Shalini Nagarajan

Hong Kong, determined to reclaim its fintech crown and rival Singapore, is poised to become a thriving crypto hub by considering the inclusion of retail investors in cryptocurrency trading.



The city-state is reportedly giving a nudge to major banks, urging them to hop on the bandwagon and embrace crypto exchanges as clients after announcing a clear regulatory framework that aims to encourage innovation.



The <a href="https://www.ft.com/content/da31d2d6-e547-43b0-821d-a235097ef9c9" target="_blank" rel="noreferrer noopener">Financial Times</a> reported on Thursday that the lenders include HSBC, Standard Chartered and Bank of China.



In a recent meeting, the Hong Kong Monetary Authority, the city&#8217;s banking regulator, questioned lenders about their hesitancy in accepting crypto exchanges as clients, the report said.



In a <a href="https://www.hkma.gov.hk/media/chi/doc/key-information/guidelines-and-circular/2023/20230427c1.pdf" target="_blank" rel="noreferrer noopener">letter</a> to the banks, the HKMA advised them that conducting due diligence on prospective customers should not place excessive burdens, especially for those establishing offices in the city to explore opportunities.



An HKMA spokesperson confirmed to Blockworks that it has provided guidance to banks on provision of banking services to corporate customers, including virtual asset service providers.



Standard Chartered reacted to the report by saying it has regular dialogue with regulators on different subjects. HSBC and Bank of China didn’t return Blockworks’ request for comment by press time.



Bloomberg <a href="https://www.bloomberg.com/news/articles/2023-03-02/uk-banks-ramp-up-crypto-restrictions-with-new-retail-limits?" target="_blank" rel="noreferrer noopener">reported</a> earlier this year that HSBC banned customers from buying crypto with credit cards due to risks, as warned by UK authorities.



<h2 class="wp-block-heading">US Government&#8217;s ongoing crusade vs. Hong Kong’s welcome</h2>



Meanwhile, in the US, the Securities and Exchange Commission’s <a href="https://blockworks.co/news/coinbase-binance-suits-different">back-to-back lawsuits</a> against Binance and Coinbase last week signify a fresh stage in the US government&#8217;s ongoing efforts to control the industry.&nbsp;



Some analysts suggest the crackdown will have minimal immediate impact on crypto investors.



A person familiar with the HKMA’s discussion told the FT that the regulator encouraged banks to overcome their fears, highlighting that the traditional banking mindset and resistance from senior executives are factors behind the hesitancy in adopting crypto



And Hong Kong legislator Johnny Ng went as far as <a href="https://blockworks.co/news/coinbase-hong-kong-invite">encouraging Coinbase and other exchanges</a> to establish official operations in the city.



<h2 class="wp-block-heading">Hong Kong&#8217;s initiatives attract crypto players</h2>



Ahmed Ismail, CEO of AI-driven crypto liquidity aggregator FLUID, told Blockworks that Hong Kong is actively implementing multiple initiatives to facilitate expansion in the local market, making it an enticing hub for companies seeking to broaden their crypto operations.



He pointed to companies like Gate Group and Huobi <a href="https://blockworks.co/news/crypto-exchanges-hong-kong">announcing plans to establish operations</a> in the region, saying that “this can help bring liquidity and trading volume to the crypto sector.”



State-owned China Pacific Insurance also recently <a href="https://www.insurancebusinessmag.com/asia/news/breaking-news/chinese-stateowned-insurer-opens-two-crypto-funds-in-hk-442383.aspx#:~:text=According%20to%20a%20report%20from,%2Dof%2Dstake%20digital%20assets." target="_blank" rel="noreferrer noopener">introduced two crypto funds</a> in Hong Kong. And according to Ismail, the Chinese government may use these to invest in crypto indirectly.



“This way, not only can China maintain its influence in Hong Kong, but it could also help gain from the region&#8217;s crypto activities,” he said.



“To put it succinctly, if Hong Kong&#8217;s crypto market manages to gain significant traction, it can potentially be the thing that kick-starts the next bull run.”



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Hong Kong urges major banks to embrace crypto exchanges as clients

Following the wind down of Silvergate, Silicon Valley Bank and Signature Bank, various theories have circled that these events were <a href="https://blockworks.co/news/operation-choke-point-2-0">a targeted attack</a> by an anti-crypto factions of the US government.



Former US Rep. Barney Frank <a href="https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html" target="_blank" rel="noreferrer noopener">claimed</a> the regulatory takeover of Signature was intended to send a message to US banks to steer clear from crypto businesses.



However, the New York Department of Financial Services disputed this, saying its possession of Signature Bank had <a href="https://blockworks.co/news/signature-possession-nothing-to-do-with-crypto">nothing to do</a> with its crypto dealings.&nbsp;



Turmoil in the banking sector last weekend saw regulators close Signature, which signaled the end of one of the crypto industry’s key banking partners.&nbsp;



But some crypto companies are reportedly turning to big banks like JPMorgan, HSBC and Deutsche Bank. New York Magazine’s <a href="https://nymag.com/intelligencer/2023/03/crypto-companies-are-asking-jamie-dimon-to-hold-their-money.html" target="_blank" rel="noreferrer noopener">Intelligencer</a> reported Thursday that <a href="https://blockworks.co/tag/jpmorgan" target="_blank" rel="noreferrer noopener">JPMorgan</a>, one of the largest Wall Street banks, is opening new accounts for crypto firms including venture capital funds and Web3 infrastructure start-ups.&nbsp;



And while the bank is not turning down business from crypto clients whose funds lie with the three failed banks, it’s also not pursuing them. Instead, it is being selective about the businesses to partners with and steering away from those that issue their own digital tokens.



Chris Burniske, co-founder of crypto-focused VC firm Placeholder, told the outlet that the collapse of smaller peers represents an opportunity for big banks to grow their own business lines. A spokesperson at another crypto VC said no big-name banks had refused partnering with them.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Though Operation Chokepoint is important to be aware of, crypto has more banking options than just SVB, Silvergate, and Signature.&mdash; Chris Burniske (@cburniske) <a href="https://twitter.com/cburniske/status/1635359181262962689?ref_src=twsrc%5Etfw">March 13, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Aside from JPMorgan, <a href="https://blockworks.co/tag/citi" target="_blank" rel="noreferrer noopener">Citi</a> is said to be another big bank that has been receptive to crypto clients.&nbsp;



These companies see the potential for growth and innovation in the crypto industry, despite the challenges that come from being associated with it. “These banks understand that they can&#8217;t ignore the crypto market and its potential to disrupt the traditional financial industry,” said Simon Schaber, chief business development officer at Spool.



Crypto companies need banks for two reasons, in his view. First, banks provide crucial infrastructure for financial transactions, including custody and settlement services. Second, banks bring a level of legitimacy and credibility to the crypto industry that can help attract more mainstream investors.



JPMorgan declined to comment. Citi and <a href="https://blockworks.co/tag/hsbc" target="_blank" rel="noreferrer noopener">HSBC</a> didn’t return a request for comment by press time.



But in recent months, regulators cranked up <a href="https://www.wsj.com/articles/federal-reserve-fdic-and-occ-warn-banks-about-cryptocurrency-risks-11672783296?mod=article_inline" target="_blank" rel="noreferrer noopener">warnings</a> against the crypto industry after FTX’s implosion. The Federal Reserve, Federal Deposit Insurance Corp and Office of the Comptroller of the Currency listed fraud and scams, market volatility and legal uncertainty within the industry among concerns.



And now crypto companies are left struggling to find banking partners. Circle revealed this week that it would <a href="https://blockworks.co/news/new-circle-bank-after-usdc-depeg">partner</a> with New Jersey-based Cross River Bank to produce and redeem its stablecoin USDC, and said it would expand ties with BNY Mellon.



Mercury Bank <a href="https://twitter.com/mercury/status/1634689874467987457" target="_blank" rel="noreferrer noopener">said</a> it already onboarded double its usual number of customers last weekend, “getting as many SVB customers live as possible.”



Meanwhile, the crypto community has also been compiling <a href="https://twitter.com/MapleLeafCap/status/1635089242337714178" target="_blank" rel="noreferrer noopener">lists</a> of banks that could be open to partnering with small crypto firms.&nbsp;



Crypto ventures are still companies at the end of the day, and most, if not all, still have services to pay that require fiat and traditional banking partners, according to Chris Bradbury, CEO at DeFi platform Oasis.



“Financial institutions recognize that, regardless of how many crypto companies fail, cryptocurrencies themselves are here to stay,” he told Blockworks. “To attract the new younger audience, banks must find a way to incorporate crypto services into their operations. They understand that those who do not provide their customers with numerous options will fail in the end.”



CoinDesk <a href="https://www.coindesk.com/business/2023/03/14/santander-hsbc-deutsche-and-others-still-willing-to-serve-crypto-clients-after-banking-failures-dcg-says/" target="_blank" rel="noreferrer noopener">reported</a> Tuesday that its parent firm, Digital Currency Group, was looking to find new banking partners for its subsidiaries, and discovered that Santander, HSBC, Deutsche Bank, BankProv, Bridge Bank, Mercury, Multis and Series Financial are ready to tie up with crypto firms.



None of the big banks are openly declaring their willingness in associating with crypto, but there could be several more that are quietly onboarding new clients.



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JPMorgan, Citi, HSBC Still Welcome Crypto Clients

Morgan Chittum

<div id="highlights-block_62320be691e2d" class="highlights">
 <ul>
 <li>”The metaverse is how people will experience Web3 [and] the next generation of the Internet,” HSBC’s Suresh Balaji said</li>
 <li>Rival megabank JPMorgan unveiled a virtual lounge last month in blockchain-based world Decentraland</li>
 </ul>
 
</div>



Financial services provider HSBC said Wednesday it will acquire a piece of virtual real estate in The Sandbox metaverse.



The purchase is a part of a larger partnership with The Sandbox to engage with sports, esports and gaming fans, according to the bank’s <a href="https://sandboxgame.medium.com/hsbc-to-become-the-first-global-financial-services-provider-to-enter-the-sandbox-c066e4f48163" target="_blank" rel="noreferrer noopener">announcement</a>.



“The metaverse is how people will experience Web3, the next generation of the Internet — using immersive technologies like augmented reality, virtual reality and extended reality,” Suresh Balaji, chief marketing officer at HSBC Asia-Pacific, said in a statement. Further details on the plot were not disclosed.



HSBC joins a laundry list of big-name brands and companies that have partnered with the blockchain gaming firm, including Warner Music Group, Gucci and Adidas.&nbsp;



“We&#8217;re pleased to see large, trusted institutions such as HSBC join The Sandbox open metaverse and embrace the culture of Web3, connecting with users through entertainment, gaming and user-generated content,” Sebastien Borget, chief operating officer and co-founder of The Sandbox, said in a statement. 



The partnership, The Sandbox US CEO Mathieu Nouzareth said, signals the “rapid maturation” of the metaverse, and other financial institutions will likely follow suit.



“As metaverse adoption expands further into the mainstream, we’re only going to see a broader spectrum of brands investing in the metaverse to create digital-first experiences that engage both new and existing customers,” Nouzareth told Blockworks.



Last month, megabank JPMorgan <a href="https://cms.blockworks.co/jpmorgan-enters-the-metaverse-with-virtual-decentraland-lounge/" target="_blank" rel="noreferrer noopener">unveiled</a> a virtual lounge in blockchain-based world Decentraland.&nbsp;



“When you think about the economics of the metaverse — or metanomics — there are opportunities in almost every market area.” the bank wrote in a note. “We are not here to suggest the metaverse, as we know it today, will take over all human interactions, but rather, to explore the many exciting opportunities it presents for consumers and brands alike.”



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HSBC Buys Virtual Real Estate in Sandbox Metaverse

Michael Bodley

<div id="highlights-block_61e01a539eed0" class="highlights">
 <ul>
 <li>Dunamis Trading Group gained an estimated 77% last year</li>
 <li>The firm is pausing on accepting more money until it finishes redoing its trading system from scratch</li>
 </ul>
 
</div>



Market-neutral crypto hedge fund firm Dunamis Trading Group has taken a time out from accepting new capital as the Brazilian asset manager retools its approach to trading after a banner year.&nbsp;



Dunamis now oversees $210 million of assets under management — dwarfing the $20 to $30 million the operation had on hand to start 2021.



Managing Partner Delfos Machado Neto told Blockworks the team decided to temporarily close to new money in the fourth quarter in order to put the finishing touches on a yearlong overhaul of the firm’s infrastructure and trading systems.&nbsp;



It’s an effort to keep up with a trading industry that has “grown up a lot,” in the last year and a half, Machado Neto said — especially when it comes to the rise of decentralized finance (DeFi.)&nbsp;



Indeed, Dunamis is one of a growing number of institutional crypto investors looking for new sources of alpha for their ballooning piles of cash. The median assets under management for crypto hedge funds was $15 million in 2020, according to the <a href="https://www.pwc.com/gx/en/financial-services/pdf/3rd-annual-pwc-elwood-aima-crypto-hedge-fund-report-(may-2021).pdf" target="_blank" rel="noreferrer noopener">latest PriceWaterHouseCoopers data available</a> — an increase from just $3.8 million the year before.&nbsp;



“Essentially, it&#8217;s like there’s a huge increase of what we can trade nowadays,” Machado Neto said.



<blockquote class="wp-block-quote">“If you would have asked me, in 2019, &#8216;You want to trade Solana?’ It was like a couple dollars back then, so it wasn&#8217;t something that was really on the radar that we would be trading. Sushi, Matic, Cardano — all of these things have really come to the forefront of activity, that plus DeFi (generally), we needed to revamp it, spend some time rethinking and redoing it.”</blockquote>



The São Paulo firm’s limited-partners have bought into the revamp, judging from their commitments to invest tens of millions of dollars more at the next opportunity.&nbsp;Those investments will range from network connectivity upgrades to updating feed handlers that interact with exchanges.



Investors have already committed capital for the March or April reopening that would boost assets from $210 million to $250 million, and the firm estimates another $50 million of commitments will roll in next month.



It doesn’t hurt that the strategy gained an estimated, unaudited 77% net of fees last year. Its returns were fueled in part by snapping up open interest on Bitcoin and Ethereum derivatives and leveraging up those holdings. It also engages in market-making functions.&nbsp;



Dunamis started trading in 2017 with proprietary capital, when the main option was spot trading Bitcoin and later Ethereum. Enter the overhaul: giving the firm the capability to trade 30 to 40 coins on a corresponding number of exchanges. It’ll allow the firm to more closely key in on what Machado Neto sees as big opportunities this year: DeFi, crypto structured products and options on volatility trading.&nbsp;



Before starting the firm, Machado Neto spent almost six years with HSBC, where he served as the head of equity trading. Another managing partner, Alexandre Thorpe, who is the firm’s chief operating officer and chief risk officer, also previously worked for HSBC — as did managing partner and chief technology officer Alexandre Pereira.



The firm has grown from little more than a dozen employees at the end of 2020 to more than 40 now.&nbsp;



“We were like 15 people,” he said. “We used to sublet a space, and we have a full floor in a nice building now. We’re an example of crypto growing up.”



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Exclusive: Crypto Hedge Fund Says No to More Money (For Now) After Banner 2021

Ben Strack

<div id="highlights-block_61b7b42b719c2" class="highlights">
 <ul>
 <li>Both banks will use Baton Systems’ Core-FX distributed ledger technology </li>
 <li>Technology allows the bank to settle funds on-demand with HSBC in more currencies than CLS Group allows, according to co-head of macro at Wells Fargo Corporate and Investment Bank</li>
 </ul>
 
</div>



Wells Fargo and HSBC are using blockchain technology for the first time in the settlement process of cross-border payments.



The two financial services titans will jointly use a shared settlement ledger to process US dollar, Canadian dollar, British pound sterling and Euro transactions, the firms announced Monday.&nbsp;



The companies have plans to extend the platform to settle additional currencies and could choose to add more participants, introducing a central Financial Market Infrastructure provider.



The platform runs on <a href="https://batonsystems.com" target="_blank" rel="noreferrer noopener">Baton Systems</a>’ Core-FX distributed ledger technology.



Adopters of the technology are no longer restricted by currency-specific cut-off times and can agree with their counterparties on when and how often they settle. It allows for multiple settlements a day and a settlement process that can be completed in three minutes.



Riskless settlement, or payment-versus-payment (PvP) settlement, has previously only been achievable with legally enforceable settlement finality through <a href="https://www.cls-group.com/products/settlement/clssettlement/">CLS</a><a href="https://www.cls-group.com/products/settlement/clssettlement/" target="_blank" rel="noreferrer noopener"> </a><a href="https://www.cls-group.com/products/settlement/clssettlement/">Group</a>.



Market participants prefer to settle via PvP because the currencies are simultaneously settled — eliminating the risk of a firm having made a payment to a counterparty that then defaults on its obligations, said Alex Knight, head of EMEA at Baton Systems



But access to PvP settlement through CLS is restricted to CLS member firms and only available across 18 currencies, he explained.



“Today’s announcement means that all [foreign exchange] businesses can now access PvP settlement protection across all currencies,” Knight told Blockworks. “We’ve used distributed ledger technology to achieve this, delivering a level of transformation that’s well overdue.”



<h3 class="wp-block-heading">Traditional finance embracing the space?</h3>



Banks currently transmit files to CLS and then get funds settled the next day between accounts held at CLS, said Mark Jones, co-head of macro at Wells Fargo Corporate &amp; Investment Bank, adding that the funds are held up during the waiting period. 



“This new technology would allow us to settle funds on-demand with HSBC in any array of currencies we choose,” Jones told Blockworks. &#8220;[It] also provides greater visibility into transactions and funds flow because both of our operations teams at [Wells Fargo] and HSBC are utilizing the same dashboard at the same time.”



Large banks sharing technology infrastructure with shared transaction visibility is a new concept, the Wells Fargo executive added.&nbsp;



David Tawil, president of multi-strategy crypto asset fund ProChain Capital, said that banks that do not look to implement blockchain and accept cryptocurrency more broadly could be hurt over the long term.



“I know that right now it’s incredibly difficult for those banks to participate in cryptocurrency broadly because of the lack of regulation,” he said. “But certainly there should be education and development going on inside of those banks to be able to act and get involved once they are allowed to.”



Tawil argued that financial institutions should work together to figure out how they can use blockchain technology collectively to facilitate transactions and perform other processes across their systems.&nbsp;&nbsp;



“Right now the decentralized aspect of this is a runaway train without them,” he noted. “If they don’t have a pre-planned way to go ahead and transition to getting onto that locomotive, they certainly could be left behind.”



Knight said that Baton Systems is in discussions with nearly all of the large foreign exchange banks about its technology, noting that some are evaluating its impact on their businesses.



<h3 class="wp-block-heading">Continuing to adopt</h3>



Mark Williamson, global head of FX partnerships and propositions at HSBC, said in a statement that the firm will continue to grow its FX Everywhere network, which has settled roughly 3 million intra-bank trades worth about $2.5 trillion since it launched in 2018. 



HSBC also intends to position itself to be able to transact in new forms of regulated digital currencies, such as central bank digital currencies (CBDCs), he added.



Wells Fargo labeled cryptocurrencies as a “viable investment asset” <a href="https://www.wellsfargoadvisors.com/research-analysis/reports/rationale-cryptocurrencies.htm" target="_blank" rel="noreferrer noopener">in a report</a> published earlier this year. It noted that crypto could see continued growth, further compression in price volatility and a possible role as portfolio diversifiers over the long term.



“We are now utilizing blockchain technology, and expect that trend to continue to grow,” Jones told Blockworks. “As it relates to the crypto ecosystem, it’s clearly evolving fast and we are paying close attention to how the regulatory structure unfolds around it.”



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