As the cryptocurrency world adapts to strict regulatory changes, Taipei-based CoolBitX will use the funding to expand its regtech offerings into other countries.
“We are the only ready solution in the world right now and the only one being used by [cryptocurrency] exchanges,” CoolBitx founder and chief executive Michael Ou told FinanceAsia.
The startup announced the closure of a $16.75 million series B funding earlier this week (February 24) with Japanese financial conglomerates SBI Holdings* and Monex Group leading the round. The National Development Fund of Taiwan also got involved.
Founded in 2014, CoolBitX previously sold wallets for cryptocurrency users to store virtual keys. The startup launched its latest product – Sygna Bridge – on the heels of a regulatory crackdown in the industry. Sygna Bridge promises to make like easier for “virtual asset service providers”, a catch-all term for individuals or businesses that move virtual assets from one place to another, to share compliance data.
“[The authorities] require all crypto exchanges to obtain and secure user information from other exchanges before processing transactions,” Ou said.
Last June, the influential Financial Action Task Force (FATF) published a series of recommendations for cryptocurrency exchanges and banks around the world in a bid to curb the proliferation of money laundering. In short, FATF requires businesses to collect and pass information about customers when transferring funds between companies.
“Before they made this announcement such infrastructure did not exist,” Ou explained. “Previously all you needed to make a transaction was to know your counterparty’s virtual wallet address.”
As exchanges scramble to comply before the June 2020 grace period ends, CoolBitX is well-positioned to reap the rewards with the latest fundraising round valuing at $91 million according to Ou.
The business model is straightforward. “All participating exchanges who sign up for our service will be able to obtain and share their customer information with other exchanges who are also in the network,” Ou said.
There are 12 exchanges that have already signed on since the Sygna Bridge platform launched in January this year. The startup counts two cryptocurrency exchanges in South Korea as clients, but this is only a fraction of the approximately 200 exchanges now operational across the country.
CoolBitX has only dipped a toe in the South Korean market but plans to use the fundraising proceeds to expand further into the country while cementing its position in the Japanese market.
Japan leads the way
Of the cryptocurrency exchanges currently using CoolBitX’s Sygna Bridge system, half are Japanese.
“Japan has one of the most serious crypto regulation environments globally,” Ou noted. “In terms of communication between the government and the private sector, it's very effective.”
In 2018, the Japanese Financial Services Agency (FSA) gave the country’s cryptocurrency industry the ability to self-regulate - a world first. Japan’s reputation was severely damaged after it was home to the large-scale bitcoin hacking of the Tokyo-based Mt Gox exchange in 2014.
The regulatory body has also taken a more flexible approach to initial coin offerings (ICOs). While currently banned, the FSA has released proposed guidelines to regulate ICOs according to a 2019 report by Allen & Overy.
The institutional lure
The parent company of the New York Stock Exchange launched crypto platform Bakkt early last year in a bid to capitalise on growing institutional interest in virtual currencies.
But the market reception has been lukewarm and points to the disparity between industry expectations and regulatory realities.
“We are definitely seeing more interest from institutional investors in crypto assets, but they do require safeguards,” PwC’s Henri Arslanian told FinanceAsia last year.
These safeguards are only now coming into use as companies like CoolBitX hope to fill the gap. “We are building regtech to make sure that on the way to mass adoption, the industry becomes less open to manipulation,” the startup’s founder said.
While representing a move away from the core precepts of cryptocurrency, namely privacy and anonymity, the inflows of institutional cash are too lucrative to pass up.
And for some cryptocurrency enthusiasts, it was only a matter of time. “As the industry develops and matures, it will move towards a regulated market,” Ou predicts.
As of autumn 2019, the global cryptocurrency market had a capitalisation of roughly $220 billion, according to Moody's Investor Service research.
* The conglomerate's venture capital wing, SBI Investments, is a frequent backer of tech startups and participated in recent rounds by UK mobile bank Tide and London-based blockchain analytics firm Elliptic.
