Hong Kong government pressures banks to onboard crypto exchanges

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(Kitco News) – Following the launch of retail crypto trading in Hong Kong on June 1, reports have emerged that to government is now pressuring large banks in the region to onboard cryptocurrency exchanges as clients to help the industry get firmly established.

According to a Thursday report from the Financial Times, the Hong Kong Monetary Authority (HKMA), the city’s banking regulator, is pressuring banks established in the region – including HSBC, Standard Chartered and Bank of China – to take on cryptocurrency exchanges as clients amid the crackdown on the industry by regulators in the U.S.

During a meeting in May, sources who were in attendance said the HKMA questioned the three banks on why they were not accepting crypto exchanges as clients. The regulator also sent a letter to the firms in April, which said that due diligence on potential customers should not “create an undue burden,” especially “for those setting up an office in Hong Kong to look for the opportunities here.”

“The HKMA and the SFC [Securities and Futures Commission] are being quite vocal about their expectations,” said Jonathan Crompton, a Hong Kong-based partner at the law firm RPC. Crompton added that the HKMA’s position was “unusual” compared to the “more crypto-skeptical” regulators around the world.

Banks in the region have been reticent to onboard exchanges over fears they could be prosecuted if a platform they serve is used for money laundering or other illegal activities.

“HKMA encouraged the banks to not be afraid,” a person with knowledge of the discussion said. “There is resistance from a conventional banking mindset… we are seeing some resistance from senior executives at traditional banks.”

This highlights the difficulties Hong Kong faces in its efforts to establish itself as a global crypto hub amid ongoing regulatory uncertainty and years of negative press about the digital asset industry. The high-profile collapse of FTX in 2022 and the current scrutiny facing the world’s two largest cryptocurrency exchanges – Binance and Coinbase – have only compounded these concerns.

But the government of Hong Kong remains steadfast in its goal of being a leader in the blockchain space. Johnny Ng, a member of Hong Kong’s Legislative Council and Chinese People’s Political Consultative Conference, has even put out a call to Coinbase to set up shop in the city following the lawsuit filed against the exchange by the U.S. Securities and Exchange Commission (SEC).

“I hereby offer an invitation to welcome all global virtual asset trading operators including @coinbase to come to HK for application of official trading platforms and further development plans,” Ng tweeted. “Please feel free to approach me and I am happy to provide any assistance.”

But with the U.S. and its SEC viewed as one of the most influential players in global financial regulations, financial institutions remain hesitant to go all in on cryptocurrencies for fear of repercussions.

Banks “are having to tread a fine line between, on the one hand getting encouragement to support crypto and exchanges, but on the other hand being aware of the US situation,” said a senior executive briefed on the meeting with the banks.

The HKMA’s focus on encouraging HSBC, Standard Chartered and Bank of China to accept cryptocurrency exchanges as clients is noteworthy because the trio is responsible for issuing Hong Kong’s currency and holds the chair and two vice-chair posts at the Hong Kong Association of Banks lobby group.

This highlights the level of dedication that Hong Kong is taking to grow its blockchain ecosystem as China’s position towards the industry has begun to thaw in recent months. China banned all things crypto in 2017 and maintained a hard-nosed stance on the industry for the next 4 years, but recently, has been signaling that it is beginning to open its policy.

In March, reports emerged that several of China’s largest state-owned banks, including the Hong Kong divisions of Bank of Communications Co., Bank of China Ltd. and Shanghai Pudong Development Bank, had begun offering services to local crypto firms or were exploring the possibility of doing so in the near future.

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China now appears to have given financial institutions behind-the-scenes approval to begin engaging with the crypto ecosystem in Hong Kong, with representatives from China’s Liaison Office and other officials regularly attending the region’s crypto gatherings to network and swap business cards and WeChat contact information.

Further evidence of China’s softening stance toward cryptocurrencies and the role that Hong Kong will serve was announced on Monday, when BOCI, an investment bank owned by the state-owned Bank of China, announced the successful issuance of a CNH 20 million digital structured note on the Ethereum blockchain, becoming the first Chinese financial institution to issue a tokenized security in Hong Kong.

According to an announcement from BOCI, the new product was originated by UBS and offered to its clients in Asia Pacific in a move that represents the start of a long-term collaboration between BOCI and UBS in the digital structured note space.

“Working together with UBS, we are driving the simplification of digital asset markets and products, for customers in Asia Pacific through the development of blockchain-based digital structured products, designed specifically for customers in Asia Pacific,” said Ying Wang, Deputy CEO of BOCI. “We are encouraged by the evolution of Hong Kong’s digital economy and are committed to promoting the digital transformation and innovative development of Hong Kong’s financial industry.”