'Like porcupines mating'

After a severe crash, consolidation is the next phase for crypto. Strong players like FTX, Ripple and Binance are looking to pick off flailing competitors in M&A deals that have suddenly become dramatically more affordable. But the crypto crash is also revealing which players have questionably wobbly businesses. Merger deals in this environment can be tricky — even messy.

Downturns mean great deals. The crash wiped out roughly $2 trillion in value and caused the collapse of major crypto players like Terraform Labs, Three Arrows Capital, Celsius and Voyager Digital. It would seem like a perfect time to go shopping.

• BlockFi last month said the crypto lender signed a deal giving FTX the option to buy the company for up to $240 million as part of a $400 million debt financing agreement. Just a year ago, BlockFi was seeking a $5 billion valuation in funding talks.
• After Ripple CEO Brad Garlinghouse predicted in May that there will be “an uptick in M&A in the blockchain and crypto space,” the payments company last week said in a statement that it is “actively looking for M&A opportunities to strategically scale the company.” Specifically, Ripple is checking out what’s left of Celsius, the once-high-flying crypto lender that filed for bankruptcy in July. The company said it is “interested in learning about Celsius and its assets, and whether any could be relevant to our business.”
• Goldman Sachs reportedly also is interested, highlighting Wall Street’s growing interest in crypto. So was FTX before the crypto giant reportedly took a look at Celsius’ finances and decided to walk away.

This is a “buyer beware” market. Some acquisition targets found themselves abandoned at the altar after would-be buyers took a closer look at what they’re buying, Moor Insights & Strategy analyst Melody Brue told Protocol.

• Crypto is known for companies “still operating in the Wild West” and “when serious operators look under the hood, something as standard as audited financials can't be produced,” she said. Deals fall apart “largely due to a lack of regulation in the space, or any standard practices of accounting and reporting.”
• This week Galaxy Digital said it terminated a blockbuster $1.2 billion merger deal with BitGo, accusing the crypto company of failing to produce “audited financial statements” that were supposed to be part of the transaction.

• BitGo rejected the claim, and suggested Galaxy Digital wants out of the deal because of recent business troubles, including a $550 million quarterly loss and the impact of the luna coin meltdown. BitGo says it plans to sue Galaxy Digital.
• Binance, the world’s biggest crypto marketplace, also got embroiled in an aborted merger deal with WazirX, which it announced in 2019. But in the wake of recent reports that the Indian government was investigating WazirX for possible money-laundering violations, Binance CEO Changpeng Zhao said the deal was never completed — a claim disputed by WazirX co-founder Nischal Shetty.

“Crypto in M&A is like porcupines mating right now,” Logan Allin, managing partner at Fin Capital, told Protocol. It’s sometimes hard to tell if a deal is “going to happen or not.” Shoppers must deal with “asset complexity,” volatility and regulatory issues. Crypto will likely consolidate, he said. But would-be buyers are treading carefully, making sure they don’t end up with “toxic assets” and “a ton of regrets.”

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On the money

The Federal Reserve issued guidance for banks working with crypto firms. The notice says banks must notify the Fed before engaging in any new crypto-related business, similar to warnings the FDIC and OCC have sent the banks they oversee. Traditional banks working with crypto firms are coming under greater scrutiny following the bankruptcies of Celsius and Voyager.

But there is backlash to that banking backlash. As progressive Sen. Elizabeth Warren pushes regulators to crack down on crypto banking activities, Republican Sen. Pat Toomey is questioning whether the FDIC is improperly deterring banks from getting involved with digital assets.

Genesis CEO Michael Moro is stepping down and the firm is cutting 20% of its employees. The reported layoffs come as the crypto brokerage, part of the Digital Currency Group conglomerate, has a $1.2 billion claim against Three Arrows Capital, which is undergoing liquidation.

Bitcoin miners are racking up big losses. The three largest U.S. publicly traded bitcoin mining firms lost more than $1 billion last quarter, driven by impairment charges as cryptocurrency prices sank.

WebBank expanded its fintech card-issuing options with an American Express partnership. The deal gives WebBank a third option to help fintechs launch cards, adding to existing deals with the Visa and Mastercard networks.

“Crypto nomads” are settling down for winter. Blockchain professionals are sticking to cities like New York and London, as those financial hubs rebound and pandemic restrictions and falling crypto values have made the nomadic style of living promoted by many in the industry impractical.

Overheard

You think Twitter crypto bots are a problem? Try LinkedIn fakes. Binance CEO Changpeng Zhao says most of the people claiming to work for him on the professional network are scammers. “I wished LinkedIn has a feature to let the company verify people,” he wrote. Do your research, I guess?

Wells Fargo is rethinking its home-loans business. “We’re not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business,” CEO Charlie Scharftold analysts recently.

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