In Hong Kong, Betting Big on Bitcoin

HONG KONG â€" By day, David Shin is an investment banker at a major financial firm. By night and in pretty much every other free minute, he is an entrepreneur looking to break into Hong Kong’s growing Bitcoin scene.

Even as concerns swirl about the long-term viability of the virtual currency, Mr. Shin is raising money, courting clients and hiring staff to build a sort of stock exchange for Bitcoin-oriented companies. Mr. Shin, 38, plans to start his venture, CryptoMex, at the end of April.

“I believe Bitcoin will bring about a brave new world of money,” he said. “The Internet started out as a revolutionary protocol, became more easy to use over time, and saw an explosive growth rate. The same is happening with Bitcoin.”

Mr. Shin joins a growing field of technology experts, financial players and crypto-geeks who are betting that an unfavorable regulatory environment in mainland China has put this special administrative region â€" with its more laissez-faire attitude â€" on the edge of something big.

Bitcoins, digital money backed by no government and “mined” by computers performing complex algorithms, have been largely unregulated, creating a virtual Wild West of programmers and speculators. But as Bitcoin tries to gain greater mainstream acceptance, authorities around the world have begun eyeing it more cautiously, as they might a currency. The spectacular collapse of Mt. Gox, the Tokyo-based Bitcoin exchange, has only fanned regulators’ concerns.

The regulatory moves in China have been among the more aggressive to date. In December, the Chinese authorities curtailed the use of Bitcoin by banks and payment processors, which helped halve the value of the virtual currency in two weeks. While the government said the general public was free to trade Bitcoin online, the broad fear is that China may eventually impose a sweeping ban on its use offline, as it did in 2009 to Q Coin, a virtual currency issued by Tencent.

But Hong Kong has so far remained relatively passive on the regulatory front. The former British colony has retained a separate political and economic system since it returned to Chinese rule, and the Hong Kong Monetary Authority, the city’s de facto central bank, says it is not directly regulating Bitcoin, at least for now.

Entrepreneurs in Hong Kong are essentially playing regulatory arbitrage. Although firm data is scarce, China is widely seen as the world’s second-largest market for Bitcoin, after the United States, and the restrictions have cooled its nascent Bitcoin scene. By virtue of proximity, businesses in Hong Kong are hoping to capture some of the demand.

“Like water, Bitcoin may take the path of least resistance and find its way into Hong Kong,” said Michael Chau, a business professor at the University of Hong Kong. “Because of the city’s proximity to China â€" and because it has become part of the country since 1997 â€" Hong Kong has the potential to absorb part of China’s Bitcoin market.”

The Chinese customer base of Laser Yuan, the founder of the Hong Kong-based exchange BitCashOut, doubled after the December notice. Three weeks ago, ANX, Hong Kong’s largest Bitcoin exchange, opened what it said was the world’s first brick-and-mortar store for the virtual currency, where customers can buy Bitcoin over the counter. It also set up a Bitcoin vending machine last week. Robocoin, a maker of Bitcoin automated teller machines, will set up its first A.T.M. in Hong Kong this spring, and plans 100 more around the world, none in China, said the company’s chief executive, Jordan Kelley.

“We have hundreds and hundreds of Chinese businessmen and entrepreneurs contact us with the purpose of becoming Robocoin operators,” Mr. Kelley said, adding that if China gave him the green light, the company would “have 200 A.T.M.s in China before the end of the year, if not more.”

Mr. Shin said he first saw the promise of Bitcoin last year, when the coins were worth $25 apiece, compared with about $620 now. After raising $2.5 million, he and his business partners built IceDrill, an operation in Montreal where racks of speedy computers race to generate Bitcoin.

But he is now selling part of his stake in the Canadian mine and focusing on his start-up in Hong Kong, which he said could be “the capital of Bitcoin in Asia.” Mr. Shin recently hired Jake Smith, a well-connected Bitcoin enthusiast who worked for Li Xiaolai â€" a Chinese investor who reportedly holds 100,000 coins â€" to get Chinese to buy into the companies listed on his platform.

“When the government comes out and puts constraints on Bitcoin in China, investors naturally look at Hong Kong â€" not Singapore, not Korea â€" for substitution,” said Mr. Shin.

Hong Kong operates in a type of regulatory limbo, so uncertainty reigns as much as opportunity. If China clamps down further, Hong Kong may be forced to rethink its stance.

John Greenwood, chief economist at Invesco and architect of Hong Kong’s exchange-rate system, said that whether the Chinese authorities would toughen measures depended on whether Bitcoin became so prevalent that it undermined China’s capital controls.

“China’s mainland residents can buy things with Bitcoin from Europe or North America or anywhere else in the world, or make transfers,” Mr. Greenwood said. “It’s a hole in the dike, a leakage from China’s system of foreign-exchange control.”

Entrepreneurs like Mr. Shin also face a legacy of past ventures that have proved problematic.

Two once-prominent Bitcoin crowdfunding platforms, BTCST and Bitfunder, are now defunct. BTCST, which offered Bitcoin-denominated securities that claimed to return up to 7 percent a week, has been charged by the United States Securities and Exchange Commission with fraud and with running a Ponzi scheme.

“The operating environment is much clearer,” said Mr. Shin. “The Hong Kong government has acknowledged Bitcoin as a commodity, so we have clarity on both fronts here as well.”

Then there is the need for better basic infrastructure and consumer awareness, a challenge for Bitcoin around the world.

For example, few businesses let customers make payments with the currency. In Hong Kong, they largely amount to a boutique hotel, a flower shop, a tailor, a music teacher and a Beijing-style crepe restaurant.

On the eve of the Chinese New Year in January, the three co-founders of the Bitcoin exchange ANX took to the bustling streets of the Lan Kwai Fong entertainment district to hand out 50,000 red envelopes, each carrying a little more than a dollar’s worth of Bitcoin.

“I use Bitcoin to buy stuff online all the time,” Ben Lau, an online marketer, said as he stood on the sidewalk using his smartphone to scan the QR code â€" an image that works like a bar code â€" on the voucher he had just received.

But Mr. Lau was in the minority. Even months after Bitcoin leapt into the limelight, most passers-by had little idea about what it does, and some associated it with drugs and scams.

When the after-work crowd diminished, the co-founders went to a nearby bar to check on rumors that it had recently started accepting Bitcoin. A few beers later, Ken Lo, managing director of ANX, waved for the bill and asked to pay in the virtual currency.

“A customer’s friend thought our bar had a matching name â€" Bit Point â€" with Bitcoin, so he helped us set this up,” said Gaga Lam, the bar’s manager. “We haven’t really tried it out yet.”

Her iPad Mini displayed the website of BitPay, the Bitcoin payment processor in which Asian billionaire Li Ka-shing was an early investor. But the group ended up paying with a credit card after a few unsuccessful tries.

“We can do better than that,” Mr. Lo said, referring to his company’s Bitcoin payment solution. “We clear faster than the banks, our transaction fee is lower than credit card companies, and there would be no chargebacks. And Bitcoin fans will flock to your bar in droves.”