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Summary of Findings

• Diginex’s key product is its crypto-exchange Equos. The exchange is ranked 296 out of 306 and competes against larger and well-funded exchanges.

• The company is trying to differentiate Equos as a secure and reliable platform catering to institutional investors. However, Diginex’s dubious transaction history, accusations of selling assets without a controlling shareholder’s authorisation, and other corporate governance red flags clearly say otherwise. 

• Even after launching multiple business lines, Diginex generated minimal revenue of $23.1k for the 1H21 end-September period. The company reported a net loss of $108m for the same period. We expect Diginex to be able to operate for 18 months based on cash burn of $32m over the last 12 months (LTM) and pro-forma cash of $47.6m.

• Founder Miles Pelham has sold almost all his shares.

Presentation of Diginex

Singapore-incorporated Diginex Limited (“Diginex”) was founded in June 2017 by former chairman and ex-investment banker Miles Pelham. The company, whose operations are mainly in Hong Kong, started life as a bitcoin miner before it pivoted to a series of ‘crypto” business lines such as asset management, capital markets services, and more recently a crypto-exchange called “Equos”.

Equos, launched in July 2020, is the key driver of Diginex’s $345m valuation (ticker – $EQOS). Diginex targets institutional clients.

Ahead of Coinbase, Diginex became the first Nasdaq-listed crypto-exchange when it merged with SPAC 8i Enterprises Acquisition Corp in October last year. Singapore-based 8i Holdings Ltd was the SPAC sponsor. 

For the 1H21 end-September period, Diginex reported that revenue was $23.1k, down from $180k a year earlier.

Ranked 296 out of 306 Exchanges, Equos is significantly behind Larger Competitors

Equos has been showcased as Diginex’s main product. A sell-side analyst wrote that “Diginex is the first and only company with a cryptocurrency exchange listed on Nasdaq, ahead of major players such as Coinbase…” while Forbes wrote that “The keystone of Diginex’s digital playbook is its virtual currency exchange Equos.”

Diginex’s interest in crypto-exchanges is quite recent. In July 2019, the same month Diginex announced its SPAC merger, CEO Richard Byworth did not mention the crypto-exchange in an interview with Bloomberg. Work on Equos only started in the fourth quarter of 2019 and the platform was launched in July 2020. 

Equos is ranked 296 out of 306 for spot exchanges after 9 months of operations, and 28/34 for derivative exchanges, according to CoinMarketCap which ranks exchanges based on traffic, liquidity, trade volume, and confidence in the legitimacy of reported trade volume.

Crypto-data company Nomics rates Equos only  “C” on its Nomics transparency scale of A to F. The “C” rating means Equos provides insufficient trade data.

Equos ranking (spot exchanges)

Source: CoinMarketCap

The global market capitalisation of all cryptocurrencies jumped 10.3x over the last 12 months to ~$2.2trn as of 14 April 2021 as per CoinMarketCap. But data reveals that Equos’s trade volume did not keep up. Equos’s 30-day average trade volume was $31.5m as of end-April compared to $1.5bn – $52.2bn for its four larger peers (see below).

This means Equos has fallen short of analyst expectations that FY3/2021 daily volume will be $300m on average, as stated in a September 2020 sell-side report [p 21]. The same analyst’s hope that Equos volume will hit a daily average of $3.3bn in FY24 is wishful thinking. 

Equos’s 30-day average trading volume against peers

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Source: Nomics and Iceberg computation. Note: Figures above include volume for both spot and derivative transactions. Coinbase’s volume only shows spot transactions.

Diginex’s revenue and performance lags other crypto-exchanges whether now or from a few years ago. The company’s 1H21 revenue was just $23.1k across all activities (including trading fees) while Coinbase generated $1.4bn in 2020. Our calculations show Diginex’s average revenue (LTM) per employee was $2.8k, based on 120 heads as of 30 September 2020. Coinbase generated $4.7m for each of its then-199 employees in 2017 [p 35].

Revenue per employee comparison

Description	Coinbase 2017	Coinbase 2020	Diginex LTM as of 30-Sep-20
Revenue – USD m	927.0	1,277.5	0.3
Number of employees	199	1,249	120
Revenue per employee – USD	4,658,291	1,022,803	2,812

Source: Company filings, businessofapps.com, and Iceberg computation

Similar to how eBay established itself as the dominant online auction player in the late 1990s, we expect crypto-exchanges to consolidate and for smaller players like Diginex to drop out. Larger exchanges will benefit from network effects as only they are able to provide liquidity, minimise bid-ask spreads, and meet the rising costs of technology and regulatory constraints. And similar to stock trading, they are also likely to offer lower or zero trading fees in a “race to the bottom” for fee revenue. As least 75 crypto-exchanges were reported to have closed down in the first nine months of 2020, due to hacks, scams or they simply disappeared for unknown reasons.

Multiple Red Flags Contradict Diginex’s Image as a Safe and Reliable Company

We have shown that comparisons with other crypto-exchanges are unflattering for Diginex. The company may argue that it targets institutional investors while many exchanges with patchy security and compliance records target happy-to-speculate individuals.

Potential institutional clients need to be comfortable before entrusting Diginex with their trade flows and financial assets. Diginex has tried to address this issue by emphasising its focus on the institutional investor, its reliability, and its “Singapore-regulated” environment. To lend a veneer of respectability, Diginex has staffed its management team and board with ex-bankers such as CEO Richard Byworth and COO Neil Sheppard. The CEO also declared in October, “When we started building Diginex, we felt strongly that we needed to help raise standards and the transparency of the industry in order to help it grow.”

However, dubious transactions and questionable parties around its SPAC tell a very different story. Here are our findings:

1. Diginex sold 51% of a subsidiary to Madison for $60m. The subsidiary turned out to be worthless after two years.

Diginex sold 51% of former crypto-mining subsidiary Diginex High Performance Computing (“DHPC”) to Madison Group Holdings (SEHK: 8057) in July 2018. The total equity value of DHPC was $118m, based on the $60m transaction price, of which $10m was paid in cash and the rest through newly issued Madison shares.

Madison eventually found itself on the wrong side of the transaction just six months later. It pursued litigation because of Diginex’s unauthorised actions, as discussed in the next section, which also caused mining operations to stop in January 2019. 

According to Madison’s 1H20 end-September report, DHPC failed to meet expectations as ‘discussions with the potential clients for the provision of high performance computing services did not materialise’.

Both Madison and Diginex fully impaired the value of their DHPC investment.

2. Diginex was sued for disposing assets without a main shareholder’s consent

Madison accused Diginex of selling DHPC’s crypto-rigs without its consent. It then started legal proceedings at the Shenzhen Qianhai Cooperation Zone People’s court in September 2019 [p 28 of Madison’s FY20 annual report].  

Source: Madison FY20 annual report [p 28]

Madison alleged that Diginex owed them ~$1.2m of cryptocurrency Ether based on its $131 unit price as of 31 March 2020. The company had agreed to produce 45k Ether for Madison within 12 months under the July 2018 agreement to sell 51% of DHPC. As per Madison’s FY20 annual report, Diginex did not deliver and was on the hook for a shortfall of 9,250 Ether.

While Madison did not provide any updates on the lawsuit, a court document (see below) from China shows Madison and Diginex agreed to an out-of-court settlement in September 2020.

Out-of-court settlement between Madison and Diginex

Source: China Judgements Online website

3. SPAC financial advisor with a history of regulatory issues

Chardan Capital Markets was the SPAC merger advisor. Chardan has a long history of regulatory issues such as anti-money laundering violations and failure to supervise conflicts of interest. Diginex’s February 2021 prospectus shows Chardan held 550k Diginex ($5.1m) shares as of 28 January 2020.

4. Sponsor’s poor investment track record

James Tan, the CEO of SPAC sponsor 8i Holdings, has been involved with companies whose share prices performed poorly. During his time as CEO of Nasdaq-listed Moxian Inc from 2013-2017 and Singapore-listed Vashion Group Ltd (now known as Incredible Holdings Ltd) from 2003-2006, the share prices of these companies declined ~40% and ~80%, respectively.

8i Holdings held 4.34% of Diginex’s outstanding shares as of 4 November 2020. The February 2021 prospectus shows 8i Holdings no longer holds Diginex shares as of 28 January 2020. 

SPAC shareholders showed the same lack of enthusiasm for Diginex. Close to 60% ($35.3m) of the shareholders redeemed their SPAC shares, leaving Diginex with just $24.1m net cash post-merger.

5. Last but not least, Singapore’s regulatory environment. 

Diginex keeps telling investors Equos is subject to tighter security because of its Singapore base. Like many other companies, Diginex has been granted a temporary exemption from holding a licence under the Payment Services Act in Singapore. While this allows Diginex to continue operating until a decision is made on its licence application, there is no guarantee that Diginex will get the licence.

Singapore has what is known as a “light touch” regulatory environment, a politically correct way of saying enforcement is virtually non-existent for securities fraud. Iceberg Research has in the past alerted Singapore’s regulators to the fraudulent practices of a local company which was responsible for the eventual collapse of the world’s largest bunker supplier (OW Bunker). We also uncovered fraud at commodities trader Noble group. Regulators chose to attack our credibility in both cases rather than going after the bad actors. Nobody in Singapore has been prosecuted for these scandals. Singapore does not have class-action litigation comparable with the US. It is also worth noting that as a foreign private issuer, Diginex is exempt from a number of rules under US securities law and is permitted to file less information with the SEC.

Given these multiple red flags, we doubt that institutional investors’ compliance teams will be convinced of Diginex’s ‘merits’. This undermines the very basis of its value proposition.

Diginex is Burning Cash at an Alarming Rate

Diginex has done well at launching every possible business line (exchange, custody, asset management, borrowing and lending, etc). Although the company calls itself a ‘listed digital asset ecosystem’ with ‘several complementary lines of business to deliver products and services to its clients’, there isn’t much beyond its powerpoint slides in terms of revenue. 

Equos business lines

Source: Diginex presentation

Revenue has been declining since FY19, and plunged 87.2% YoY to $23.1k for the 1H21 period. This is 10 times lower than the average US bakery. Diginex reported losses of $108m in the same period. A July 2019 presentation shows Diginex expected $267m revenue in FY21.

Diginex’s historical revenue breakdown

Description	FY19	FY20	YoY %	1H20	1H21	YoY %
Capital markets	900,085	291,315	-67.63%	102,561	9,998	-90.25%
Asset management	46,763	119,857	156.31%	75,412	0	-100.00%
Trading income	3,216	78,833	2351.27%	2,357	9,105	286.30%
Custody services	0	4,202	-%	0	3,272	-%
Others	0	415	-%	0	758	-%
Revenue	950,064	494,622	-47.94%	180,330	23,133	-87.17%

Source: Diginex’s February 2021 prospectus and Iceberg computation

Employees have done well despite the disappointing performance. Excluding director compensation, each Diginex head was paid an average of ~$159k (salary + share options) in 1H21. The average per director was $1.4m. 

The company also enjoys a prestigious and expensive office space at the International Financial Centre in Hong Kong, the highest tower on Hong Kong island, which costs $187k a month under a 3-year rental agreement that expires in June this year.

We estimate that Diginex has a cash runway of 18 months, based on its pro-forma cash balance of ~$47.6m post private placement ($27.6m as of end-September + $36.2m January net placement proceeds – $16.2m estimate of cash spent up to March) against a current cash burn of ~$32m per year. In comparison, Coinbase had $1.1bn as of end-December 2020. Diginex’s LTM operating cash flow was negative $25m while Coinbase generated $3bn. 

Founder Miles Pelham has Sold Almost all of his Shares

While retail investors have been buying this ‘exceptional opportunity’ to invest in the first Nasdaq-listed crypto-exchange, Diginex’s founder has been selling his stake. Miles Pelham, through HK-incorporated Pelham Limited, has sold about 5.5m Diginex shares or 96% of his stake since June last year.

Movement in shares held by Pelham Limited

Name	Jun-2020(As projected post SPAC merger)	% held	Jan 2021	% held
Pelham Limited	5,708,029	16.20%	231,397	< 1%

Source: Diginex’s June 2020 and February 2021 prospectuses

Another shareholder called DHC Investments Limited also dropped its stake to 2.6m shares (6.9%), down from 5.4m (15.5%) in June 2020. The February prospectus states that DHC is equally-owned by Paul Yang and Connie Wei, both of whom ‘disclaim beneficial ownership’ [p 117]. There is no further information on who ultimately benefits from these shares. However, a schedule 13D form filed in September 2020 shows DHC once shared the same address as Diginex. DHC has since moved its address to another part of Hong Kong. 

Pelham dealt with DHC in the past. He was non-executive chairman of timber operator Woodbois Ltd from April 2016 – July 2019. The company announced in July 2020 that Rhino Ventures Limited (a company affiliated with Pelham) would purchase 80.2m Woodboi shares from DHC. 

Pelham’s other actions during his time as chairman also weakened the financial structure of the company. Shareholders were paid a $20m dividend in October 2018 just 16 months after the company started. He also provided Diginex with a $20m 12.5% unsecured credit facility in FY19, of which $10.7m was utilised at the end of FY20. The $10.7m was fully repaid before the SPAC merger.

Conclusion

We believe that Diginex has been meticulously hyped around crypto-mania, and more recently, exchanges. 

Diginex is particularly late to the exchange game. Its value proposition of being a reliable and regulated counterparty for institutional investors is easily dismissed by the series of red flags. Even the sell-side seemingly struggles to articulate Diginex’s prospects and recognises the huge gap between the company and existing players. All that underlies its inexplicable market cap of $345m are a powerpoint deck and a struggling marketplace. 

Considering Diginex’s mission impossible plan for growth, miniscule revenues, dubious history of transactions, and along with its high cash burn, we believe Diginex will struggle to survive.

We are short $EQOS and expect its share price to quickly and substantially decline.

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