Crypto Firms May Look at Traditional Finance Firms as M&A Targets

If some observers are right, cryptocurrency mergers and acquisitions may soon become a “man bites dog” story.

This much is clear: Deal activity in the crypto sector is heating up. As mainstream adoption of cryptocurrencies grows, so has the number of mergers and acquisitions in the digital assets market. New deals or partnerships that blur the lines between traditional finance and crypto finance are announced daily. The total value of crypto-related M&A rose to $55 billion in 2021 from $1.1 billion a year earlier, according to PricewaterhouseCoopers.

Some cash-rich crypto companies have also begun to acquire traditional finance assets. In January, crypto exchange Coinbase bought FairX, a U.S.-based derivatives platform. In Europe, cryptocurrency trading and payments firm BCB Group said it would buy Sutor Bank, a 100-year-old German bank.

Public blockchain networks, which were once an anathema to traditional financial institutions, are now an acceptable topic of conversation on Wall Street. According to analysts at Bank of America, the Solana blockchain could become the “Visa of the digital asset ecosystem.”

In such a market, it doesn’t seem crazy to wonder if Visa itself, or another storied incumbent, could look to acquire or build influence over blockchains such as Solana to try to ward off a competitive threat from this new technology. In fact, Visa has been dipping its toes into the crypto ocean in areas such as stablecoins, NFTs (non-fungible tokens) and startup incubation.

CoinDesk spoke to several industry figures and asked them whether traditional finance companies could look to invest, buy a stake in or even start buying up coins to try to influence or control blockchain-based protocols. We asked them what are the barriers for financial institutions to buy coins or a stake in a network and whether traditional finance could try to absorb crypto finance in order to survive.

Surprisingly, some of them predicted the opposite: that crypto companies flush with cash might make more deals for traditional players, and acquisitions like BCB’s would no longer seem unusual. Wild as it may sound, Changpeng “CZ” Zhao, CEO of leading crypto exchange Binance, recently said he’s eyeing non-crypto acquisitions in order to “make the crypto industry bigger”

As referred to above, there is precedent for such table-turning acquisitions from the dotcom era two decades ago, when early internet on-ramp AOL took over media dinosaur Time Warner (although the fate of the combined company might serve as a cautionary tale for would-be crypto empire builders).

Here’s what the experts said:

Judging by history, I would predict that M&A will go the other direction. Crypto companies are cash-rich fast movers that are building a fundamentally 10 times better product than traditional finance.  We are looking at a lot of traditional finance assets that look very cheap right now.

Legacy incumbents with a poor track record on innovation typically have an inability to monetize, retain and grow innovative fast-moving startups. Internet history is littered with examples of these incompatibilities in a lot of different styles, from AOL’s $164 billion “merger of equals” with Time Warner in 2001 to Yahoo’s value-destroying acquisition by yet another legacy media company, Verizon, in 2017.

It is hard to see a slow-moving incumbent that lacks innovation and technology culture to somehow both acquire and expand a cutting-edge crypto startup company.

While there are no disclosure rules in crypto, it will be difficult for an outside party to come into these ecosystems and “control” without the implicit buy-in from the specific community that is underpinning the protocol, DAO (decentralized autonomous organization) or foundation targeted. When the community can just pick up, copy the project (fork) and leave, community buy-in and support will be so much more important than how a normal hostile takeover happens in the traditional world.

It’ll be quite difficult for these traditional companies to stage a hostile takeover of a top crypto community without creating an ugly backlash and exodus from the community. In many cases, it would be as silly as some company in 1996 trying to take over and control the internet.Traditional players can and should build applications on top of these technologies and protocols. We have already seen top banks experiment with settlement and clearing on blockchains, and I would expect to see more experimentation from these players in the future.

I do think you might see an increase in crypto firms acquiring banks for their charters and funding as the crypto balance sheet and earnings profile matures. However, I think that even after [Wednesday’s] presidential executive order, we need actual regulatory clarity for this to really pick up any steam.

Right now,…