The world’s biggest cryptocurrency exchanges are looking at reverse mergers in Hong Kong, as hopes dim for bitcoin mining rig makers’ plans to go public in the city.
The back-door listing efforts have come to light amid the reluctance of the Hong Kong stock exchange to approve the initial public offering (IPO) applications of companies involved in the underregulated cryptocurrency industry, according to people with knowledge of the matter.
Charles Li Xiaojia, chief executive of the Hong Kong Exchanges and Clearing, said on Wednesday that companies seeking to go public in the city should show consistency in their business models, in response to media questions about the status of the IPO applications from the world’s largest makers of cryptocurrency mining rigs – Bitmain Technologies, Canaan Creative and Ebang International Holdings.
Li, who spoke on the sidelines of the World Economic Forum in Davos, did not comment specifically on those three IPO applications, but clarified the Hong Kong stock exchange’s general principles for listings.
On the same day that Li made his comments, Hong Kong-listed construction engineering firm Leap Holdings Group disclosed that the company’s controlling shares are now held by OKC Holdings Corp, the parent company of OKCoin – the world’s No 2 cryptocurrency exchange by trading volume.
OKC bought a 60 per cent stake in Leap in a HK$484 million (US$62 million) deal completed on January 14. Star Xu Mingming, founder of the OKCoin exchange, is now the largest individual shareholder of Leap through his majority stake in OKC.
That deal represents a reverse takeover, or back-door listing, which allows a privately held company to acquire control of a publicly traded firm, bypassing the lengthy and complex IPO process.
A Beijing-based spokeswoman for OKCoin declined to comment on the deal, and referred questions to a statement via the Hong Kong exchange. Xu did not reply to a request for comment.
The acquisition followed a similar move made by Chinese cryptocurrency exchange Huobi, which bought a 66 per cent stake in Hong Kong-listed Pantronics Holdings for about HK$600 million in August last year.
There is no specific plans yet for Huobi to inject its own business into the acquired public company, according to Livio Weng Xiaoxi, vice-president of Huobi, in an interview earlier this month.
The pursuit of back-door listing have come as exchanges are among the first and most obvious victims of the prolonged bear market in cryptocurrencies, which have wiped out more than US$600 billion in the total value of some 2,000 digital tokens since January 2018, according to data from CoinMarketCap, which ranks cryptocurrencies by their market value.
Last year’s market crash has been blamed on the bursting of a bubble in initial coin offerings, a largely unregulated crowdfunding method involving digital money, as well as the bitcoin cash “hard fork”, which led to a split in the fourth largest cryptocurrency into two separate entities due to fundamental disagreements among its developers.
The cryptocurrency crunch has begun to bite, leading enterprises like Bitmain, the world’s biggest maker of specialised computers used for creating new units of digital money, and Switzerland-based software production studio ConsenSys to announce plans for lay-offs.
“Hong Kong is one of the easiest markets for reverse IPOs, because there are many small-cap stocks,” said Xiao Lei, a cryptocurrency analyst with Beijing-based research firm Symbt, on the recent back-door listing initiatives.
Xiao said the cryptocurrency exchanges are more likely to inject their blockchain technical services, not their trading businesses, into the publicly traded shell companies, given the Hong Kong exchange’s strict policies around digital assets.
“It did not go well for hardware manufacturers like Bitmain to go public, what more for companies directly dealing with cryptocurrency trades,” he said.