This weekend saw the launch in Macau of Micro Connect Financial Assets Exchange (MCEX), a blockchain powered exchange founded by Charles Li, former CEO of HKEX, and backed by the venture arm of the Agricultural Bank of China and Li Ka-shing’s Horizons Ventures. Using a novel digital asset, Micro Connect provides financing for Chinese micro and small businesses, particularly consumer facing businesses such as restaurants, retail stores and sports clubs.
A Daily Revenue Obligations (DRO) represents rights to income from the SME, with funding repaid through the daily tracked revenues via point of sale (POS) solutions and banking data. Hence there is significant transparency about the performance of the DROs. Investment in these small firms started long before the launch of the exchange, with funding of more than $120 million for 2,900 stores across 200 brands. That last point highlights that the quick route to rollout is to target brands rather than single unit businesses.
Blockchain is used for the trading, settlement and clearing of DROs.
“This is the world’s first financial market dedicated to the micro economy of China through an innovative new asset class, the DRO,” said Charles Li, Founder and Chairman of Micro Connect. “We look forward to Micro Connect’s contribution to connecting China’s micro and small businesses with global capital.”
MCEX isn’t relying on funders directly investing in DRO’s. Instead, it is additionally launching structured products and funds. DROs can be pooled similarly to asset backed securities (ABS), with senior and junior tranches. Additionally, the founders have planned Daily Revenue Funds, which also invest in DROs.
A year ago, Micro Connect raised a $70 million Series B funding round bringing the total funds raised to $120 million. The funding included existing investor Sequoia China and new investors such as ABC International (Agricultural Bank of China), Adrian Cheng, Ausvic Capital, Chuang’s Capital, Dara Holdings, Li Ka-shing’s Horizons Ventures, Keywise ARCHina Fund, Lenovo Capital, Vectr Fintech, and others. In December, HSBC advanced a $25 million asset backed loan facility.
It’s certainly a big idea. Understandably the white paper emphasized the opportunity, which seems significant, as opposed to the risks. These seem to be if people find ways to game the system by circumventing the tracking. Or if there’s an economic downturn resulting in lower daily revenues. Presumably, that means the repayment will take longer, but that wasn’t clear from the white paper. Another potential risk is if data is manipulated between it being provided by POS systems and entered on the blockchain. But with transparency, that should be detectable.