Hong Kong’s bitcoin businesses suffer after local bank accounts frozen

Companies say they have had to go to foreign banks after disruption

PUBLISHED : Sunday, 19 November, 2017, 12:46pm
UPDATED : Monday, 20 November, 2017, 1:57pm

Hong Kong’s bitcoin entrepreneurs say they have been forced to open bank accounts overseas to operate their businesses, after local banks froze or closed their accounts, threatening the city’s push to become a fintech hub.

Staff at Hong Kong-based cryptocurrency exchange Gatecoin – which allow customers to exchange their digital money for fiat currency – were left perplexed after they received a phone call from a Hang Seng Bank representative on September 15, where they held a company bank account, and were told their account was suspended without a detailed explanation.

“It was a major disruption to our business,” Gatecoin marketing head Thomas Glucksmann said.

“We had just tripled our customer base in a two to three month period, the price of bitcoin was rallying, the amount of money clients were depositing was increasing – the timing couldn’t have been worse.”

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While the company has had its accounts frozen with other banks before, this was first time it was suspended without prior notice, he added.

Soon after, Gatecoin’s backup account with Fubon Bank was imposed with a daily transaction limit that was significantly below their needs, effectively shutting down the account.

One of bitcoin’s mission statements is to depart from the traditional banking system. But ironically, without a local bank account, new bitcoin buyers cannot purchase the digital currency.

Glucksmann said the company strived to be “the most anti-money-laundering (AML) compliant, strict and transparent exchange”with its banking partners, only for their efforts to be fruitless.

“We’ve been very much in favour of enforcing strict AML best practices; we do a lot of client due diligence and we don’t accept cash or cheques, because we have always wanted to make sure that we can associate every bank transfer coming in and out with the name of the client that has registered with us and we have all their [‘know your customer’ (KYC)] information,” Glucksmann said.

“This way our banking partners feel satisfied that we’re able to provide [information] for their KYC and AML teams.”

Without a banking solution for its customers, Gatecoin sent an email telling them that transfers were suspended until they could find a way forward.

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The announcement alarmed some customers, who subsequently contacted police, fearing that Gatecoin would meet the same fate as Mt.Gox, a Japanese bitcoin exchange that collapsed in 2014.

A spokeswoman for Hang Seng Bank said: “We do not comment on individual cases.”

A Fubon Bank spokeswoman said they could not comment on information relating to its clients, but it would “apply customer due diligence measures in a balanced manner” and “strengthen” communications with customers on account opening requirements and procedures.

Failing to find a local solution, the bitcoin exchange looked overseas to fulfil their banking needs, settling for a European payments processor and a Swiss bank. But it will take two to six weeks before they can use these to transfer money to and from anxious customers.

George Harrap, founder of remittance payment company Bitspark, also had to resort to opening bank accounts overseas to meet his banking requirements.

“Banking is a prized commodity in the bitcoin space,” he said.

Harrap claimed that dozens of local banks denied his company a bank account without “any explanation”.

While he was eventually able to open an account several months later, the uncertainty led him to change his business model by opening bank accounts in Europe and accepting cash deposits through money transfer shops that his company dealt with.

Both Harrap and Glucksmann felt that the difficulty of opening a bank account in Hong Kong tarnished the city’s reputation as a business and financial hub, and risked the government’s push to make the city a centre for fintech.

Glucksmann said the government could look to Japan, which officially recognised bitcoin exchanges in September, as a blueprint on how to regulate cryptocurrency businesses, which could give banks a sense of safety to do business with them.

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The Post contacted several banks about their willingness to take on cryptocurrency-related businesses. Near identical replies were received, stating that they followed regulatory requirements and due diligence on accounts avoiding any direct mention of bitcoin-related businesses.

HSBC was more forthcoming. A spokesman for the banking giant said it had “very limited appetite for banking virtual currency exchanges”, but welcomed start-ups, which made up 70 per cent of new account openings each month.

Hong Kong’s de facto cental bank, the Monetary Authority, dismissed claims that a high number of businesses failed to open bank accounts.

A spokesman said that the average account opening rejection rate was below 5 per cent per month.

According to Hong Kong Bitcoin Association president Leo Weese, the top concern for members was getting a bank account, while losing their bank account was their “number one fear”.

“The few that do have bank accounts are trying to be as cautious as possible. But ironically by being cautious they also raise red flags with banks,” he said.

“There’s pretty much no way around that minefield without eventually having the account shut down.”

Weese believed that the KYC cost for each banking transaction by bitcoin companies was unattractive to banks. He also suspected that banks did not want to help competitors to their business model.

But information technology lawmaker Charles Mok said the banking issues were not limited to cryptocurrency businesses. Start-ups and other fintech companies were also having difficulty opening bank accounts in Hong Kong.

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However, Mok said that the government could not claim that Hong Kong was a fintech hub without helping businesses clarify whether they may face bank account hurdles in the city.

Bitcoin has exploded in value, hovering at around US$7,500 per coin since the beginning of November – an almost 970 per cent increase compared to last year when the digital currency was trading at about US$700.

Some bitcoin analysts have predicted that the cryptocurrency will surpass US$10,000 within the next few months.

Economists have warned that bitcoin is in a massive speculative bubble. But prophecies of its impending doom have not come to fruition and coin prices continue to set records.