Fintech 🧠 Food - 12th Sep 2021 - Coinbase vs. The SEC, Wave building Africa's Fintech Super App & Why 8 Words are worth $1m

Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 7,773 others by clicking below, and to the regular readers, thank you. 🙏

🔌 Plug: This weeks’ rant is about NFTs, but if you want more, we had a fantastic conversation on Blockchain Insider: NFTs explained. Why NFTs are more than JPEGs.

🔌 Plug: Do you want to work in banking as a service? Are you obsessed with the subject and wanna shape it for others? Hit me up; 11:FS helps banks and non-banks understand an execute in the subject, and we need you :)

🗣 Shout out: Fintech Devcon happened earlier this week, and I could not have greater FOMO. Several people have told me the developer first content was exceptional, and especially Angela Strange's keynote blew everyone away. Fun fact: Angela's work on creating a banking stack inspired the work that became the Banking as a Service report 💡

Weekly Rant 📣

Why 8 words are worth nearly $1m

Last week, the world of NFTs was set on fire by a seemingly innocent collection of words called "loot." On the 27th of August noted artist, Dom Hof (dhof) announced "Loot for adventurers" with the following tweet:

Loot is essentially just a list of items. It has no artwork, no stats, or even rules about how the items are used. There are 8,000 unique lists of words in the "Loot for adventurers" drop, but that's not the most interesting part.

Thousands of people rushed to own one of these lists from themselves. Then, 10s, if not hundreds, of complementary projects appeared to fill in the gaps from Loot.  Everything from teams creating artwork, tools to monitor price changes, and even creating worlds (games) full of adventurers who would use this gear. 

The Loot NFTs are currently trading anywhere between $36,000 and $938,000.

And at this point, you may be thinking.

• What the hell is an NFT?

• What makes NFTs unique vs. other digital items?

• Why is Loot an interesting NFT?

What the hell is an NFT? 🤷‍♂️

(Skip this bit if you're familiar with them, but I wanted an excuse to write an explanation that's been rattling around in my head for a few years)

 NFTs (as many of you know) standards for non-fungible token.

I like to work backward in defining NFTs.

So

Token:

Is any object that represents ownership or access. In the physical world, both the key to a house and the deed to the house are tokens. The key represents access to the house, and the deed represents ownership. Neither of those things is an actual house. In the world of Crypto, we are talking about cryptographic tokens.

Cryptographic tokens are usually a set of numbers that represent an underlying data set. In the world of credit cards, we see "card tokenization" as a common phrase, where a device (like your mobile phone) can store a token that represents your card number, expiry, and security code without storing the data directly. The other common non Cryptoasset use of tokens is for access (access tokens) to websites or services. In this case, user credentials are "tokenized" to be passed between an application and an API without revealing the underlying data. 

Cryptographic tokens can represent ownership of something (e.g., your credit card account) or access (to spend using your credit card).

In the world of Cryptoassets, these tokens are managed by wallets and stored on a blockchain. Wallets are software (and sometimes hardware) that help you manage your tokens securely.

The blockchain is a single source of truth for all tokens and which wallet has which token (and an entire history of all token transactions). The wallet is software that allows the user to access the blockchain to send or receive Cryptoassets.

Using a wallet, you can access or own tokens, that are stored (recorded) on a Blockchain.

Fungible: 

A fungible good is replaceable for any other. So $1 is no different from another $1; they have equal value.

Any part of a fungible good is indistinguishable from another (so $0.01 = $0.01); it doesn't matter which one you own.

Dollars are fungible, Bitcoin and Ethereum are fungible, and in fact, most currencies are fungible.

Non Fungible: 

Therefore, any non-fungible good is not replaceable for another. A banana cannot easily be replaced with a toaster. The original Mona Lisa has more value than a replica etc.  

Non-fungible items are proveably unique. They tend to have distinguishing features that make them different from anything else in the same category. Your cat is very different from someone else's cat; for example, even if they look similar, they have different DNA, and you'd be pretty annoyed if someone swapped your pet because "they're the same thing."

In the physical world, most things are non-fungible.  

In the digital world, it was surprisingly challenging to make something genuinely non-fungible and proveably unique. If I sent you a JPEG via email, you don't have the original; you have a perfect digital copy. 

We've seen this play out in the world of digital intellectual property; ever since Napster in the late 90s, the ability to quickly copy music, film, or pictures transformed our relationship with media. Media became cheapened because it is so simple to replicate.

NFTs have features other digital objects don't have. 🛠

Each token has a complete record of previous holders/owners. Because we have a global record of every token, we always know which token belongs to which wallet. This means we can also see which wallets historically owned those tokens.

NFTs create the perfect provenance (history) of a token. So, in the same way, knowing a celebrity used to own a house can increase its value, knowing a star owned a Cryptopunk can increase its worth.

Each token (NFT) is guaranteed to be unique. Each token is assigned a unique identifier (hash), and, no other token can ever use the same identifier on that blockchain.  

Each token can store metadata about itself (e.g. this JPEG is edition 1 of 100 or this Cryptopunk has a beanie hat). This data can be validated by anyone in the world, in real-time.

Each token can grant "ownership."  The only way to have an NFT is to complete a transaction on a blockchain to purchase (or receive) that NFT from the previous owner. (There is some debate about whether owning an NFT means you own underlying legal and intellectual property, but that's a different debate).

NFTs create digital scarcity.  With NFTs, an artist or creator can make 1, 10, 100, or 1000 limited editions and know that there can only ever be that many Crypto wallets that hold the token for that NFT. Many famous NFT projects use this scarcity to create value (e.g., there are only 10,000 "original" Cryptopunks). 

Tokens (and NFTs) can grant access.  Developers can use tokens to access software, experiences, or even more complex functionality like airdrops.  

For example, the Bored Ape Yacht Club started as a collection of 10,000 unique works of art with collectible characters. Over time, developers have extended their features to airdrop add-on characters (like the Bored Ape kennel club, a matching dog to go with your bored ape). 

Another example is token gated communities. Groups with shared interests (like a video game, culture, or even just Crypto itself) can create a token that grants a series of benefits. Perhaps the clearest example is the "friends with benefits" (FWB) community, which operates as a global society or membership club.

Holders who have more than 75 FWB can access their online chat forum (on Discord). Someone who wants access to the token can buy the token from a marketplace (like Uniswap), join the discord server, and then connect their Crypto wallet to the discord server. The server checks the blockchain (in this case Ethereum) to see if that wallet does indeed hold 75 FWB, and if it does, the owner of that wallet is then granted access to the online forum. From here, the FWB community also has other uses for the token (like voting, tickets to access real-world events, and much more).

NFTs change how IP is distributed. Back to our Bored Apes. The developers wrote software to issue a new unique digital token to any Crypto wallet that currently holds one of the 10,000 unique Bored Ape tokens.  

To replicate this functionality without NFTs, you'd have to build a centralized server and build your own access management/database of ownership. The Bored Ape Yacht club didn't have to make Crypto wallets or a blockchain; they just created the art for the characters and the software that managed the token minting, and the network takes care of everything else. The "owners" of Bored Apes can use the same software (their wallet) to buy and sell the Bored Apes as they use for any other NFT. In effect, NFTs created a global marketplace for collectors.

NFTs change how IP collects revenue.  Perhaps the most powerful feature of NFTs is that functionality can be baked into the token. The artist can ensure that a % of each transaction to buy the NFT is sent back to the artist. The artist sets this % when they mint (create) the NFT, and this logic is then enforced by the blockchain.

So the only way a Crypto wallet can buy (or receive) the NFT is if the % of that transaction is sent to the wallet of the original artist or creator. In the physical world, if an artist creates an asset and sells it for $10, that is all they ever receive. If an artist creates an NFT and sells it for $10, they receive $10, but when the asset is sold for $1,000 later, the artist gets a % of that future sale (and all future sales).

Digital goods also have zero cost of distribution. If I want to send you a CD or a signed work of art, that costs. If you buy an NFT, as the issuer, I have (in principle) no shipping costs (except for Ethereum gas fees which are currently high but maybe solved in time and alternatives exist). In time it's rational that digital distribution's marginal cost trends towards zero.

Now any artist or creator can create IP and issue it to a global marketplace of buyers without permission.  This means a musician doesn't need a record label; an artist doesn't need a gallery or art dealer. No middleman, more revenue from the secondary market.

(If you want to read more about NFTs as a subject, a16z has a list of "NFT Canon," including all of the essential reads and explainers).

Why is Loot an interesting NFT? 💡

This tweet nails it - Loot is NFT improv.

While the core use case of NFTs up until this point had been digital collectibles, Loot took this a step further. Rather than the art itself being the NFT, the ways you can use the NFT unleashed a wave of creativity.  

Kyle Russel gave an example contrasting the Marvel cinematic universe vs. Loot. Marvel built characters, worlds, costumes and monetized them through countless comics, films, and merchandise.

The Loot approach would be to start by generating hero names and a set of powers. Others could build tools to define which powers are stronger, which others are rarer. Artists are free to imagine heroes, illustrate them, and in time coalesce around a shared of shared traits for characters. Writers can create stories, and the community can begin to drive where the broader narrative is taken and how the IP is monetized. 

By not having one issuer of the NFT, the space for creativity increases. Digital items become permissionless.

For example, one of the common use cases people give for NFTs is video games. In the "free to play" model, the game itself is free, but items like character skins or weapons cost extra. This model is used by games like Fortnite or Roblox. 

By creating an NFT of a sword or a gun, an artist defines the properties of that item that the game has to use (e.g., the weapon is very powerful). But these items don't transplant from one game to another easily. While a gun may be "fair" inside Halo, it's overpowered when you bring it to Call of Duty.  

With the Loot approach, the developer gets to choose how the item is interpreted by the game. The item can be rare but be made to fit the game's existing rules and parameters.

Loot is a primitive, perhaps the most primitive form of a digital good.

When developers are given primitives, exciting things can happen.

Imagine a scene from Ready Player One. At one point, the game's villain uses an item to create a shield in a battle against our heroes. The Orb of Osuvox is an artifact that makes a sphere indestructible by any other object or weapon in the universe).  

The book imagines this game world (and its items) being created by one person, who hid these items throughout the universe and could be used in any game world.

With the Loot model, the "Orb of Osuvox" token would exist, there would only be one, but every game world is free to interpret its implementation.

As we change ownership and access, we also change finance and the economy. Damn, that's cool.

ST. 

4 Fintech Companies 💸

1. Keebo - The credit builder credit card (UK)

• Keebo provides credit cards to consumers who haven't had credit before in the UK.  Keebo starts with a relatively low credit limit and can adjust up or down as a consumer's financial health changes over time. The primary competitor for the service today is pay-day lending or high-interest credit. By focussing on good financial behavior, Keebo aims to keep APRs lower over time and help consumers gain other sources of credit.

• I love the phrase "we rely on open banking and our nerdy expertise" to get a view of users' financial behavior. Remember, credit underwriting has two elements, affordability (users' ability to pay) and creditworthiness (users' likelihood to pay). It's much easier to see the track record from their banking activity than from a credit history (i.e., how they did with credit before), especially if they never had credit before! PS. In the UK, Credit Kudos offers this open banking credit rating as a service via open banking. 

Speaking of interesting underwriting

2. Otto Credit - Credit builder credit card secured against your car

• Otto provides a credit card to consumers in the US by asking them to prove they own their car and check their monthly income.  The primary competition is vs. auto title loans that require an in-person application and can trap borrowers in debt. 

• This really made my brain go "oooo." It's gone beyond using open banking to securitized-credit-card-as-a-service.  The consumer doesn't lose their car if they miss a payment, but the awareness of the existence of that car as an asset is a good part of the equation for "can this customer pay me back." 

3. Abound - Neobank for SMB features as an API

• Abound has APIs that allow Neobanks or anyone building for independent workers (e.g., earned wage access) to quickly add features to their product. Developers can add tax calculations for freelancers, tax form generation, and benefits like healthcare and retirement plans. 

• Abound is a Fintech company that builds features for other Fintech businesses; this signifies how mature Fintech is now.  Embeddable functionality is a default. I wonder how big the market for this is and how unbundled Fintech features ultimately become?

4. Canopy - Practice management for accounting firms

• Canopy is a SaaS platform that helps accounting firms track their time with clients, manage invoicing, document sharing payments, and integrate with the major accounting platforms.  

• Accounting has been an unloved profession that lives in spreadsheets and paperwork. By embedding payments, Canopy is solving the broader problem set in accounting practices.  This is the type of thing a bank would never build, but the sort of thing that has permission to become "the operating system" for that industry vertical and embed more finance over time. 

(h/t Alex Johnson)

Things to know 👀

Sequoia and Stripe invest $200m in African Fintech Wave.

• The round is led by Sequoia heritage and includes Ribbit capital and YC's Sam Altman. This investment follows major Fintech investments on the continent, including OPay raising $400, and Flutterwave raising $170m

• Wave is a Senegal-based mobile money provider aiming to build the "Venmo for Africa." Across Africa, most mobile money services are provided by Telco's, not banks. These Telco-led services are available to the subscriber of that Telco and, in some markets, are slowly becoming interoperable. Wave aims to be more "Paypal-like" in that any user can sign up, load their wallet and send money to any other user. Wave has built its own agent network (for cash-in, cash-out) 

• This week rather than my analysis, I asked Gwera Kiwana from 11:FS to give her views. 

• 🤔 Gwera's Analysis: Wave has built a network of over 4,000 agents which is impressive in a short space of time.  The nature of the market being cash-heavy means agent-led distribution is key. 

• 🤔 Gwera's Analysis: Wave may have a better shot at being "the pan-Africa bank" than anyone if they can replicate their success in Senegal. The African Neobanks are taking the banking model and making it more digital; Wave is taking the Telco model and making it smartphone native.

• 🤔 My Analysis: The fact that Wave is app-based stood out to me. When Telco mobile money services first emerged, smartphone ownership was much less common. With QR codes and an agent network, Wave can extend beyond money movement into many other complementary services (in the same way the telcos have).

2. Coinbase is having a public argument with the SEC.

• Coinbase CEO Brian Armstrong took to Twitter to complain about the SEC's treatment of a DeFi yield product that Coinbase was about to launch.  Coinbase announced it wanted to offer its customers the ability to make a 4% APY return on USDC (a US dollar like stablecoin) through the Coinbase app and platform.

• The SEC responded advising that the new Coinbase feature is "a security" and falls inside the SEC jurisdiction without saying why.  Brian points out that the SEC has published no guidance on DeFi yield products, and many other companies have these products in the market today. The SEC has threatened legal action if Coinbase does launch the product but is apparently, refusing to engage in dialogue.

• 🤔 The SEC isn't wrong; DeFi lending does look a lot like a security.  DeFi products function a bit like a bond, someone else is borrowing against a market, and you're buying a piece of that borrowing via an intermediary. A bond is a security. This isn't a straight "savings" product because there's no bank with FDIC insurance in the middle. However, there are good consumer protections most of these DeFi yield products do have (like insurance). 

• 🤔 But how the SEC is going about it is, frankly, a stupid move that will harm innovation and consumers more than it protects them.  FDIC-insured savings accounts offer almost no return to consumers. The SEC is coming down hard on letting consumers into the stock market, and at the same time, from making a return in Crypto. Meanwhile, the Fed is printing more money than before with all-time-low interest rates. Collectively the SEC and Fed are making it near impossible for Main St to generate a return. But they're perfectly fine with large institutions who "can absorb the losses" taking those risks.  Do they genuinely not get how this is more harmful to consumers than a DeFi yield product?

• 🤔 The UK solved consumers buying unlisted securities, and the SEC could just copy + paste those rules.   The USA has "crowdfunding" rules under the Jobs Act, but the UK has specific crowdfunding regulations and guidance.  This includes standard guidance about how consumers can self-certify they have read and understood the risks of losing all of their investment. The reality is DeFi yield is a lower-risk product than equity crowdfunding. So why can't we have the consumer self certify in the same way?  If I were Coinbase (and every other Crypto player), I'd want to build out a standard consumer self-certification process. Voluntarily doing this would be a huge signal to regulators they take consumer protection seriously.

Good Reads 📚

1. How do Mid-Sized banks compete with Fintech

• Alex argues that maybe mid-sized banks shouldn't try to compete with the consumer Neobanks. Instead, these banks should focus on their core revenue-generating customer, the small to medium-sized business (SMB).   The SMB market is also varied, complex and the Mid-sized banks have developed strong industry specialisms.  

• Alex lists several companies banks don't consider competitors (like Greenphire, Relay, and Canopy that help with project budgets, shipping logistics, and tax workflows) as potential sources of inspiration.  Going deeper into those problem spaces is key to relevance in the next decade for these businesses.

• 🤔 Embedded finance is coming to non digitally native businesses.  Vertical SaaS platforms that solve a core operating problem in a specific industry have a tremendous opportunity to embed finance. 

• 🤔 What is a bank's right to win in vertical-SaaS? These banks tend to have very strong relationships with their clients and have a good entry point to deploy SaaS solutions. But do these banks have the DNA to become SaaS businesses and execute accordingly? If they don't, how do they execute that?  It would be interesting to see several regional banks partner with a venture firm or studio to start cranking these out.  I'm thinking about how Walmart is partnering with Ribbit for its Fintech specialism. Take a Fintech specialist investor and customers with distribution, sprinkle on some SaaS revenue, and presto? 

Fun fact, a high percentage of 11:FS work right now is developing bank adjacent brands and services. Where Fintech meets non Fintech industries is a fascinating nexus. Perhaps second only to where DeFi meets CeFi. 

Tweets of the week 🕊

That's all, folks. 👋

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