Investing in OSL, compliant crypto group BGX may be licensed in Hong Kong

Source: Odaily Planet Daily
Author: Husband How Qin Xiaofeng
This evening, Hong Kong's licensed virtual asset exchange OSL announced that cryptocurrency group BGX has made a strategic investment in OSL's parent company, Hong Kong-listed BC Technology Group (HKG: 0863), subscribing to new shares worth approximately HK$710 million.
Yesterday, BC Technology Group issued a notice to suspend stock trading and announced that it would soon release a major announcement; this morning, BC Technology Group sold 90% of the equity of its indirect wholly-owned subsidiary Shanghai Jingwei Enterprise Development Co., Ltd. for approximately RMB 23 million (approximately HKD 24.6 million).
According to the announcement of BC Technology Group, it will issue 187.6 million new shares to BGX, equivalent to approximately 42.79% of the existing share capital; BC Technology's existing major shareholder East Harvest's shareholding will be diluted from 42.77% to 29.96%, and BGX's shareholding will reach 29.97% in the future; in addition, BC Technology stated that approximately 43% of the net proceeds will be used for potential mergers and acquisitions of digital assets and blockchain platform companies, approximately 29% will be used to develop digital asset platform technology, approximately 14% will be used to meet capital requirements, and approximately 14% will be used for general working capital.
“Our investment in BC Technology Group and OSL is a strategic move that reflects our belief in the tremendous potential of the digital asset market. We believe this partnership will not only enhance BGX’s global reach, but also the growth trajectory of the digital asset industry,” said Patrick Pan, CEO of BGX.
A shortcut to entering Hong Kong: investing in a licensed trading platform
What is more interesting is who is BGX? The announcement mentioned that BGX Group is a "progressive leader in the field of cryptocurrency" and aims to provide an innovative platform for institutional and retail investors to find cryptocurrency investment opportunities anytime and anywhere. Why is BGX Group willing to invest hundreds of millions of dollars in a Hong Kong-listed company?
As Hong Kong has introduced a series of friendly policies for the crypto industry, more and more crypto companies have begun to apply for virtual licenses to enter Hong Kong, including Binance and OKX. However, the journey to Hong Kong is long and arduous.
First, the application for compliance licenses is time-consuming, labor-intensive and progresses slowly.
According to the "Guidelines for Virtual Asset Trading Platform Operators" (VASP Guidelines) published by the Hong Kong Securities and Futures Commission on June 1 this year, operators who want to conduct exchange business must hold dual licenses, namely the traditional No. 1 license (securities trading), No. 7 license (providing automated trading services) and the latest VASP license.
Since the new VASP licensing system has set many thresholds in terms of capital amount, registration, custody, personnel and other dimensions, currently no trading platform has obtained a VASP license, and all platforms are basically on the same starting line.
However, two exchanges have already obtained the traditional No. 1 and No. 7 licenses, namely HashKey and OSL. A number of crypto-native platforms such as Binance are not even on the "List of Virtual Asset Trading Platform Applicants" recently announced by the Hong Kong Securities and Futures Commission, and their progress is slow.
In addition, the initial cost of applying for a license is high, and there is no upper limit to subsequent investment.
According to Tencent News’ Qianwang report, people who are trying to apply for exchange licenses said that the cost before submitting the application for the license is expected to be at least HK$100 million. In addition to the cost of management personnel, most of the cost is on system technology, which is just an entry ticket to apply for an exchange license in Hong Kong. Even after the system is built, there is still the risk of not getting the license.
The process of actively applying for a license is slow, the expenditure is huge, and there is a high degree of uncertainty. Against this background, it may be an efficient path for BGX Group to lower the threshold for entering Hong Kong by making a strategic investment in BC Technology Group, the parent company of OSL, which already has a license.
2. OSL's business is not doing well, BC Technology introduces BGX as a new shareholder
Another question is, there are currently two companies in Hong Kong that have obtained licenses. Why did OSL become a breakthrough for BGX Group to obtain a license? A very important reason is that OSL's development in recent years has not been satisfactory, and its performance has not improved much.
OSL is a subsidiary of BC Technology Group (HKG: 0863), a Hong Kong-listed company. BC Technology Group Limited is an investment holding company that operates three core business divisions, namely OSL Digital Assets and Blockchain Business Division, Advertising Business Division and Business Park Management Services Business Division.
OSL digital assets and blockchain platform business is the main source of revenue for BC Technology Group and includes two main business divisions: digital asset market business (prime brokerage, trading and custody) and digital asset technology infrastructure business (SaaS), which provides technology to banks, asset management companies and financial institutions, enabling them to provide digital asset trading services to their customers.
According to the financial reports of the past two years, BC Technology Group sold OSL because it felt that it was "useless" and it would be a pity to throw it away.
According to BC Technology Group's financial report for the first half of this year, revenue was HK$126 million and basic loss per share was HK$0.22; OSL digital asset business revenue was HK$105 million (equivalent to US$13.45 million). Although OSL exchange revenue increased by 28.3% year-on-year to HK$6.5 million, the overall gap with other leading crypto exchanges is too large, and it is not even as good as the monthly revenue of a third-tier exchange.
Previously, according to media reports, BC Technology Group intended to put OSL on the trading platform.
Earlier this year, Tencent News’ Qianwang reported that BC Technology Group planned to sell OSL and was looking for buyers in the market, but no one took it. In October this year, Bloomberg reported again that BC Technology Group planned to sell its digital asset platform OSL at a valuation of HK$1 billion. At the same time, relevant insiders also revealed that BC Technology Group may decide to sell part of OSL’s business, rather than the entire business. But just one day later, the board of directors of BC Group refuted that the content and statements of the report were inconsistent with the facts and were extremely misleading.
In early November, OSL Chief Financial Officer Hu Zhenbang said that the APP development work had been completed and it was expected to be listed on the app store within this month. It seems that he wants to take advantage of the market momentum.
Today’s announcement seems to confirm that BC Technology Group does intend to introduce BGX, a crypto-native company that is more adept at crypto operations, as a new shareholder in an attempt to revitalize its stalled business.
After all, Hong Kong has now become a new crypto mecca, and it is a wise choice for OSL, which holds a license, to wait for a good price.
4. BGX Group obtains a development window
This investment has achieved a win-win situation for BC Technology Group and BGX Group. Of course, it seems to be more meaningful to the latter, and the benefits are obvious:
First, according to regulatory requirements, banks and securities firms in Hong Kong must cooperate with digital asset licensed institutions to provide digital asset services to customers. Only OSL and Hashkey are available.
Second, in August this year, OSL obtained approval from the Hong Kong Securities and Futures Commission to upgrade its existing license, and can officially provide digital asset trading services for mainstream currencies such as Bitcoin and Ethereum to retail investors (retail investors).
With the OSL license, BGX Group completed its layout in Hong Kong one year ahead of its peers, expanding new incremental users outside the existing competitive market. (Note: According to regulations, companies with physical operations in Hong Kong can have a one-year transition period to prepare for license applications, that is, they must obtain at least one license before June 2024.)
Of course, this strategic layout does not mean that you can sit back and relax. According to the regulations of the Hong Kong Securities and Futures Commission, the Securities and Futures Commission will inquire after a licensed company changes its major shareholder (more than 10%), and may need to submit a new business plan, which may take some time in the process.
In addition, although investing in OSL has helped BGX gain a certain amount of time, if it fails to apply for a VASP license in the future, it will still only be able to provide security token transactions based on License No. 1 and License No. 7, with a relatively limited variety.
Since last year, Luna, FTX, Three Arrows Capital and others have collapsed one after another and the market has hit bottom. Now that ETFs are on the verge of being launched, the pace of compliance in Hong Kong and other places has accelerated, and the price of coins has rebounded rapidly, the global crypto market has completed a comprehensive reshuffle and reshaping of the structure, and a new order is being established.