That is so even in Hong Kong, where government officials and regulators have launched a charm offensive to win crypto business. Their efforts have included scrapping a yearslong ban on cryptocurrency trading by small investors and launching a new licensing regime for crypto exchanges.
The one snag: Crypto still makes a lot of banks in Hong Kong nervous.
At least two global banks with operations in the city have ruled out any activity directly linked to crypto trading, according to bankers. Many banks have also resisted opening accounts that will hold the money of crypto exchanges’ clients, leading to a direct approach by government officials eager to help these exchanges get started.
Hong Kong regulators’ difficulties are a sign of how tough life has become for a group of firms that were once convinced they would change the nature of finance.
When Sam Bankman-Fried, founder and then-chief executive of cryptocurrency exchange FTX, spoke via videolink at a Hong Kong fintech conference last October, one of the topics was “how to identify and balance the risk of emerging technologies that will truly disrupt the financial industry.”
Since then, FTX has collapsed, Bankman-Fried has been arrested and U.S. regulators have sued Binance and Coinbase, two other big exchanges, as well as crypto lender Celsius. In January, a group of U.S. regulators including the Federal Reserve said that issuing or holding cryptocurrencies “is highly likely to be inconsistent with safe and sound banking practices.”
One fear for banks in Hong Kong is that cryptocurrencies will be used to launder money, said Rocky Mui, a Hong Kong-based partner at law firm Clifford Chance, adding that it will take time for banks to update their anti-money-laundering processes to incorporate checks on crypto companies.
Another big question is how banks should analyze the risk of crypto firms. These companies often have unconventional—and sometimes unclear—business plans, meaning banks cannot simply apply risk-management frameworks from other sectors.
“There’s a push to bank these clients, but the risk models that are associated with this line of business are still something that’s being developed,” said Stephen Richardson, the Asia head of Fireblocks, a provider of crypto and blockchain technology.
Hong Kong’s Securities and Futures Commission started accepting applications from crypto exchanges last month. To get a license, an exchange is required to have one or more segregated accounts at authorized banks for handling and storing their clients’ money.
That has created a “chicken and egg” situation, Mui said: Exchanges need those bank accounts to get a license, but banks may want to open accounts only for licensed firms. The securities regulator plans to address this by issuing approvals-in-principle to qualified exchanges, which could provide a degree of comfort to banks during the application process, he said.
To become regulated in Hong Kong, a crypto-trading platform also needs to maintain enough assets—at least a year’s worth of operating expenses in cash, short-term government debt and deposits—to prove its financial soundness.
The Hong Kong Monetary Authority, the de facto central bank, has suggested banks consider opening basic operating accounts for crypto exchanges that are seeking licenses, so that they can at least pay rent and salaries while their applications are being vetted.
In response to a query from The Wall Street Journal, a spokesperson at the monetary authority said banks should not reject an account opening just because of the sector a firm operates in, and said banks should try to meet the legitimate business needs of licensed companies in the broader virtual-asset sector. It also said that anti-money-laundering systems in Hong Kong are consistent with international standards.
The monetary authority and the securities regulator have also organized two meetings between crypto exchanges and banks to discuss the issue of opening accounts. Banks that attended include HSBC, Standard Chartered and the Bank of China, all of which have an important status as issuers of Hong Kong dollar bank notes.
Representatives from Citibank, Singapore’s DBS Group and China Construction Bank were also present, according to people with knowledge of the meetings. About 100 people from banks, professional services firms and more than 80 virtual-assets-related companies attended, according to the HKMA.
A large global bank recently changed its position and is now considering opening basic accounts for crypto exchanges applying for a license, subject to the usual anti-money-laundering and due-diligence reviews, said a person familiar with the matter.
To pay salaries from funds derived from crypto income, one firm with hundreds of employees in Hong Kong currently has to sell crypto assets to get foreign currency, which it then deposits in a bank overseas. After that, the company transfers the money back to Hong Kong, converting it to the local currency. This added step is because the company’s Hong Kong banks won’t accept funds directly sourced from crypto.
Not all of the city’s banks are so squeamish. The local unit of China’s Bank of Communications and a local virtual bank called ZA Bank moved quickly to offer services to crypto firms after the city unveiled plans to develop the sector earlier this year.
The European Union recently agreed on its own crypto framework, and other countries are trying to appeal to the industry.
