How CPAs Can Better Evaluate Cryptocurrency M&As
Recent accounting webinars highlight the growing trend of M&A in cryptocurrency and blockchain, yet few seem to be questioning the sensibility and sustainability beyond the pitch.
Projects are burning through initial capital and those seeking a functioning product are likely to start consolidating. The trend seems to be catching the attention of some CPA firms looking to expand their current, service portfolio.
Below I explore a few questions that may be useful in evaluating potential deals for your clients, your own firm and a reminder to not abandon existing non-blockchain competitors when performing strategic analysis.
Current Crypto M&As
The Tron acquisition of BitTorrent is touted as creating the “largest decentralized Internet ecosystem in the world.” BitTorrent is a peer-to-peer file sharing system that has grown to more than 100 million users in over 15 years. Using a client interface like μTorrent, users could share large files.
The system did have its challenges, including use by those circulating pirated material and malware. The team reportedly were working to apply technological improvements to enhance security and speed prior to the acquisition.
Tron likely paid between 120 and 140 million to acquire BitTorrent. Some have pointed to this acquisition strategy as increasing Tron’s legitimacy, bolstering its young platform with a mature product and acquiring users.
If it is to increase legitimacy, I think Justin Sun may have already exhausted that by carrying on with over-the-top Twitter contests. Giving away cars and “cash,” that is actually Tether despite continuously denominated as if it is USD.
To incentivize users to remain, Tron resorted to airdrops (token giveaways). What is interesting about this M&A is that this is the first case of two tradeable tokens (TRX and BTT), governed by one entity.
To incentivize people to buy their token (TRX), they offered a giveaway of BTT based on one’s TRX holdings. Of course, this is done with the intention to increase the demand and price of TRX, which makes it susceptible to being dumped. BitTorrent has a diverse user base also.
One must ask the likelihood of user retention and I, for one, cannot imagine it is high given the steps required to purchase and use crypto. Once integrated, existing BitTorrent users will need to move from a one-click user interface to a multi-step process of acquiring crypto, transferring it, and then using it. Reminder, this is to save time on the download speed.
Admittedly, it’s been a while since I attempted to use a DApp, but in the past I could have finished a round of golf in the time it took me to acquire the appropriate token and gain access to the platform. When considering the users circulating pirated files, they likely will seek methods that are not an immutable, auditable trail.
A Decentralized Internet?
Stepping back from the theatrics of this, has anyone asked what his actual vision means? When I ask, I get his vision parroted to me: “He is creating a decentralized Internet and has the largest decentralized platform.” I ask: what are we decentralizing exactly and why?
I understand that there are many that are not afforded the liberties of freedom of speech that I very much enjoy and appreciate. I can search at will on the Internet. Rarely do I see this being raised as the primary reason.
When one looks beyond the marketing, Tron is not exactly the epitome of decentralization. Tron uses Delegated Proof-of-Stake (DPOS) to reach consensus in securing the network. There are 27 super representatives elected to this position.
A common concern raised with DPOS models is bribery. Tron allows their representatives to actively solicit incentives for securing the network. This could result in complete control of a party and censorship. (For more information on this model, see The trials of Tron)
What is Tron’s target market? When looking at the gallery of DApps, the gallery is dominated by gambling, games of chance, and a few exchanges. It recently announced an additional acquisition of a relatively unknown, CoinPlay, to create an app like store front. Prior to this, there was the announcement of BitTorrent Live (BLive), a social media platform to allow users to create and share video content using live streaming and internet access.
As Joseph Young explains this concept and the acquisition in greater detail here, and that “BitTorrent Live is not directly connected to the BitTorrent protocol.” None of these pursuits seem to support a token use case.
Considering Existing Competition
Assume that Tron’s initial sectors of interest are gaming and messaging. Has anyone considered the existing competition in these markets? It seems to me it is racing into an established industry with bemouth players at every turn.
A current example of some of the existing competition it faces is elucidated in the sale of Nexon. It is a complex and dynamic sector where most participants are involved in entertainment (e.g. K-Pop, e-sports and movies), communications (e.g. internet and messaging apps), cryptocurrency, and gaming.
On the sell side is Nexon, which includes 2 cryptocurrency exchanges and a children’s accessory business, along with the gaming business. Reports of potential suitors vary, the current short-listed ones being Tencent, Kakao, and several private equity partners. Kakao owns and operates the cryptocurrency exchange, Upbit (which has a partnership with Bittrex).
What About Regulations?
Firms in this market are faced with the evolving regulations and issues on a global scale, including cryptocurrency, loot boxes, labor laws, gaming restrictions, sex scandals, and the proliferation of pornography. These considerations do not disappear when one puts it literally or figuratively on the blockchain.
It seems as though these competitors are able to evaluate and add blockchain and cryptocurrency to their existing models and user base where appropriate easier than Tron could add gaming and social media to a nascent platform. In order to expand its reach and gain acceptance on a global scale, Tron has already announced a willingness to work with the Japanese government by censoring the development and access to gambling apps in Japan. David Morris explains the implications of this in a detailed Breaker article, concluding; “If anything, Tron here is inviting MORE government control than pre-blockchain solutions.”
Acquisitions for talent or regulatory licenses is also commonplace. As for talent, in the case of Tron, Bram Cohen, the creator of BitTorrent left the project prior to the acquisition to begin work on the platform Chia.
Most other employees left soon after, or those that stay are bound either by the strength of an agreement or opportunities elsewhere. For those not familiar with Coinbase’s choice to acquire talent recently, there is a series of articles on Breaker, beginning with David Morris’ initial article here. Acquiring licenses such as a money service business, transmitter, or to achieve regulatory status with a jurisdiction seems dangerous. The acquirer could have little to no knowledge of what is required to comply and maintain that license.
I realize that many CPAs are excited about the opportunities that evolving technology and industry trends present, but when evaluating these, it is imperative that we as accounting professionals take time to assess near and long-term potential outcomes.