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Global investment firms make debut in Asian cryptocurrency market

MAY 10, 2021

Nikkei Asia


HONG KONG -- Hong Kong-based crypto financial-services startup Babel Finance has raised $40 million in a new funding round that marks the first crypto deal in Asia for several global investment firms, underscoring increasing investor appetite in the region for the fast-growing digital-currency market.

The series A fundraising was led by New York-based Tiger Global Management, Sequoia Capital China, Sequoia-affiliated Dragonfly Capital, German media conglomerate Bertelsmann and its Asia-focused investment arm BAI Capital, as well as Zoo Capital, the early-stage venture fund of Chinese private equity firm Boyu Capital.

Babel -- which focuses on more established cryptoassets such as bitcoin and Ethereum -- is the first crypto portfolio in Asia for Tiger Global Management, BAI Capital and Zoo Capital. Babel CEO Flex Yang said the financing round is a strategic move aimed at building external partnerships, rather than fulfilling capital needs.

"We are actually a very profitable company with good cash flow," Yang said in an interview with Nikkei Asia. "But these investors can provide us with extensive connections and credibility we need for our growth."

Founded in 2018, Babel provides crypto financial services to more than 500 institutional clients, including corporate investors, family offices and high net worth individuals. Its business model -- crypto lending, crypto prime financing and crypto asset management -- has helped it achieve resiliency through market cycles as it profits largely from interest rates.

As of February, the three-year-old company had an outstanding balance of $2 billion worth of cryptocurrency loans, compared with $289 million at the end of 2019. It is also among the largest crypto derivative players globally, with monthly trading volume of $8 billion in equivalent cryptocurrency. About 80% of its clients are based in Asia-Pacific.

Asian companies recently have accelerated their bets on cryptocurrencies.

South Korean gaming giant Nexon last month said it had shifted $100 million of its cash into bitcoin, following the lead of companies like Tesla, Hong Kong-listed social media app Meitu and digital payments specialist Square, which is led by Twitter co-founder Jack Dorsey.

The price of bitcoin, one of the best-known cryptocurrencies, jumped 300% in 2020 and hit an all-time high of more than $63,000 in early April as investors poured into the market.

Nonetheless, some prominent investors, such as Berkshire Hathaway CEO Warren Buffett, have said repeatedly that bitcoin is a speculative investment with no underlying value. Its volatility also remains a major concern for mainstream investors and regulators around the globe.

With the fresh funding, Yang said his company would invest heavily in compliance and license acquisitions in various jurisdictions, including Hong Kong, Singapore, Europe and the U.S. Still, the former PwC consultant acknowledged that Babel's market expansion plan could be hindered by unclear regulatory policies in different countries.

"The uncertainty of the regulatory framework worldwide is the biggest challenge of our business," Yang said. "But we would like to fully comply with these requirements, so we are pulling lots of resources to deal with this."

Chinese regulators so far have an opaque stance toward cryptocurrencies. While Beijing cracked down on crypto trading and initial coin offerings in 2017, Li Bo, the deputy governor of the People's Bank of China, called cryptoassets "investment alternatives" at the Boao Forum last month.

Hong Kong and Singapore, meanwhile, have introduced regulatory sandboxes to test crypto-related rules.

Babel is looking to double its current workforce to 100 people by the end of this year, with an emphasis on recruiting experienced talent in compliance, finance and risk management to satisfy stringent internal control requirements of traditional investors. It also plans to develop more "innovative" crypto-structured products.

"Our goal is to manage 1 million bitcoins within four years," Yang said, adding that cryptocurrencies could eventually become an asset class comparable to gold in terms of its storage of value. "The more institutional investors participate in the market, the less volatile it will be."

Bowen Wang, head of crypto at Zoo Capital, said in a statement that his firm is "pleased with the partnership with Babel Finance" and believes its global network and experiences will "provide valuable support for Babel Finance to build a sophisticated gateway for the traditional market."

Meanwhile, venture funds also are turning to crypto investment platforms for retail investors. Kikitrade, a cryptocurrency trading platform based in Hong Kong, has closed an $8 million funding round co-led by Dragonfly Capital, with participation from the likes of Ethereum co-founder Joseph Lubin.

The startup, with a digital-asset exchange-provider qualification licensed in Australia, is setting its sights on retail markets in Taiwan, Southeast Asia and Australia with a minimum investment amount of $1 to target young and beginner investors.

The startup's goal is to "lower the entry barrier of crypto investment and provide everyday people with the necessary tools and knowledge required," Kikitrade's co-founder Allen Ng told Nikkei.

"Public perception for cryptocurrency has changed profoundly in the past year," Ng said. "A few years ago people regarded it as a scam, now everyone is rushing to learn how to invest in crypto."

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