On December 24, 2013 Blockchain.info announced its acquisition of ZeroBlock, a cash transaction conducted entirely using digital currency, bitcoin.
Bitcoin is both a network enabling a new payment system as well as a digital currency that is exchanged through the network. It uses cryptography to control the creation and exchange of the currency, rather than a central authority. Bitcoin operates through a mobile application or computer program that allows users to send and receive bitcoins through personal bitcoin wallets. Bitcoins can be acquired in exchange for fiat currency at bitcoin ATMs and are increasingly accepted by commercial retailers for goods and services. ZeroBlock is an example of a bitcoin mobile application while Blockchain.info is the original and dominant bitcoin wallet.
The acquisition of ZeroBlock is not the first or only deal involving the use of bitcoin (see also, the July 2013 acquisition of SatoshiDice, a bitcoin gambling website, by an unnamed buyer for US$11.5 million – paid in bitcoin). However, the use of bitcoin is certainly a new and recent development in M&A transactions. The use of bitcoin as deal consideration provides several transactional advantages: payment is faster, often instantaneous, and more flexible as compared to traditional wire transfers. Using bitcoin also avoids foreign currency exchange costs in cross-border transactions. Further, an increasing number of entities engaged in the exchange and mining of bitcoins as well as the growing acceptance of bitcoin by commercial retailers highlights a growing pool of buyers and sellers in potential bitcoin transactions.
These recent transactions certainly illustrate that one can do an M&A deal using virtual currency such as bitcoin. However, several issues associated with bitcoin should be considered.
Many M&A transactions require some, often significant, delay between closing and the exchange of consideration. Such delays highlight a major issue with the use of bitcoin currency: volatility. According to a report from J.P. Morgan, bitcoin’s realized volatility has averaged 120% over the past 3 years, between 50 to 400%; meanwhile, typical G10 currency volatility typically ranges between 7 to 16%. Even during extreme financial crises, national currencies have not reached the volatility levels experienced by bitcoin since its inception. Given such volatility, parties unaccustomed to the use and exchange of bitcoin may be exposed to significant risk and costs from its exchange and conversion to national currencies.
Other issues associated with the virtual currency have included a lack of regulatory oversight and legal recourse in the event of theft or fraud as well as a susceptibility of the Bitcoin network to malfunction and hackers. This susceptibility is highlighted by the recent software bugs that affected exchanges in both Slovenia and Bulgaria, as well as the main bitcoin exchange, Mt Gox, resulting in a freeze on customer withdrawals and fluctuations in bitcoin value.
While deals like Zeroblock and SatoshiDice may be uniquely positioned to utilize the advantages provided by the virtual currency, it is still early in the life of bitcoin. If the digital currency can address its volatility issues, and as it gains traction with retailers as a unit of account, the use of bitcoin as a currency may very well become more popular in future M&A transactions.
The author wishes to thank Jennifer Ng, articling student, for her valuable assistance in preparing this legal update.