A merger reportedly in the works between Coinsquare and WonderFi, which collectively own three of Canada’s most prominent cryptocurrency-trading platforms, would happen under extremely challenging conditions for acquisitions in the sector.

A bitter crypto winter, more intense due diligence expectations and bull market-era lofty valuations have contributed to a recent string of failed crypto acquisitions, industry watchers say. Most agree that mergers are coming to the sector, but settling on a fair price for companies that were often last valued in 2021’s frothy market can be a challenge.

“In the Canadian crypto market, I would expect to see a fair amount of consolidation in the next one to two years,” said Brian Mosoff, CEO of Toronto-based Ether Capital. “You also have another tricky dynamic where valuations may be out of whack [among] companies who raised during this enormous bull run.”

Coinsquare declined to comment on BNN Bloomberg’s report that the two companies are in merger talks, while WonderFi issued a release saying it has “held preliminary discussions with various third parties” about both acquiring another firm and being acquired. 

If WonderFi and Coinsquare merge, the combined company would include three out of 10 Canadian crypto platforms registered with securities regulators, with a total of about 1.15 million users. Among other scenarios, the two companies are reportedly considering a deal that would give Coinsquare a majority stake in the combined business and more seats on the board than WonderFi. 

WonderFi’s market capitalization was about $66 million at market close Thursday. According to Mogo, a major investor in Coinsquare, the crypto platform had a pre-money valuation between $250 million and $350 million in February 2021, the beginning of that year’s crypto bull run when Mogo first bought a stake in the firm.

But news of the potential merger capped another turbulent week in the sector, as a different deal involving Coinsquare disintegrated—perhaps as the company cleared the way to make its deal with WonderFi. 

On Monday, Coinsquare confirmed to The Logic it intended to terminate its agreement to acquire rival platform CoinSmart for $29 million in cash and stock plus performance incentives, a deal announced in September. CoinSmart is publicly traded while Coinsquare is private, and in an email to The Logic, Coinsquare chief operating officer Eric Richmond cited the cost, as well as disclosure requirements and risk associated with acquiring a public company, as reasons for seeking to pull out of the deal. WonderFi is also a public company.

In another email, CoinSmart chief executive Justin Hartzman said the notice of termination “took the CoinSmart board and management by surprise” and that the company is “considering all options.”

It was the latest in a series of Canadian-linked crypto acquisitions to go sour over the past few months. They include proposed deals to buy Ether Capital portfolio company Wyre, digital-asset trust company BitGo and Calgary-based crypto-trading platform Bitvo, which all failed amid fallout from the collapse of the stablecoin TerraUSD over the summer and November’s implosion of cryptocurrency-trading platform FTX.

BitGo is seeking at least US$100 million in damages after Toronto Stock Exchange-listed Galaxy Digital Holdings walked away from a US$1.2-billion deal to acquire it in August. The following month, the online-checkout company Bolt Financial scrapped its planned US$1.5-billion acquisition of Wyre, which would have been the largest ever non-SPAC acquisition of a crypto company.

Axios reported last week that Wyre intends to wind down its business in the coming weeks, citing an email from the company’s CEO. Toronto’s Ether Capital announced Monday it may fully write down the value of its US$1.5-million investment in Wyre, which it made in 2018.

The mother of all failed crypto acquisitions—Binance pulling out of its agreement to buy Bahamas-based competitor FTX in November—sparked a spectacular collapse that led to bankruptcy for FTX and criminal charges against its former chief executive Sam Bankman-Fried. As a result, Bitvo’s shareholders terminated their agreement with FTX to allow the offshore platform to acquire it.

Toronto-based crypto lender Ledn’s proposed acquisition of the digital-asset investment manager Arxnovum has yet to close, despite the fact Ledn had said it hoped to finalize the deal in the fourth quarter of 2022. Ledn chief strategy officer Mauricio Di Bartolomeo told The Logic it is awaiting regulatory approval and the company’s “plan is to complete the acquisition as soon as possible.”

Robert Le, a crypto analyst at PitchBook, said he thinks consolidation will eventually come to the crypto sector, but many companies are currently watching for how much further the market could fall amid ongoing contagion from the collapse of FTX.

“Everyone is in a wait-and-see type of environment,” he said. “Once companies feel like we’re close to that bottom, they’ll be comfortable making acquisitions.”

Tanim Rasul, chief operating officer of the Calgary-based crypto-trading platform NDAX, thinks consolidation in the Canadian market will go ahead despite the challenges of closing deals. (He, Le and Mosoff all spoke to The Logic before reports emerged of a deal between Coinsquare and WonderFi). Rasul said NDAX itself is looking for acquisition targets that would allow it to grow during a time of extreme challenges for centralized crypto platforms like his.

Foreign platforms looking to gain regulated status in Canada by acquisition—a move that FTX was attempting with its proposed acquisition of Bitvo—are likely to have a tougher time, Rasul added. Following the collapse of FTX, regulators are likely to expose such proposed deals to more scrutiny than ever, he said.

“There’s definitely a lot more pressure from securities regulators on doing due diligence on those foreign entities,” Rasul said. “Nobody wants to see something like FTX happen in Canada.”