Cryptoexchange Coinsquare Ltd. plans to acquire competing cryptocurrency trading platform CoinSmart Financial Inc. for about $29-million in cash and shares as the value of tokens such as bitcoin plunges in a volatile market for digital assets.
The deal, announced in joint statements this week, is expected by the Toronto-based companies to close in the fourth quarter this year. The move will put two of Canada’s biggest crypto companies under the same roof, giving them more than one million customers altogether and more than $350-million in digital assets under custody as a whole.
In interviews with The Globe and Mail on Friday, the chief executive officers of the companies described Coinsquare’s acquisition of CoinSmart as another step toward nationwide consolidation for the digital asset and blockchain industry. They also acknowledged that it positions Coinsquare in direct competition with another large player: WonderFi Technologies Inc., which has been on an acquisition spree, buying Coinberry Ltd. and Bitbuy Technologies Inc. earlier this year, then Blockchain Foundry Inc. in September.
The agreement includes an upfront purchase price of $3-million in cash and the issuance of 5,222,222 shares of Coinsquare, which is privately held, to CoinSmart, which trades on the NEO Exchange. Coinsquare shares are valued at $5.02, according to the most recent financial results for Vancouver-based Mogo Inc., Coinsquare’s largest shareholder.
After the transaction closes, Coinsquare will take over the management of CoinSmart and acquire its operating subsidiary, Simply Digital Technologies Inc. Still, CoinSmart will hold a nearly 12-per-cent ownership stake in Coinsquare on a pro-forma basis, the companies said.
Additionally, as part of the agreement, CoinSmart may be eligible to receive up to $25-million in cash and shares, in further payments from Coinsquare, contingent upon the future performance of two business lines: CoinSmart’s SmartPay and its OTC (over-the-counter) trading business. SmartPay is CoinSmart’s digital tool that accepts crypto payments, then converts them to fiat currency for same-day payouts wired to a bank account; OTC trading allows brokers to buy large amounts of crypto directly from a dealer instead of using a public exchange.
Founded in 2014, Coinsquare is among Canada’s oldest digital asset firms. By as early as 2018, Coinsquare had been seeking to become a member of the Investment Industry Regulatory Organization of Canada (IIROC). While Coinsquare waited, in early 2021, the Canadian Securities Administrators (CSA), an umbrella group for all 13 provincial and territorial securities commissions, issued its first guidelines about how to regulate cryptoexchanges.
Under those guidelines, which largely remain a patchwork across Canada, cryptoexchanges must apply to a provincial or territorial regulator to become restricted dealers, which would allow them to conduct trades and route orders to another platform, earning a fee from each transaction. This provides them with a two-year window to eventually become IIROC dealers. But because Coinsquare filed an application with IIROC before the guidelines were issued, it was never required to become a restricted dealer.
Coinsquare is still awaiting IIROC’s approval to this day, but now chief executive officer Martin Piszel says it is in the final stages of becoming a dealer and marketplace member.
“It’s certainly taken us a while,” Mr. Piszel said. “But there is a massive competitive advantage here.”
Several crypto companies have merged their operations this year, as the high cost of regulation collided with a global tailspin for cryptocurrencies.
CoinSmart CEO Justin Hartzman said those costs are just one reason that large, combined companies are best suited to “stand the test of time.” He said there will “always be ups and downs because crypto is still in the build phase at the moment.”
Coinsquare has already seen those lows this year. In late July, Coinsquare laid off about a quarter of its workers, going from 125 employees to about 95 as a large number of technology companies also reduced staff.
Mr. Piszel and Mr. Hartzman told The Globe they would not rule out further layoffs after the acquisition. The number of employees at the combined company under Coinsquare is expected to be “within the 110- to 120-person range,” Mr. Piszel said.
“At the end of the day, this is about the long-term for us,” Mr. Hartzman said. “We have to remain cash-flow positive. It’s not just about making quick money in crypto. And that’s what transactions like this and consolidation in this space does. It prepares us for the future.”
On Friday, bitcoin was trading for around US$18,600, which is down by more than 70 per cent from last year and around 6 per cent over the past week. Other cryptocurrencies have also tumbled, such as ethereum, which was trading at around US$1,280.
Temur Durrani