A financial system disruption was formerly discussed by cryptocurrency companies. Now, some of them are having difficulty finding conventional institutions that would accept their funds.
That is true even in Hong Kong, where regulators and government representatives have started a charm drive to win over cryptocurrency investors. With their help, a long-standing ban on small investors trading cryptocurrencies was lifted, and a new licensing system for cryptocurrency exchanges was established.
The one drawback is that many banks in Hong Kong are still wary of cryptocurrency.
According to bankers, at least two international banks with operations in the city have ruled out any activity specifically related to cryptocurrency trading. Government authorities keen to assist these exchanges in getting established have come directly to many banks in response to their refusal to open accounts that will hold the clients’ money.
The challenges faced by Hong Kong authorities are an indication of how difficult life has become for a group of companies that were once certain they would revolutionize the face of finance.
Last October, Sam Bankman-Fried, the creator and former CEO of the cryptocurrency exchange FTX, spoke via videolink at a fintech conference in Hong Kong. One of the topics he covered was how to assess the risk of developing technologies that have the potential to seriously disrupt the financial sector.
Since then, FTX has failed, Bankman-Fried has been detained, and US officials have filed lawsuits against Celsius, Binance, and another significant cryptocurrency exchange. A group of American regulators, including the Federal Reserve, stated in January that it is quite likely that producing or owning cryptocurrencies will be incompatible with safe and sound banking practices.
According to Rocky Mui, a Hong Kong-based lawyer at the law firm Clifford Chance, one concern for banks in Hong Kong is that cryptocurrencies would be used to launder money. He said that it will take time for banks to upgrade their anti-money-laundering procedures to include checks on crypto firms.
How banks should evaluate the risk of crypto companies is another important subject. Because the business plans of these enterprises are frequently unusual and occasionally hazy, banks cannot simply apply risk-management frameworks from other industries.
Although there is a push to bank these clients, Stephen Richardson, the Asia head of Fireblocks, a distributor of cryptocurrency and blockchain technology, said that risk models related to this line of business are still under development.
The Securities and Futures Commission in Hong Kong began taking applications from cryptocurrency exchanges last month. For managing and holding the money of its clients, an exchange must have one or more segregated accounts at approved institutions in order to obtain a license.
According to Mui, this has led to a “chicken and egg” problem because banks may only want to issue accounts for enterprises that are already licensed, but exchanges require those bank accounts to obtain a license. By giving qualified exchanges approvals-in-principle, the securities regulator intends to remedy this, which might provide banks some comfort during the application process, he added.
A cryptocurrency trading platform must also keep adequate assets on hand—at least one year’s worth of operational costs in cash, short-term government debt, and deposits—to demonstrate its financial stability in order to be regulated in Hong Kong.
The de facto central bank of Hong Kong, the Hong Kong Monetary Authority, has advised banks to issue simple operating accounts for cryptocurrency exchanges applying for licenses so they can at least cover rent and salaries while their applications are being reviewed.
According to a monetary authority spokesperson, banks shouldn’t deny an account opening simply because of the industry a company operates in. Instead, banks should work to satisfy the legitimate business requirements of licensed businesses in the larger virtual-asset sector. Additionally, it stated that Hong Kong’s anti-money-laundering measures adhere to global norms.
In order to tackle the issue of opening accounts, the monetary authority and the securities regulator also organized two meetings between cryptocurrency exchanges and banks. HSBC, Standard Chartered, and the Bank of China, all of whom hold significant positions as issuers of Hong Kong dollar bank notes, were among the banks that attended.
According to those with knowledge of the meetings, representatives from Citibank, Singapore’s DBS Group, and China Construction Bank were also there. According to the HKMA, almost 100 representatives from banks, professional services companies, and more than 80 businesses involved in virtual assets attended.
According to a person familiar with the situation, a major global bank recently reversed course and is now considering issuing basic accounts for crypto exchanges requesting for a licence, subject to the standard anti-money-laundering and due-diligence inspections.
One company in Hong Kong that employs hundreds of people presently needs to sell crypto assets in order to obtain foreign currency, which it then puts in a bank abroad, in order to pay salaries using money earned from cryptocurrency. The money is then converted to local currency and transferred back to Hong Kong by the business. This extra step is necessary since the company’s Hong Kong banks will not accept payments made with cryptocurrency directly.
Some of the city’s banks are not as cautious. After the city declared ambitions to grow the industry earlier this year, the local branch of China’s Bank of Communications and a local virtual bank named ZA Bank moved rapidly to offer services to crypto companies. Other nations are attempting to court the sector, and the European Union just approved its own crypto framework.
