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Babel Finance rides on crypto tailwinds, but its business model draws skepticism

Written by Stephanie Pearl Li Published on     5 mins read

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Babel Finance has faced questions over its business model after a market crash in March 2020, when Bitcoin’s value plunged 50% in a two-day drop.

When Flex Yang, the co-founder of Hong Kong-based crypto lending and asset management firm Babel Finance, first encountered blockchain technology, he thought it looked “untrustworthy.” “The first time I heard about Bitcoin, I was like, okay, it was just another fraud,” he said in an interview with the Bitcoin in Asia podcast.

Before founding Babel Finance in July 2018, Yang worked at accounting firm PwC for nearly four years. He interacted with an assortment of financial products during his time at PwC, but he was looking for something more.

In July 2015, he started his own financial data service startup, named Standard Financial Inclusion, helping banks and credit companies to assess the credit profiles of small and medium entrepreneurs in China. He started thinking about the pain points of Chinese banks, which did not have sufficient credit data to offer loans to unbanked people.

During an entrepreneurship class organized by JD.com in 2017, he came across Binance co-founder He Yi, who introduced Yang to Bitcoin. When He shared more information about blockchain technology with Yang, his attitude toward crypto and decentralized started to change. “As I got more information on blockchain, I started to change from thinking that it was a scam or fraud to wanting to do something, because this industry can bring people a new kind of freedom,” Yang said in Bitcoin in Asia podcast.

Yang’s crypto epiphany came at a time when the Chinese government was cracking down on P2P lending. All existing P2P loan platforms were ordered to transition to small loan provision within two years, and all outstanding loans had to be resolved in less than a year before the switch, per a Reuters report.

The regulatory change forced Yang to drop his credit data startup. He pursued his passion for crypto to shape his next venture, Babel Finance, which offers crypto lending, asset management, and prime financing to institutional investors, which mostly operate mining businesses. Most of Babel Finance’s revenue comes from crypto lending, with over 500 institutional capital providers such as private equity firm Genesis Capital, US-based crypto lending firm BlockFi, and Goldman Sachs-backed Bitgo.

Within three years of its inception, Babel Finance reached an outstanding balance (in cryptocurrency) of USD 2 billion, with monthly trading volume of USD 8 billion across its product lines as of February. The crypto lending firm secured USD 40 million in a Series A round led by Zoo Capital, Sequoia Capital China, Dragonfly Capital, BAI Capital, Bertelsmann, and Tiger Global Management on May 21.

In comparison, Babel Finance’s rival Matrixport, which was founded by former Bitmain co-founders Wu Jihan and Ge Yuesheng in 2019, logged USD 700 million in outstanding loans, and USD 5 billion in monthly trading volume, with USD 10 billion of assets under management and custody as of March.

Despite Babel Finance’s success, it has faced questions over its business model after a market crash in March 2020 led to a 50% plunge in Bitcoin’s value in two days. Anonymous sources who claimed to be familiar with the situation told Decrypt that Babel Finance was misusing client funds through highly leveraged transactions without permission.

Decrypt’s sources claimed the firm was “wiped out” during the crash, so it asked Tether, one of its creditors, to extend the repayment period from within 48 hours to one month, according to multiple reports. Babel Finance denied this characterization, and its spokesperson told KrASIA that the crash was an “industry-wide stress test.”

“The majority of the crypto companies in Hong Kong or in the mainland at that time were pretty wiped out right because it [the crash] was very serious that time. We, as one of the largest players in the crypto lending space, enjoyed so much stress as well,” Babel Finance’s spokesperson said to KrASIA. “After the big test, we hired more people for our legal, compliance, and internal control team to fend off the next shock. We are in a lot better position today than we were in March last year.”

Yu Shanshan, Babel Asia’s CEO, told KrASIA that she learned about Bitcoin in 2017 and became a firm believer in cryptocurrencies as interest surged among mainstream investors. Courtesy of Babel Asia.

With Babel Finance announcing its Singapore entry on Thursday, establishing a separate legal entity named Babel Asia in the city-state, the firm is set to cover new ground. “Singapore is a recognized leader in fintech innovation and financial services. In the short term, our primary focus is to establish trust and achieve full compliance in the country. In the future, we hope to expand to other markets and serve more diverse, global investors,” Babel Asia CEO Yu Shanshan told KrASIA, adding that the Singapore entity aims to target both traditional financial institutions and high-net-worth individuals.

Babel Finance applied for a Type 9 fund management license in Hong Kong last November to provide portfolio management services involving market instruments, such as stocks, funds, and securities. The application has yet to be approved. While Yu emphasized that Babel Finance does not have any operations in Singapore, she added that the Singapore entity, Babel Asia, is still preparing applications for the relevant licenses.

With crypto becoming a mainstream asset and investment vehicle, regulatory scrutiny continues to intensify. The Chinese government launched a series crackdowns on bitcoin mining and trading bans in May, reshaping the landscape for the world’s second most active cryptocurrency community and user base, with over USD 150 million of digital assets managed by users in the country.

Yang told Reuters in an interview that the uncertain regulatory landscape has been a source of risk for Babel Finance, but he was encouraged when deputy central bank governor Li Bo said in April that the government was studying crypto as an investment tool.

“For the industry, regulation is important and necessary, especially for companies that have a long-term vision in a maturing industry. Singapore’s trusted legal system, well-developed wealth management industry and openness to fintech provide a welcoming environment for crypto businesses,” Yu said, adding that Babel Asia is working with the regulators to obtain the relevant licenses to operate in Singapore.

Read this: The Monetary Authority of Singapore adds Binance to its Investor Alert List

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