The Wirecard saga, what comes next and what it means for the crypto space

From around €100 to nearly worthless to now about €4, all in about two weeks — that's the dramatic fall in the stock price of the scandal-hit German payments processor Wirecard.

Once the most promising fintech company of Europe, Wirecard fell from grace after its auditor EY said it could not find evidence for €1.9 billion (~$2.1 billion) worth of cash previously reported on Wirecard's balance sheet.

Wirecard said $2.1 billion was being held in two banks in the Philippines — BDO Unibank and Bank of the Philippine Islands — in “trust accounts” controlled by third-party partners that Wirecard relied on to process payments in markets where it didn't have licenses.

But the banks and Philippine's central bank said the missing cash never entered the island's financial system. Now Wirecard has acknowledged that the cash probably doesn’t exist.

Sorting out who is exactly is to blame, and for what, may take a while. The company's auditor, EY, claims that Wirecard provided "false confirmations and statements" in the audit for 2019. But some argue that EY failed on its part and did not request Wirecard documents for three years that could have uncovered the scandal sooner.

Soon after the news of missing billions broke, Wirecard CEO Markus Braun resigned. He was then arrested and later released on bail of €5 million (~$5.6 million). Amid this chaos, Wirecard filed for insolvency in a Munich court and said it is evaluating whether insolvency applications have to be filed for its subsidiaries. Soon after, the U.K.'s Financial Conduct Authority (FCA) abruptly suspended Wirecard's subsidiary, Wirecard U.K., or Wirecard Card Solutions (WCS), which issues Visa debit cards for several crypto firms. The suspension caused some panic among WCS users since cards stopped working.

The episode, which has drawn comparisons to the Enron scandal, has sparked global attention. But what does it mean for crypto?

A crypto card shift?

WCS issues crypto cards for Crypto.com, TenX and Cryptopay.me. The FCA soon lifted the suspension on WCS, and these cards were subsequently reactivated. The regulator, however, continues to monitor WCS and is still working with the firm to sort out issues.

When the cards stopped working, Crypto.com said it would move to a new vendor. The firm did not respond to The Block's requests for comment. Neither did TenX or Cryptopay.me.

Several payments and fintech experts told The Block that Wirecard clients are looking to shift to other vendors because they don't want to deal with Wirecard's uncertainty.

If that’s true one vendor in the crypto space that appears to benefit the most from the Wirecard scandal is Contis Financial Services.

Contis currently issues debit cards for ten crypto firms - Wirex, Monolith, Swipe, SpectroCoin, Plutus, Change, Hold, Trastra, UKEX and CL Baanx, according to CEO and executive chairman Peter Cox. Binance is launching its branded payments card via Swipe, as The Block reported earlier this week.

Cox said Contis offers crypto firms and exchanges "a total funds movement capability with individual accounts," which helps ensure that anti-money laundering processes are "tightly controlled."

Cox called Wirecard’s issues “complicated.” Since Wirecard is Germany’s largest fintech company, “this isn't just a simple regulator's decision, but one that could be affected by political will, and the desire for Germany to be seen as a leader in the fintech space,” he said.

Cox said "many" of Wirecard's clients are seeking alternative solutions as there's "little certainty in their future." He said he welcomes those businesses, but the firm's market is currently limited to the European Economic Area (EEA), although it is "seeking to go global."

Contis has issued over 500,000 crypto debit cards to date. The firm is set to partner with more crypto firms of "significant size," Cox told The Block.

Meanwhile, in the Asian market, Wirecard's notable rival is Omnipay, which currently issues cards for Crypterium. And in the U.S., Metropolitan Commercial Bank and Evolve Bank & Trust issue cards for various crypto firms.

Elsewhere in the crypto space, Wirecard had worked with crypto exchange bitFlyer Europe to power its "Instant Buy" feature. That feature was suspended "as soon as the issues with Wirecard were acknowledged," a bitFlyer spokesperson told The Block.

Another possible side effect in the crypto context is the willingness of other card issuers, including Visa, to expand their involvement.

The whole Wirecard scandal may act as a "catalyst" for Visa to focus on partnerships with established players in the crypto space, who then could potentially provide card services to third parties, James McKay, principal and founder of London-based market intelligence firm McKay Research, told The Block. McKay gave an example of Visa teaming up with Coinbase earlier this year and granting it principal membership.

The path ahead for Wirecard

Besides WCS, Wirecard Singapore also serves crypto clients, and it has been asked by the Monetary Authority of Singapore (MAS) to keep customer funds in the country's banks. The MAS doesn't currently regulate Wirecard Singapore, but the company has filed a license application under Singapore's new Payments Services Act. The MAS is reportedly working with Singapore's Accounting and Corporate Regulatory Authority and local police to scrutinize Wirecard.

Meanwhile, Wirecard's North American entity is seeking an acquisition.

Despite undergoing insolvency proceedings, the parent company Wirecard said it would continue to operate its activities because that is in the "best interests of the creditors."

Wirecard's court-appointed insolvency administrator or liquidator is Munich-based law expert Michael Jaffé, who previously managed insolvencies for German media group KirchGruppe and German memory-chip maker Qimonda.

Jaffé now has to capture and secure Wirecard's assets for the interest of creditors and make "the most economically sensible decisions," Klaus-Peter Jüngst, a spokesman and an additional supervisory judge at the Munich district court, told The Block.

On Thursday, the court put Jaffé in charge of Wirecard's five more subsidiaries – Wirecard Acceptance Technologies, Wirecard Sales International Holding, Wirecard Service Technologies, Wirecard Issuing Technologies and Wirecard Global Sales, Jüngst told The Block.

The insolvency process generally results in "provisional or even permanent continuation of a profitable business, possibly up to the sale of parts or the entire insolvent company," said Jüngst.

Indeed, Jaffé will reportedly soon ask investment banks to manage the potential sale of Wirecard's assets. "Numerous" companies are said to be interested in buying parts of Wirecard.

What payment experts say

Fintech and payment experts told The Block that insolvency proceedings could go on for the next three to four months, and it could result in the parent company Wirecard going out of business.

"I certainly expect the holding company to go out of business," said Jeroen de Bel, founder of Amsterdam-based fintech consulting firm Fincog, which is currently helping Wirecard clients to migrate to new vendors.

According to de Bel, certain divisions of Wirecard will be cherry-picked by others. "I believe the UK WCS business has some unique capabilities. However, for the remainder of the company, it's a patchwork of activities and entities acquired over time. And the acquiring business doesn't have the best reputation."

Marcus Mosen, Germany-based investor, advisor, and former CEO of Wirecard rival Concardis, also told The Block that he doesn't expect all assets of Wirecard can be sold off during the insolvency proceedings and that all claims can be paid back. Banks who have provided loans to Wirecard would have to write off "significant parts of that," said Mosen.

Wirecard owes about €1.3 billion (~$1.46 billion) in bank debt and has a further €1.4 billion (~$1.57 billion) of debt outstanding.

Matthias Kröner, independent consultant and founder and former CEO of German online bank Fidor, told The Block that banks "must write off loans" since there is insolvency filed. Then again, writing off the loans may not be enough to rescue Wirecard, according to Kröner.