Hong Kong warns over digital currencies amid alleged bitcoin fraud

By Michelle Price

HONG KONG (Reuters) - Hong Kong's central bank has warned people against investing in virtual currencies amid local media reports that a bitcoin exchange may have run off with $387 million in client funds - making it potentially the biggest bitcoin scandal after last year's bankruptcy at Tokyo-based Mt.Gox.

The South China Morning Post reported on Monday that clients of Hong Kong-based MyCoin had approached a local lawmaker alleging the company absconded with their money. An assistant for Legislative Council member Leung Yiu-chung told Reuters that Leung had received more than 15 complaints from MyCoin clients regarding the alleged fraud, and these would be passed on to the police on Wednesday.

The Hong Kong Monetary Authority (HKMA) said in a statement late on Monday that the case "may involve fraud or pyramid schemes," adding: "Given the highly speculative nature of Bitcoin, we have all along urged the public to exercise extra caution when considering making transactions or investments with Bitcoin."

Calls to MyCoin in Hong Kong could not be connected. Calls to the company's China customer service line were not answered.

Bitcoins are created through a 'mining' process where a computer's resources are used to perform millions of calculations.

Advocates say the virtual currency is revolutionary as it's not controlled by a central bank and has potential as an alternative means of online payment. But the rise of bitcoin, which is unregulated in many countries including Hong Kong, has stoked concerns it can be used as a vehicle to launder money and finance extremist groups.

Mt.Gox, once the world's largest bitcoin exchange, filed for bankruptcy a year ago after it claimed to have lost around $500 million worth of customer bitcoins in a hacking attack.

On its website, MyCoin claims to be a "leading global Bitcoin trading platform and application service provider," with a China-based research and development team.

MyCoin promised clients a HK$1 million ($128,976) return over a 4-month period based on a HK$400,000 investment that would produce 90 bitcoins on maturity, the South China Morning Post reported, adding MyCoin claimed to have 3,000 customers each investing an average of HK$1 million.

The price of a bitcoin has slumped from a late-2013 high of above $1,000 to around $220, according to CoinDesk's price index.

($1 = 7.7534 Hong Kong dollars)

(Additional reporting by Anne Marie Roantree; Editing by Ian Geoghegan)