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Chinese banks court crypto firms in Hong Kong after mainland ban

Tan KW
Publish date: Mon, 27 Mar 2023, 04:08 PM
Tan KW
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Crypto firms rushing into Hong Kong after the city opened its doors to the battered sector are finding a surprising source of potential support: China’s state-owned banks.

Chinese banks have been directly reaching out to crypto businesses over the past few months, adding to signs that the city’s push to become a major digital asset centre has backing from Beijing, even though trading of crypto has been banned on the mainland for well over a year.

The Hong Kong arms of Bank of Communications Co, Bank of China Ltd and Shanghai Pudong Development Bank have either started offering banking services to local crypto firms or have made inquiries to the field, according to people with knowledge of the matter who asked not to be named discussing internal information. On at least one occasion, sales representatives from one Chinese bank even visited the office of a crypto company to pitch its services, said one person.

The olive branch is notable as the sector has been shunned by major banks and faced difficulties in securing normal banking services, such as opening an account to pay staff and vendors. It’s also an opportune time, with the lenders filling a void after the failures of US tech banks Silicon Valley Bank, Silvergate Capital Corp and Signature Bank.

The push by Chinese lenders “means a lot to us because it’s something you’d never expect at this point, even around the globe”, said Sung Min Cho, founder and chief executive of beoble, a provider of a messaging system for decentralised applications. “A cryptocurrency account at a tradfi bank is something groundbreaking.”

A top executive at a branch of a major Chinese bank in Hong Kong, who asked not be named discussing private information, said the crypto push, the apparent green-light from Beijing and the uncertain local lending situation has offered an opportunity to explore the market. Chinese officials have also been seen mingling at the city’s digital asset events, exchanging contact details and asking for reports, Bloomberg News reported earlier.

Bank of China, Bocom and Shanghai Pudong didn’t respond to requests for a comment.

Banking for crypto businesses has never been easy. Its anonymous nature has been a major red flag for traditional banks, where know-your-client procedures are standard for compliance. Digital asset firms have been forced to find various workarounds to meet operational banking needs, according to Hong Kong-based crypto firms ranging from startups to regulated entities, who agreed to speak on the condition of anonymity.

It can easily take three months for crypto-focused companies to secure a corporate bank account, compared to one month for non-crypto firms. This means firms often try out more than a dozen lenders, including niche choices such as Indian or Japanese banks, or virtual banks like ZA Bank Ltd. Even with an account, banks often flag transactions related to digital asset firms and can suddenly suspend accounts after an initial warning call.

For those dealing in crypto tokens, it’s even harder. Almost no traditional banks offer help to transfer tokens to fiat currencies as a regular service, so many had turned to crypto-friendly banks abroad such as Signature or alternatives in Switzerland and the Middle East. Signature’s payments network real time crypto network was still operational even after the lender was put into receivership, Bloomberg News reported earlier.

Those without bank accounts need to be even more creative. That can mean setting up a separate Hong Kong company without a crypto link to apply for bank accounts for payroll purposes, or by outsourcing human resources and payroll to a third party. To cash out tokens, some have turned to over-the-counter crypto exchanges such as OSL and Hashkey, the only two licensed in Hong Kong, or used physical crypto money exchanger counters in the city.

“It would be great if local banks could start some trial program to support crypto firms and more professional service providers that understand our native environment,” said Dominic Law, chief Metaverse officer of Neopets Metaverse, a game backed by Chinese firm NetDragon Websoft Holdings Ltd. “The business landscape would certainly be more welcoming and easier to support more startups to develop in this field.”

ZA Bank, a Hong Kong virtual bank, said its a “Web3 friendly” lender and is open to digital asset firms who pass regulatory and internal requirements, according to Devon Sin, its alternate chief executive officer. It last year opened a pilot program for express business account openings, he said in a statement.   

Global crypto firms scrambled to move funds away after the US banking crisis, with local companies such as crypto hedge fund MaiCapital - which held funds with Signature - urgently sought to open bank accounts in Hong Kong. Hex Trust, a local startup that offers custody services for crypto assets, told its investors after the SVB crisis that the firm made a prescient decision in January to convert the “vast majority” of holdings in USD Coin, a stablecoin, into US dollars and to move those funds to an unidentified Hong Kong bank.

Jack Chou, founder of the blockchain technology company CNHC Group, is one founder who’s seeking to establish in Hong Kong in the aftermath of the collapse of the crypto friendly banks in the US. The firm, which offers an offshore Chinese yuan-pegged stablecoin, was able to recover about US$10 million of its more than US$12 million deposits in SVB, Signature Bank and First Republic Bank. A majority of that was transferred to an offshore bank account in China’s Hainan’s pilot free trade zone and a small portion to DBS in Singapore.

Chou and his business partner have travelled to the city five times since Hong Kong announced its new crypto push last year and plan to visit again in April. “Opening bank accounts is one of the top priorities,” Chou said.

So far Chou has approached DBS Hong Kong, HSBC, Standard Chartered, Bank of China (Hong Kong) and Hang Seng Bank but there was not much progress. “Crypto is still sensitive,” the banks told him.

“That’s the conflict. On the one hand the government is pushing the development of the industry, on the other hand, the city’s banking system does not offer us any services,” Chou said.

Still, the general feeling is that Hong Kong banks are more open to crypto firms than they were a few years ago, but that there is yet to be a big shift since background KYC and anti-money laundering rules remain a mainstay in the finance world. Rather, there is a sense that banks are more open to engagement when sales are quiet, including enabling bank accounts after previous attempts failed.

The city’s banking regulator issued a detailed guide in January 2022, asking banks to conduct appropriate money laundering and terrorist financing risk assessments when they make banking relationships with virtual asset service providers.

"From the perspective of prudential supervision, the HKMA does not currently intend to prohibit AIs from incurring financial exposures to VAs, such as through investment in VAs, lending against VAs as collateral, or allowing their customers to use credit cards or other payment services to acquire VAs." - HKMA, January 2022

A spokesperson for the The Hong Kong Monetary Authority said the authority has a dedicated team that follows up on inquiries from the business community, including the virtual asset industry, regarding bank account opening and maintenance matters.

Banks in Hong Kong are well positioned to tap into the capital inflows following the banking failures in the US, said Sean Lee, the Hong Kong-based co-founder and executive director of the decentralised wallet startup Odsy Network. While many Asian companies banked with tech-friendly US banks in the past, this is unlikely to be the case going forward due to regulatory concerns.

“Hong Kong will benefit tremendously,” he said. “But questions remain whether the geopolitical climate will deter non-Asian projects to bank with Chinese banks.”

 


  - Bloomberg

 

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