Financial Institutions May Lead the Way in Coming Crypto M&A Boom

Investors and analysts expect to see a boom this year in financial institutions acquiring cryptocurrency startups that offer unprecedented revenue opportunities. An M&A surge would be driven in part by new guidance issued last week from the Office of the Comptroller […]

article-image

share

key takeaways

  • Financial institutions are “scrambling” to acquire crypto companies after last week’s OCC guidance okaying banks to facilitate payments using stablecoins
  • The crypto and finance industries should expect financial institutions to become more dominant in the world of crypto exchanges
  • Payment tech companies are shopping for deals most actively; there could be one worth $1 billion this year

Investors and analysts expect to see a boom this year in financial institutions acquiring cryptocurrency startups that offer unprecedented revenue opportunities.

An M&A surge would be driven in part by new guidance issued last week from the Office of the Comptroller of the Currency that gives banks the green light to conduct payments using stablecoins. It effectively puts blockchain networks on equal footing with legacy networks like SWIFT, ACH and FedWire.

“There’s a scramble right now,” said Peter Johnson, a partner at Chicago-based Jump Capital, where he leads fintech and crypto investments. “People are trying to find their dancing partner for crypto. Companies in our portfolio are having big institutions reach out to them about potential deals – and they’re not learning or fishing expeditions.”

Jump Capital’s portfolio includes BitGo, the digital asset financial services and trust company, and Bitnomial, a derivatives exchange for institutional traders.

Stablecoins – like the Facebook-initiated Diem (formerly known as Libra) and JPMorgan Chase’s JPM Coin – are blockchain-based currencies designed to minimize the volatility of their price.

Banks could use them internally or with other banks, but the lowest hanging fruit for them is in cross-border transactions. The global average cost of sending $200 is 6.8 percent, according to The World Bank, and there are 266 million migrants that move $550 billion in remittances in a year.

Plus, many see the U.S. as lagging behind China and the rest of the world when it comes to financial innovation. Its central bank has begun rolling out a sovereign digital currency, making China better positioned to reap economic gains in an increasingly digital global economy. The OCC guidance may help put the U.S. back in the race, said Henri Arslanian, Global Crypto Leader at PwC.

New institutional demand

The new ruling came amid a major bitcoin bull run driven by institutional investors that began around October. The bitcoin price soared to a new all-time high in December and climbed steadily above $41,000 last Friday.

“Asset managers and private banks often underestimate the demand that exists from their clients for crypto assets,” Arslanian said. “If their clients could get access to an easy, secure way to get exposure to digital assets, they probably would.”

Source: PWS’s “H1 2020 Global Crypto M&A Fundraising Report”

In the first half of 2020, total deal value of global crypto M&A, $597 million, surpassed the total value of deals in all of 2019, $481 million, according to a November 2020 report published by PwC. The average deal size in the first half of 2020 was $45.9 million, compared to $19.2 million in 2019.

Payment tech companies like FIS, Fiserv and Jack Henry will be the ones most actively seeking a deal this year, said Johnson, who added that he expects to see at least one billion-dollar deal. 

Custody, compliance and execution management providers are ripe for acquisition. Trust companies will go after trust startups and exchanges like Gemini, Paxos and Coinbase, said Mark Yusko, chief investment officer at Morgan Creek Capital Management, adding that there will “for sure be a deal or two in 2021.”

Strategic Partnerships

“Deals will happen with banks but I don’t think it will be widespread,” said Adrian Patten, chairman at Cobalt DL, a provider of risk and settlement infrastructure to the FX and digital asset markets. “Banks are generally reluctant buyers of Fintechs, unless they come with client assets under management. It is possible that they could look at a larger exchange but this itself could come with perceived reputational challenges for the banks.”

Arslanian said partnerships and minority investments are likely to continue. Last month Northern Trust partnered with London-based Standard Chartered Bank to form Zodia, a cryptocurrency custodian for institutional investors; and Fidelity Digital Assets, a subsidiary of the investing giant, partnered with BlockFi to allow clients to put up bitcoin collateral for cash loans.

“Unlike previous years when crypto exchanges were the dominant players, we should not be surprised to see financial institutions play a bigger role in the ecosystem this year,” Arslanian said.

But the vast majority of financial institutions haven’t made any such investments yet, he added, and they will be the ones that face the age old dilemma of whether to build or buy the talent and expertise they need to meet client demand.

Banks went on a similar spree in 2015, an era of anti-bitcoin enterprise blockchain tests, innovation labs and consortia and partnership announcements.

But this time they’re looking to make bitcoin – specifically bitcoin – part of their strategy. And rather than slowly testing and learning and finding ways to cut costs, bitcoin offerings are more of a P&L driver for them and banks want to give clients exposure to cryptocurrencies as soon as possible, Arslanian said.

Tags

    Upcoming Events

    HYATT REGENCY SALT LAKE CITY

    TUES, OCT. 8, 2024

    Guided by the expertise of Blockworks Research Analysts team, this one day event will feature senior leaders, entrepreneurs, and developers from across the crypto industry. Attendees will have the opportunity to participate in an immersive experience to explore the latest trends, […]

    Salt Lake City, UT

    WED - FRI, OCTOBER 9 - 11, 2024

    Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

    recent research

    hivemapper.jpeg

    Research

    We believe crypto market participants overlook Hivemapper’s fundamental potential due to a poor understanding of both the niche map data market and Hivemapper’s positioning relative to incumbents. Hivemapper’s token model catalyzes both a cost and product advantage via unmatched map freshness and near real-time accuracy, which is its wedge into a market characterized by stale data and high data collection costs. Its current and potential future product suite may represent one of the strongest possibilities for PMF in crypto today.

    article-image

    The Fidelity Ethereum Fund, like other proposed ETH ETFs, seeks to stake a portion of its assets, according to the firm’s Wednesday registration statement

    article-image

    The DAO first voted on enabling SAFE transfers over a year ago

    article-image

    The final Bitcoin halving, where the mining reward becomes smaller than one satoshi, is expected to occur in 2140

    article-image

    The Department of Justice and Commodity Futures Trading Commission announced back-to-back lawsuits against KuCoin Tuesday

    article-image

    Judge Failla found that Coinbase didn’t operate as an unregistered broker in offering its wallet service

    article-image

    A fund by Laser Digital offers investors exposure to the Polygon network, while a new 21Shares ETP focuses on staking rewards from Toncoin