Tuesday, October 26, 2021

Banking and ICOs a Minefield for Hong Kong’s Gatecoin

Banking and ICOs a Minefield for Hong Kong’s Gatecoin

Navigating the minefield of ICO legality and banking relationships is a challenge in an advanced economy like Hong Kong. Exchange Gatecoin described to Bitsonline its recent efforts and struggles trying to build an interface between the crypto economy and the traditional financial world.

Also read: Swiss Technical University Accepts Bitcoin to Boost Tech Cred

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Banking Partner Quits Without Notice

Those struggles came to a head recently when Gatecoin found itself abruptly cut off from its new banking partner. Hang Seng bank gave the company no notice or reason, and has frozen Gatecoin’s funds.

Gatecoin logoGatecoin announced on 28th September that it would have to suspend USD and HKD accounts until another solution is available.

The exchange is best known for ETH trading, becoming the first exchange to list it when it became available, in mid-2015. Since then it has also become a platform for Ethereum-based ERC20 token token sales.

However, Gatecoin’s Thomas Glücksmann said management doesn’t think that’s the issue, despite the recent chaos over ICO fundraising rules in mainland China and a recent statement by Hong Kong’s regulator defining some ICO tokens as securities.

“It’s always been difficult for (cryptocurrency exchanges) to sustain banking relationships for long periods,” he said. Besides, he added, some banks barely seem to grasp what Bitcoin was, let alone smart contracts or token sales.

Gatecoin’s History a Microcosm of Crypto Economy’s Trials

Some background: Gatecoin is a registered and licensed Money Service Operator (MSO) with the Hong Kong authorities. It has operated in the territory since 2013.

In May 2016 the exchange suffered a hack that resulted in the loss of $2 million USD (at the time) worth ETH. That dollar value is considerably higher in late 2017, though Gatecoin is “close to repaying” all the lost funds.

It did this via traditional investment and its own business profits, eschewing an ICO raise or Bitfinex-style “IOU token” of its own. To do so as a regulated, locally-registered exchange would have required approval from the HK Securities and Futures Commission.

Standard Chartered Blocks the Startup It Funded

Gatecoin CEO Aurelien Menant at the SuperCharger fintech accelerator
Gatecoin CEO Aurelien Menant at the SuperCharger fintech accelerator, 2016

Gatecoin’s main banking partner Standard Chartered announced it was cutting ties in Q1 2017. Glücksmann described this as frustrating — the company had even participated in the Standard Chartered-funded “SuperCharger” fintech startup accelerator.

That bank also didn’t give a reason, although it did give the exchange months of notice so it could find a new partner. Not so with Hang Seng.

“Of course we had backup accounts but we had to scrambled to arrange it,” Glücksmann said. But that only caused more problems — when Gatecoin tried to shift its entire balance to Taiwan’s Fubon, the amount auto-froze the account.

What Might the Banks’ Problem Be?

Both Gatecoin’s 2016 theft and the (often negative) coverage of 2017’s ICO boom would look like reasons for banks to get cold feet.

But bank account pinball is a game familiar to nearly all cryptocurrency exchange operators — whether they be in China, Australia, Japan or elsewhere. Their business activities are poorly understood and applicable laws usually uncertain. Given the low relative value and obscurity of the global crypto market, banks are more likely to simply shut them off.

“Eventually you run out of bank accounts. So what do you do next?” Glücksmann. Still in limbo, Gatecoin is exploring a number of options.

Notably, many big-name banks have had no similar problems dealing with actual criminals. HSBC seems to frequently in trouble and was even described as “a preferred bank for Mexican drug cartels”.

Several of Australia’s big banks are also in hot water for multiple regulatory breaches involving millions of dollars in questionable transactions. This included one that somehow managed to have a franchise location completely infiltrated by a crime gang.

Maybe there’s just not enough money in (legal) crypto tokens yet to persuade them to find a way.

Trying to Be the Compliant ICO Platform

Gatecoin’s experiences highlight the tribulations any company will face if it chooses to mix ICO specialization with proper legal compliance. In many cases it will be dealing with laws that are in flux — or not even written yet.

Thomas Glücksmann, Gatecoin
Thomas Glücksmann, Gatecoin

It led the way trading early ICO tokens like Augur, ICONOMI, DigixDAO and SingularDTV. Gatecoin also works with issues to underwrite token launches, charging a listing fee and 5 percent of the initial raise. It has now underwritten more than 15 ICOs and listed over 20 ICO tokens.

Gatecoin’s team are fully identifiable and it performs KYC/AML on its traders; one of the few such token exchanges to do so. Several of the more popular multi-token exchanges are opaque and non-compliant, in jurisdictions where it might be hard to seek redress should anything go wrong.

The hard crash of Cryptsy in 2016 and U.S. federal authorities’ raid on BTC-e in 2017 are two famous examples of this.

No Problems in Europe Yet

A slim majority (about 55 percent) of Gatecoin’s users are Hong Kong residents. About 30 percent are in Europe, with the rest scattered around other regions.

Glücksmann said they’ve had no problems dealing with European banks at all. In fact, the company is looking to open up physical offices somewhere in that continent next year.

In the crypto economy, though, nothing is certain. The eventual riches from Bitcoin, Ethereum, ICOs and others may make it all pay off someday — but operators will need to be dedicated.

Why do Bitcoin and other cryptocurrency exchanges have such a problem with banks? Let’s hear your thoughts.

Images via Gatecoin, Pixabay, CrowdFundInsider.com, Jon Southurst

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