Should Cryptocurrency Exchanges Go Public?
Cryptocurrency Exchanges with New Rules of the Game
TL;DR
Cryptocurrency exchanges are growing rapidly in the Web3 industry with solid revenue models. Notably, several exchanges are preparing to go public, marking a significant step in the Web3 industry's transition from fringe to mainstream.
By going public, exchanges aim to raise capital and improve their image by becoming more transparent. Their revenue structure centers on transaction fees and is highly influenced by the market. This makes securing capital crucial for stable operations.
However, going public introduces new regulations, and some fear it may limit exchanges' flexibility and restrict their business operations. Despite these concerns, going public is expected to enhance governance and management transparency, fostering healthy industry development.
1. Intro
The cryptocurrency exchange business has become one of the most established models in the Web3 industry. Recognized as legal businesses in their respective jurisdictions, these exchanges are growing rapidly with a stable revenue model based on transaction fees. Coinbase exemplifies this success, having operated legally and eventually gone public. Several other exchanges are now preparing to follow suit. This marks a significant shift, as the Web3 industry, once seen as non-mainstream, is entering the mainstream. This report analyzes the crypto exchanges preparing to list on the stock market and the reasons behind their pursuit of traditional market listings.
2. Cryptocurrency Exchanges Preparing for Stock Market Listings
After Coinbase successfully listed on the Nasdaq in 2021, several other exchanges are now preparing for stock market listings. Exchanges that have officially announced their plans include Japan's Coincheck, South Korea's Bithumb, and Thailand's Bitkub. Additionally, the U.S.-based Kraken has recently initiated a pre-IPO round, heightening expectations for its listing. The pre-IPO round is a fundraising stage conducted before a company goes public, indicating that Kraken's preparations for listing are well underway.
The reasons why crypto exchanges pursue public listing are similar to those of other companies. The primary purpose is to raise capital efficiently and enhance their corporate image. By securing additional funds through a public listing, a company can achieve various goals, such as business expansion, research and development, and operational funding. Raising capital is crucial for a company's growth and development.
However, the listing process is complex and lengthy. The crypto industry, in particular, faces legal uncertainty due to unclear regulations in many countries, and the lack of precedents makes success difficult to predict. These factors make it even harder for crypto exchanges to go public. Despite these challenges, the reasons for pursuing a public listing are simple: the potential benefits outweigh the obstacles.
For example, Japan's Coincheck is preparing to list on Nasdaq in the U.S. through a De-SPAC transaction expected in 2024. Coincheck plans to raise significant funding in the larger U.S. market and use it to strengthen its cryptocurrency business through talent acquisition and strategic acquisitions. Additionally, the company aims to expand its influence globally, moving beyond its image as a domestic Japanese company.
Thailand's Bitkub announced plans to go public in a 2023 shareholder letter and is now preparing for a 2025 listing. The company is prioritizing a listing on the Stock Exchange of Thailand (SET) to enhance the country's competitiveness as a Thailand-based technology company. Bitkub is also considering a listing on the Hong Kong Stock Exchange (HKEX) to expand its reach beyond Thailand and into the broader Asian market.
Finally, Bithumb is considering a listing on the South Korean KOSDAQ with a target date of 2025. The aim is to gain public credibility and to overcome the company's negative image, including judicial risks. By doing so, Bithumb hopes to strengthen its competitiveness in the Korean market. Interestingly, while other exchanges aim for global expansion through their listings, Bithumb's strategy focuses on solidifying its presence in the Korean market.
3. The Purpose of Listing on an Exchange
Exchanges prepare to list for various reasons, but these can be summarized into three main goals: 1) raising capital, 2) improving the image of the exchange, and 3) gaining a foothold in the global market.
3.1. Raising Capital
Raising capital is the primary reason crypto exchanges seek to go public. Given their heavy dependence on the market environment, most exchanges need a stable source of funding. However, the reality is that many exchanges do not have diverse business models and rely on transaction fees for over 80% of their revenue. In fact, major crypto exchanges in South Korea depend on transaction fees for 99% of their revenue. Going public to raise capital is a highly effective strategy in this context. In 2023, global IPOs raised an average of $93 million per company. Considering that Bithumb posted an operating loss of approximately $10 million in 2023, the capital raised through an IPO could be very helpful for crypto exchanges in recouping such losses.
3.2. Gaining a Foothold in Global Markets
Listing on an exchange is a crucial step for gaining access to global markets and increasing visibility. Going public not only raises funds but also provides access to a broader range of global investors, including those who may be unable to invest directly due to regulatory risks and market volatility. Even for non-investors, a listing on a global stock market, such as in the U.S., significantly boosts the exchange's visibility. This expanded reach is an important step toward expanding into global markets and essential for exchanges aiming to grow internationally.
3.3. Improving Exchange Image
Finally, going public can significantly improve an exchange's image and positively impact user acquisition. For example, Coinbase experienced a surge in user growth after going public in 2021. Publicly listed exchanges are perceived as operating safely and within regulatory frameworks, enhancing their brand image. This transparency and credibility are crucial, as many people still have a negative perception of cryptocurrencies.
According to NICE D&R's ‘Korea Financial Market Syndicated Study 2022’, 91.1% of survey participants have an unfavorable view of investing in cryptocurrencies. Being a publicly traded company can help mitigate these negative perceptions and attract more users.
4. Challenges of Listing on a Stock Exchange
While there are clear advantages to listing crypto exchanges on the stock market, there are also notable disadvantages and challenges. The main challenges include: 1) restrictions on business scope due to regulatory requirements, 2) conflicts of interest between exchange operations and shareholders, and 3) the risk of low valuation.
4.1. Increased Regulatory Enforcement
When an exchange goes public, it means new rules apply. Listed exchanges must comply with various regulations, including disclosure obligations, which differ significantly from traditional crypto industry operations. While this transparency and accountability are beneficial, they can also limit the industry's flexibility. These restrictions can become a huge risk to the exchange’s growth potential in a rapidly changing industry.
Going public may force the shutdown of many existing businesses. For instance, regulations may hinder the issuance and trading of exchange-based tokens or the operation of various trading products, such as perpetual futures. This means that listing might restrict more activities than it enables. In contrast, non-listed exchanges might expand freely without such restrictions, potentially limiting the growth of a listed exchange. Additionally, listed exchanges may face increased regulatory scrutiny, making it more challenging to operate.
4.2. Conflicts of Interest
Complex situations can arise when an exchange is a publicly traded company and must balance commercial interests with regulatory compliance and fairness. In such scenarios, conflicts of interest are likely. For example, investors might demand aggressive marketing or indiscriminate token listings to maximize profits. These demands can increase the likelihood of exchanges compromising fairness in pursuit of commercial interests, putting them at odds with increased regulatory scrutiny.
Of course, this issue is not unique to crypto exchanges. Intercontinental Exchange (ICE), which operates NASDAQ and the New York Stock Exchange (NYSE), is also a public company and a stock exchange. They balance commercial interests with stringent regulations and fairness. This demonstrates that while conflicts of interest are a potential issue for any publicly traded company, proper regulations and internal control systems can mitigate these risks.
4.3. Low Valuation
Crypto exchanges may struggle to achieve proper valuations when going public. In many countries, unclear regulations and a lack of precedent can lead to inadequate valuations. As the Silicon Valley adage goes, "Stay private longer," indicating that exchanges might need to delay public listings to secure better valuations.
Regulatory uncertainty hinders the growth of exchanges, preventing their potential from being fully realized. According to TripleA, the global average crypto ownership rate in 2024 is projected to be just 6.8%, with the highest rate in the UAE at 25.3%. In contrast, 61% of U.S. citizens own stocks. This disparity shows that the crypto market is still not fully developed, further complicating the valuation process for public listings.
5. Closing Thoughts
Going public offers clear benefits for crypto exchanges, such as more efficient funding and an enhanced corporate image. However, it also introduces challenges due to strengthened regulatory requirements. These rules, while new to crypto exchanges, are established market norms that many companies already adhere to and are crucial for healthy development. Adhering to these regulations is part of an inevitable process of transitioning from the fringe to the mainstream, which is essential for the market's healthy evolution.
Public listings can be a solid foundation for growth. However, the listing process is difficult and time-consuming, even for traditional companies. The regulatory and business risks associated with going public must be carefully considered and reviewed to ensure successful navigation of this transition.
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