Bitcoin Firms Using Backdoors To Reach The Mainstream

There are a lot of cryptocurrency exchanges that are moving ever closer to the mainstream markets. This is primarily being done through buying out listed companies and looking to raise funds and present themselves as a core part of the traditional financial service space despite once being ignored.

In the most recent deal with the US crypto, broker-dealer Voyager achieved a backdoor listing on Toronto’s Venture Exchange after it bought control of the mineral exploration company, UC Resources.

These kinds of purchases are known as reverse mergers and allow firms to offer shares to the public without the rigours and regulatory analysis of a full IPO (Initial Public Offering).

Just in case you’re not fully clued up, an IPO occurs when a company puts their shares up for sale on a public market, it’s sort of like the backbone to an ICO.

According to Investopedia:

“An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it.”

An IPO makes that investment possible.

A managing partner at the virtual assets investment company Ledger Capital, Fei Ding’an said, “many (cryptocurrency) exchanges have put a lot of strategic effort into trying to legitimize their operations and their reputations, and for some there’s an assumption that having some exposure to the traditional public market will help.”

Japan’s Financial Services Agency is the biggest national regulatory body which has so far drawn up a definitive framework to govern digital assets and the platforms where they traded.

Last month, OKC Holdings bought 60.5 percent of the Hong Kong-listed construction company, LEAP Holdings. The sale went for $61.69 million ($484 million HK dollars).

Not even a week later, the owner of Bithumb - South Korean based crypto exchange - announced plans for a US listing through the purchase of Blockchain Industries.

As reported by Reuters:

“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, while Huobi, a Singapore based exchange, bought a 72 percent stake in Hong Kong-listed power electrical company Pantronics Holdings.”

Voyager said that its listed shares could assist the fund to grow. As written by the CEO of the crypto broker, Steve Ehrlich in an email, “Being a public company enables Voyager to operate with the transparency that the crypto market deserves from its institutions.”

Neither Huobi or OKCoin have provided any details of their plans for the purchases. The Hong-Kong based financial tech firm, ANX International is staying separate from the BC Group but ever since the change in ownership, the listed unit has started up new businesses that include a digital asset trading and exchange platform.

Even though Huobi, Bitthumb and OKCoin all denied to comment on the matter, the BC Group said that being publicly traded gave clients that little bit more “confidence in knowing we are a credible company and here for the long game.”

Viable

According to crypto experts, the idea of this is that the deals will help bolster the space garner more acceptance from the mainstream but just how viable is this?

Cryptocurrencies don’t exactly have the best reputation from mainstream media outlets. The fear of price volatility and possible users for laundering money alongside high-profile hacks and infrastructure failures is what gives crypto its bad name.

There were multiple cryptocurrency exchanges that were warned last year by the New York attorney general’s office that they were being affected by the poor market surveillance and extensive conflicts of interest, saying that some of them could be operating under illegal circumstances.

In fact, in February alone, $137 million in cryptocurrencies has been frozen in the user accounts of the Quadriga exchange, that we spoke about yesterday, following the untimely death of the founder who was the only person who knew the password to gain access to users funds.

The director at financial technology consultancy Kapronasia, Zenno Kapron said: “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.”

Fighting regulations

Public listings of cryptocurrency exchanges also pose a challenge for regulators, who are only beginning to fight with the problems of overseeing the trading of cryptocurrencies.

The first jurisdiction to regulate exchanges was the FSA in Japan in 2016. Since then, they have ‘edited’ the rules to allow the industry to regulate itself for the most part.

When it comes to Hong Kong, the SEC is considering whether some cryptocurrency trading platforms are right to be regulated.

One person who is familiar with the committee’s process anonymously said, “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.”