The news that Binance is to buy FTX’s non-U.S. business is rocking crypto markets – not least as it emerges from revelations about shaky financials in Sam Bankman-Fried’s empire.
But it also heralds a shift in approach in the crypto world, which is potentially about to see its first large-scale merger and all the regulatory baggage that goes with it – assuming it goes ahead.
While many crypto companies have been small-scale startups or boutique firms, a merged organization could represent 80% of the crypto market, analysts at Bernstein said in a Tuesday report. That’s the kind of scale that normally makes competition enforcers worry about market dominance, or about how consumers could get ripped off via less choice and higher prices.
Merger regulators have tough powers to police corporate deals, and companies pay the price if they don’t play ball. Facebook, now Meta, had to surrender its purchase of animated image site GIPHY under pressure from U.K. regulators, and was fined 110 million euros ($110 million) by the European Union for providing misleading information ahead of its takeover of messaging service WhatsApp.
“You definitely would think that any merger between two big competitors is going to be closely scrutinized by the antitrust authorities,” James Webber, a partner in the antitrust practice of law firm Shearman & Sterling, told CoinDesk in an online interview. “That's one of the main things the antitrust regime is there to check.”
That review can cause a “very significant” delay to the deal that could last around 18 months, Webber said, as regulators comb over the details of the market. They'll look, for example, at whether having the two companies cease to be rivals could harm crypto investors looking to find the best deal.
That could be hurried up given the liquidity problems FTX is apparently facing, as delays could mean its customers will have an even rawer deal, Webber said.
“If the alternative is just to let it go bust and let the pieces fall where they fall, It's probably worse to allow that to happen than to allow a merger to happen,” he said. “That does play a role.”
On Wednesday, a spokesperson for the European Commission, the EU’s antitrust authority, told CoinDesk it hadn’t been notified about the merger yet – though that wouldn’t normally be expected at this stage, where Binance has only expressed an intention to buy.
Normally, big companies would have to inform Brussels of the deal if their turnover within the bloc is over 250 million euros each. Measuring that threshold is unusually murky for companies which publish relatively few details of their affairs and have little physical presence – but there are tricks for the EU to get involved anyway, Webber explained.
“The EU will one way or the other be able to get jurisdiction over a transaction like this, even if the initial turnover would suggest that you don't,” Webber said.
Given that the binance.us and ftx.us sites are, in principle, carved out of the deal, Webber argues the EU and U.K. will be the main jurisdictions to watch. Because Binance claims it's available in over 100 different countries, antitrust specialist Thibault Schrepel says there could be many reviews involved.
Regulators could end up imposing conditions on the deal, such as demanding that Binance sell off certain business lines, according to Schrepel, who tweeted his take on the deal.
"Agencies usually impose remedies when fewer competitors are left, and when markets are not as dynamic, but antitrust agencies also need to show teeth in what they consider to be a space where consumers need their protection," Schrepel, an associate professor at Amsterdam University said, adding that the review would set a crucial precedent about whether the world of crypto is a single market, or is comprised of several different ones.
A further question is whether the EU and other regulators can get their way if they want to force changes on a purely online business.
“You can fine them, but that just moves the problem to a different place,” Webber said. “It’s typically hard to enforce fines outside your jurisdiction, so that would be an issue.”
Historically, Binance has declined to say where its head office is, or even that it has one – but more recently, it has gained regulatory recognition in EU countries including Cyprus, France, Spain and Italy – something that may give the EU some grip over the merger.
The crypto world may be up for a culture clash, and a wake-up call, as it grapples with yet another area of regulation it has escaped so far.
Many crypto projects involve collaborating with others – and indeed, decentralization depends on it. Yet, a Monday tweet from FTX CEO Bankman-Fried said that he wanted to “work together for the ecosystem” with his rival Changpeng Zhao is exactly the kind of thing that raises eyebrows among antitrust regulators worried over competitors forming cartels.
Zhao will even have to be careful during the coming days as he pores over FTX’s books and checks there’s nothing in there that could sour the deal, Webber said.
“During the course of your due diligence, the information you learned about your competitor is very carefully protected” with “proper controls on the information that’s being shared,” Webber said, to ensure commercially sensitive data can’t be used if the merger is abandoned.
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