Fintech, cryptocurrency, and mergers and acquisitions are expected to overlap significantly over the coming year. M&A activity is expected to rebound quickly – more than 60% of decision makers at large companies polled by FTI Consulting for a February report agree that their company has recently been the target of aggressive mergers and acquisitions, and 39 % say their companies are looking to M&A in the wake of the COVID-19 pandemic. At the same time, the cryptocurrency market is making strides towards mainstream acceptance.
As a result, there will likely be an increase in transactions involving cryptocurrency assets and valuations throughout 2021. While this trend is likely to spur exciting developments in the financial industry, it is also starting to raise questions. unprecedented on whether cryptocurrency and these complex business models can be accurately assessed and verified in the context of trading.
Digitize the world of finance
The effects of the COVID-19 pandemic have resulted in significant shifts from physical to digital services across a wide range of industries – no more dramatic than in the financial services sector, in which S&P Global reported roughly $ 420 billion. of transactions, worth $ 7 trillion, will move to cards and digital payments by 2023, reaching $ 48 trillion by 2030.
Related: How has the COVID-19 pandemic affected the crypto space? Expert response
PayPal further legitimized the cryptocurrency when it started accepting it in November 2020 and announced its acquisition of Israeli cryptocurrency startup Curv in March. Visa has also been active in FinTech, most recently with its $ 5.3 billion acquisition of Plaid in January. Investors are also closely watching developments following Coinbase’s recent debut on the Nasdaq exchange. Naturally, all of this activity is generating a lot of interest in fintech and cryptocurrency companies among traditional financial services institutions and big tech companies. Even amid market lows in the first half of 2020, cryptocurrency-related mergers and acquisitions reached $ 600 million, more than the total for all of 2019. All signs point to an even more year. big in 2021.
Related: Will PayPal’s crypto integration bring crypto to the masses? Expert response
The need for due diligence
Of course, with mergers and acquisitions, IPOs and capital increases, there is also a need for due diligence, market assessments and valuations. But when cryptocurrency is involved as a primary or key asset, there are additional, complex layers to standard due diligence processes.
Buyers and target businesses should consider conducting a technical assessment of in-game digital assets. Potential buyers will want to know how to verify cryptocurrency assets and ensure that the reported assets of the target company are accurate. Because cryptocurrency companies often operate under unconventional business models and due to the very nature of distributed ledger systems, it’s not always clear what. The crux of the matter is finding out any issues, risks, or inaccuracies in a target company’s cryptocurrency assets, framework, and business model and whether the proper procedures are in place to support their based business operations. on cryptography.
Likewise, cryptocurrency firms looking to raise funds or sell their business to a larger tech or financial services company (or file an IPO application) can help position their business in conducting in-depth assessments that will demonstrate their differentiators and value to potential buyers. and support subsequent assessment and due diligence activities.
The nuances of the crypto space
Many may not understand the importance of conducting a technical assessment and a cryptocurrency valuation as part of their larger financial due diligence, or even that it is possible. However, experts in this field are beginning to develop complex methodologies to conduct rapid, in-depth and profitable technical assessments of cryptocurrency assets and to leverage digital forensic investigation techniques to sample and verify digital wallet ownership. , ownership of digital assets, as well as verifying assets in custody, as well as the value and validity of assets.
Additional areas buyers should look at in a crypto-focused technical assessment include:
- The full range of digital assets, including dynamic wallet services, cold wallet storage, professional wallet services, portfolio management and other services.
- Size, locations, functions and other key details relating to technical and commercial support and development teams.
- Risks related to contracts related to cryptocurrency, confidentiality, security, Know your customer, anti-money laundering, signatures and other policy controls.
- Code audits across portfolios, user interface, and application programming interfaces.
- Governance implications (such as regulatory requirements and standards, including US Government Cyber Security Maturity Model certification and European Union General Data Protection Regulation).
- Technical structure and stability.
- Partnerships with third parties, use of data and obligations.
- Research and development projects and coin / token development support.
In addition to the traditional financial due diligence and assessments that accompany fundraising and M&A operations, buyers of this space will also need to validate and assess the technical elements of the company’s cryptocurrency assets and structures. target. Doing this right will require the support of an expert in the blockchain and cryptocurrency field who understands the technical complexities and knows what questions to ask. Cryptocurrency remains a conundrum for many, but a thorough, expert-led technical audit can uncover the risks and remove the guesswork to support the execution of high-value disruptive deals.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Steven S. McNew is a senior managing director within the technology practice of FTI Consulting. In his role, Steven helps clients evaluate and implement blockchain solutions and develop profitable and defensible strategies to manage data for complex legal and regulatory issues. Steven is an expert in blockchain, information and data security, complex discovery, and digital forensics. He completed blockchain and cryptocurrency studies at MIT and led engagements involving blockchain assessments, pilot projects, and software selection and implementation. He has also led litigation regarding issues related to blockchain and various forms of cryptocurrency.