This article was originally published in Law360 on September 14, 2023, and is republished here with permission.
The landscape of mergers and acquisitions is undergoing a seismic shift powered by the adoption of distributed ledger and other blockchain derivative technology across industries.
Recent challenges in the cryptocurrency sector have cast doubts on the sustainability of the entire digital asset class. However, a deeper analysis reveals the enduring potential of distributed ledger and other blockchain derivative technologies.
These technologies are uniquely positioned to solve endemic business problems at scale, from health care delivery to the global supply chain and beyond. Blockchain businesses have demonstrated remarkable resilience, attracted sustained financial investments, and are seeing positive M&A outcomes. This article delves into the evolving role of blockchain technology in driving M&A activity, exploring how various facets of the financial and investment sectors are revolutionizing.
Resilience Amid Turmoil in the Crypto Investment Space
Despite the turmoil in the cryptocurrency space, there remains a robust interest from financial investors. In 2022, the venture capital landscape saw 2,541 investments, injecting a staggering US$26.2 billion into cryptocurrency and blockchain companies. Noteworthy examples include Celestia, which secured US$53 million in a Series B round, and Matter Labs, which raised a substantial US$200 million in a Series B funding round.
In the fourth quarter of 2022, the top 10 VC-backed companies collectively raised approximately US$8.45 billion in funding throughout their existence.1
VC cryptocurrency bets totaled just under US$2.3 billion in April through July, the lowest quarterly level for over three years, according to data firm PitchBook. In the first half of 2023, investments were down by almost three-quarters from a year ago to US$5 billion.
But despite the downward trend in new venture investments, according to The Business Research Company in its "Web 3.0 Blockchain Global Market Report 2023" published in July, the global web3 blockchain market is expected to grow from US$2.28 billion in 2022 to US$3.25 billion in 2023 at a compound annual growth rate of 42.8%.
Active Players in the Cryptocurrency Investment Landscape
The financial investment landscape in the sector is vibrant and active. Coinbase Global, a prominent name in the cryptocurrency industry, emerged as the leader in the first quarter of 2023 with a staggering 340 investments, including ventures like Amber Group, CoinDCX, and CoinTracker. NGC Ventures followed closely, securing the second position with 258 investments.2
These numbers underscore the industry's energy and resilience.
Blockchain's Impact on M&A Trends
Financial Services Deals Leveraging Blockchain
Analysis of M&A trends reveals that blockchain is a driving force in financial services deals. In the second quarter of 2023, blockchain played a role in 10 financial services deals with a total value of US$50 million. The most notable among these deals was the US$50 million minority acquisition of INX Digital Company by Republic Core. This substantial deal highlights the growing influence of blockchain technology in reshaping financial transactions and ownership structures.3
The Ongoing Digital Evolution and Asset Tokenization
The digital evolution spurred by cryptocurrencies and blockchain technology continues to redefine the financial landscape. One potential outcome is the tokenization of real-world assets, a trend with numerous implications.
Tokenization offers a gateway to fractional ownership, increased liquidity, and enhanced transferability of assets. However, the lessons from sector volatility underscore the importance of careful management to prevent overheating and dislocation events in the market. And of course, strict adherence to applicable securities laws is paramount.
Opportunities in DeFi and CeFi
The emergence of decentralized finance (DeFi) and centralized finance (CeFi) presents intriguing opportunities for both traditional and crypto-native players. DeFi protocols empower direct, peer-to-peer financial services, potentially disrupting traditional finance models. CeFi offers a bridge between traditional finance and the cryptocurrency ecosystem, combining the security and risk management of traditional finance with the benefits of blockchain technology.
Transformation in Traditional Financial Services
Convergence between traditional financial institutions and blockchain-native startups indicates a broader transformation. This integration, accompanied by partnerships between investment banks and crypto-native entities, holds the potential for a paradigm shift in the financial services domain. Collaborative efforts from custody solutions to cryptocurrency trading products demonstrate this convergence.
Blockchain's Influence on Financial Services Use Cases
The implementation of blockchain technology has the potential to revolutionize payment systems. By enabling 24/7 cross-border transactions and creating direct peer-to-peer networks, blockchain offers solutions to long-standing challenges in global money movements.
Automation in Investing and Lending
The introduction of smart contracts and blockchain automation heralds a new era in investing and lending. Previously manual processes are now self-executing, offering benefits such as efficient collateral management and streamlined settlement of contractual payments.
Tokenized Assets and Customization
Smart contracts enable the creation of tokenized assets, granting investors access to a wider range of tailored products. This customization, coupled with the advantages of on-chain technology, enhances the investment landscape and encourages more diversified portfolios.
Despite the challenges, the sector is on a trajectory of maturation. Valuations are aligning with the broader tech industry, signifying the growing consistency of the digital asset industry. The recent crisis served as a filtration process, separating viable players from unsustainable ones. This, in turn, has led to a more rational approach among investors.
Within the cryptocurrency system, certain subsectors, such as blockchain security platforms, are positioned to deliver superior performance and drive consolidation plays on a global scale. As the industry evolves, check sizes issued by private investors and buyers in M&A transactions will continue to support valuations. The lessons learned from the cryptocurrency markets extend beyond the digital asset class itself and provide valuable insights into managing digital transformation.
The convergence of traditional finance and crypto-native startups has the potential to reshape the financial services landscape, opening avenues for innovation and growth. The journey of crypto-driven M&A is an ongoing narrative, highlighting the fusion of technology and finance in a new era of investment and ownership.
The transformative power of blockchain technology in the realm of mergers and acquisitions continues to make waves, proving its resilience even in the face of challenges within the cryptocurrency sector.
As we've witnessed, blockchain-based businesses have not only weathered the storm but have thrived, attracting significant financial investments and yielding positive M&A outcomes. The impressive influx of venture capital, exemplified by the billions poured into the cryptocurrency and blockchain space in 2022, underscores the enduring faith in this technology's potential to revolutionize various sectors, from health care to supply chains.
As we move forward, it becomes increasingly clear that blockchain and distributed ledger technologies will play a pivotal role in shaping the future of financial and investment landscapes, promising innovative solutions to longstanding industry challenges.