The directors present the strategic report for the year ended 31 December 2022.
Payward Ltd is a company registered in England and Wales. The company is a wholly owned subsidiary of Seven Cities Pte. Ltd. (the "parent company"), which is incorporated in Singapore. The principal activity of the company is to provide digital asset exchange services for UK customers.
Prior to 1 January 2022, the company derived revenue based on a cost-plus reimbursement from Payward Inc. (the “ultimate parent company”) which was recorded as service fee income. Effective 1 January 2022, the company entered into a Shared Services and Profit Split Agreement with the ultimate parent company. Under this agreement, the company provides shared services to members of the group and receives a split of the ultimate parent company's revenues and profit based on the residual profit split method ("RPSM") which is recorded in the statement of comprehensive income. For the year ended 31 December 2022, the company recognised total revenues amounting to €48.7 million (2021 – €56.4 million service fee income). The decrease in revenue for the year was mainly due to developments involving FTX and Genesis which saw a decline in trading volumes across the digital asset industry.
Despite the slowing market sentiment during the year, the platform continues to develop and enhance its tools and support for trading digital assets. In December 2022, the platform publicly launched a new web platform that encompasses a full suite of its advanced trading tools and unified access to spot and margin trading. As of the date of this report, the platform supports over 240 tokens.
In addition to the above-mentioned services that supports the ultimate parent company and the network of affiliated companies, the company is also responsible for the onboarding and offboarding of client monies and has internal operational banking accounts in the United Kingdom and the rest of Europe. As of 31 December 2022, the company has €964.3 million (2021 – €2,668.2 million) of cash and cash equivalents.
Market Risk
The risks around digital assets are mainly related to their volatility. Unexpected changes in market sentiment can lead to sharp and sudden movements in price. A sudden downward movement in price can create a loss of confidence among users. Conversely, a sudden upward movement in price may attract more users to trade digital assets. This directly impacts the number of users on the platform and the services the company provides on behalf of its ultimate parent company. The company is therefore directly subject to significant digital asset market risk as described in Key Performance Indicators. The ultimate parent company manages its digital assets and fiat holdings to ensure that there is sufficient liquidity to settle all of the ultimate parent company’s customer liabilities, if any unforeseen circumstances were to occur. Additionally, the ultimate parent company aims to maintain several months’ worth of operating cash and digital assets to settle any operating expenses incurred by the company.
As the company’s principal activity is to provide digital asset exchange services to its customers in the UK, the company’s revenue is directly impacted by market volatility and user confidence. User confidence, depends on the ultimate parent company’s level of activity, which can be monitored through trading volumes and the operating expenses required to support such activities, including bank fees. For the year ended 31 December 2022, the ultimate parent company’s trading volumes decreased by approximately 92% compared to the previous year. The company also incurred bank fees and net interest expense amounting to €16.3 million in 2022 (2021 – €31.5 million).
Section 172 of the Companies Act 2006 requires each director of the company to act in a way in it considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to a range of matters including:
the likely consequence of any decision in the long term;
the interests of the company’s employees;
the need to foster the company’s business relationships with suppliers, customers and others;
the impact of the company’s operations on the community and the environment;
the desirability of the company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the company.
The directors make decisions by taking their legal duty into account and also the priorities and requirements of the stakeholders. The directors fulfil their duties to act in good faith to promote success of the company through its implementation and shared strategy with the ultimate parent company.
Decision Making
The directors fulfills their duty by considering the consequences of their decisions on the long-term objectives and sustainability of the company, its stakeholders and the community whilst also preserving its values and culture. We are a business built on our standards and reputation and would not take a decision which would have a detrimental impact on this whether in the short term or the long term. We are dedicated to ensuring we maintain our culture whilst achieving our purpose.
Employee Engagement
Our employees are key so it is very important that they have the right attitude and the drive to create ideas and set high standards. The employees of the ultimate parent company are a diverse group of thinkers and doers that are dedicated to making digital assets available and accessible to the world.
Examples of the engagement with employees include:
regular all-hands meetings are conducted to provide updates to employees on the strategic vision, values and business updates;
requesting all employees to participate in an online employee survey to assess key metrics such as employee engagement, inclusion, intent to stay and strategic alignment against industry benchmarks;
Business Relationships
We are one of the longest running, most trusted and healthiest exchange and our clients benefit from access to industry-leading liquidity, deep markets and direct access to over-the-counter trading and futures exchange. We carry out our business with similar-minded people who we like and build on this to forge strong and lasting partnerships which is important for our long-term success.
Community and Environment
The ultimate parent company and by extension, the company, has an ongoing commitment to a high level of corporate social responsibility. is important to the company and it undertakes many initiatives in this area. The directors recognise the relevance of leading the company in such a way that it contributes to wider society.
Examples of corporate social responsibility actions include:
becoming a Diamond Sponsor of the Anti-Human Trafficking Intelligence Initiative (ATII), a U.S.-based nonprofit that harnesses intelligence to help financial institutions, technology firms and digital asset exchanges combat human trafficking and child exploitation.
High Standards of Business Conduct
The directors take a comprehensive approach to protecting clients’ digital assets with a team of experts who take a risk-based approach to ensuring clients’ assets are protected at the highest levels.
Examples of the ultimate parent company and the company’s commitment to maintain the high standards of business conduct include:
encryption of all sensitive account information at both system and data level with strictly controlled and monitored access;
data servers that reside in secure cages with 24/7 surveillance by armed guards and video monitors with strictly controlled physical access and code deployment;
a team of experts dedicated to testing our own systems with a bug bounty program to leverage the expertise of the broader security research community; and
a robust set of security procedures and controls to manage information security that is ISO ("International Organization for Standardization") 27001 certified.
Fairness Between Members and Stakeholders
The company’s mission is to accelerate the worldwide adoption of digital assets. The directors will act with integrity and courtesy in all of its business relationships and will consider all members and stakeholders when making decisions for the overall good of the company.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2022.
The results for the year are set out on page 9.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company has performed an assessment of the potential impact of the Russian invasion of Ukraine. We continuously monitor our dealings and have appropriate controls in place to enforce the sanctions that have been imposed in the wake of the conflict in Ukraine.
The company also evaluated the recent market developments and concluded that the company has no material direct or indirect exposure to the affected companies (FTX and Genesis) in the digital asset industry.
Refer to Note 15 to the financial statements.
The company continues to enhance its trading platform to attract and retain customers.
Key elements of the company's strategy include but are not limited to the following:
Continuous enhancement of the trading platform
Customer retention and growth
Providing customers with more options for engaging with crypto products and protocols
Providing customers with increased education around crypto
As the company has not consumed more than 40,000 kWh of energy in this reporting period, it qualifies as a low energy user under these regulations and is not required to report on its emissions, energy consumption or energy efficiency activities.
The directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the financial statements. Further details regarding the adoption of the going concern basis can be found in Note 1.2 to the financial statements.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
The extent to which our procedures are capable of detecting irregularities, including fraud
The objectives of our audit, in respect to fraud are: to identify and assess the risks of material misstatement of the financial statements due to fraud, through designing and implementing appropriate responses: and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows:
We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and determined that the most significant is the Companies Act 2006.
We understood how the company is complying with those frameworks through discussions with the directors.
We assessed the susceptibility of the company's financial statements to material misstatement including how fraud might occur by considering the key risks impacting the financial statements.
We carried out a review of manual entries recorded in managements accounting records and assessed the appropriateness of such entries.
We have assessed that the company's control environment is adequate for the size and operating model of such a company.
To address the risk of fraud through management bias and override of controls, we:
performed analytical procedures to identify any unusual or unexpected relationships;
tested journal entries to identify unusual transactions;
assessed whether judgements and assumptions made in determining the accounting estimates set out in Note 2 were indicative of potential bias; and
investigated the rationale behind significant or unusual transactions.
In response to the risk of irregularities and non-compliance with laws and regulations, we designed procedures which included, but were not limited to:
agreeing financial statement disclosures to underlying supporting documentation;
reading the minutes of meetings of those charged with governance;
enquiring of management as to actual and potential litigation and claims; and
reviewing correspondence with HMRC, relevant regulators, and the company’s legal advisors.
There are inherent limitations in our audit procedures described above. The more removed that laws and regulations are from financial transactions, the less likely it is that we would become aware of non-compliance. Auditing standards also limit the audit procedures required to identify non-compliance with laws and regulations to enquiry of the directors and other management and the inspection of regulatory and legal correspondence, if any.
Material misstatements that arise due to fraud can be harder to detect than those that arise from error as they may involve deliberate concealment by for example forgery, or intentional misrepresentation or through collusion. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing noncompliance or fraud and cannot be expected to detect non-compliance with all laws and regulations.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Payward Ltd. is a private company limited by shares incorporated in England and Wales. The registered office is 6th Floor, One London Wall, London, EC2Y 5EB.
The financial statements are prepared in Euros, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest €'000.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, loans from fellow group companies and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
Digital assets
Our customers have the ability to hold, receive, transfer, sell and convert a wide range of digital assets on the exchange platform for their benefit. The company has presented these digital assets, held on behalf of our customers, off balance sheet. This has been determined in consideration of a variety of factors due to the lack of an accounting standard that specifically deals with this determination. Factors considered include:
The company does not have the right (explicit or implicit) to use the digital assets for its own purposes; and as such, the company does not consider customers' digital assets to meet the definition of an asset under Section 11: Basic Financial Instruments or Section 12: Other Financial Instruments of FRS 102;
The company considers the customers of the digital assets to maintain control of the asset and have preferential claim on the assets held by the company on their behalf in the event of liquidation; therefore not meeting the framework definition of a liability under Sections 11 and 12 of FRS 102; and
The level of segregation of the customers' assets from the company's.
Refer to Note 16 for further details.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
Recoverability of amounts owed by group undertakings
At each reporting date, amounts owed by group undertakings are assessed for recoverability. If there is any evidence of impairment, the carrying amount of the debtor is reduced to its recoverable amount. Impairment loss is calculated based on a review of the current status of existing amounts owed and historical collections experience. The impairment loss is recognised immediately in the profit and loss account. See Note 9 for the carrying amount of amounts owed by group undertakings.
The company has no employees other than directors, who did not receive any remuneration during the year (2021: €nil).
The average number of employees, including directors, during the year were as follows:
The actual (credit)/charge for the year can be reconciled to the expected (credit)/charge for the year based on the profit or loss and the standard rate of tax as follows:
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The deferred tax asset set out above is expected to reverse in the subsequent years and relates to the utilisation of tax losses against future expected profits of the same period.
There is a single class of ordinary shares. There are no restrictions on the distribution of dividends and the repayment of capital.
The company's reserves comprise of cumulative profits or losses, net of any dividends paid, and other adjustments.
The directors have considered the impact of Russian forces entering Ukraine on the company’s business and the recent digital asset market developments involving FTX and Genesis. The directors are satisfied that these are non-adjusting, post balance sheet events which does not materially impact the balances included in these financial statements.
Related party transactions
The company has taken advantage of exemption, under the terms of Financial Reporting Standard 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', not to disclose related party transactions with wholly owned subsidiaries within the group.
Digital assets
An affiliate entity, Payward Ventures Inc ("PVI"), acting as the custodian for the company, maintains the internal record-keeping of our customers' digital assets, including among other things, cryptographic addresses and the amount and type of digital assets held in their accounts. As of 31 December 2022, PVI held US$596,672,995 of crypto assets on behalf of our UK customers. These balances represent the entire crypto assets for UK customers and have been determined using unadjusted quoted prices in active markets.
We are subject to legal proceedings, regulatory investigations and claims that arise in the ordinary course of business. We review each proceeding, investigation and claim on a case by case basis and determine the probability of losses after considering, among other things, opinions and views of legal counsel and outcomes of similar cases and circumstances. There is significant judgment in making these estimates and actual results may be materially different from these estimates. As at 31 December 2022, no provision for any liability has been made in these financial statements.
The company previously incurred negative interest expense on its Euro denominated bank balances due to the negative interest rate policy set by the European Central Bank ("ECB"). In previous years, these amounts were presented under cost of sales in the Statement of Comprehensive Income. In 2022, the ECB announced changes to the interest rate which has resulted in the company earning an interest income on its Euro denominated bank balances. Management believes it is more appropriate to present the interest income and expense as a separate line item.
Please see details below: