Who should control Canada's Crypto space?

At long last, O'Leary & Paterson finally team up

Am I the only one who thinks that last week’s announcement of a three-way merger between Coinsquare, CoinSmart (SMRT.NE) and WonderFi (WNDR:TSX) raises a pretty basic question about the future path of Canada’s so-called regulated crypto space? As in, who should control it?

On its face, I can see the capital markets play. You’ve got a couple of publicly-listed firms trading for pennies a share, with a third (Mogo:TSX) capitalizing on the opportunity to surface at least some value for its Coinsquare subsidiary. CoinSmart was trading at 17 cents before the proposed deal was announced last Monday, while WonderFi’s undisturbed share price was $0.1155 (implying a market cap of ~$32M, meaning Kevin O’Leary’s stake was worth <$3M at the time). The late Ross McMaster would have had a NSFW name for NewCo, but you can’t fault these Boards for switching gears.

You need courage to be an investor in a nascent industry, but the macro environment looked pretty compelling a couple of years ago for any serious player that had an opportunity to be part of the infrastructure that would allow investors to transact Bitcoin, Ethereum, or anything else that a collector fancied. Whether it be Christie’s, Sotheby’s, Phillips, Ritchie Bros., or the Toronto Stock Exchange, the folks who own a dominant trading platform do very well.

I think you can separate the “is Bitcoin a security or an asset?” question from the investment thesis for the infrastructure backbone that is needed for institutional and retail investors to trade said “coin” between two willing parties. In a capitalist system, we shouldn’t fault anyone participating in the predictable land grab. How much of it is first-mover advantage, marketing, deep pockets, technological innovation or connections can be debated. But what I won’t question is the wisdom of those who got involved in trying to build various platforms; someone had to win.

That said, I’ve not paid as much attention as might have been warranted. The anti-money laundering laws that North American banks need to abide by made it impractical for CIBC Innovation Banking to onboard a client that transacted in and around crypto, which meant that my team and I were focused elsewhere over the past five years. I credit the Globe’s Ethan Lou from forcing my hand, however, with his weekend column: “Canada’s cryptoland will get as concentrated as its banking sector – that is good.”

Canada’s crypto sector is becoming like all its other sectors – concentrated.

This past week the Kevin O’Leary-backed WonderFi Technologies Inc. announced a three-way merger with CoinSmart Financial Inc. and Coinsquare Ltd.

While there’s no central body tracking the market shares of domestic exchanges – a difficult task anyway given the nature of crypto – it’s safe to say WonderFi is on its way to become very, very big.

I know you think I fell for the O’Leary bait, but it’s not what it seems. With columnists such as Minnesota-based Mike McFeely recently referring to KO as a “lying” “two-bit hustler,” there’s nothing I can possibly add for the moment. What was interesting about the WonderFi news was the reference to Mr. O’Leary’s new business partner: G. Scott Paterson. A former colleague, it’s been more than 20 years since “GSP” was a regular focus of Canada’s business media; but that doesn’t mean that his market shenanigans are at all forgotten.

You can review the list of the Ontario Securities Commissions accusations here, but they involved five different companies where GSP was accused of acting “against the public interest.” With the benefit of some savvy legal advice, GSP had the good sense to do a deal. He wound up agreeing to a two-year ban and a $1.1 million payment. GSP’s former head trader, Pier Donnini, took his case to trial at the OSC and lost — winding up with a 15-year prohibition. GSP’s market ban is long over, and, in a free market, folks are welcome to do business with whomever they choose.

As much as I have no interest in re-visting those difficult years, there was a line in Mr. Lou’s column that stood out: “One day a new crisis will tear through the crypto space, and we in Canada who are shielded from it might just have our concentrated industry to thank.”

When I think about Canadian investors being “shielded” from a future “crisis,” it’s fascinating that — in a highly regulated environment — these two fellows have wound up as Joe & Jill Retail’s protectors.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo: Marchande de Ballons, 1950, by Irving Penn)