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Cryptocurrency companies will make use of a ‘backdoor’ listings to the transition to the mainstream

HONG KONG (Reuters) – Several cryptocurrency exchanges have to be closer to the mainstream markets through the purchase of listed companies, looking to raise money and present themselves as embedded in the traditional financial world that they once spurned.

FILE PHOTO: A man walks past an electric board showing currency exchange rates of various cryptocurrencies on Bithumb cryptocurrencies exchange in Seoul, South Korea, January 11, 2018. REUTERS/Kim Hong-Ji/Photo File

In the most recent deal, AMERICAN crypto broker-dealer and Voyager Digital Feb. 11 reached a “backdoor” listing in Toronto’s Venture Exchange, after it bought control of mineral exploration the company UC Resources.

Such purchases, also known as reverse merger, allow companies to offer shares to the public without the hardships, and the legal control of a full initial public offering (IPO).

“A lot of (cryptocurrency) exchanges have much of the strategic effort in trying to legitimise their activities and their reputation, and for some, there is 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 the Financial Services Agency (FSA) is the only major national supervisor until now, to have drawn up a definitive framework to determine the digital assets and the platforms on which they are traded.

In January, OKC Holdings, a company controlled by Star Xu, the founder of crypto-exchanges OK Coin, bought 60.5 percent of the JUMP Holdings, a Hong Kong-listed construction company, for HK$484 million ($61.69 million).

Days later, the parent company of the Korean crypto exchange Bithumb announced plans for a US listing via the purchase of Blockchain Industries.

Last year, investors, who are also the co-founders of the crypto-exchange software producer ANX International bought a majority stake in Hong Kong listed marketing Branding China, while Huobi is based in Singapore exchange, bought 72 percent of the shares in Hong Kong-listed power electric company Pantronics Holdings.

Voyager said its listed shares would be able to assist with the funding of the growth.

“Because it is a public company enables Voyager to work with the transparency that the crypto market is deserving of its institutions,” Voyager CEO Steve Ehrlich said in an e-mail.

Nor Huobi, nor OKCoin has given details of their plans for the purchases.

ANX International remains separate from the name BC Group, but since the change in ownership of the listed unit is started with new companies that are fitted with a digital asset trading and exchange platform.

A spokesperson from BC Group said publicly traded gave customers added confidence in knowing that we are a credible company and here for the long game.”

Spokesmen for OKCoin and Huobi declined to comment.

Nor Bithumb nor her parents Blockchain Exchange Alliance responded to requests for comment.

LEGITIMACY

Crypto experts say that the offers can help the industry more mainstream acceptance.

The reputation of cryptocurrencies and, in particular, the exchange, has been hard hit by the fears of the volatility of prices and applications for money laundering in addition to the high-profile hacks, and infrastructure failures.

Last year, the New York attorney general’s office warned that a number of cryptocurrency exchanges have been plagued by poor supervision on the market and in-depth conflicts of interest, saying some may actually be illegal.

This month, $137 million in cryptocurrencies was frozen in the accounts of the Canadian digital platform Quadriga after the founder, the only person with the password to gain access to, died unexpectedly.

The crypto market peaked at the end of 2017, when the trade volumes increased and bitcoin, the biggest cryptocurrency, reached a high just above the $20,000. Bitcoin, the price dropped by 80 percent since then, and trading volumes slumped.

Some exchanges may also feel the pressure from investors seeking a means of realizing their profit.

“With the market of the south, and supervisors are not happy, this is a chance to meet the investors and the founders who are looking for an exit,” said Zennon Kapron, managing director at financial technology consultancy Kapronasia.

WRESTLING WITH THE SUPERVISORS

Public offerings from cryptocurrency exchanges also pose a challenge for supervisors, who are only beginning to grapple with the problem of monitoring the trade of digital currency.

Japan FSA was the first major power to regulation of the exchanges in 2016, but has since refined the rules so that the industry is largely self regulating.

In the United States, in the state of New York until now, it has issued a handful of so-called BitLicences for companies which are a kind of virtual currency business.

Both Hong Kong market watchdog, the Securities and Futures Commission and the Hong Kong Exchange declined to comment.

But the commission is considering a number of cryptocurrency trading platforms are suitable for the regulations, a process that it hopes at the end of this year, the chief executive, Ashley Alder, told lawmakers on Tuesday.

Hong Kong officials have already questioned the sustainability of crypto companies as last year, the world’s largest creators of cryptocurrency mining rigs not to proceed on the IPO plans in Hong Kong, in part because of the questions of the civil servants increased.

“It is possible a crypto-exchange can incubate a new crypto company in a Hong Kong-listed company, the listed company to its existing activities, and not be treated as a new IPO, but it is a very difficult tightrope to walk,” says a person familiar with the listing committee of the processes, speaking anonymously because he was not authorized to speak with the media about the subject.

The Hong Kong Stock Exchange Listing Committee must be satisfied that a company is sustainable, before it can the list. The miners bids were hampered by the fear that the falling price of bitcoin to their business models unworkable, the sources said.

Although the backdoor entries are permitted in most countries, some regulators, including those in Hong Kong, the room may be, and may in some circumstances require a full public OFFERING in the first place.

“Crypto-companies struggle to demonstrate fitness for placement on the list given the state of the regulation of the sector and an uncertain business models,” said Jason Sung, a hong Kong-based partner at law firm Herbert Smith Freehills.

Statements of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are to be seen on a PC motherboard in this illustration, image, February 13, 2018. REUTERS/dado Ruvic/Illustration

Fairs such as Bithumb who are looking to the United States could also have similar obstacles.

The SEC has the authority over the AMERICAN companies, the sale of digital effects and companies perform a reverse merger in the United States.

“Depending on what the companies are planning to do them a lot as possible seek the approval of the SEC or the CFTC,” said Richard Levin, president of the financial technology and regulatory practices in the US based law firm Polsinelli.

Reporting by Alun John in Hong Kong and Anna Irrera in New York; Editing by Jennifer Hughes and Gerry Doyle

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