Crypto & ICOs — The Future of M&A?

Until now, cryptocurrency has been seen as a digital version of gold with no use for real transactions such as M&A deals. However, with the recent innovation of Initial Coin Offerings (ICO) utilizing the blockchain ledger, the new technology may be the future of banking. According to IMF head Christine Lagarde, this has profound implications for the future of financial mediation and central banking as there may not be a need to have a regulator[1].

How Are ICOs Used?

Cryptocurrencies allow financial transactions to be accessible by everyone in the world using a uniform currency. Instead of going on a months-long fundraising roadshow, entrepreneurs are able to raise millions from the comfort of their home due to the online crowdfunding idea that ICOs follow. By distributing tokens to the public, the token owners, which are potential users of the blockchain company, are incentivized to contribute to the network. ICO investors are able to access the blockchain and apply the technology to their ideas and companies. From the company’s perspective, rather than spending time on a fundraising plan, they are able to focus on bigger issues such as building the network and recruiting the right team. However, the simplicity and ease of raising funds in this manner is looking more and more like traditional finance (e.g. greater complexity, sophistication and, yes, regulation) everyday—which is most likely a good thing.

Today, large financial institutions such as J.P. Morgan and Goldman Sachs have begun to experiment with blockchain technology and cryptocurrency. According to Goldman Sachs, ICOs have outpaced traditional venture funding for all companies, not just blockchain companies[2]. Since 2013, ICOs have raised over $2 billion while cryptocurrency-specialized venture capitalists have only raised $550 million. Filecoin, now the largest ICO to date, raised $206 million from its ICO and added $52 million from a presale raised by venture capitalists, totaling to $258 million[3]. To put it in perspective, that is about 4.4 times as much as Microsoft raised in its IPO[4]. There are other cases of ICOs raising a significant amount in an astonishingly short period of time, such as Bancor Protocol raising $153 million in under three hours or former Mozilla CEO Brendan Eich raising $35 million from an ICO in 30 seconds[5].

Are ICOs Considered Legitimate in the M&A World?

Many dismiss cryptocurrency and the token market as a bubble. However, some tokens are able to pass the Howey Test, which was created by the U.S. Supreme Court to determine whether certain transactions qualify as securities[6]. There are tokens on the crypto market which have immediate liquidity while others may not be released to the public until months or years after the token sale. Over the last few months, a number of regulators have said that digital tokens which have the characteristics of typical securities, such as shares of stock or debt, will be regulated regardless of the “official” name[7].

The acquisition of blockchain-focused companies, even those without their own tokens, are not a norm. The long-term view of ICOs have downside risks that can outweigh the benefits. For example, a company may have difficulty explaining the current value of the tokens to the target company or explaining how exactly the crypto market is powered. Companies outside of the cryptocurrency world may be hesitant to conduct ICO transactions mainly due to the inconvenience of acquiring and liquidating ICOs, reluctance to adopt the new technology, or perhaps the doubts of cryptocurrency sway them away[8].

With the sudden exponential growth in cryptocurrency, regulators across the world have taken a strong approach against the legitimacy of ICOs. There is a general concern regarding the risks with cryptocurrencies, including fraud. Seemingly anyone can create a new ICO with the intention of a scam or otherwise known as a “pump and dump”. Since this is an emerging technology, there are still many unknowns with trading at scale and how the software will react to surprise events.

Potential Tax Savings

Under current accounting principles, cryptocurrencies are not considered to be cash or cash equivalents since they lack the liquidity of cash and the stable value of cash equivalents[4]. However, the current designation of ICOs by some countries could provide millions of dollars in tax savings in all types of M&A deals.

In the EU, a decision was reached by the European Court of Justice ruling that cryptocurrencies should be treated like government-backed securities and holders should not be taxed on any purchases or sales. In countries like Germany and the U.K., cryptocurrencies are treated like “private money” and are not subject to tax outside of commercial use. Recently in Japan, cryptocurrencies were similarly reclassified as a “means of settlement” of transactions and are thus exempted from Japan’s consumption tax. Previously for Japan, a country which strongly supports cryptocurrencies and its purposes, purchases of cryptocurrencies were subject to an 8% consumption tax[4]. However, there are no official accounting guidelines to follow regarding cryptocurrencies from the International Finance Reporting Standards (IFRS), and many countries have not released statements on any potential tax effects of cryptocurrencies and ICOs.

The Impact on M&A Deals

ICOs could affect how companies raise funds in order to complete a merger or an acquisition. Companies may no longer need to rely on a financial institution to assist with the financing of the deal when they can create an ICO and issue valuable tokens to common users. This gives more power to the public as they can earn value in return while having vested interest in the long-term success of the company. If the company does well following the deal, the people who purchased the tokens are rewarded as the value of the tokens become accretive.

You may also see an increase in the type of companies that may be acquired. Since the blockchain technology is applicable to more than just cryptocurrency – it can be used for improving data management or enhancing national security measures – financial technology companies specializing in the development of blockchain and who utilize ICOs can be acquired simply for the code. The technology can be used for reasons beyond imagination and has the ability to substantially impact many industries.

ICOs are traded globally, which opens up more opportunities for ICO issuers to move transactions outside a certain country if there are strict laws and regulations. Due to the anonymity of ICO transactions, national governments and financial institutions may struggle to limit or intervene in cryptocurrency trading. There may be international M&A deals that have an enormous impact on connecting the global industries and economies.


In addition to its potential use to fund M&A transactions, ICOs may possibly be considered as an asset worth acquiring for in a company. Large sums of tokens are able to be transferred from one company to another in a matter of seconds all while avoiding traditional fees and costs that are implemented by banks. However, the lack of certainty in the marketplace and the extreme volatility of cryptocurrency will pose challenges for any future deals. Only time will tell whether ICO can break into the M&A space beyond its current reputation as a speculative form of currency.

  1. Jeffrey A. Tucker, How Will Banking and Credit Work in a CryptoCurrency Market? (2017), https://fee.org/articles/how-will-banking-and-credit-work-in-a-cryptocurrency-economy/ (last visited October 27, 2017)
  2. Ash Egan, ICO M&A? Token Exits Could Get Messy (2017), https://www.coindesk.com/ico-ma-token-exits-get-messy/ (last visited October 27, 2017)
  3. Stan Higgins, $257 Million: Filecoin Breaks All-Time Record for ICO Funding (2017) https://www.coindesk.com/257-million-filecoin-breaks-time-record-ico-funding/ (last visited October 27, 2017)
  4. Alex Wilhelm, Morning Report: The $258 Million Filecoin ICO in Context https://news.crunchbase.com/news/morning-report-258m-filecoin-ico-context/ (last visited October 27, 2017)
  5. Jeffrey Mazer, Demystifying Cryptocurrencies, Blockchain, and ICOs (2017) https://www.toptal.com/finance/financial-consultants/cryptocurrency-market (last visited October 27, 2017)
  6. Tama Churchouse, Is a Cryptocurrency like a stock? This is what the SEC says … (2017) https://stansberrychurchouse.com/asia-wealth-investment-daily/cryptocurrency-like-stock-sec-rules/ (last visited October 27, 2017)
  7. Charltons – Hong Kong Law, Regulation of Cryptocurrency and blockchain tokens and ICOs (2017), https://www.charltonslaw.com/regulation-of-cryptocurrency-and-blockchain-token-or-initial-coin-offerings-icos/ (last visited October 27, 2017)
  8. Matthew Lau, Cryptocurrency Remains Rare in M&A Transactions Despite Potential (2016) http://www.deallawwire.com/2016/09/29/bitcoin-update-cryptocurrency-remains-rare-in-ma-transactions-despite-potential/ (last visited October 27, 2017)
Curran Aiyer
Curran Aiyer is a junior at the Kelley School of Business at Indiana University, Bloomington where he is currently majoring in Finance, Business Analytics, and International Business with a minor in Spanish. Curran is interested in a career in investment banking and has recent experience in the healthcare industry and financial services industry.

Curran was an intern in the Global Commercial Operations department at AstraZeneca Pharmaceuticals where he developed a new communication channel using social media to promote internal efficiency. Additionally, Curran was a key research team member in a report about idiopathic pulmonary fibrosis at the Leonard Davis Institute of Health Economics at the University of Pennsylvania. Curran was most recently an investment advisor intern where he assisted with implementing effective investment, insurance, and financial strategies. Currently, Curran is a summer intern for Pfizer’s Rare Disease department in Collegeville, PA.

Outside of academics and work, Curran is an avid sports fan and passionate athlete. Curran helped create the 5th fastest-growing sports blog in Philadelphia as a high school student and is now an active member on the Indiana University men’s club water polo team.

Curran lives outside of Philadelphia, PA with his family and graduated from The Haverford School in 2015.
  • Slim
    Posted at 16:28h, 09 December Reply

    1. This topic and article have a lot of potential and I would suggest additional coverage on it.

    2. However, only the “tax savings” and “conclusion” sections start to address the issue – the rest of the article is just background… How will a merger or acquisition be accomplished through cryptocurrency besides just raising am ICO.

    3. Impace should be Impact.

    • Nate Nead
      Posted at 21:54h, 09 December Reply

      Hi Slim,

      Thank you for the feedback and for the visit here. Currently there are several methods for providing “consideration” in mergers and acquisitions. They are as follows:

      1. Cash
      2. Various types of stock, including a stock merger
      3. Note or some other type of debt instrument
      4. Earnouts

      Bitcoin, Ethereum and other cryptocurrencies represent another potential method for acquiring value and assets from another business. As cryptocurrencies gain more recognition and more stability, I would expect that this new asset class would eventually become the fifth potential prong for M&A transaction considerations.

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