There is no denying the increasing popularity and notoriety of the virtual currency Bitcoin. Bitcoin market capitalization currently stands in the billions of dollars, with over 13 million Bitcoins having been mined and made available for circulation. An increasing number of merchants, including Dell, have begun accepting payment by way of Bitcoin. The list of goods and services that have been purchased with Bitcoin now includes university tuition, airline tickets, cars, and pizza delivery. Some companies have started paying employees in Bitcoins. Canada in particular has been a world leader in Bitcoin ATM’s: the first Bitcoin ATM in the world was installed in Vancouver and a number of Bitcoin ATMs have now been installed in other Canadian cities. Canada also stands second, behind the US, in global rankings in the amount of venture capital invested in Bitcoin companies according to a recent study by the Montreal Economic Institute. Will funding M&A transactions by way of Bitcoins in Canada be next?
There is already some precedent outside Canada of purchasers using Bitcoin to fund M&A transactions, although to date, the transactions look to have been limited to those involving players in the Bitcoin space. The acquisition of Bitcoin gambling service SatoshiDice in July 2013 was funded by way of 126,315 Bitcoins (valued at approximately US$11.5 million at the time of the acquisition). Blockchain.info’s purchase in December 2013 of ZeroBlock, a bitcoin mobile app publisher, for an undisclosed amount was also funded entirely by way of Bitcoin.
Bitcoins can be attractive as a mode of payment as they can result in fewer fees and a faster payment than a traditional wire transfer. However, there are a number of risks associated with the use of Bitcoins as a method of payment. The most significant risk is the fact that the value of Bitcoins is not fixed and can fluctuate significantly – making it more akin to stock consideration rather than cash. For example, the value of Bitcoins dropped more than 50% from December 2013 to April 2014, from a high of US$1,151 to a low of US$401. Therefore, timing issues, such as closing delays, can significantly affect the value of Bitcoin consideration. However, these issues have been seen before in the context of stock consideration transactions and could be mitigated in similar ways, by setting an exchange ratio for example.
Another risk factor is the fact that Bitcoins remain largely unregulated and subject to an uncertain legal landscape. Unlike traditional currency-based transactions involving an individual bank account, Bitcoin transactions can be completed in a manner that does not specifically identify the individual completing the transaction. As a result, Bitcoins have been used to purchase illegal goods. In October 2013, the FBI shut down the Silk Road online drug market and seized US$28.5M worth of Bitcoins in the process. The use of Bitcoins in a transaction could therefore raise reputational risk for the entities involved in the transaction.
The level of regulation affecting Bitcoin also varies widely between countries, and is shifting quickly, requiring anyone considering using Bitcoins to fund a transaction to keep abreast of the evolving legal landscape (in particular with respect to tax and anti-money laundering laws) and to give real consideration to compliance issues. In Canada, for example, Bill C-31, implementing legislative change coming out of the 2014 federal budget, received royal assent on June 19, 2014. This Bill extends the scope of existing anti-money laundering laws to persons dealing in virtual currencies such as Bitcoin, by including these within the definition of “money services business”, thereby making Bitcoin transactions subject to government anti-money laundering reporting requirements.
Other potential risks exist. Bitcoins could be difficult to convert into cash if the value were to drop sharply at some point in the future, or if Bitcoin exchanges have difficulty accessing the traditional financial system. Data security issues are a real risk, as shown in the data breach episode affecting Mt. Gox. Mt. Gox, once the world’s biggest bitcoin exchange, filed for bankruptcy after claiming it lost more than US$400 million of its customers’ Bitcoins (approximately 850,000 Bitcoins) following a hack attack. Subsequently, and after filing for bankruptcy, Mt. Gox actually rediscovered 200,000 of the lost bitcoins on one of its old hard drives.
Consequently, using Bitcoins to fund an M&A transaction at this juncture in Canada has the potential to introduce significant legal, reputational and market risk, and requires careful consideration. The board of any seller would have to consider these issues in the context of their fiduciary duty to the target company. At this point it seems unlikely that the board of a public company would accept the risks associated with Bitcoin consideration unless the terms of the transaction were overwhelmingly positive, or more sophisticated hedging options for Bitcoins become available so as to allow the target to in effect swap the Bitcoin consideration offered at the time the deal is signed into a fixed dollar amount payable at closing.