Hong Kong’s crypto stimulus has hit HSBC and Stanchart

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HSBC has a history of money-laundering defaults. It was fined in the US a decade ago for its role in enabling Latin American drug cartels and in the UK in 2021 for a number of failures, including serving a criminal gang leader.

It is therefore understandable that the bank and its counterpart Standard Chartered would be reluctant to take on crypto exchanges in Hong Kong as customers.

“Like come on. They are here for crime,” Samuel Lim, the then chief compliance officer at Binance, said in a conversation in 2020 about some of its customers, according to a filed in court by the Commodity Futures Trading Commission—the kind of statement that does little to support it or its rivals over the large and highly-regulated banks.

Now that the US Securities and Exchange Commission is suing Binance and Coinbase as part of a broader crackdown on the crypto industry, the risk to exchange operators providing basic banking services is more visible than ever. And the potential rewards seem small.

Except, of course, when it comes to keeping Hong Kong regulators on edge. Hong Kong – the birthplace of the stablecoin Tether and former home of the now-collapsed exchange FTX – is trying to become a global crypto hub.

But many crypto exchanges “can’t get bank accounts, and that’s making it difficult,” said Gwen Cheong, partner at PwC-affiliated law firm Tiang & Partners, who advises crypto funds. “If you set up a bank account for a crypto exchange, you have to worry about incoming inflows.”

As a result, Cheong says, banks are concerned about protecting themselves from accusations of handling the proceeds of crime. But Hong Kong watchdogs are actively trying to bring crypto businesses together, including making life easier for exchanges and meeting founders facing action in the US.

Tyler Winklevoss, whose New York crypto exchange Gemini was sued by the SEC in January, Tweeted A “fantastic meeting” with Hong Kong’s Securities and Futures Commission last week said: “Hong Kong is ready to take the lead in crypto.”

Very few in Hong Kong’s finance community know why the region is seeking to attract crypto firms, given the series of disastrous collapses in the industry and the US’s move in the opposite direction.

Some speculate that Beijing has decided to use Hong Kong as a testing ground to allow mainland China to one day bring back crypto. Others say Hong Kong is concerned that its role as a financial center is diminishing – in part because of Singapore’s emergence as a rival Asian finance hub.

Whatever the reason, the pressure from the Hong Kong Monetary Authority is real. The regulator has summoned HSBC, Standard Chartered and other banks to several meetings and asked them why they are not providing basic services that would enable crypto exchanges to rent offices in the area and pay staff.

In a letter to banks in April, it said it wanted them to consider providing banking services to crypto firms that have not yet been licensed by Hong Kong’s SFC, especially if they are in the process of applying for one. are in A top executive at a crypto firm that applied for a license said the letter was “one of the most direct regulatory issues I’ve ever seen”.

But it is unable to give meaningful assurance. If banks are found to be handling the proceeds of crime, the onus to take action would lie with law enforcement bodies such as the Hong Kong police or potentially the US Department of Justice – not the HKMA. This puts the banks in an awkward position. If they keep Hong Kong’s political and regulatory elite happy, they risk putting themselves in the DoJ’s firing line.

The other option is to isolate Hong Kong, and risk losing credibility in a market that is economically and strategically important. Their best hope may be that Hong Kong’s stricter approach to regulating crypto will erode its attractiveness.

So far, HSBC appears to be engaging in a delicate dance, holding meetings with regulators and making at least some of the right noises, while its senior executives remain cautious. But it cannot do so indefinitely. Ultimately, it is much more than crypto. For HSBC’s leaders, it is a test of how intelligently they can juggle competing demands from the bank’s twin bases, East and West, at a time when political relations have soured. In the years to come, this problem will manifest itself in different forms and perhaps with greater intensity.

kaye.wiggins@ft.com