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.

Or, if you will, an "AOL Buys Time Warner" 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:

Hany Rashwan

Co-founder and CEO of crypto ETP issuer 21Shares

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.

Paul McCaffery

Head of alternative capital sales/co-head of equities at U.S. investment bank Keefe, Bruyette & Woods (KBW)

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, many crypto firms are making a lot of money and just funneling it all into customer acquisition, but that isn’t going to last. Fees will compress as incumbents get more involved in the crypto space, and when profitability expectations increase, these firms will have to make more money on their lending/deposit-oriented activities.

Separately, I can see a scenario, though, where we get some regulatory clarity around digital assets at some point, and if stablecoin issuance has to go through federally insured deposit institutions such as the [President’s Working Group] report suggested in November, bank charters could become additive to certain crypto platforms (i.e. think like a Circle or Gemini, anyone who issues a coin).

For now, the hurdles [for traditional players looking at crypto] remain lack of regulatory clarity, onerous capital requirements (i.e. banks as relates to 100%+ risk weightings) and ill-suited GAAP (generally accepted accounting principles) intangible asset accounting rules. Clarity on these items will also be required to see real appetite for the traditionals.

I also think the public market traditional finance group is currently constrained by the loftier private market valuations at this point. However, I would imagine you will see increasing participation from bank and payment companies in blockchain networks, like Tassat and USDF. There are already hundreds of banks that have expressed interest in Tassat and USDF.

James Stickland

CEO of institutional crypto trading platform Elwood Technologies

Traditional finance is already investigating the crypto markets, as evidenced by Visa buying a CryptoPunk and Mastercard supporting on-ramps for Coinbase's NFT platform.

These two events would have been unimaginable even two years ago.

Further, these worlds are already colliding. For example, Coinbase, a publicly listed crypto company, bought BRD wallet, merging a decentralized wallet with their centralized one.

Ultimately, we will see further mergers between traditional and digital-native companies, but I think it's unlikely to be in the form of buying tokens instead, forming long-standing partnerships. This trend will only continue as we see more institutions entering the digital asset market.

Oliver von Landsberg-Sadie

Founder and CEO of crypto trading and payments services firm BCB Group

Traditional finance simply can’t ignore the speed and efficiency that blockchain is bringing to payments. The improvements that this technology has made on the speed and costs of remittances is disrupting the market and payment companies, and banks have a number of options to adapt to this new reality. We are seeing the crucial role of partnerships throughout the industry, but we have yet to see if traditional players will maintain their position with current strategies to increase their leverage on these faster, cheaper networks.

This raises questions on how much control could traditional finance expect to achieve beyond internal blockchain innovation and M&A, leaving options such as acquiring enough coins on a blockchain to influence its future development. The decentralized structure of blockchain is designed to push back any centralized control, though this will be continually tested by the technological and financial firepower of leading stakeholders and from those with the most to lose and gain.

So far, we have seen incredible resilience in maintaining the integrity of decentralized networks and traditional finance will continue to enable centralized finance to access the crypto markets. We are starting to see a hybrid approach where the parallel systems of CeFi (centralized finance) and DeFi (decentralized finance) can work harmoniously together while taking on the best each has to offer.

TradFi (traditional finance) may want to eat DeFi, but its eyes may be bigger than its stomach.

Thomas B. Michaud

President and CEO of KBW

The collision between blockchain and payments is gaining traction (witness the growing collaboration that has been announced).

The current payment system was essentially developed in the 1970's. It is time for modernization, and blockchain offers a contemporary alternative to how payments are made, especially in a B2B context.

Regulation is coming. The gap between innovation and regulation is about as wide as I have ever seen it. Expect the gap to narrow with the government stepping up to provide guardrails and guidance to the industry.

More likely than M&A activity, I believe the near future is going to be driven by joint ventures and collaboration. Fintechs and traditional financial institutions have a great deal to offer each other, but a JV reduces risk and allows for substantial upside for both parties.

JVs also allow for the usage to expand faster as more financial institutions are able to offer the product and services.

Elie Bonin

Head of digital assets trading at market maker GHCO

I believe we are in the wake of a silent revolution. Bit by bit, renowned companies get exposure to crypto, be it by owning coins or by accepting tokens as a means of payment.

Crypto is not only about money and cheap transactions, it is also about decentralized consensus and infrastructure maintenance; it is a formidable opportunity for companies to reduce operational costs. As robots replaced men, blockchain will replace companies' computers and databases. They will simply need to operate logic on top of these.

In these times of meek economic growth, my take is that governments perceive this as a potential pool of growth and innovation, which leads to favorable regulations here and there.

With this in mind, should you be a private company, you truly only have three choices: to ignore the whole crypto topic and endure the opportunity cost; to partake in its evolution by eventually becoming what we call a chain validator, reaping transaction fees as an additional source of revenue; or to convert themselves by building products directly on the blockchain

Having said that, should we take the example of Visa and Mastercard, their profit margins are respectively 51% and 46%. There is no rush for them to [make] a pro-crypto transformation. For the likes of the banks, because of the immense regulatory hurdles, I frankly doubt we see serious involvement from them any time soon. Simply getting crypto profits from an exchange to a bank account gives them cold feet.

Being involved in a blockchain as such does not necessarily give you control over it. As Vitalik [Buterin, one of the co-founders of the Ethereum blockchain] said in a paper, the goal of crypto economics is to avoid this new technology encountering the usual human governance and decision-making issues.

In the case of Ethereum and Bitcoin, upgrades are subject to a rough consensus that involves all the vested interests. Owning a substantial part of the coins will not grant you additional decisional power. A private company that would like to delve and get actively involved into crypto should keep this in mind: They agree to delegate to the community the power to decide on certain topics.

The likes of Visa and Mastercard could achieve inorganic growth through crypto, tapping into new markets, but without the certainty to achieve control over it, no matter the amount invested.

Frank Schuil

CEO and co-founder of crypto exchange Safello

It's clear that traditional financial players will acquire their way into a market if needs be. We can look at the acquisitions of Tink by Visa and Aia by Mastercard to see a real-life example of the companies' ability to adapt to change, in this case open banking.

Influence over decentralized protocols is much harder to do, and it's a losing game. Influence over one protocol leads to copycats; we have seen that numerous times in our industry. And efforts to build centralized solutions to compete with decentralized solutions have proven to be futile time and time again, as well.

Instead the companies' leading the payment space today will adapt to the technology through make-or-buy decisions and/or lobby to outlaw their competition. We see similar efforts underway in the United States, where legislation is proposed by the SEC (Securities and Exchange Commission) to curtail the DeFi market.

The size and maturity of the crypto industry makes it unlikely that TradFi will eat the entire industry. There will be those financial institutions that adapt and those who won't. The analogy here is closer to how the internet impacted TradFi than for instance PSDII/open banking. There are 6,008 banks in Europe alone, how many of them have the competencies, appetite and go-to-market timeline luxury to do this themselves? How many will hold out while customer demand gets stronger both on the retail and corporate side? It's likely going to be a frenzy once MiCA regulation comes into effect to power TradFi offerings with crypto capabilities. (MiCA, or Markets in Crypto Assets. is the European Commission's proposed set of regulations.) We will gladly help them, it's a foundational principle of our company.

Compliance is the biggest thing holding adoption back. In Europe, this will change with MiCA. Until then, TradFi will need to keep it off balance sheet and partner up or sit on the sidelines.

UPDATED (March 10 16:56 UTC): Edits and updates quotes from Elwood Technologies CEO.

Read more: Crypto M&A Surged Nearly 5,000% in 2021, PwC Report Says