Analysis: Cryptocurrency companies use 'backdoor' listings to ease into mainstream

Water Oasis

22/02/2019 24:00

By Alun John and Anna Irrera
    HONG KONG, Feb 22 (Reuters) - Several cryptocurrency
exchanges have moved closer to mainstream markets by buying
listed companies, looking to raise funds and present themselves
as embedded in the traditional financial services world they
once spurned.
    In the most recent deal, U.S. crypto broker-dealer Voyager
Digital  VYGR.V  on Feb. 11 achieved a "backdoor" listing on
Toronto's Venture Exchange after it bought control of mineral
exploration firm UC Resources.
    Such purchases, also known as reverse mergers, allow
companies to offer shares to the public without the rigours and
regulatory scrutiny of a full initial public offering (IPO).
     "Many (cryptocurrency) exchanges have put a lot of
strategic effort into trying to legitimise their operations and
their reputations, and for some there's an assumption that
having some exposure to the traditional public market will
help," said Fei Ding'an, managing partner at Ledger Capital, a
digital asset investment firm. 
    Japan's Financial Services Agency (FSA) is the only major
national regulator so far to have drawn up a definitive
framework to govern digital assets and the platforms where they
are traded.
    In January, OKC Holdings, a company controlled by Star Xu,
the founder of crypto-exchange OK Coin, bought 60.5 percent of
LEAP Holdings,  1499.HK , a Hong Kong-listed construction firm,
for HK$484 million ($61.69 million). urn:newsml:reuters.com:*:nS7N1Z301K urn:newsml:reuters.com:*:nL3N1ZO1HN
    Days later, the parent of Korean crypto exchange Bithumb
announced plans for a U.S. listing via the purchase of
Blockchain Industries  BCII.PK .
    Last year, investors that included the co-founders of
crypto-exchange software producer ANX International bought a
controlling stake in Hong Kong-listed marketing firm Branding
China  0863.HK , while Huobi, a Singapore based exchange, bought
a 72 percent stake in Hong Kong-listed power electrical company
Pantronics Holdings  1161.HK .
    Voyager said its listed shares could help fund growth. 
    "Being a public company enables Voyager to operate with the
transparency that the crypto market deserves from its
institutions," Voyager CEO Steve Ehrlich said in an email.
    Neither Huobi nor OKCoin has given details of their plans
for the purchases.
    ANX International remains separate from the renamed BC
Group, but since the change in ownership the listed unit has
launched new businesses that include a digital asset trading and
exchange platform. 
    A spokesman for BC Group said being publicly traded gave
clients "additional confidence in knowing we are a credible
company and here for the long game." 
    Spokespeople for OKCoin and Huobi declined to comment.
    Neither Bithumb nor its parent Blockchain Exchange Alliance
responded to requests for comment. 
    
    LEGITIMACY
    Crypto experts said the deals could help the industry gain
greater mainstream acceptance.
    The reputation of cryptocurrencies, and particularly
exchanges, has been hit hard by fears of price volatility and
possible uses for laundering money alongside high-profile hacks
and infrastructure failures.
    Last year, the New York attorney general's office warned
that several cryptocurrency exchanges were plagued by poor
market surveillance and pervasive conflicts of interest, saying
some may be operating illegally.  urn:newsml:reuters.com:*:nL2N1W41F7
    This month, $137 million in cryptocurrencies was frozen in
the user accounts of Canadian digital platform Quadriga after
the founder, the only person with the password to gain access,
died unexpectedly.  urn:newsml:reuters.com:*:nL3N1ZZ46Z 
    The crypto market peaked in late 2017, when trading volumes
surged and bitcoin, the largest cryptocurrency, reached a high
just above $20,000. Bitcoin's price has fallen more 80 percent
since then, and trading volumes have slumped.
    Some exchanges may also feel pressure from investors seeking
a means of realising their profits. 
    "With the market turning south and regulators not being
happy, this is an opportunity to satisfy investors and founders
who are looking for an exit," said Zennon Kapron, director at
financial technology consultancy Kapronasia. 

    WRESTLING WITH REGULATORS 
    Public listings of cryptocurrency exchanges also pose a
challenge for regulators, who are only beginning to grapple with
the issues of overseeing the trading of digital currencies.
    Japan's FSA became the first major jurisdiction to regulate
the exchanges in 2016, but has since refined its rules to allow
the industry to largely self-regulate.  urn:newsml:reuters.com:*:nL3N1X42SJ
    In the United States, New York state has, so far, issued a
handful of so-called BitLicences for companies doing any sort of
virtual currency business.
    Both Hong Kong's market watchdog, the Securities and Futures
Commission, and the Hong Kong Exchange declined to comment.
    But the commission is considering whether some
cryptocurrency trading platforms are suitable for regulation, a
process it hopes to finish this year, its chief executive,
Ashley Alder, told legislators on Tuesday.
    Hong Kong officials have already questioned the
sustainability of crypto businesses when last year, the world's
largest makers of cryptocurrency mining rigs did not follow
through on IPO plans in Hong Kong, in part because of the
questions officials raised.
    "It's possible a crypto exchange could incubate a new crypto
business inside a Hong Kong-listed company, maintain the listed
company's existing operations, and not be treated as a new IPO,
but it is a very difficult tightrope to walk," said a person
familiar with the listing committee's processes, speaking
anonymously because he was not authorised to speak to the media
on the subject.
    The Hong Kong Stock Exchange's Listing Committee must be
satisfied that a company's business is sustainable before it can
list. The miners' bids were stymied by fears that the falling
price of bitcoin made their business models unworkable, sources
said.  urn:newsml:reuters.com:*:nL4N1XQ2FL 
    Although backdoor listings are permitted in most countries,
some regulators, including those in Hong Kong, can review the
deals and can in some circumstances require a full IPO instead.
    "Crypto companies may struggle to demonstrate suitability
for listing given the state of regulation of the industry and
uncertain business models," said Jason Sung, a Hong Kong-based
partner at law firm Herbert Smith Freehills.
    Exchanges like Bithumb that are looking to the United States
could also similar roadblocks. 
     The SEC has authority both over U.S. companies selling
digital securities and companies conducting a reverse merger in
the United States. 
    "Depending on what the companies are planning to do they
very well might have to seek regulatory approval from the SEC or
the CFTC," said Richard Levin, chairman of the financial
technology and regulatory practice at the U.S. law firm
Polsinelli. 

($1 = 7.8455 Hong Kong dollars)

 (Reporting by Alun John in Hong Kong and Anna Irrera in New
York; Editing by Jennifer Hughes and Gerry Doyle)
 ((Alun.John@thomsonreuters.com; +852-28415827;))