TechFinancials, a technology provider to retail brokers, released its preliminary financial results for 2017 and a separate annual report this Tuesday. Regulatory pressures caused the firm to see a dramatic decline in its year-on-year profits and make a shift in business strategy.
The trading technology provider finished 2016 with total revenue of $21.33 million. At the end of this year, that figure had slumped to $13.36 million – a 37.5 percent decrease. Profits were impacted even more than revenues as the firm saw only $5000 in profit for the year, compared to $3.92 million in 2016.
The degree to which profits decreased is in large part explained by an ‘impairment of intangible assets’ that equaled $1.50 million. To put this in layman’s terms, the firm invested in two products, one trading solution for the Japanese market and another for the US market, and will not be able to recover the costs incurred by those investments.
TechFinancials’ failed efforts to expand into those two markets were not the only cause of its decline in business last year. Regulatory changes meant the firm lost business and had to change its strategy.
In April of 2017, 24Option cancel its contract with TechFinancials. The company had been TechFinancials’ largest client and, although it had informed TechFinancials of its decision to cancel the contract beforehand, this seems to have dented the technology provider’s profits for the year.
How is this connected to regulation? Well, 24Option was based in Israel until March of 2017, after which it moved operations overseas. The reason behind this was a ban, from the Israeli government, on selling binary options to Israeli citizens in March of 2016. This was followed by a total ban on selling binary options in October of 2017.
Today’s annual report does not state that the Israeli regulation was behind 24Option’s decision to cancel its contract with TechFinancials, but it seems entirely plausible that it was. The canceled contract with 24Option may have been the most conspicuous side-effect of regulation on TechFinancials’ business, but it was not the only one.
Without going into specifics, the firm’s report noted that its software licensing business had felt the squeeze too. It noted that binary options regulations had meant that banks and payment service providers had ceased providing services to brokers and TechFinancials, as a software provider to those brokers, had felt the pinch of this.
The firm has also actively sought to cease operating parts of its business as a result of the changes. B.O TradeFinancials (BOT), which had regulatory approval in Cyprus, used to operate the firm’s OptionFair trading platform. As of February 2018, the platform has shut down, and TechFinancials has returned BOT’s regulatory license to the Cyprus Securities and Exchange Commission.
The firm entered into a conditional agreement to sell BOT in November of 2017. This deal fell through after the buyer did not receive the requisite regulatory approval to acquire BOT. As a result, TechFinancials is still “carefully considering [its] options with regard to the shareholdings in BOT.”
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Change of Plans
If you fear for the future of TechFinancials, fear not, for the firm has a number of plans to ensure it will still be making money in the coming years.
The new rules, from the European Securities and Markets Authority (ESMA), including a ban on binary options and strong restrictions on contracts-for-differences (CFDs), mean TechFinancials will cease any business-to-consumer (B2C) operations in Europe.
Instead, the business is going to focus solely on B2C operations in the Asia-Pacific region where regulation is not (yet) as severe as it is in Europe. The firm will be carrying out its efforts in the region via its joint venture with DragonFinancials.
In anticipation of binary options regulation in the region, the firm is also continuing to develop a greater focus on CFD and FX products. Asaf Lahav, TechFinancials’ CEO, noted that as a result, the firm is now “a provider of diversified online trading solutions rather than a binary options business.”
Outside of the ‘traditional’ trading space, the firm is also turning its attention to the current industry ‘zeitgeist’ and investing in blockchain.
The firm has already taken a 2 percent stake in CEDEX, a blockchain firm that aims to start a diamond exchange. Alongside this 2 percent stake, TechFinancials also has an option to purchase another 90 percent of CEDEX.
To acquire this percent stake and have the 90 percent option, the firm provided CEDEX with a loan of $400,000 in 2017. In June of 2018, CEDEX had paid back $340,00, and the option was worth an estimated $8.9 million.
Alongside this investment, the firm has also made inroads into the cryptocurrency space. It has worked on cryptocurrency payment solutions and is building a white label exchange system for cryptocurrency trading.
In the first quarter of 2018, the firm had integrated Bitcoin, Bitcoin Cash, and Ethereum payment processing solutions into its systems. As a partner of TechFinancials, CEDEX became the first firm to integrate these new solutions into its service offering.
Regulatory crackdowns may have harmed TechFinancials in 2017, but the firm seems to have coped well with them. Its efforts towards expanding its service offering and the pursuit of new business lines in different jurisdictions suggest it was reasonably well prepared for the consequences of Israeli and ESMA regulation.
The firm may not have recorded record profits for the year, but given the beating the industry as a whole has taken, especially in the binary options sphere, it has done well. Its strategy moving forward should give confidence to any stakeholders and potential clients of the firm.