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New Considerations for M&A Cryptocurrency Agreements

     

Despite the popular buzz around cryptocurrencies such as Bitcoin, the technology has yet to see mass adoption in the world of mainstream business and finance. However, the past year has seen a number of indications that cryptocurrency is gaining a good deal of legitimacy and stability.

As the token industry continues to mature, the opportunities for token project mergers & acquisitions are growing as well. In this article, we’ll discuss some of the considerations that must resolved in order to successfully complete an M&A transaction in the token space.

What is a Cryptocurrency M&A Transaction?

Instead of having an initial public offering (IPO) like a traditional business, many startups are having “initial coin offerings” (ICOs). During these events, companies sell tokens of their own cryptocurrency in exchange for cash or other cryptocurrencies, such as Bitcoin. Since the beginning of 2017, ICOs have raised more than $20 billion in value.

While an ICO is a tantalizing way to raise cash, a growing number of token projects are choosing the M&A strategy instead. Here, we need to distinguish between M&A transactions that are partially or entirely completed using cryptocurrencies as consideration and M&A transactions that are completed on companies in the crypto space.

As of writing, there have been very few M&A deals using only cryptocurrency as consideration. Notable exceptions include the online gambling site SatoshiDice and the Bitcoin mobile app ZeroBlock. However, general M&A activity for cryptocurrency companies is at a record high this year: up more than 200 percent from 2017.

What Are the Concerns with Cryptocurrency M&A?

One of the biggest concerns about M&A transactions using cryptocurrency is how these assets should be treated for accounting purposes. Despite the name, cryptocurrencies are typically not considered a currency at all under the U.S. accounting framework. They are not accepted as legal tender, are not backed by a government, and are not easily converted into cash.

Instead, cryptocurrencies should be seen as an indefinite-lived intangible asset, which is a broader term applying to assets that are not cash, currencies, or other financial instruments. This means that declines in the value of the cryptocurrency since its acquisition will be accounted for, but not increases.

In regions such as the European Union, cryptocurrencies are treated as “private money” and are not subject to sales tax. However, the IRS in the United States has issued a 2014 ruling stating that “virtual currencies” should be considered private property and are therefore subject to tax on gains and losses. Due to the complicated legal and financial issues surrounding cryptocurrencies, you should expect to receive additional scrutiny from regulators and tax agencies if using them as payment for an M&A transaction.

Another potential issue with cryptocurrency M&As: the dramatically unstable prices of many tokens. In December 2017, Bitcoin’s value exploded to nearly $20,000, and then lost thousands of dollars in the following weeks. What’s more, security incidents such as the hack of Bitcoin exchange Mt. Gox, which lost the equivalent of $460 million to digital thieves, have made many investors wary of using cryptocurrencies as payment. In order to reduce the potential risks that you face during an M&A transaction, you should use strategies such as a structured collar to protect against fluctuations.

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