‘Starting gun for consolidation’: Kevin O’Leary-backed WonderFi closes deal to buy crypto exchange Bitbuy after long regulatory hurdles

Left to right: Kevin O’Leary, Josh Richards, an investor for WonderFi, and Ben Samaroo, co-founder and chief executive officer of WonderFi.Handout

Vancouver-based WonderFi Technologies Inc. WNDR-NE is set to close its deal to buy Toronto-based cryptocurrency trading platform Bitbuy Technologies Inc. after months of regulatory scrutiny that pushed provincial and territorial authorities across Canada to shape new policy around mergers and acquisitions in the controversial digital asset and blockchain sector.

Operating under parent First Ledger Corp., Bitbuy became the first regulated crypto marketplace in the country when it received approval from the Ontario Securities Commission late last year.

Kevin O’Leary, of Dragon’s Den and sharktank fame, is a strategic investor in WonderFi and often the public face for the company. The acquisition of Bitbuy is worth $206-million in cash and shares, and was announced in early January. But since then, executives at both companies said, they faced many hurdles before a deal could be finalized this week.

Much of the delay stemmed from the fact that there is no previous or established policy for regulators to turn to make their decisions about the sector. This is the first time securities regulators from all 10 provinces and three territories were asked to approve a change of control in which a publicly traded company was acquiring a regulated crypto exchange, both already functioning in multiple jurisdictions prior to the deal.

Regulators also had to assess financial technology that has yet to be formally reviewed in this country. So-called decentralized finance (DeFi) has become enormously popular around the world owing to rock-bottom interest rates and a yearning for the most substantial returns crypto can provide. DeFi is also popular because it is based on secure distributed ledgers (blockchains), which remove the control that banks and other traditional institutions have on money, products and services.

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On the other hand, there is also centralized finance (CeFi), which offers some of the ease of use and security that traditional financial products provide. CeFi users with electronic wallets for their crypto can earn interest on savings, and borrow or spend money much like a debit card. CeFi is usually managed by a business or a consortium of companies and organizations.

Both types of technology handle cryptocurrencies, albeit through differing mechanisms and applications.

Kevin O’Leary, of Dragon’s Den and Shark Tank fame, is a strategic investor in WonderFi and often the public face for the company.Chris Young/The Canadian Press

Mr. O’Leary said the WonderFi-Bitbuy deal brings CeFi and DeFi under the same roof, along with financial instruments for play-to-earn blockchain gaming and non-fungible tokens.

“It’s the real reason I found this investment to be so compelling,” Mr. O’Leary said in an interview. “The metric that matters to me the most is customer acquisition cost. What I don’t want to see happening is losing someone who came onto our platform because of the merits of decentralization then walked away all of a sudden because they decided they’d like to have a centralized wallet. Why would I want that? I spent all that money acquiring that customer.”

Michael Arbus, chief executive officer of Bitbuy, said the acquisition sets the stage for the company’s long-term plans, allowing it to grow at a faster rate and “aggressively” expand into countries such as the United States and Australia.

Mr. Arbus believes crypto companies will soon have to face a global reckoning, in which a few large players will increasingly buy out many smaller ones that are struggling to meet the high costs and obligations of regulatory registration.

“People have been talking about this for a while, but I think it’s finally here. This deal will be a starting gun for consolidation in the crypto space,” Mr. Arbus said.

WonderFi is funding the acquisition by issuing 70 million new shares, paying $20-million upfront and promising $30-million in deferred cash via vendor financing.

The deal allows the Vancouver company to gain access to Bitbuy’s roster of more than 375,000 Canadian clients who buy and sell 16 different cryptocurrencies. The exchange has processed $4.4-billion in transactions since 2018.

“It certainly wasn’t easy to get here though. Our industry moves at the speed of light and regulators do not,” said Ben Samaroo, co-founder and chief executive officer of WonderFi. “The biggest challenge was really getting regulators up to speed on what exactly we’re doing here and educating them about DeFi.”

In the end, every provincial and territorial regulator approved the Bitbuy acquisition through the Canadian Securities Administrators. Apart from Alberta and British Columbia, however, all other authorities said they would continue to review WonderFi’s DeFi technology before allowing full access to it in their jurisdictions.

Erica Pimentel, a professor at the Smith School of Business at Queen’s University, who studies blockchain technologies, said cultural and institutional differences among provinces and territories could explain why Alberta and British Columbia chose not to limit WonderFi whatsoever while others did. But she said jumping through regulatory hoops might actually be a good thing for the crypto sector.

“We can say that the bar is too high for the crypto space. Certainly, some smaller players may never be able to enter the market because of it. And yet, there are good reasons for this,” Prof. Pimentel said. “Regulators strike the balance between facilitating innovation and making sure we all don’t get defrauded. Things like that have happened before.”

Despite those hurdles, Mr. O’Leary said he still thinks Canada’s regulators are “the most enlightened compared to other geographies with the potential to be a global leader for this space.” He said acquiring Bitbuy also ensures a “stronger, domestic defense against foreign unregulated exchanges,” such as Coinbase, Crypto.com, FTX and Binance.

In total, Bitbuy and WonderFi have raised $100-million over the past 12 months – the largest amount of capital raised by a crypto platform in Canada.

WonderFi shares closed at $1.47 on the NEO stock exchange Thursday, up 4.3 per cent.

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