Crypto exchanges aren't openly discussing acquisition plans, but they're getting ready to buy

Last week in this column, I outlined the significance of Binance's acquisition of CoinMarketCap. This week, I'm going to stick to the topic of mergers and acquisitions. 

It's a timely topic to explore, given the Binance deal as well as a report released Monday by PwC, which showed that crypto M&A deals nosedived by 40% in 2019 compared to the previous year. Fundraising also declined by 18%, the firm found.

As for 2020, it's difficult to predict what the landscape for M&A will look like, given the uncertainty of the coronavirus pandemic and its economic ramifications. Indeed, as I noted last week, pandemic anxiety has hit the breaks on a number of significant deals, including the widely-reported Morgan Stanley/E*Trade tie-up. 

Still, I think it is safe to say that when the dust settles, there will be a lot of pent up demand on the part of larger companies in the market to snap up smaller companies at a discount. Indeed, the precarious environment has already resulted in adversity for some companies, including cryptocurrency exchange ErisX, which furloughed ten employees, according to John Lothian News and several sources familiar with the situation. Rumors of layoffs abound, but nothing else The Block can confirm at this point. 

Depending on how companies weather the current storm, they might come out on the other side in search of a buyer. 

And the buyers will be ready. Recent news from crypto exchange Kraken indicates that the firm is readying its plate for an acquisition spree, hiring veteran crypto lawyer Marco Santori as its chief legal officer. 

In an interview with The Block, Santori said that he was looking to hire tech transaction and M&A attorneys. 

"There are plenty of corporate lawyers, but not as many who understand how to draft a crypto specific transaction agreement," he said. 

When asked if Kraken was preparing for an increase in M&A activity in 2020, a spokeswoman danced around the question, noting that the firm didn't have anything to report. Similarly, a Binance spokeswoman declined to comment on the matter. A spokesman for Coinbase did not get back to an inquiry. 

Perhaps the spokespeople doth protest too much. But trust me, they're getting ready. 

Miners and exchanges counted for 7 out of the top 10 acquisitions in 2018, according to PwC. We shouldn't expect exchanges (specifically the ones named above) to sit the next acquisition spree out. 

In a conversation with The Block, PwC global crypto leader Henri Arslanian said he expects further consolidation to come in 2020.

"This is likely going to come from some of the large players that are either profitable or have dry powder looking to acquire providers that offer ancillary services to their current offering," he said, noting the Binance/CMC deal as a perfect example. 

2020 will not necessarily be marked by larger exchanges snapping up smaller rivals, but rather by large exchanges purchasing service providers to expand their offerings. Those service providers could including tax companies, compliance firms, and maybe even research firms (wink wink). 

As Arslanian put it: "Unicorns are increasingly becoming Octopuses."