Hong Kong’s status as Asia’s capital for Bitcoin automatic teller machines (ATMs) could be under fire as the city rethinks its approach to retail access to cryptocurrencies.

In a move to protect the city’s retail investors, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) in January restricted access to financial products that invest directly in digital assets to only professional investors.

See related article: Hong Kong to propose bill to license crypto exchanges

Products such as cryptocurrency spot exchange-traded funds (ETFs), including overseas products, are to be offered only to investors with a portfolio of HK$8 million (US$1 million) and above, the HKMA and the SFC said. 

Cryptocurrency spot markets are “largely unregulated at present” and may present higher risks to investors with less experience and knowledge, the regulators said. Derivatives-based products offered in exchanges specified by the SFC, such as Bitcoin futures ETFs, may still be offered to retail investors, they added. 

Bitcoin City

This could potentially weigh on Bitcoin ATMs in Hong Kong, the city with the highest number of such ATMs per capita in Asia.

While experts say the rapid expansion of Bitcoin ATMs reflects mass-market appeal for cryptocurrencies in Asia, their future is circumspect due to the growing regulatory uncertainty around the region.

“Maybe in the future there will be more Bitcoin ATMs,” 36-year old J. Li told Forkast. (He did not want his first name used.) “But as we move toward more regulation in crypto, especially in Hong Kong and China, these ATMs may become heavily surveilled and regulated,” said the Hong Kong-based cryptocurrency investor, who is working in the online fashion retail business. 

See related article: What lies ahead for crypto regulations in 2022

Hong Kong had 147 of the machines that accept cash deposits to buy crypto held in online wallets, more than double the number from a year ago, according to Coinatmradar

China, having outlawed the trading and mining of cryptocurrency, does not appear on Coinatmradar’s ATM tracker. 

Meanwhile, the central bank of Singapore recently shut down the city-state’s nine crypto ATMs over concern that they might encourage impulsive investments.

Knowing the customer

In February, the government administering Hong Kong released a discussion paper on requiring stronger anti-money laundering and counter-terrorist financing standards on crypto businesses. The paper proposed rules that would require companies to acquire licenses to operate in the region. 

Licensed businesses can provide services to professional investors only, the paper proposed. 

These proposals could become law after being placed before the legislative council in the second quarter.

It is understandable why lawmakers in Hong Kong are getting uncomfortable over the deposit and withdrawal of cryptocurrencies via ATMs. 

Clamping down on corruption and the flight of capital remain priorities for Beijing. 

See related article: Will 2022 be the year of crypto regulation?

Mainland Chinese residents can only convert up to US$50,000 a year in non-yuan denominated currencies (or substitutes) for travel or for overseas study or work. And despite not being allowed to use that limit to buy overseas property, securities or life insurance policies, mainlanders remain the biggest overseas buyers of property and insurance policies in Hong Kong and elsewhere.

Before the borders with China were closed, mainlanders would often travel to Hong Kong with cash and switch them for cryptocurrencies. That substituted dealing with underground money changers and shadow banks in Hong Kong which got increasingly fraught with authorities in China and Hong Kong frowning on the lack of know-your-customers norms.  

On Hennessy Road in the Wan Chai district of Hong Kong, a not-to-be-missed cryptocurrency ATM in bright yellow had long queues of mainlanders queuing to buy Bitcoin and other cryptocurrencies. But last month, the ATM was moved to the first-floor office of the service provider for unexplained reasons. 

Getting stuck with the small fish

Observers point out that Hong Kong’s latest rules could potentially jeopardize the future of Bitcoin ATM machines in Hong Kong, as the target users are mainly retail traders wishing to buy smaller amounts of cryptocurrencies.

A senior executive with CoinUnited, one of the largest Bitcoin ATM operators in Asia, remains hopeful despite the regulatory uncertainty.

“If the policy kicks in, I’m sure the retail customers will drop,” Angus Lo told Forkast. The CEO of Asia’s largest operator of Bitcoin ATMs network said the silver lining would be more institutional interest in cryptocurrencies following a clarity on regulations. 

Lo’s business has branched out to ventures in non-fungible tokens (NFTs) and digital wallet services, adding that he does not see cryptocurrency ATMs going away even if retail investors are kept away in Hong Kong.

“I’m not quite sure what the detail [of the new policy] is going to be, you might need to be a professional investor to settle an account with an exchange in Hong Kong,” Lo said. “But people may still be allowed to buy crypto from the ATMs and send them to a wallet operated by another country.”

However, Lo cautioned against onerous regulations on the cryptocurrency industry, noting that his company was prepared to move to “more receptive jurisdictions” if it gets difficult to do business in Hong Kong. 

“If it happens, we will maybe move our ATMs to other countries and continue our business,” Lo cautioned. “As I said, ATM machines are only one of our businesses.”

Banking the unbanked

CoinHere, a company which also operates Bitcoin ATMs in Hong Kong, said the technology provided convenience and accessibility, especially for those who don’t have access to regular banking services. 

For example, laborers who are paid on a daily basis could potentially benefit from the direct cash-to-cryptocurrency transactions provided by the ATMs, a company spokesperson told Forkast.

But ATM services are also gaining ground with mainstream businesses, CoinHere said.

“An increasing number of traditional, established commercial property owners are interested in having our ATMs set up in their shopping malls and facilities,” the spokesperson said. The CoinHere spokesperson added that the company is ready to comply with cryptocurrency regulations, especially when it comes to anti-money laundering (AML) and know-your-customer (KYC) requirements.

Saravana Kumar, a Hong Kong cryptocurrency investor, told Forkast that security and privacy remain the biggest advantages of a Bitcoin ATM. 

“If one uses the Bitcoin ATMs, there is no second party involved in the transaction,” said Kumar. “And it’s so easy to convert fiat into cryptocurrency.”