Fintech, cryptocurrency, and mergers and acquisitions are expected to overlap significantly in the coming year. M&A activity is expected to recover quickly – more than 60% of large company decision-makers surveyed by FTI Consulting for a February report agree that their company has recently been a target of aggressive M&A and 39% say their companies are looking at M&A as a result of the COVID-19 pandemic. At the same time, the cryptocurrency market is making strides towards mainstream adoption.
As a result, there is likely to be a pickup in the cryptocurrency asset and valuation business over the course of 2021. While this trend is likely to fuel some exciting developments in the financial sector, it also raises unprecedented questions about whether cryptocurrency and these complex business models can be accurately assessed and verified as part of dealmaking.
Digitize the world of finance
The impact of the COVID-19 pandemic has resulted in significant shifts from physical to digital services in a wide variety of industries – no more dramatic than in the financial services industry, where S&P Global estimated 420 billion transactions valued at US $ 7 trillion -Dollar reported will move to cards and digital payments by 2023 and reach $ 48 trillion by 2030.
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PayPal further legitimized the cryptocurrency when it started accepting it in November 2020, and announced in March that it would acquire Israeli crypto startup Curv. Visa has also been active in the fintech space, most recently with its $ 5.3 billion acquisition of Plaid in January. Investors are also closely watching developments after Coinbase’s recent debut on the Nasdaq exchange. Of course, all of this activity from traditional financial services institutions and large technology companies generates a lot of interest in fintech and cryptocurrency companies. Even amid market lows in the first half of 2020, cryptocurrency-related mergers and acquisitions stood at $ 600 million, up from all of 2019. All signs point to an even bigger year in 2021.
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The need for due diligence
Of course, mergers and acquisitions, IPOs and capital increases also involve the need to carry out due diligence, market assessments and valuations. However, when it comes to cryptocurrency as the primary asset or key asset, there are additional, complex layers for standard due diligence processes.
Buyers and target companies need to consider a technical assessment of the existing digital assets. Potential buyers want to know how to review the cryptocurrency assets and ensure that the target company’s reported assets are correct. Because cryptocurrency companies often operate on unconventional business models and because of the nature of distributed ledger systems, it is not always clear what is what. The crux of the problem is to identify problems, risks, or inaccuracies in a target company’s cryptocurrency resources, framework, and business model, and to determine whether the right procedures are in place to support its crypto-based business activities.
Likewise, cryptocurrency companies looking to raise money or sell their business (or apply for an IPO) to a larger technology or financial services company can help position their business by conducting in-depth evaluations that demonstrate and support their differentiators and value to potential buyers subsequent evaluation and due diligence activities.
The nuances of the crypto space
Many may not understand the importance, or even possible, of having a technical assessment and valuation of the cryptocurrency as part of their major financial due diligence. However, experts in the field are beginning to develop complex methods to perform quick, thorough, and inexpensive technical assessments of cryptocurrency assets and use digital forensic investigation techniques to test and verify digital wallet ownership, digital asset ownership, and verification The assets in custody, as well as the value and validity of the assets.
Other areas that buyers should investigate in a crypto-focused technical assessment include:
- The full scope of digital asset inventories, including hot wallet services, cold wallet storage, business wallet services, portfolio management, and other services.
- Size, locations, roles, and other key details related to technical and sales support and development teams.
- Risks in contracts related to cryptocurrency, data protection, security, know your customer, anti-money laundering, signatures and other policy controls.
- Code audits across wallets, user interfaces, and application programming interfaces.
- Impact on corporate governance (e.g. regulatory requirements and standards, including certification of the US Government’s Cybersecurity Maturity Model and the General Data Protection Regulation of the European Union).
- Technical structure and stability.
- Third Party Partnerships, Data Usage, and Obligations.
- Research and development projects and development support for coins / tokens.
In addition to the traditional financial due diligence reviews and evaluations that come with fundraising and M&A transactions, buyers in this area must also validate and evaluate the technical elements of the target company’s cryptocurrency assets and structures. Getting this right requires the support of a blockchain and cryptocurrency domain expert who understands the technical complexities and knows what questions to ask. Cryptocurrency remains a mystery to many people, but a thorough, expert-driven technical review can uncover risk and remove the guesswork to aid execution of quality, disruptive deals.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Steven S. McNew is Senior Managing Director in the technology practice of FTI Consulting. In his role, Steven helps clients evaluate and implement blockchain solutions and develop cost-effective, tenable strategies for managing data for complex legal and regulatory matters. Steven is an expert in blockchain, information and data security, complex discovery, and digital forensics. He completed studies on blockchain and cryptocurrency at MIT and led engagements with blockchain assessments, pilot projects and the selection and implementation of software. He has also led disputes related to blockchain and various forms of cryptocurrency.