Crypto and Traditional Finance To Merge Via M&As

As Coinbase has already gone public, and eToro, Kraken are also planning to list their shares, we can also expect to see an increase in acquisition activity in the coming months.

While it‘s expected that mergers and acquisitions are set to increase this year, what isn’t so clear is who will be initiating such moves. Will traditional finance (or fintech) companies be acquiring crypto firms, or will it be the other way around？

Bridging both sectors

It‘s worth pointing out that mergers and acquisitions have already been increasing quite rapidly within the cryptocurrency industry. According to PwC’s 3rd Global Crypto M&A and Fundraising Report, the total value of M&As within crypto more than doubled in 2020, to just over USD 1.1bn. They expect to see further consolidation in the industry with some of the larger, well-funded, or profitable firms continuing their M&A activities.

“We expect the focus to be not on the acquisition of smaller competitors but rather of firms that offer ancillary services to their current offering (e.g. crypto media, data, compliance, research),” they added.

With an average value of USD 53m (up from USD 19 million in 2019), most of the previous deals involved one crypto firm merging with or acquiring another. For example, Binance bought CoinMarketCap, while Coinbase acquired New York-based crypto brokerage Tagomi.

Nonetheless, with bitcoin and crypto now turning the heads of financial institutions and banks, it‘s likely that 2021 (and beyond) will bring a greater number of ’traditional‘ finance companies buying up firms within crypto. And we’ll also see an increase in crypto firms acquiring companies outside of the sector.

“Large scale crypto institutions may want to buy mid sized traditional fintech companies as part of acqui-hire strategy when building out liquidity or financial instruments requiring in-depth knowledge of the regulatory environment and offerings. Large scale traditional financial institutions may want to demonstrate thought leadership to growing nervousness amongst high net-worth individuals who are starting to fear missing out on significant capital growth potential within the crypto sector,” said Andrew Kessler, Chief Technology Officer and Co-founder of Zug-based digital data management platform Zenotta.

At the same time, Kessler expects that mid-sized institutions within crypto and traditional finance might want to team up, in order “to mutually strengthen their individual positions by bridging these two sectors.”

For Mike Colyer, the CEO of Digital Currency Group-owned mining-staking company Foundry, there will be one particular area of the crypto industry which will enjoy an increase in interest from firms outside of crypto.

“There is already an increasing trend among traditional companies to acquire or merge with crypto companies, especially those from the mining sector. In recent months, we've seen all kinds of publicly traded companies in North America, from sports lottery businesses to tech support solution providers, either acquire or merge with crypto mining businesses,” he told Cryptonews.com.

Colyer expects this trend to ramp up this year, while he also expects to “see more crypto players acquire traditional finance companies, especially as long as the bull market continues.”

‘The only choice’

Given that some crypto firms are now so large, big traditional finance corporations may be forced to acquire at least some of them, since the odds of building something equally successful in a shorter space of time are falling by the month.

“Given the time to market to build a crypto offering for all but the most agile traditional financial firms will be measured in years, if firms have not already started building a crypto offering then the only choice will be an acquisition to ensure they remain relevant. Paypal has led the pack with its recent acquisition of the custody infrastructure provider Curv,” said Seamus Donoghue, VP of strategic alliances at METACO, a digital asset infrastructure provider for traditional financial institutions.

He added that PayPal is now embracing digital payments (i.e. cryptocurrencies) that would otherwise completely disrupt their existing business model. This is ultimately something that banks and other kinds of companies may be forced to do, potentially via acquisitions.

“Too many traditional banks have been in a wait and see mode with regard to crypto assets and now find themselves in the uncomfortable position of being completely bypassed by crypto native companies that are experiencing what could be described as ‘hyper-growth’,” he told Cryptonews.com.

But given the conservatism of many traditional financial institutions, it could still be a while before they begin taking action.

“We‘re observing more institutional money move into crypto as an asset class, but that doesn’t immediately translate to acquisitions in the sector by traditional finance players […] I think we'll see further consolidation within crypto ahead of any serious moves by traditional finance players,” said Alexander Höptner, CEO of BitMEX owner 100x Group. He recently said that BitMEX might also “buy something” as theyre planning to launch spot trading, brokerage, and custody services.

Accelerated evolution

Regardless of the timescale, its hard to shake the suspicion that cross-mergers and acquisitions between crypto and traditional finance will eventually happen. But how will this affect crypto？

“One way or another, as cryptocurrencies become more mainstream, crypto companies will eventually become more institutionalized, moving more within the purview of regulators and offering products or services that more closely resemble those that have long been offered by traditional financial institutions. Thus, I believe that such mergers and acquisitions will only accelerate this evolution, advancing cryptocurrencies and crypto companies in the process,” said Mike Colyer.

For Patrick Campos, Chief Strategy Officer at Securrency, one possibility is that cross-M&As may result in a partial hybridization between crypto and traditional finance.

“The emerging ecosystem will consist of seamless integration of legacy systems with newer distributed ledger technology-based systems. These systems will use interoperable rails to streamline the transition to the future state in which digital assets predominate in areas where the efficiency of programmable business logic and compliance automation leads to expanded markets and greater revenue capture,” he told Cryptonews.com.

This is only one possibility, however, and Campos also suggested that banks may end up not needing digital assets and blockchain on a significant scale, and vice versa. Regardless, the available evidence indicates that M&As will certainly increase for crypto this year, even if it will mostly be crypto firms themselves doing the buying.