Nothing New Under the Sun: The First Bank Run In the Crypto Era


Update: this article originally cited a 2008 article from the South China Morning Post that referred to a bank run on the Bank of East Asia. The citation has been removed due to irrelevance to the current situation in Hong Kong.

The cryptocurrency industry has been keen on Hong Kong this week after a number of reports connected a bank run with elevated BTC trading volume levels. But could there be any truth to this narrative?

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Here’s what’s going on: the city, which is legally considered to be a Special Administrative Region (SAR) of China, has been the center of numerous demonstrations by pro-democracy activists who are protesting against the Chinese government for the last several years.

As an SAR, Hong Kong has a higher degree of autonomy than other regions that exist under the mainland Chinese government. However, there have been movements in the region for Hong Kong to become a totally independent sovereign state; the most recent one began after the Hong Kong electoral reform of 2014-2015.

The activists are concerned that the mainland Chinese government–which has promised to allow Hong Kong to have its independence until 2047–is encroaching on their democracy, and that the government of Hong Kong itself is failing to operate the region with “genuine democracy.” The United Kingdom previously controlled the region until 1997.

So far, most of the protests have been occupational in nature, including the 79-day occupation in 2014 that was eventually dubbed the “Umbrella Revolution.” Protests were sparked again more recently after demonstrations against the country’s Extradition Law Amendment Bill (ELAB) in April and May; the protests became a mass movement in June.

This week, the political unrest in Hong Kong resulted in a bank run–ATMs and banks around the city are clogged with lines of people hoping to withdraw every cent that they can. However, it’s unclear what the reason for the bank run is: many news outlets (especially crypto news outlets) are reporting that the bank run is the result of a deliberate decision by protestors to put pressure on the government of Hong Kong and the jurisdiction’s financial system.

Many crypto-related news outlets have made a connection between the bank run in Hong Kong and reports of increased Bitcoin (BTC) trading volume on over-the-counter (OTC) Bitcoin trading platform LocalBitcoins.

Indeed, citing either intentional political pressure or distrust in the financial system, these news outlets have reported that the increased trading volume in Hong Kong is because citizens of the region are increasingly turning to Bitcoin as an alternative to Hong Kong Dollars (HKD) as a way to store their savings.

However, a number of analysts have poked holes in the narrative connecting the spike in BTC trading volume with the bank run. What is the truth?


Correlation, but not necessarily causation

Of course, it is certainly true that political turmoil has been known to be a driver of capital into cryptocurrency markets. Citizens of developing countries around the globe are increasingly using Bitcoin and other cryptocurrencies as a way to transact, store value, and build savings; citizens of countries in economic crisis, such as Venezuela and Zimbabwe, have also turned to cryptocurrency as a means of surviving hyperinflation and other harsh economic conditions.

However, a number of analysts have agreed that the political turmoil in Hong Kong may not be the main driver behind the spike in BTC trading on LocalBitcoins.

Matt Ahlborg, Data Scientist, Research Fellow at startup accelerator DLab and creator of, wrote in a Twitter thread that most of the spike in volume on LocalBitcons was the work of a single trader.

OTC trading platforms are notoriously difficult to analyze

However, it is also important to note that trading volume on OTC trading platforms is notoriously difficult to analyze–most of these platforms keeo their data private. In the past, a number of analysts have speculated that the majority of BTC trading volume happens on these OTC platforms, and therefore isn’t recorded in aggregate sites that report crypto trading metrics based on data from conventional cryptocurrency exchanges.

So indeed, there is a possibility that trading volume could have risen on other OTC platforms in Hong Kong. However, this data is proprietary. On the other side of things, however, two cryptocurrency exchanges that operate in Hong Kong’s market have told Finance Magnates that they have not observed any major fluctuations in trading volume in Hong Kong.

Frankie Chan, Regional Director in Asia of Paxful (another OTC trading platform), told Finance Magnates that rather, “the trade activities on Paxful from HK have been steadily growing since Q4 of last year. There may be multiple reasons for the growth, such as political reasons, but based on our own data, there isn’t necessarily a direct correlation between the two.”

Marie Tatibouet, Chief Marketing Officer at cryptocurrency exchange, told Finance Magnates that there was “nothing to report” in terms of trading volume–”HK traffic on our end seems still,” she said.

Although OKEx does not serve the Hong Kong market, Andy Cheung, Head of Operations at the exchange, said that the operators of OKEx “don’t think” that the spike in BTC trading volume is the result of the bank run: “I think it is more like an independent case,” he told Finance Magnates.

However, Cheung didn’t completely rule out the possibility that capital could flow into BTC markets as a result of the political events in Hong Kong: “every time when there is instability, people start to re-evaluate their investment strategies, and now people have new options in cryptocurrency,” he said. “It potentially provides an alternative to the market.”

Paxful’s Frankie Chan echoed Cheung’s sentiments: “Cryptocurrencies have been used for wealth preservation, especially in countries whose currencies are relatively volatile, e.g., Venezuela. So we wouldn’t be surprised if people in HK are buying more crypto to hedge HKD’s potentially increased volatility,” he told Finance Magnates.

However, at the same time, “the general public in Hong Kong is still very skeptical about bitcoin and other cryptocurrencies,” Chan explained. “A lot of effort is still required, particularly on education, in order to bring about mass adoption in the market.”

”USD is the real valuation currency behind the Hong Kong economy. The crisis only creates a question in the city of whether we should continue to trust HKD or shifting it to USD.”

Gavin Mak, Chief Consultant at fintech solution provider VP Business Solutions, also told Finance Magnates that Bitcoin is unlikely to be the first choice of Hong Kong citizens who may be looking to shift their savings to a more stable asset.

“I don’t see any relation between the HK crisis and crypto industry,” he said. “Since HKD is long been pegged with USD, from an asset valuation point of view, USD is the real valuation currency behind the Hong Kong economy. The crisis only creates a question in the city of whether we should continue to trust HKD or shifting it to USD.”

Therefore, “as long as the global market holds strong confidence on USD, I don’t foresee anything crypto industry could help Hong Kong. Moreover, Unlike most of the economy in the world, Hong Kong is free from capital restriction, [and therefore] currencies can be exchanged freely without any restriction. Hence, I don’t believe that the two main functions of cryptocurrencies – storage of value and acting as a medium of exchange –are applicable to the current Hong Kong situation.”

The short- and long-term effects of the bank run

Mak said that therefore, the more dramatic effects of the bank run will be felt outside of cryptocurrency markets in Hong Kong: ‘HKD is completely backup by USD via a linked exchange rate system,” Mak explained.

Therefore, if anything, the bank run will likely have a more significant impact on forex markets than on crypto: “a bank run would decrease the HKD money supply as well as the foreign exchange reserve. Technically speaking, it will become an end-game to the USD/HKD peg once the foreign exchange reserve dropped to zero,” he explained.

However, Mak believes that the short-term effects of the bank run won’t be too severe: “the foreign exchange reserves fell from USD 448.4 billion in July 2019 to USD 432.8 Billion in August 2019. This is certainly a signal of alert due to the political turmoil, but the reserves are still very strong to hold the Hong Kong dollar within the band. Hence, I don’t believe anything would happen in the short run–the USD/HKD exchange rate will still be stable within the band.”

“In the long run, however, there are just too many possibilities,” he added. “It heavily depends on the level of intervention on Hong Kong politics by the central government – the continuous interfere on Hong Kong politics by the central government heavily damage the fundamental of success and confident of the Hong Kong economy – the one-country two-system model.”

“If no one in the market is going to trust the one-country two-system model anymore, it’s not surprising to expect a humongous capital outflow of HKD and speculative activities to bet USD/HKD to be unpegged. At the most pessimistic side, the damage of the one-country two-system model would result in the total failure of the Hong Kong Economy, and hence, a disappearance of the Hong Kong Dollar.”

What does the future hold?

But exactly how likely is this disappearance?

OKEx’ Andy Cheung told Finance Magnates that ultimately, he does not think it will come to pass: “I have this strong sense that as a global financial center, Hong Kong is extremely hard to be replaced. Hong Kong still has its own edges compared with other Asian cities.”

“In the short-term, Singapore could be benefited by the capital outflows from Hong Kong,” Cheung said. “However, in the long run, when things settled, and the US-China trade tensions eased, Hong Kong could thrive again as a connection between the east and the west, which is the uniqueness of Hong Kong.”

However, Mak told Finance Magnates that “there’s nothing much else anyone could do on the Hong Kong situation nowadays. The future of Hong Kong highly depends on what the central government think is the most important to them – political stability of CCP in general or the Hong Kong economy.”

“However, no matter what will happen, I believe Hong Kong people would fight until the very last to defend the one-country two-system model, and maintain the world’s confidence in this Pearl of the Orient.”


Update: this article originally cited a 2008 article from the South China Morning Post that referred to a bank run on the Bank of East Asia. The citation has been removed due to irrelevance to the current situation in Hong Kong.

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