Investors in doldrums as HK’s oldest Bitcoin exchange shuts down

By Staff Reporter

Hong Kong’s oldest Bitcoin exchange Gatecoin has filed for bankruptcy, casting doubts over whether the clients will be able to recover their assets, reports the South China Morning Post.

The exchange, which was founded by Frenchman Aurelien Menant six years ago, has had a tumultuous past. The company lost nearly US$21.4mn in clients’ assets in a hacking incident in May 2016 and have subsequently had its account shut down by nine of the city’s banks.

The Hong Kong newspaper speculates that investors, 40 percent of which are Hong Kong residents, are likely to face a “long, challenging liquidation process with a dim recovery outcome,” citing insolvency and legal experts. The paper estimates total losses at US$1.05bn.

This is because most of the cryptocurrency exchanges hold clients’ assets under their own digital signature which means they legally belong to the exchange, not the clients.

The insolvency was triggered, the paper speculates, after Gatecoin’s French payment service provider has allegedly failed to “return funds linked to a large volume of transfers.” After Hong Kong banks severed ties with the firm, citing compliance reasons, Gatecoin had reportedly linked up with a payment company in France.

Hong Kong’s securities the Securities and Futures Exchange (SFC) has proposed a regulatory sandbox for exchanges that are willing to opt into such an arrangement.

The proposed eligibility requirements, however, are somewhat onerous, including that the exchanges limit their services to professional investors (those with assets over US$1mn), and take out insurance against hacks and thefts, and also to keep reserves equivalent to 12 months of operating expenses as a financial buffer.

Given the high bar, it is too early to say if the exchanges would continue to remain unregulated, exposing investors to risks.

Or, there would emerge a clear framework for crypto exchanges in Hong Kong but the call for regulations certainly seem set to increase with the collapse, not so surprisingly, of the city’s oldest crypto exchange.

 

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