Crypto ETN issuer tied to Binance commences liquidation

Singaporean crypto-asset manager and custodian Eqonex is selling its businesses to pay creditors and is seeking a custodian for its crypto exchange-traded note (ETN) in Europe, just months after entering into a binding agreement with the payments arm of Binance.

Within weeks of its stock listing on the Nasdaq stock exchange through a special purpose acquisition company (SPAC) in February, Eqonex announced a strategic partnership with Bifinity, including a $36m convertible loan – which converts to equity at a later date – in return for strategic control of the company.

Eqonex said the partnership will begin by focusing on its custody business, Financial Conduct Authority-licensed Digivault, which will give Binance a regulated window into the UK market.

The FCA previously expressed “concerns” about Binance, and about the transaction with Eqonex, saying it “did not have powers to determine the suitability and propriety of the new beneficial owners or the change in control before the transaction was completed “.

Within the first month of the tie-up, Bifinitiy exercised its right to make senior appointments, naming former head of Binance UK Jonathan Farnell as CEO of Eqonex and former Bifinity special projects lead Almira Cemmell as its chief corporate affairs officer.

The company then underwent several strategic shifts over the summer, launching the Eqonex Bitcoin ETN (EQ1B) on the Deutsche Boerse in July and then making the “difficult” decision to end its crypto exchange business a month later, along with senior hire to facilitate his business. “pipeline” of structured products in H2.

However, the collapse of the FTX exchange and FTT token in November led to what Eqonex would later describe in a letter to shareholders as a “painful inflection point”.

This started a vicious cycle of Eqonex being unable to meet its loan repayment obligations, Bifintiy refusing to continue financing the company and its financial health deteriorating further.

“Due to technical violations in terms of the loan agreement, the withdrawal of the fifth part of the Bifinity loan was not made available to us. Without this funding, our runway and ability to continue to drive our operational roadmap is severely compromised,” Eqonex said in a Nov. 21 shareholder notice.

“To address these liquidity issues, the firm has been in negotiations with potential investors to obtain equity financing through the issuance of new shares, and in negotiations with Bifinity for, among other things, a waiver of violations and a modification of terms under the loan agreement. Unfortunately, despite the group’s best efforts, these negotiations were not successful.”

With Bifinty refusing to offer a reprieve and no new investors stepping in to save the company, Eqonex has applied to the High Court of Singapore to go into judicial administration, allowing it to restructure its debt and to protect against third party creditors.

Meanwhile, the company has placed its Hong Kong entity Diginex and Eqonex Capital into voluntary liquidation to raise funds to pay creditors.

Nine months after becoming the first company with a crypto exchange to list on the Nasdaq, the exchange’s listing eligibility department said it will delist Eqonex’s stock by the beginning of December.

What this means for crypto ETN investors

However, the potentially most impactful part of the company’s collapse for ETN investors is the wallet provider for EQ1B’s internal custody business, Digivault, which is ending operations on December 7.

The ETN’s external security trustee, Apex Corporate Trustees, said in a Dec. 1 filing that it had sought authorization to withdraw digital assets from the wallet provider and replace Digivault before the shutdown date, but “has not received a response” from Eqonex does not.

Eqonex said: “We are currently looking for a buyer to recapitalize [Digivault] however, this is not guaranteed and as such we advise our clients to withdraw all their assets at this time. We want to assure you that your assets remain safe and available for withdrawal until that date.”

However, the filing noted “it is not clear that an event of default has yet occurred” for the issuer or wallet provider and added in such an event, Apex would have “limited” ability to act in the interest of ETN investors on to step.

It added it “is currently unclear” what the wallet provider’s shutdown means for Apex’s ability to enforce security over the digital assets in Digivault’s wallets in the event of a default, its ability to withdraw crypto assets, or what would happen if the issuer fails to replace the wallet provider before it closes its business.

Explaining what would happen if EQ1B was forced to close, Laurent Kssis, crypto-ETP specialist at CEC Capital, said ETF stream: “Eqonex noteholders will be part of a call option by the issuer and its collateral agent and the latter will redeem the units and return any proceeds less a fee, to sell the underlying assets, back to the noteholders.

“It will be a decent litmus test that the ETN structure functions and does exactly what it is supposed to do. Again, the collateral agent is a guarantor for the noteholders and will initiate the procedure to return the ETN in cash to noteholders.”

The expected outcomes will now be that a new wallet provider must be found and the ETN will continue to operate, or a mandatory redemption will occur and proceeds returned to investors.

On the other hand, the uncertainty about whether the product will continue to trade, radio silence with the security trustee and whether investors will be able to withdraw assets if the issuer becomes insolvent, the ETN’s situation remains uncertain.

If FTX is crypto’s Lehman Brothers moment, it should teach ETN investors that when they invest in crypto, they are not only exposed to asset price risk, but also the risk of the product’s issuer and every counterparty in the value chain.

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