by Neil Foster, Partner at Brown Rudnick’s International Corporate Practice Group and chair of the firm’s Global Technology Group…
The ‘crypto winter’ of 2022 was brutal: global crypto market capitalisation dropped by 64%, established players such as FTX, BlockFi, Voyager and Celsius entered into restructuring processes and regulators repeatedly failed to inspire confidence in the market.
However, technologies underlying the crypto market are here to stay. Crypto technologies including blockchains, smart contracts, cryptocurrencies and NFTs have seen approximately $94 billion in investment since the beginning of 2021, with $20-30 billion invested last year.
Institutional investors and banks are also warming to the benefits of crypto technologies. Goldman Sachs recently arranged a bond sale via its tokenisation platform and settled the sale in 60 seconds rather than the normal five-day period. Digital and financial transformation is afoot globally and the UK should seek to become the heart of it by eliminating obstacles for crypto and blockchain companies seeking to locate in the UK.
Similarities have been correctly drawn between the dotcom crash and the ‘crypto winter’. Irrational exuberance and ignored fundamental investment disciplines led to major players collapsing and a significant market correction.
There was consolidation of internet 1.0 companies following the dotcom crash and we believe that consolidation of the crypto industry is on the horizon.
On 20 April 2023, Brown Rudnick hosted its inaugural Global Blockchain Conference in London and we launched our report produced with Novum Insights on “Equity Finance and M&A in Crypto and Blockchain”. The headline findings are promising: financing rounds are continuing at a steady pace with $13.04 billion invested in 2023 so far, with an average deal value of $24 million, the highest on record.
M&A deals are also on an upward trend with crypto lending, DeFi and GameFi industries being sectors to watch.
However, a significant number of deals are distressed, which is a trend set to accelerate this year. Companies with great technology and strong revenue growth are well placed to be on the buy-side.
We are seeing consolidation on both sides of the Atlantic and, as well as distressed M&A, there are more share for share mergers because it’s hard to justify 2021 valuations. For large scale consolidation or any significant scale up, institutional investors will need to come to the table, but they are reticent given the fall of FTX and Alameda Research.
The UK has the requisite capabilities to capitalise on this opportunity and a strong base to build on. Our research-universities are world class, our courts have proven to be flexible in applying legal concepts to cryptocurrencies, and we receive more investment in fintech than the next 10 European countries combined.
In venture capital, the UK dwarfs its European neighbours for investment, particularly for crypto start-ups because London is the European centre for venture funding and has more employees working in crypto than any other city in the world. In fact, we are currently advising several crypto clients who are considering relocating their headquarters to the UK.
But there are issues. Post Brexit, the UK has the legislative freedom to adopt regulations that encourage innovation and attract talent and investment.
The UK government has signalled its desire to become the global crypto hub and has spoken about diverging from the EU’s landmark regulation ‘Markets in Crypto Assets’. What we need to make this happen is legal and regulatory action.
Coinbase, one of the largest crypto platforms in the US recently stated that it would consider moving its headquarters to the UK and that the UK is “well-placed” to become the global crypto centre.
The crypto industry is the next frontier of digital and financial innovation and just like the UK’s adoption of technology, which led to the ‘Big Bang’ in 1986, the UK government has a once in a generation chance to be the epicentre of this industry. However, regulators’ delays and inflexibility will dampen demand.
We are not arguing for lighter regulation, but for more certain regulation and, crucially, more efficient regulatory oversight. Crypto companies should increasingly be onshore, high-quality, regulated and taxed onshore.
If crypto companies are attempting to mature in these ways, UK regulators should make this industry a cornerstone of its fintech vision.