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Risk-Wary Banks Chill Bitcoin Market - WSJ

APRIL 26, 2017

At least three exchanges have said in recent weeks they can’t process transactions in dollars

At least three exchanges have said in recent weeks they can’t process transactions in dollars

Bitcoin trading has become more of a challenge under pressure from global banks and regulators.

Bitcoin trading has become more of a challenge under pressure from global banks and regulators. PHOTO: CHRIS RATCLIFFE/BLOOMBERG NEWS

By Gregor Stuart Hunter and Julie Steinberg

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At least three bitcoin exchanges have said in recent weeks that they can’t process transactions in dollars, as global banks pull back from sectors they deem too risky.

Hong Kong-based Bitfinex, the largest cryptocurrency exchange by market share, said last week its customers couldn’t withdraw or deposit any currencies because the Taiwanese banks that handle its transactions were blocking all requests. OKCoin International, the Hong Kong-based arm of one of China’s biggest bitcoin exchanges, and BTC-e have warned users of disruptions in U.S.-dollar transactions.

Earlier this month, Bitfinex sued Wells Fargo & Co., alleging it had refused to process some bitcoin-related transactions through the Taiwanese banks. A week later Bitfinex withdrew the suit, acknowledging that Wells Fargo has no legal obligation to serve every customer, said Philip Potter, the exchange’s chief strategy officer, in an interview. Wells Fargo declined to comment.

Bitcoin, a digital currency launched in 2009, runs on a decentralized network of computers and isn’t backed or controlled by any government. Users purchase bitcoin with U.S. dollars or other currencies.

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Many bitcoin exchanges have accounts with local banks that rely on larger “correspondent banks” to facilitate wire transfers and process transactions that involve foreign currencies. But global banks have long been wary of even indirect interactions with bitcoin exchanges, for fear of being held liable if bitcoin users—who are difficult to identify—are involved in illegal or shady activities, said Ross Delston, a former U.S. banking regulator and anti-money-laundering consultant.

J.P. Morgan Chase & Co. prohibits banks it transacts with from dealing with virtual-currency exchanges, according to an internal document seen by The Wall Street Journal.Standard Chartered PLC also doesn’t process such transactions, according to a spokesman.

To be able to transact with the wider financial system, bitcoin exchanges must play cat-and-mouse, said Bitfinex’s Mr. Potter, continually switching bank accounts.

“They close one account, we open another somewhere else,” Mr. Potter said. “It’s a battle, but it looks like one that we appear to be losing, largely because we’re the largest such exchange in the world and we’ve got the biggest target painted on our back.”

Bitcoin is also drawing more regulatory scrutiny. The U.S. Securities and Exchange Commission last month rejected two separate proposals for bitcoin-based exchange-traded funds, saying the lack of transparency could leave investors open to fraud and manipulation. The agency this week said it would review one of the rejections. China’s central bank is considering requiring bitcoin exchanges to verify a client’s identity and adhere to banking regulations, The Wall Street Journal reported last month.

The market value of all cryptocurrencies this month hit a record $30 billion, two-thirds in bitcoin, according CoinMarketCap. But trading has plummeted this year as regulatory pressure has risen in China—which accounted for 90% of volume last year, according to research site CryptoCompare. Over the past month China’s share of the much-diminished total has averaged just 11.2%, the site says.

In response to scrutiny from regulators, global banks over the past year to 18 months have ratcheted up their “know-your-customer” checks by re-examining existing clients, said Benjamin Quinlan, chief executive officer of Hong Kong-based financial services consultancy Quinlan & Associates.

Bitcoin exchanges barred from transacting in U.S. dollars or other currencies effectively forgo their most common function, as places to buy cryptocurrencies with money stored in the traditional financial system—though users can still convert bitcoin into other virtual currencies such as Monero or Zcash.

‘They close one account, we open another somewhere else.’

—Philip Potter, Bitfinex

Bitfinex’s difficulties in the past year include the loss of around 120,000 bitcoin, worth some $65 million, to hackers last August. The exchange has since reimbursed customers. It was also fined $75,000 by the U.S. Commodity Futures Trading Commission last June after failing to register as a commodities exchange.

Other cryptocurrency exchanges have reported disruptions in recent weeks. OKCoin International said on its website on April 18 that it would temporarily suspend deposits in U.S. dollars because of unspecified “issues with intermediary banks.” It said it was seeking alternatives to resume usual service.

Bitcoin exchange BTC-e, whose location isn’t clear, said in a tweet on April 14 that as a result of changing its bank account, it wouldn’t be able to accept U.S.-dollar wire transfers until the end of the month. The exchange didn’t respond to requests for comment.

—Chao Deng and Suryatapa Bhattacharya contributed to this article.

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com and Julie Steinberg atjulie.steinberg@wsj.com

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