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The crypto SPAC deal backlog keeps on building

Anyone waiting for closure on eToro’s ongoing SPAC merger shouldn’t hold their breath. It’s been more than a year since the fractionalized shares and crypto trading platform agreed to go public with FinTech Acquisition V.

Since then, eToro has received pushback from the Securities and Exchange Commission (SEC) and fallen in value by 15%.

In a regulatory filing in December 2021, the SPAC backed by banking veteran Betsy Cohen postponed the deal a second time—it was originally slated to close in Q3 2021—citing eToro’s inability to meet SEC conditions required of foreign issuers. FinTech extended the deal deadline to June 30, 2022, and slashed the online stockbroker’s post-money valuation from US$10.4 billion to US$8.8 billion.

Well paired

In some ways, SPACs and crypto are a perfect match. Both are speculative plays. The ability for pre-profit companies to make forward-looking financial projections has propelled businesses in speculative industries, including crypto, to go public through SPAC mergers, rather than wait until they build the scale and track record usually required for a traditional IPO.

SPAC listings are also typically faster than conventional IPOs—the operative word being “typically.”

The SEC has come down hard on SPACs and the crypto industry over concerns that retail investors will lose their shirts on hollow promises. In a virtual speech made last month, SEC Chairman Gary Gensler vowed to protect investors better in the cryptocurrency market through increased regulations. The speech echoed similar remarks he has made about SPACs in the past 12 months.

Crypto winter?

This double scrutiny means that crypto SPAC deals are taking far longer to complete than SPAC mergers in other industries. Deal data shows at least nine mergers between crypto businesses and SPACs have been announced to date, with six of the transactions—including eToro’s—still pending.

Bitcoin miner Prime Blockchain’s agreement to merge with 10X Capital Venture Acquisition II on April 1, 2022, not only marked the first SPAC merger of Q2 this year, it also showed that speculative assets can still combine in the face of market and regulatory pressures.

Whether the backlog clears and other transactions follow in the short term, however, is looking doubtful. For one, appetite for SPAC deals has cooled significantly since last year despite the record sums of capital already raised.

But the biggest hurdle will be the crypto market itself. Bitcoin and other cryptos have been crucified amid the wider tech stock market rout this year. The total cryptocurrency market cap at the beginning of 2022 stood at US$2.2 trillion—it has since cratered to less than US$1.26 trillion as investors flee inflation-sensitive assets.

Further denting confidence, Terra Luna—previously a top ten crypto—saw its market cap collapse by over 99% last week as its associated algorithmic stablecoin, UST, de-pegged from the dollar and sent Luna in to a death spiral, bringing the market down with it.

Even if there is a recovery in the coming weeks and cryptos don’t tip into a protracted bear market (as they did in 2018-20), the inherent volatility of these assets makes determining fair valuations a real nuisance—doubly so when deals face such long delays.