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Fidelity buys BC stake but SFC license is the prize

The deal sets up two behemoths in Hong Kong competing over the new digital asset industry.

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Why has Fidelity taken a stake in BC Group, the crypto holding company behind trading platform OSL?

Fidelity International, the London-based ex-North America arm of the Fidelity financial empire, has acquired a HK$110.5 million ($14.2 million) stake in BC Technology Group.

The stake was taken during a January share placement by BC Group, which is listed on the Hong Kong Stock Exchange. Fidelity accounted for nearly half of a total of $36 million raised by BC. In the process, Fidelity ended up with a 5.6% stake in the company, buying 17 million shares at HK$6.5 per share.

Bloomberg broke the news on Friday, February 21.

What’s in it for Fido?

Why would Fidelity do this? After all, it already has a big crypto custody and brokerage offering. Its traditional investment units are entrenched across Asia. Adding OSL’s trading – a volatile business – can’t be attractive. And in November 2019, Fidelity secured a trust license in the U.S. State of New York, giving it a regulated platform to conduct crypto custody and trading.

Dave Chapman, executive director at BC Group, told DigFin: “There is a very limited number of investable companies in the space. We remain the only established player in the digital asset space that is mainboard listed, big-four audited [PwC], fully insured for custody, and the first to submit for the new virtual asset license issued by the SFC – including security tokens.”

It’s this last part that is the one that really counts. The Hong Kong Securities and Futures Commission announced in November that any venue trading even a single security token would need to get a Type 7 license, just like the one Hong Kong Exchanges has – thereby opening the door to a regulated crypto venue, albeit one limited to professional investors.

Chapman confirmed the importance of this: “The SFC VA license is massive because it covers security tokens,” he told DigFin. “The security-token narrative has been used for the past two years but we now, finally, have a license that covers security tokens issued by a credible region [under] an innovative regulator, the SFC.”

This goes beyond what Fidelity or its rivals such as Coinbase can find in the U.S.

Just the start of M&A?

This may not be the end, then, of global financial giants acquiring crypto operators in Hong Kong. Indeed, some of the world’s biggest crypto markets do business here, such as Huobi and OKEx. So do the most active crypto derivative exchanges, BitMEX and FTX.

“The Fidelity acquisition is confirmation of the inevitability of digital assets,” said Frank Troise, an investment banker in the fintech space based in Singapore. “We’ll see further investments like this in the Asia-Pacific region from Western firms.”

However, Hong Kong’s other leading crypto venues may not make attractive acquisitions. They are domiciled in overseas jurisdictions such as Antigua, Malta or Seychelle Islands, not in Hong Kong. SFC chief executive Ashley Alder has also made clear his intention to crack down on bitcoin futures operators if they use too much leverage.

These exchanges have a choice: go regulated and institutional, or remain in the (highly lucrative) unregulated space but without access to the institutional investors that a Fidelity can attract and service. Today, the unregulated and retail world is where virtually all the real volumes and liquidity are found in crypto. The bet that BC has made is that the institutional trade will come to dominate. Plus, those who remain in the unregulated world always run the existential risk of an SFC crackdown.

There are two other players known to have thrown their hat into the ring to acquire an SFC VA license: Hashkey and HKbitEX.

Hashkey’s top executives come from mainland China’s asset-management industry. Chairman Xiao Feng was founder of Bosera Asset Management, one of China’s earliest and better run fund houses. Michael Lee, its executive president, boasts a long career in international investment banking and securities trading.

HKbitEX was set up last year by Gao Han, formerly of HKEX, where he helped design its various “China Connect” platforms.

Both companies would offer a would-be acquirer or partner access to the Chinese institutional world, and are backed by credible veterans of the financial industry.

The other big fish

However, there is one other competitor for a VA license that should not be discounted: HKEX. It is not about to sit back and let others corner digital assets in its backyard.

HKEX is building a blockchain platform of its own, which is aimed initially to support global institutional investors’ operations on HKEX’s China Stock Connect platform. This appears narrow in scope, compared to, say, the post-trade infrastructure that Australia Stock Exchange is implementing on a distributed ledger. But HKEX’s blockchain will reach deeper into institutions’ operations; it is a more ambitious, farther reaching project.

From there it does not require a great leap for HKEX to enable listing digital tokens on its bourse, now that the SFC has set out the regulatory framework.

If an OSL, Hashkey or HKbitEX wants to compete in digital assets with a Type 7 license, they’re going to need a backer with the heft of Fidelity if they’re to take on the incumbent.

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Fidelity buys BC stake but SFC license is the prize