Another week, another casualty in the crypto community. The ravages of Crypto Winter continue to wreak havoc on the crypto landscape, as a court in Hong Kong has ordered the local Gatecoin crypto exchange to shut its doors and liquidate its assets. Gatecoin marks the fifth crypto exchange to close its doors in 2019. Company representatives said the company had no choice “after an unsuccessful attempt to recover funds lost in a dispute with a former payment services provider.”
In its announcement to its customers, the team behind the exchange admitted that they had been battling for months to stay in business, but the suspension of service was necessitated by a court order to cease operations and wind down immediately. There had been an ongoing battle with its previous Payment Service Provider (PSP) over deposits that had been secured, but never refunded. Banks consider crypto related firms to be high risk, and, as such, by contract demand large, un-refundable deposits to cover potential chargebacks or disputes over cross-border remittances.
In this case, the bank froze the exchange’s bank accounts for undisclosed reasons back in September of 2018. Company management notified customers in November that it had retained the services of a bank in Switzerland and a European payment processor, one that was “a fully regulated payment institution by the French regulator”.
Their current message to clients noted that this move was also problematic:
Even after we managed to mitigate our loss by replacing that PSP with more reliable alternatives to process our clients’ transfers in September 2018, the situation did not improve because that PSP retained a large part of our funds.
While the management of Gatecoin may insist that poor banking support was its cause for shuttering, the exchange, it is thought, never truly recovered from a series of cyber attacks that followed 2016 and resulted in the loss of 185,000 ETH and 250 BTC. It would not, however, be the first instance where a crypto related company did not receive adequate support from the banking community. There have been several recent articles, most notably one from Bloomberg, which have revealed the difficult task of overcoming a bank’s reticence to service any entity in the crypto ecosphere.
Banking support is one thing, but the recent bear market has put pressure on all crypto related companies. Mining shutdowns have been prominent in the news, as have the negative aspects on major computer supply companies like Nvidia. Prior to Gatecoin, however, there have been four other exchanges that recently bit the dust:
- Cryptopia – a New Zealand exchange that shut after a $16 million hack;
- Liqui – a Ukrainian exchange that cited liquidity issues;
- Coinpulse – another crypto exchange that declared “indefinite maintenance” due to liquidity concerns, but it is also looking for new investors;
- QuadrigaCX – an embattled Canadian exchange that shut after its owner died of mysterious circumstances and $140 million in client funds mysteriously disappeared, as well.
These closures do not come as a surprise. Many insiders have been predicting the consolidation of all things crypto due to Crypto Winter, declining volumes and valuations, and financial pressures to stay afloat. Per Ran Neuner at CNBC:
I’m expecting more exchanges to shut down in this bear market. Last year everyone rushed to start an exchange. Exchanges require infrastructure that is expensive to maintain and most won’t survive this.
Clients of these beleaguered exchanges will more than likely be absorbed by larger exchanges like Binance and Coinbase, but a new wave of sophisticated, state-of-the-art exchanges like Bakkt and ErisX will be coming on stream shortly. These newer models will be regulated and designed to address prior shortcomings that the SEC and institutional investors have found abhorrent. We might expect another round of closures and consolidations to follow when this wave hits the shores of Crypto-Land in future.