HONG KONG: Crypto dealers find willing partners at banks seeking to fill SVB void amid city’s virtual asset push.

As published on scmp.com, Friday 21 April, 2023.

Crypto platforms in Hong Kong are opening accounts and partnering with local banks, as the city attracts more market players ahead of passing its new licensing regime as part of an effort to become a virtual asset hub.

Online-only financial institution ZA Bank was one of the first in the city to start offering services to crypto firms. The company announced this month that it would service digital asset conversions and accounts. However, insiders note that larger, more traditional banks are also looking to tap into virtual assets.

Last week, Hashkey Group, a digital-asset service provider based in Hong Kong, announced a partnership with ZA Bank and the Hong Kong arm of China’s state-owned Bank of Communications to launch a virtual asset trading platform called HashKey Pro, which will facilitate trades in some major cryptocurrency tokens.

“Our partnership with local virtual bank ZA Bank is only a starting point, and we plan to collaborate with other financial institutions to offer our clients a diverse range of solutions,” Hashkey Pro CEO Colin Zhong said.

Opportunities for such moves come a month after the bankruptcies of Silicon Valley Bank (SVB) in California and Signature Bank in New York, both known for servicing crypto companies. Hong Kong’s recent moves to embrace the virtual asset industry have separated it from markets like the US, which has recently taken a much tighter regulatory approach, and mainland China, where cryptocurrencies are banned.

The city’s new crypto-friendly approach has left some finance firms looking to be a new source of liquidity in the industry.

Last November, Hashkey Group became only the second crypto firm in Hong Kong to get a licence, which was voluntary at the time. Under new regulations that take effect in June, all cryptocurrency exchanges servicing Hong Kong clients must be licensed by the Securities and Futures Commission (SFC), but they can now sell big-cap tokens to retail investors, who could not buy from licensed exchanges under the previous regime.

“Our platform aims to set the bar for virtual assets exchanges in Hong Kong for compliance, safety, and security by obtaining regulatory approval and certifications,” Zhong said. HashKey Pro will open to professional investors in the second quarter, according to Zhong, and eventually to retail investors.

“Once we have the license uplifted, and once the SFC’s retail trading policies are in place, then we’re looking to offer those to our retail clients,” he said.

OSL, the first exchange to be licensed by the SFC, is also strengthening its ties to local banks ahead of the possible policy change. It first partnered with ZA Bank in 2021 and has continued expanding partnerships with other local firms. It will also be working with local branches of some major Chinese banks, according to Gary Tiu, executive director at BC Technology Group, owner of OSL.

The platform plans to “bring a range of tokenised financial products to retail investors”, Tiu said.
Since Hong Kong’s policy shift late last year, the city has been gaining attention among crypto companies with ties to mainland China as a potential way of moving back closer to home. Huobi and OKX, both founded in the mainland but which fled during earlier crackdowns, have announced that they were applying for SFC licences.

However, representatives from Hashkey and OSL say this process is not easy, as it involves professional auditors, banks, and external consultants to provide independent compliance assessments.

But with the licensing requirement just weeks away from kicking in, crypto firms are opening up accounts in the city. Lily Z. King, chief operating officer of digital asset custody solutions provider Cobo, said the company has been communicating with several banks seeking to open local accounts.

“Historically, crypto companies have faced challenges when trying to access traditional banking services, even for operating accounts that are used for salary payment and vendor service payment,” King said.

“With Hong Kong’s upcoming licensing regime, digital asset companies see an opportunity for clearer regulatory guidelines, which might lead to better access to traditional bank account services,” she added.

Part of the appeal of Signature Bank and SVB was that they worked 24/7 to settle cryptocurrency trades quickly. Now Hong Kong’s eight virtual banks could attract some of that business because of their own around-the-clock offerings, said Cobo co-founder and CEO Mao Shixing.

While Hong Kong’s larger financial institutions are likely to avoid unlicensed crypto companies because of high compliance standards, smaller banks may be more willing to work with such firms, according to Isabella Wong, a financial services partner at Deacons law firm.

Despite market upheaval over the past several months, Hong Kong has remained committed to virtual assets. At Hong Kong’s Digital Economy Summit this month, Financial Secretary Paul Chan Mo-po said the city should attract competent and innovative market players in the face of a “burst bubble”, calling it “the best time to promote development”.