- $100M token-based bonds
- Token symbol: BB1 Token
- Blockchain: Stellar
- Countries excluded: U.S. and Canada
- Accepted currencies: Euro, Steller, Bitcoin, Ether
General Background of the Company
Bitbond GmbH (the “Company”) is a global lending platform for small- or medium-sized enterprises (SMEs) which facilitates loans between lenders and borrowers.
The borrowers go through a creditworthiness assessment that includes a video identity verification and access to their business and seller accounts (eBay, Amazon, MecadoLibre, PayPal, bank account, accounting software, etc.) for income verification. Bitbond then uses a machine learning algorithm to evaluate the data from these accounts, as well as performing a manual review to determine the borrower’s credit rating.
Bitbond uses the Bitcoin blockchain as a rail for cross-border payments, which means the loans are granted and paid back in Bitcoin.
According to the company’s self-reporting, at the current date, the platform has facilitated more than 1,300 loans in total. $15M of these loans were funded by over 1,800 individual and institutional lenders worldwide.
Venture capital funds and angel investors are responsible for funding Bitbond. The company raised a total of $6M in equity over several rounds, in addition to debt financing of $5M. Among its investors and creditors are Havella Capital, Point Nine Capital, Sky Level Group and angel investor Sekip Can Gokalp.
Bitbond earns revenue by charging origination fees to borrowers and repayment fees to investors. The origination fees range from 2-3% of the loan amount. The repayment fee ranges from 0.5-1.5% of the total repayment.
Offering Terms and Structure
Bitbond is the first German company to get approval from the German Financial Supervisory Authority (BaFin) to conduct a blockchain-based security offering which is available to the general public based on a prospectus that is fully compliant with EU prospectus regulation.
The legal issuer will be Bitbond Finance GmbH (the “Issuer”), a 100% owned subsidiary of Bitbond GmbH that was set up during 2018 for the Issuance of the STO.
The Bitbond security token is a debt instrument that pays a 1% interest rate quarterly (4% annually). In addition to the 4% base rate, the token-based bonds are subject to an annual variable interest component of 60% of profit before tax (if any), as per the audited financial statements. The token-based bond will mature on June 30, 2029, for redemption (however the Issuer may redeem it before maturity date at the end of 2021).
Bitbond plans to raise to EUR 100M such that up to 100M BB1- token-based bonds will be issued, and each BB1-Token equals 1 Euro.
The tokens will be issued over the Stellar Blockchain, with each token representing the right to one bond.
Use of Proceeds
80% of funds will be invested in SME loans offered and available on the Bitbond brokerage online platform. 10% of funds are provisioned for working capital to the Bitbond platform. 10% of the funds will cover marketing and issuance costs.
Business Analysis Opportunities and Concerns
The European peer-to-peer lending industry is already crowded. Bitbond is competing with a dozen other platforms, as shown in the following graph:
Bitbond loan volume is falling behind the competitors. To scale up and take a significant market share in this rapid growth industry, it will need to differentiate itself from the pack.
Bitbond maintains a 13% average annual return after defaults for investors (self-reported).
It seems that now Bitbond maintains three partial differentiators:
- Segment: Bitbond focuses on loans to SMEs across the globe.
- Credit Score: All borrowers are risk-graded based on a machine learning algorithm linked to the business’ accounts (eBay, Amazon, PayPal, bank account, etc.). This means investors can choose to invest in loans to companies depending on their risk appetite.
- Settlement Method: Payments are executed and settled using the Bitcoin blockchain.
- The platform does not provide a buyback guarantee (in comparison to most competitors), which can deter investors. That can be mitigated if the risk assessment conducted by the platform is good enough to reduce defaults to a bearable minimum and earn more trust from lenders.
- Using open protocols like the Bitcoin blockchain for cross-border payments can reduce settlement times. However, efficiencies mainly apply to people who already own Bitcoin and know how to use it. For people who don’t, it can create a hurdle as using Bitcoin is not intuitive. To provide users with a smooth and transparent experience, it requires an operational effort.
The published prospectus includes information about the Issuer. The Issuer is a new subsidiary of Bitbond GmbH established in October 2018 (with almost no Financial history). Imperative financial information of Bitbond GmbH such as revenues, gross margins, burn rate and headcount was not published.
However, the approval granted by BaFin for a public issuance provides a certain level of comfort regarding the risk level of the Company’s team and business.
Several issues should be noted and raise some concerns about the offering:
- Subordination – the rights attached to the token-based bonds shall rank second to all of the Issuer’s other existing and future non-subordinated liabilities. These are poor terms in comparison to traditional debt instruments, and as a result, token investors bear an entrepreneurial risk higher than that of a regular lender. In substance, that means that the token owners are last in line to collect their debt.
- The Issuer is a subsidiary not parent – The issuer of the tokens is a subsidiary of Bitbond GmbH that was established on October 2018 in purpose for the STO. Therefore, this new entity would pay the interest and principal with no guarantees from the parent company which runs and owns the Bitbond platform.
- Anticipated returns – The main intended activity of the Issuer and use of proceeds are to grant loans to SMEs over the Bitbond online platform. So, most of the profit which will be used for computation of the variable interest will be generated from returns on those loans. The average return for investors on the Bitbond platform is 13% (self-reported). The variable interest on the tokens is 60% out of the pre-tax profit of the Issuer. Together with the annual base interest of 4%, the annual expected return should be appx. 11.8% (4% + 60%*13%). Practically, token owners can invest directly in loans offered over the Bitbond platform and gain a higher average return (13%).
- No custodian – Token owners hold their tokens privately on a digital wallet and are responsible for the security and storage of their private key. If the investor transfers its tokens to an incompatible wallet or loses his/her private key, the investment is lost. That is not ideal, and as the BB1-Tokens represent the right to the underlying bonds, a retrieval of rights in case of lost private key should be available to investors.
- Liquidity – It is explicitly stated in the prospectus that the token-based bonds would not be listed in a regulated trading market. However, it also states that it cannot be excluded that token holders may transfer BB1-Tokens directly to other parties and/or BB1-Tokens may be listed at the request of investors or others on an unregulated online trading platform for cryptocurrencies. As the token-based bonds are financial securities by nature, it is reasonable to assume that most unregulated platforms for trading cryptocurrencies will avoid listing them. That reduces future liquidity dramatically. There will not be an online marketplace for buyers and sellers to meet.
Using the Stellar blockchain
Choosing to use the Steller network and not the more popular Ethereum Network to lunch the token-based bonds has its pros and cons. Stellar is primarily a payment transfer protocol which executes cross-border payments by the usage of multiple currencies including its cryptocurrency, Lumens (XLM). Apart from being a payment transfer platform, Stellar also acts as a development solution for non-complex applications through simple, smart contracts and therefore can provide more simplicity, speed, and cost-effectiveness across the board.
However, Ethereum has gained significant market traction, and today most STOs/DSOs are launched over Ethereum. Also, most of the regulated trading platforms support protocols which were developed using Ethereum smart contracts. As the BB1-Tokens will not be listed on any regulated exchanges, this is less of a concern.
From a risk assessment perspective, we can cautiously say that the Steller network has reached the required level of maturity for companies to use it to launch their token based securities.
We couldn’t find available information about whether the Company created the smart-contracts on its own or used a third-party technology service provider for that purpose. Also, we couldn’t find available details about security and audit procedure that was taken to ensure the safety of the smart-contracts.
The Bitnond token-based bond is a high-risk, high-reward debt instrument that provides exposure to the growing global peer-to-peer lending industry.
The approval granted by BaFin to Bitbond to conduct a public offering is, to some extent, a stamp of confidence about the team and underlying business. However, Bitbond is competing in a crowded space and will need to show better performance to gain significant market share.
The following risk factors should be taken into account by investors:
- Future returns will arise (if any) from loans granted on the Bitbond platform and not from profits generated by the Bitbond platform as a business.
- Liquidity – With no regulated market where the tokens will be listed, investors will be very limited in their ability to transfer tokens before the maturity date.
- Token rights are subordinated to any current or future creditors of the issuers.
|Discount Tier 1 11.03.–01.04.2019 or up to €1M||EUR .70 (30% discount)|
|Discount Tier 2 02.04.–08.04.2019 or up to €3M||EUR 0.90 (10% discount)|
|Discount Tier 3 09.04.–15.04.2019 or up to €5M||EUR 0.95 (5% discount)|
|Discount Tier 4 16.04.–22.04.2019 or up to €9M||EUR 0.97 (3% discount)|
|Regular price 23.04.–10.05.2019 or up to €100M||EUR 1.00 (Regular price)|
This analysis is based on publicly available information. The information contained in this article is for educational purpose only and not financial advice. Do your own research before making any investment decisions.