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

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

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

The FCA previously voiced “concerns” about Binance, and on the deal with Eqonex, stating it “did not have powers to assess the fitness 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 and named 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 in summer, launching the Eqonex Bitcoin ETN (EQ1B) on the Deutsche Boerse in July and then making the “difficult” decision to wind-up its crypto exchange business a month later, alongside senior hires to facilitate its “pipeline” of structured products in H2.

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

This commenced 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 breaches under the loan agreement, the drawdown of the fifth tranche of the Bifinity loan was not made available to us. Without this funding, our runway and ability to continue driving our operational roadmap was severely compromised,” Eqonex said in a shareholder notice on 21 November.

“In order to address these liquidity issues, the firm has been in negotiation with potential investors to obtain equity financing through the issuance of new shares, and in negotiation with Bifinity seeking, amongst other things, a waiver of breaches and an amendment of terms under the loan agreement. Unfortunately, despite the group’s best efforts, these negotiations have not been successful.”

With Bifinty refusing to offer a reprieve and no new investors stepping in to rescue the company, Eqonex filed with the High Court of Singapore to go into judicial management, allowing it to restructure its debt and shield from third party creditors.

In the meantime, the company put 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 qualifications department said it would delist Eqonex’s stock by the start of December.

What this means for crypto ETN investors

Potentially the most impactful part of the company’s implosion for ETN investors, however, is the wallet provider for EQ1B – in-house custody business, Digivault – winding down its operations by 7 December.

The ETN’s external security trustee, Apex Corporate Trustees, said in a filing on 1 December it had sought authorisation to withdraw digital assets from the wallet provider and replace Digivault before the wind-down date, but “has not received a reply” from Eqonex.

Eqonex said: “We are currently seeking a buyer to recapitalise [Digivault] however this is not guaranteed and as such we are advising 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 interests of ETN investors.

It added it “is currently unclear” what the wallet provider’s wind-down 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 shutters its business.

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

“This 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 to the noteholders and will trigger the procedure to redeem the ETN back into cash to noteholders.”

The expected outcomes now would be for a new wallet provider to be found and the ETN to continue functioning, or a mandatory redemption to happen and proceeds to be returned to investors.

On the other hand, the lack of clarity over whether the product will continue trading, radio silence with the security trustee and whether investors will be able to withdraw assets if the issuer becomes insolvent, show the ETN’s situation remains uncertain.

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

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