged.
“The moment you put a warning in the wallet, for which there are technical ways to do that, the defense of not knowing whether certain assets are contaminated is no longer possible,” he said.
But such options were out of the question when it came to cryptocurrencies traded without intermediaries to block such transactions, experts said, adding that criminals could also launder their proceeds through multiple exchanges.
Cheung To, founder and director of blockchain security firm UDomain, noted that decentralized cryptocurrency exchanges may sometimes refuse to cooperate with law enforcement and share information about their platform users.
“It is very likely that they will not be collaborative, otherwise how could they be decentralized?” he said.
Decentralized cryptocurrencies, such as Bitcoin and Ethereum, do not involve intermediaries in transactions, which means that operators are unable to freeze suspicious accounts or destroy related assets.
Cheung said that complex money laundering chains without central operators also pose obstacles in terms of tracking and blocking such transactions.
In Hong Kong, the regulator Securities and Futures Commission has approved only two cryptocurrency exchanges, OSL and Hashkey, for licenses covering virtual asset trading services for professional and retail investors.
Experts told the Post that if the city wants to crack down on criminal activity using cryptocurrencies, Hong Kong would need more proactive law enforcement and more vigorous civil litigation to solidify existing rules, rather than more regulation.
Cheung said that effective intervention in laundering the proceeds of cyber crime largely depends on swift and dedicated action by law enforcement.
“The police will need to contact very quickly all exchanges and organizations that have been in contact with the suspicious account to send letters or deliver court freezing orders to them,” he said.
He added that such actions must be taken “within hours” of the case being reported.
“I think it really depends on how proactive law enforcement is and how many resources they have,” Cheung said.
Chu, meanwhile, argued that in addition to Hong Kong authorities needing to build up experience in law enforcement through investigations, local courts also need to enforce regulations and consolidate the city’s reputation.
“Only as prosecutors gain experience in trying such cases in court and as judicial precedents accumulate can they demonstrate that their jurisdiction has a regime that is sufficiently mature to deal with newly emerging issues,” he said.