How Gatecoin's Party Got Gatecrashed

Another month and another cryptocurrency exchange shuts down. However, this one was closer to home and highlighted the perfect storm created by regulators, banks and PSPs.

Hong Kong-based exchange Gatecoin, which was founded and run by Aurélien Menant, recently announced that it is winding up its operations and starting its liquidation process. Its customers received notices such as the one below:

The Catch-22 Scenario

While Gatecoin blamed its previous and unnamed “fully regulated” French payment service provider (PSP) for its current predicament, it appears that the trading platform's financial woes had already begun in September 2017. It was when it started to see “issues with their banking partners.”

According to Gatecoin, apparently without any notice, their account with Hang Seng bank was frozen. Their accounts at Alpen Baruch and Fubon Bank were eventually frozen as well, making it difficult to access actual investment funds.

In the world of cryptocurrencies, this is not uncommon. Cryptocurrency business continues to face banking difficulties worldwide even today, reported Bloomberg. Companies are routinely denied access to even the most basic of banking services.

Managing director of law firm Duane Morris & Selvam LLP, Krishna Ramachandra, who advises on a wide range of compliance and regulatory matters, touched on the catch-22 nature of the situation in Hong Kong.

“While the Hong Kong securities commission issued a conceptual framework for licensing and regulation of virtual asset trading platforms in November 2018, PwC Hong Kong reports that this framework still requires that bank wires come from a Hong Kong bank. It does not address the issue of opening bank accounts in Hong Kong for cryptocurrencies being extremely difficult, despite there being no formal directives prohibiting banks from opening such accounts.”

Comparing the situation with that in Singapore, Ramachandra added that “the difficulty of opening bank accounts for companies dealing in cryptocurrencies is similar. While the Monetary Association of Singapore (MAS) has not prohibited the same, the regulations applicable to banks regarding identifying source of funds as well as know-your-client (KYC) and other anti-money laundering (AML) requirements have caused banks to take a conservative stance with regards to opening cryptocurrency-related bank accounts.”

Russian Roulette for Investors

Regulators everywhere are still deciding how to regulate the cryptocurrency exchange scene, and it is becoming clear that the eventual regulations, standards and guidelines will vary from country to country. But the key point to note in situations like that of Gatecoin's is whether it is a regulated exchange.

Jessica Chuah, the chief compliance officer of UDAX, another Asian crypto exchange, shone more light on this issue.

“If the exchange operator has been issued a license by its respective commission, then the operator must have laid down the recovery process in the business model during its submission,” said Chuah. “This means that there must be guidelines on how to recover funds from the trustee account which should have a paid-up capital.”

Hence in a regulated scenario, an exchange like Gatecoin would have safeguards put in place for its creditors, investors and equity partners and appointed a provisional liquidator to recover funds and refund the various stakeholders.

Still, Chuah cautioned that even with regulations, cryptocurrency being a high-risk investment, it is a case of “caveat emptor buyer beware” and that “investors should have done their own due diligence on the exchange's white paper and the term of services stated. The investment should be made based on carefully evaluated risk exposure and that ultimately all risks lie with the investors' risk appetites.”

In other words, it is up to the investors to take on the high risks. And in Gatecoin’s scenario, it also includes bank, PSP and regulator risks that evolved into an unfortunate, yet perfect, financial storm.