Hong Kong’s crypto push puts HSBC and StanChart in a bind

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

So it is understandable that the bank and its peer Standard Chartered might not be keen to take crypto exchanges as clients in Hong Kong.

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

Now that the US Securities and Exchange Commission is suing Binance and Coinbase in a widening crackdown on the crypto industry, the risks of providing even basic banking services to exchange operators look greater than ever. And the potential rewards seem small.

Except, that is, when it comes to keeping Hong Kong’s regulators on side. Hong Kong — the birthplace of stablecoin Tether and the former home of 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 Gaven Cheong, a partner who advises on crypto funds at the PwC-affiliated law firm Tiang & Partners. “If you set up a bank account for a crypto exchange, you’ve got to worry about the flows that are coming in.”

As a result, Cheong says the banks are concerned about protecting themselves against charges for handling the proceeds of crime. But Hong Kong’s watchdogs seem to be actively trying to bring in crypto business, including by cajoling banks to make life easier for exchanges and meeting founders facing crackdowns in the US.

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

Few in Hong Kong’s finance community seem to know why the territory wants to attract crypto firms, given the series of damaging collapses in the industry and the US’s move in the opposite direction.

Some speculate that Beijing decided to use Hong Kong as a testing ground for ways mainland China might one day allow crypto to return. Others say Hong Kong is worried that its role as a financial centre is in decline — in part because of Singapore’s rise as a rival Asian finance hub.

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

It wants them to consider providing banking services to even those crypto firms that Hong Kong’s SFC has not yet awarded a licence, especially if they are in the process of applying for one, it said in a letter to banks in April. A top executive at a crypto firm applying for the licence said the letter “was one of the most direct I’ve ever seen a regulator issue”.

But it is unable to offer meaningful reassurance. If banks were found to be handling the proceeds of crime it would fall to law enforcement bodies such as Hong Kong’s police or potentially the US Department of Justice — not the HKMA — to take action. That 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 alienate Hong Kong, and risk losing goodwill in a market that is financially and strategically vital. Their best hope might be that Hong Kong’s stringent approach to regulating crypto kills its allure.

So far, HSBC appears to be engaging in a delicate dance, turning up to meetings with regulators and making at least some of the right noises while its senior executives remain cautious. But it cannot do that indefinitely. In the end, this is about more than crypto. For HSBC’s leaders, it is a test of how intelligently they can navigate competing demands from the bank’s twin bases, east and west, at a time of fracturing political ties. That problem will present itself in different forms, and perhaps with greater intensity, in the years to come.

kaye.wiggins@ft.com