Henry Chong, the CEO of Fusang Family Office, isn’t thinking about competing against other crypto exchanges. He’s thinking about HKEX, and trying to lure companies that would otherwise list with Hong Kong Exchanges and Clearing.
Executives working in traditional finance may be forgiven for laughing at the prospect of a not-yet-launched exchange trying to swim in the same pool as HKEX, which regularly tops the global lists for IPO capital raised.
With Bitcoin’s price collapse last year, crypto is over, right? We can forget about magic computer money and get back to our real jobs?
“Five years from now,” Chong said, “this is either all gone, or digital finance is the future and HKEX or custodians like State Street decide to compete against us.”
All talk and no action
The world of digital assets is still dormant. Securities tokens – tokenized representations of a security, and therefore regulated – have been issued but aren’t being listed on crypto exchanges, let alone be traded on secondary markets. STOs – the primary issuance of security tokens – have yet to materialize, other than a handful of real-estate related products from the U.S.
“We need a real listco [listed company] with real assets to do an STO because they think it’s an efficient way to raise capital,” Chong said. Regulatory and legal impediments remain, along with prosaic problems such as integrating an investment firm’s order-management or execution-management system to handle digital tokens, or all the fund-admin and reporting required to invest in these assets.
Five years from now this is all gone, or digital finance is the future
Henry Chong, Fusang
“There’s been a lot of talk about STOs and no action,” Chong said. This is a problem for Fusang, given its new license – in Labuan, an offshore financial center in Malaysia – is meant to attract primary listings.
Fusang was set up in 2016 by Chong’s father, David Chong, as a spinout from Henry’s Portcullis Group, a Singapore-based trust, investment and family office business. Henry remains a director in Portcullis, according to its website, but he says his focus is now on running Fusang. Fusang operates out of Singapore and Hong Kong but it was issued a securities-exchange license this spring from the Malaysian Ministry of Finance.
Chong argues that there are real benefits to smaller companies to issue securities tokens when they can’t afford to get a listing on a mainstream stock market.
First of all, it costs millions of dollars in legal, accounting, consulting and banking fees for a company to list on the main board of a big exchange. Companies that are high quality but smaller can’t afford it. STOs open the doors to them.
Secondly, some kinds of companies have lots of assets that can’t be valued or collateralized on a traditional exchange. A museum could have billions of dollars worth of art in its halls. A digital stock exchange could provide a cheap avenue to securitizing such assets.
We need a real listco with real assets
Henry Chong, Fusang
Third, the boom for initial coin offerings may have ended in a bust, but it showed the potential for new models for raising capital, crowdsourcing, and turning stakeholders into shareholders. For example, a ritzy private school in Asia catering to the tycoon-brat set today issues debentures to parents, as a way to fund the school (and assure parents their sprogs get admitted). What if it used digital tokens to securitize these, giving parents an economic stake in the school?
Finally, for big companies, STOs would give them far greater insight into who actually owns their shares.
“The premise of digital finance has to be that it provides transparency and doesn’t just create more headaches,” Chong said.
Headaches are aplenty in the digital world, though. Regulatory acceptance remains the biggest barrier, but there are also lingering problems around the clumsy pas de deux between hot and cold wallets, valuing tokens, and integrating reporting into existing systems. Crypto is primitive in many ways: many exchanges keep investor assets on thumbnail hardware, and crypto assets more resemble bearer bonds or cash – a regressive move from the perspective of traditional stock exchanges, which went completely electronic in the 1990s.
Fusang is launching a custody service to go with its exchange in Labuan, relying on its origins as an Asian family office and trustee to provide a smooth service to future investors. “The main questions now aren’t operational but legal and tax,” Chong said.
He plans to have the exchange go live in the second half of this year, and expects to list the first primary issues by the end of 2019. Fusang is in talks with broker-dealers in crypto to buy exchange seats and use their KYC and customer-onboarding systems to ensure that retail investors are compliant, while it is hoping to attract institutional investors directly.
These compliance and KYC issues are especially important to attract mainland Chinese investors. Chong says Fusang wants to be recognized for respecting China’s capital controls, which becomes a problem when digital assets are structured as bearer bonds, with ownership tied to whoever holds the cryptographic keys, rather than being tied to known identities. Fusang is working with potential broker-dealers and with Malaysian regulators to ensure there are methods in place to identify and report token owners.