Crypto Comes of Age: M&A Considerations as Crypto Deal Activity Surges

With Bitcoin’s latest bull run resulting in its price surge by almost 6x over the last year, taking hundreds of other digital currencies along for the ride, it is becoming increasingly clear that crypto-related merger activity is poised to skyrocket in 2021. According to a PwC report on the crypto M&A fundraising landscape, the global deal value associated with the crypto industry was $597 million in just the first half of 2020, surpassing a total of $491 million for the entire year in 2019. The recent IPO of Coinbase, the largest U.S. based cryptocurrency exchange, represents yet another milestone for the exploding sector, marking the intersection of cryptocurrency and traditional finance. As more companies integrate cryptocurrency into their business models to favorable results and new crypto-based platforms emerge, many private equity sponsors are beginning to explore it as a viable means of increasing the value of their portfolios and generating alpha during an investment period. The continued rise of crypto-related dealmaking gives way to a special set of considerations surrounding federal and state money transmission (“MT”) requirements, certain of which are highlighted below.

Federal MT/MSB Laws and Regulations

Unless otherwise exempt, under the MT laws of each state in which a company transacts, a special license is required to engage in the “business of money transmission,” or in other words, to receive and transmit money. The Financial Crimes Enforcement Network (“FinCEN”) defines MT as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” FinCEN’s reference specifically to “other value” in its MT definition suggests these laws may apply in the cryptocurrency context. MT activity would render such company a money services business (“MSB”) under the federal Bank Secrecy Act (“BSA”), subjecting it to a registration requirement with FinCEN and related anti-money laundering (“AML”) compliance rules. In general, payment services companies, including crypto payment processors, that facilitate monetary transactions but are not part of the flow-of-funds are not subject to MT licensing or MSB registration requirements.

The unique nature of crypto platforms may subject them to MT-related requirements. FinCEN, which implements the BSA, has noted that certain activities involving cryptocurrency, including the receipt and transmission thereof, are subject to BSA registration requirements, even in instances where the activity might not be subject to MT licensing requirements at the state level. In its 2013 Guidance, FinCEN clarified that exchangers and administrators of cryptocurrency are money transmitters under the BSA, and as such, they have the obligation to (a) register with FinCEN, (b) develop, implement and maintain an AML compliance program and (c) meet all applicable recordkeeping and reporting requirements. In its 2019 Guidance, FinCEN further clarified that financial institutions that provide anonymizing services that accept cryptocurrency and retransmit them in a manner designed to prevent others from tracing the transmission back to its source, referred to as “mixers” or “tumblers” of cryptocurrency, or suppliers of anonymizing software used for the same purpose must also meet these same requirements. Additionally, as part of a risk-based approach, the Office of Foreign Assets Control (“OFAC”) encourages digital currency service providers to implement sanctions compliance controls proportional to their risk profiles.

As the need for regulatory certainty surrounding cryptocurrency reaches its peak, federal regulators other than FinCEN and OFAC are also focused on cryptocurrency. The U.S. Commodity Futures Trading Commission (the “CFTC”) stated that virtual currencies are encompassed under the definition of “commodity” in the Commodity Exchange Act, and thus, are subject to its jurisdiction. While the U.S. Securities and Exchange Commission (the “SEC”) has not adopted rules specifically tailored to cryptocurrencies, in March, President Joe Biden’s SEC chair nominee Gary Gensler indicated that the SEC will likely work on its first guidelines for cryptocurrencies in the near future.

State-Specific Regimes

In addition to considering federal regulations, acquirers should be mindful of state by state nuances between MT licensing regimes, as some states may interpret such regimes to be applicable to certain activities involving cryptocurrency, while others may not. Though state MT laws vary in scope, many employ a MT definition substantially similar to the one prescribed by FinCEN. Further, a number of states have amended their MT regimes to address the regulation of cryptocurrency, and as institutional interest in crypto continues to rise, we expect this pattern to continue. The variance in state-by-state interpretations undoubtedly have the potential to disrupt compliance approaches, particularly in deals involving cross-state or cross-border M&A. Therefore, market participants should pay special attention to the potential applicability of MT licensing regimes to any particular crypto activity on a state-by-state basis.

Other Diligence Considerations


One of the primary reasons why MT is regulated is to deter money laundering and transactions involving terrorists, narcotics traffickers and other individuals and entities that are the target of sanctions, which can give rise to separate legal and reputational damage. As such, as with other regulated businesses, exposure for noncompliance with regulations also should be an area of focus when conducting a crypto M&A diligence process, including voluntary disclosures, pending or past investigations or penalties, inquiries or complaints related to fraud and the prudence of recordkeeping. Another diligence consideration is whether the target company has contractual commitments that subject it to compliance with certain rules and regulations, even if applicability of such laws is otherwise uncertain.

Change in Control

There are change in control requirements associated with MSB registration with FinCEN and MT licenses in many states. For example, if there is a transfer of 10% of the voting power or equity interests of an MSB registered with FinCEN (except for an MSB that must report such transfers to the SEC) or a re-registration requirement under state law due to a change in control, the MSB must re-register with FinCEN.

Cryptocurrency and related digital ledger technology is increasingly being adopted by operating companies. With the increased institutional interest, crypto is becoming more mainstream and crypto-related companies and private equity sponsors alike are taking advantage of its normalization. As private equity sponsors continue to consider opportunities in this space, it will become increasingly important to keep track of the emerging regulatory and other specialized diligence issues that acquisitions in this sector involve.


We thank Weil counsel Timothy Welch for his contributions to this blog.