SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among crypto companies fostering decentralized finance networks. We look at why they are compelling and why each could be a fit for a blank-check merger.

We’ve looked at the crypto sector a number of different ways in our Top 3 series over the past year, but current events keep upping its relevance in ways that are impossible to ignore. Plus, there are plenty more interesting companies out there and SPACs drift towards “interesting” like moths to a lantern.

This week, we’ll be looking specifically at crypto enterprises aimed at creating the infrastructure for decentralized finance (DeFi) – financial services that run on open-sourced and permissionless blockchains without traditional gatekeepers and intermediaries like banks or brokerages. Such DeFi platforms had been growing at a low rumble, which grew to a veritable roar in 2021. Transaction fees from Ethereum, which remains the most widely used blockchain, hit a crescendo of $3.6 billion in the first half of 2021 after generating just $596 million in all of 2020, according to Pitchbook.

A measure of uncertainty is drifting over the sector, however. This week, Moody’s gave Coinbase (NASDAQ:COIN) a debt-issuer rating at junk status while noting that its financial profile “suggests investment grade credit strength, but for now the uncertain regulatory environment and fierce competition offset these strengths”.

All DeFi companies are certain to face similar scrutiny. But, as Moody’s note indicates, companies like Coinbase could quickly enjoy a friendly financial environment as soon as certain clouds were to drift on. As such, SPACs have surely made calls but may be waiting for certain meteorological changes to announce deals in the fast-growing sector.

Should the storm break, there may be transactions ready to go or at least phone calls to be made and this is who we think we’ll hear from first.

Ripple Labs

If there is to be a crypto titan brought to the public markets via a SPAC, Ripple Labs appears to be the first in line. Ripple has built a financial payments structure that has sought to engage with centralized finance networks and offer alternatives in line with existing financial institutions rather than as a competitive rebuttal.

Ripple helped Spanish banking giant Santander (MC:SAN) set up its own DeFi network One Pay FX allowing for same-day, low-cost international payments which can now be used throughout the euro zone. Other clients include Bank of America (NYSE:BAC) and American Express (NYSE:AXP), which have made smaller product rollouts as well as dozens of international banks.

Being a facilitator of DeFi commerce for large financial institutions may help insulate it from the broader regulatory uncertainty on the sector as it has plenty of legal teams looking at the particulars.

It has already gained plenty of confidence in the private markets as well, having reached a valuation of $10 billion in a $200 million October 2020 Series C and reportedly has been fundraising for an additional round this summer.

Even with its services focused towards institutions, Ripple has had its own brushes with regulatory scorn, but, again, appears to be among the firms able to take a big next step once some of the smoke clears. An important date for investors to note is October 15, when a lawsuit brought by the SEC over an alleged sale of unregistered securities is to see discovery testimony from experts from both sides. It is set to be a popcorn moment for both sides of the crypto debates.

BlockFi

BlockFi hasn’t quite reached Ripple’s valuation but it has trumped most other crypto firms in its private fundraising capacities, raising $1 billion since its founding in 2017.

The crypto wealth management firm is now reportedly working on a Series E that would value it at around $5 billion following a March round that valued it at $3 billion. Previous raises saw it plunge capital into creating crypto-rewards credit cards and its current rounds are designed to get it into new markets and verticals.

All of that activity would seem to leave less room to maneuver for a SPAC, but there has been scant news on BlockFi’s capital plans since June, which could provide an entry point.  Its earlier offerings include crypto interest accounts that earn up to 8% APY and it has already attracted eyes that are active in the SPAC market. Hedosophia is rumored to be in its current round while Bain Capital participated in its March efforts.

An intriguing fit among potential SPAC partners could be Nocturne (NASDAQ:MBTC). It is led by Chairman and CEO Henry Monzon, who served a year as chief revenue officer for major crypto-mining firm Bitfury from 2018 to 2019. The SPAC also has just under 12 months to complete a transaction before its September 1, 2022 transaction deadline. This is not an imminent pressure, but given the 4-6 month cycle for SPACs normally go through from announcement to completion, Nocturne is at a point where it would ideally like to announce something and maintain cushion.

Gemini

Gemini is not going to be content to let BlockFi dominate the consumer crypto finance market, however, and it has released its own credit card with 8.05% APY and 3% cash back on purchases. Like BlockFi and others, Gemini started out as a crypto exchange and still processes significant volume in about 40 crypto coins on its exchange.

The Winklevoss-led company has also been aggressive in pursuing new verticals through M&A, which a SPAC transaction could certainly accelerate. It has acquired four companies since November 2019, starting with Nifty Gateway, which was an early pioneer of non-fungible tokens (NFTs). Acquiring Blockerize helped accelerate its credit card offerings in January, followed by the purchase of Shard X in June, which beefed up the security of its transactions. Two months later, it acquired Guesser to bolster its internal smart contracts and tech.

Gemini’s own stable coin, GUSD, peaked in market cap in late July at $326 million and remains at about $207 million despite volatility in the intervening months. Following the announced combination of Gemini peer Circle with Concord (NYSE:CND) in July, an early blueprint has been set for the parameters of SPAC-crypto deals of this type.

Circle and its $4.5 billon enterprise value in the deal present a high watermark of what a target like Gemini could achieve, but Circle’s stable coin USDC had a market cap of about $22.6 billion at the time – over 100x the market cap of GUSD now. But, given Gemini’s acquisitive nature, a deal striking the balance in between could provide plenty of upside for both parties. Investors would receive an earlier equity entry into Gemini, and Gemini could receive plenty of dry powder to extend its own M&A strategy.