Coinbase ❤️ Mercado Bitcoin = Showdown with Binance in the Cards?
The largest US exchange is looking to buy 2TM Group, which valued at US$2.1bn, could be one of the largest ever acquisitions in crypto
Bom dia Brazil Crypto Crew:
The great exchange race in Brazil continues to heat up. After CZ’s roadshow for the ages earlier this month promoting Binance in Brazil, it is arch-rival Coinbase’s turn for a big move.
And what a big move it is - a rumored acquisition of 2TM Group, the parent company of Brazil’s homegrown unicorn exchange Mercado Bitcoin.
According to Estadão, one of Brazil’s largest news outlets, the deal has been in the works since last year and will be announced before the end of April.
Bitso, the Mexico-based unicorn that has been making a big push in Brazil as of late, was identified by Estadão as the “Plan A” acquisition target. Negotiations failed to advance, however, and then Mercado Bitcoin came into play.
Up until a couple of months ago, the speculation surrounding 2TM/Mercado Bitcoin was a potential initial public offering following up on Nubank’s successful listing in the US. The speed at which the narrative shifted likely indicates that this is a deal that came together fairly quickly.
2TM Group raised a Series B funding round of US$200m in June 2021 from Softbank Latin America Fund and closed the round with an additional US$50m raise in November, putting the conglomerate at a US$2.1bn valuation.
Simply assuming that Coinbase pays the full valuation price (disclosure: I’m not an expert on M&A or valuations) indicates that this would be one of the largest ever acquisitions in crypto. You can check out PwC’s 2022 crypto M&A report for background and comps. TLDR is that the only deals larger than this last year were SPAC mergers and mining hardware related acquisitions.
In addition to Mercado Bitcoin and its 3.2 million Brazilian customers, 2TM also owns MeuBank (a crypto wallet and investing platform), MB Digital Assets (a tokenization firm), Bitrust (a custodian) and several other entities.
2TM has also been actively looking to expand into other Latin American countries, as well as to Portugal - where it acquired a controlling stake in exchange CryptoLoja recently.
While we don’t know any further details about the proposed deal, it makes a lot of sense on several fronts:
2TM has been building itself out largely following the Coinbase model.
First, build a retail exchange (Mercado Bitcoin) that provides an easy on and off-ramp funnel for new crypto investors and then gobble them up during the boom periods.
Then, introduce a suite of institutional-focused offerings aimed at custody, tokenization, etc.
Mercado Bitcoin has played the “let’s go out of our way to work with regulators” card in Brazil the same way Coinbase has done in the US. Contrast this to the “seek forgiveness later” modus operandi employed by other exchanges.
2TM also has its Blockchain Academy arm which is focused on retail education and adoption
Coinbase, now a publicly-traded company in the US, has the war chest necessary to make a massive acquisition like this. There’s a lot of money sloshing around in crypto, but US$2bn is still a lot of money.
Irrespective of industry, entering the Brazilian market in greenfield fashion is notoriously difficult vis-a-vis the M&A route. This is largely due to the “custo Brasil”, which is essentially a tax imposed on businesses operating in Brazil due to corruption, bureaucracy, labor laws and cultural complexity, etc. These costs will still be incurred regardless of means of entry, but acquiring a business that already has operations, a user base and product-market fit in Brazil will be much less headache.
Such a deal would also be inline with the exchange’s global expansion push - which it announced with some fanfare back in February.
The acquisition would give Coinbase a home base from which to expand operations elsewhere in Latin America. The company recently indicated its view of Brazil as an “important technology hub” for expansion in the region.
Frankly, Coinbase had to do something to avoid being outflanked by Binance after CZ’s blitzkrieg through Brazil earlier this month. Brian Armstrong and team had to respond with a counterpunch to claim some momentum, and they have a lot of ground to quickly make up. Furthermore, foreign exchanges Crypto.com and FTX are also ramping up their respective presences in Brazil, but Binance - which accounts for 1/3 of the total bitcoin trading volume in the Brazilian market - is the top dog. While its future was in question just weeks ago given new developments in crypto legislation working through Congress, CZ now has politicians from Rio and SP eating out of his hand.
Keep reading for my analysis of CZ’s “state visit” earlier this month and why it was such a shrewd power move for Binance. I’d also recommend this thread from Portal do Bitcoin reporter Fernando Martines.
With this context, Coinbase simply had to respond with something big if it wants to be a serious player in the Brazil market. Acquiring 2TM and Mercado Bitcoin is the grand prize here and matches CZ tit for tat and makes Brazil the latest front in the Coinbase vs Binance race globally. Hold on tight because there will be a lot more fireworks to come!
Thanks for reading,
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Note: This analysis piece is a cross-post from Linkedin
Cardinal Rule of Crypto: Never Bet Against CZ
It's hard to overstate the importance of Changpeng Zhao's "state visit" to Brazil this past week and his announcement that Binance, the world's largest crypto exchange would soon officially enter the Brazilian market - with its population of 214 million - via acquisition.
Aside from appearing at the ETH Rio conference (where he received a rockstar welcome), CZ paid a visit to São Paulo Governor João Doria, Doria's son João Doria Neto, regulators from the Banco Central do Brasil, and he even received the key to the city from Rio de Janeiro Mayor Eduardo Paes and economic development secretary Chicão Bulhões.
He also sat down with the most influential media outlets in the country like Folha de S.Paulo O Globo Bloomberg Línea and more and fielded a lot of tough questions.
CZ emphasized that Brazil is now a Top 10 priority market for the exchange and pledged to setup a country HQ in either São Paulo or Rio de Janeiro. He also committed to hiring more than 1,000 employees in Brazil and to funding scholarship programs for blockchain developers.
Why does all of this matter?
While Binance has consistently controlled about 1/3 of total bitcoin trading volume in Brazil, it has come under intense scrutiny from regulators in Brazil due to its extra-legal operating status.
Because there is currently no regulatory framework for crypto exchanges in the country, Binance (and numerous others) have been servicing Brazilian customers without being officially registered as a business entity in the country (it operates under an independent entity called B Fintech)
Domestic exchanges have accused Binance of playing with an unfair advantage due to this extra legal status and have been trying to use the legislative process (crypto reg bill passed the House in December, currently in Senate and looks set to pass) to force Binance out by pushing for rules that require all crypto exchanges to obtain a license from the federal government before they can begin operate in the country.
Last summer, Binance's country director abruptly resigned after 6 months on the job as the exchange fell into the clutches of regulators around the world.
More recently, Binance has also been publicly scapegoated in high profile cases of bitcoin pyramid scheme operators, many of whom allegedly used the platform to launder investor funds out of the country.
In truth, it look a couple of weeks ago as if the walls were closing in on Binance in Brazil.
But, going back to our cardinal rule: never bet against CZ. After being blackballed in other jurisdictions around the world, he unleashed his charm offensive in Brazil and found an audience that welcomed him with open arms.
This was a wickedly-savvy and perfectly-timed power move that only a CZ or SBF caliber operator could engineer. I believe this will be a turning point for Binance and for crypto for broadly in Brazil.