With cryptocurrencies and security tokens becoming increasingly prevalent as a new class of asset, it is of no surprise that companies are choosing to hold such assets as part of their portfolio. The intersection of cryptoassets and M&A inevitably brings about many new complexities. This blog considers some of the key issues to manage in private M&A transactions where the target company holds cryptoassets.

What is a cryptoasset?

There are two main types of cryptoasset which a company may hold, transfer or trade: “exchange tokens” and “security tokens”.

While exchange tokens, such as Bitcoin and other cryptocurrencies, were originally intended to provide an alternative means of payment, they have become an increasingly prominent investment asset due to their high volatility. Security tokens, on the other hand, provide holders with a particular interest in a business or asset - they are traded in a similar way to traditional securities and provide new opportunities for businesses to raise funds and monetarise illiquid assets.

All cryptoassets rely on some form of distributed ledger technology, the most common being Blockchain. The decentralised digital ledgers record each transaction, are immutable, and are secured using cryptography.

Why are companies investing in cryptoassets?

While some companies view cryptoassets as an opportunity to diversify their investments and benefit from increased returns, others view the asset as a natural hedge against fluctuating fiat currencies. Such investments can also form part of a wider corporate strategy to “embrace the new” and to integrate crypto-related activities into a company’s business model.

Due diligence considerations where a target holds cryptoassets

Where a target company holds cryptoassets there will inevitably be additional complexity to the standard due diligence process.

As a first step, the buyer should clarify the scope of the target’s cryptoasset base and dealings to appropriately frame the diligence process and identify potential areas of risk. This investigation should assess the amount of cryptoassets held, the sources of any crypto inflows (e.g. customers, clients and debtors) and whether the target carries out any crypto activities. Consideration should also be given to the accounting method which should be applied in valuing the company's cryptoassets, particularly given their volatility. To date, there is no specific accounting guidance applicable to cryptoassets.


Firms which carry out crypto activities, including currency exchanges and wallet providers, fall within the domain of the Fifth Anti-Money Laundering Directive. These firms require to register with the Financial Conduct Authority and a failure to do so is a potential criminal offence.

It follows that where a target company is itself a crypto-firm, additional diligence will be required to ensure that it has complied with all applicable regulations in connection with its crypto activities. This assessment should include a thorough review of the company’s AML policies and procedures.

There are other complexities to consider when acquiring companies which carry out crypto activities and, given the unregulated nature of the crypto ecosystem, any buyer should be mindful of prospective legislative and/or regulatory changes which may impact the target. The buyer should also consider whether the target is aware of the regulatory landscape and has suitably prepared for such changes.


The taxation of cryptoassets is an evolving area and will depend on the activities of the company. According to the recent HMRC guidance (which is limited to the taxation of exchange tokens), a company which disposes of a cryptoasset will be liable to pay corporation tax on any resulting gain. 'Disposal' is defined broadly and occurs whenever the company sells, exchanges, or uses cryptoassets to pay for goods and services.

The guidance also suggests that where a company buys and sells cryptoassets, it may, in exceptional circumstances, amount to a trade. Where a company’s crypto activities amount to a taxable trade, any resulting profits (or losses) will form part of the company’s trading profits as opposed to being a chargeable gain.

There is an evident sense of uncertainty over how cryptoassets should properly be taxed. We strongly recommend that any buyer seeks professional advice when assessing the potential tax implications of acquiring a target which holds and/or trades in cryptoassets.

Storage & Security

The target’s storage methods should also be a key focus of the due diligence exercise. Cryptoassets can either be held in “hot” or “cold” wallets. “Hot” wallets are a means of online storage provided by currency exchanges and other online platforms, whereas “cold” wallets store the cryptoassets offline and usually take the form of an app or USB stick. While hot wallets are more convenient for trading purposes, they are also susceptible to online hacking. A buyer should confirm the proportion of cryptoassets stored by each medium, and whether adequate insurance cover is in place to protect the amounts stored online. While some exchanges operate insurance funds to reimburse users for losses incurred by online hacks, a more recent development is the availability of insurance policies which provide specific cover against the risk. Due diligence should also confirm any terms and conditions applicable to the online storage, including limitations on withdrawal and transfer fees.

The wallet’s “public” and “private” keys (the crypto-equivalents of an account number and PIN) are also crucial. If forgotten or mislaid, the wallet will remain locked and the cryptoassets it stores will be lost. A buyer should confirm how the target maintains its wallet keys and seek assurance that it has not provided copies to any third parties. It is essential that the buyer obtains control of the wallet keys (and associated passwords) to ensure it has access to and control over the cryptoassets.

The increased prevalence of cryptoassets as a new investment class brings new considerations to the due diligence process. A buyer should obtain specialist support to ensure that it is properly informed on the complexities of the target’s cryptoasset base and is contractually protected against any identified risks. Target companies should also conduct in-depth assessments of their cryptoassets to make themselves more attractive to prospective buyers.

How can Brodies help?

Our Corporate team regularly advise on all types of M&A deals across various sectors and our Technology, Funds and Regulatory teams have expertise advising on transactions involving cryptoassets. If you are acquiring or selling a company which holds cryptoassets or carries out crypto activities, or have any related questions, please get in touch.


Charlotte Hair

Trainee Solicitor