Tokocrypto hopes to lure Indonesian money home

Tokocrypto’s message is it wants to be regulated and viewed as a catalyst to attracting Indonesian-owned capital back onshore.

Having won a license and attracted Binance as its leading shareholder, now the crypto exchange is looking to raise the capital to broaden its capabilities – and win it the legitimacy it needs to win over Indonesian overseas wealth.

Co-founder and CEO Xue Kai Pang says Tokocrypto, the Binance-backed, largest crypto exchange in Indonesia, is keen to develop local jobs and invest in local tech projects.

These projects attract additional investment from offshore venture capital funds. “So all of this is FDI,” or foreign direct investment, Pang said. Tokocrypto has an incubator program to support onshore blockchain projects.

Indonesia’s families, both rich and middle-class, are well known in financial circles for preferring to bank and invest their wealth somewhere else. It’s why Singapore is, well, Singapore. Local capital markets are underdeveloped, and there are few investment options outside of property and a desultory selection of domestic mutual funds.

Pang says blockchain finance offers a route to change this equation. “We can help Indonesia leapfrog financial legacy systems and surpass what developed countries already have…Decentralized finance can make it easier to bring some of that money back over time. Eventually it will be spent on industries outside of crypto.”

Small tickets versus big FDI

To realize that goal, the exchange is working to develop products that would merit such flows. It recently launched a marketplace for non-fungible tokens, to support local artists.

A quick look at the website, TokoMall, reveals a number of digital art collectibles, but the most expensive was IDR3,000,000 – or $212. It has a long way to go to attract meaningful flows.

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However, Tokocrypto’s domestic business was designed to cater to Indonesian retail investors, enabling tiny fractionalized orders. Its management will have to find the right balance between enabling small ticket sizes for local customers versus its vision of becoming a significant vessel for FDI.

Pang acknowledges the need for more products. He says Tokocrypto is now working on developing decentralized-finance (DeFi) applications as the next step.

As it builds up a series of capabilities in both centralized and decentralized markets, the idea for the founders is to exit in a TradFi (traditional finance) manner and list on the Jakarta Stock Exchange. Pang reckons this can happen in two or three years, once it has a track record to meet the exchange’s requirements.

Big fish

Tokocrypto is looking to raise capital next year (see below), and the founders are also open to the possibility of being acquired by a SPAC.

The company was founded in 2018 with the support of investors in an earlier (and still active) crypto enterprise called Digix, including Pang, Kai Ching – both men are native Singaporeans – and Pang’s co-founder, Teguh Kurniawan Harmanda.

Later backers include Sinar Mas, one of Indonesia’s biggest conglomerates.

Tokocrypto launched its crypto exchange in 2018. Today it says it has about 55 percent or more of the domestic crypto market, dwarfing another dozen venues. It has over 1 million users – and given Indonesia has a population of around 260 million, the company’s founders see plenty of room to grow.

CoinGecko and CoinMarketCap vary in their statistics, calculating Tokocrypto’s market cap between $153 million and $220 million, as of October 26, with daily average trading volumes around $27 million.

But Tokocrypto is a big fish in a small pond, negligible in size compared to global venues such as Binance ($24 billion spot daily volumes) or Coinbase ($5 billion). That doesn’t mean its success has gone unnoticed.

Getting licensed

The startup’s next milestone came in November 2019, when Tokocrypto became the first Indonesian blockchain fintech to become regulated. It won a license from Commodity Futures Trading Regulatory Agency, or Bappebti, which lets it operate a spot market.

“We want crypto to become a mainstream asset,” Pang said. “That means working with regulators to develop the legal and technical frameworks for things like custody, so we can attract institutional money.”

The license obliges Tokocrypto to monitor on-chain transactions for money laundering or terrorist financing, and to avoid serving wallets on global blacklists. It reports trading activities daily.

The Indonesian government is also likely to start taxing its crypto exchanges, a step Pang says Tokocrypto welcomes as part of its desire to be seen as a regulated business.

The price is worth it: the license makes it easy for banks to provide fiat-to-crypto ramps for Tokocrypto, which explains the venue’s dominance of the local market.

Enter Binance

The second milestone was selling a controlling stake in the business to Binance, in May 2020, for $800 million, according to a source.

Around the same time, Tokocrypto launched a stablecoin tracking the rupiah, called TKO, which launched on Binance’s exchange and raised about $7.5 million. The token launched at ten cents and is today valued around $2.

The purpose of TKO was to connect Tokocrypto – a domestic exchange – with the global blockchain world. Investors can use TKO to stake money in Indonesian projects, purchase local NFTs, and (in the future) connect to local DeFi programs.

The affiliation with Binance raises delicate questions for Tokocrypto’s drive to be viewed as a legit, licensed institution. Binance is known for attempting to avoid KYC and other regulatory constraints, and claims it has no geographic headquarters. Its local business units have been ordered closed by regulators in the U.K. and elsewhere.

Tokocrypto’s backers say there is a distinction between Binance’s onshore units versus the “decentralized” Binance.com. In Singapore, its local unit is busy meeting KYC and AML rules in a bid to win a payments-services license, for example. The same division should hold true for Tokocrypto’s domestic business.

More capital raising

To scale the business, expand its global ties, and – perhaps – deepen its relationships with regulators, Tokocrypto is in the early stages of preparing a major financing. The managers are targeting a raise possibly for summer 2022, and they are eyeing as much as $75 million.

The proceeds would go to building the NFT marketplace and DeFi products – to copy anything Binance is doing and make it legal for the Indonesian market.

But the raise isn’t really about money. Between the TKO launch and the Binance money, Tokocrypto has a big warchest, even by global standards.

“Money doesn’t solve everything,” Pang said. “We need strategic partners who can help us work with regulators and connect us with institutions and VCs.”

Those relationships are needed to pave the way to an eventual IPO. With Coinbase as the benchmark, Tokocrypto’s leaders see going public as the key to attracting institutional money and banking relationships – in other words, to meeting Tokocrypto’s dual goals of serving low-ticket domestic investors and attracting large-scale capital onshore.

Source: https://www.digfingroup.com/tokocrypto/