Fintech 🧠 Food - 20 March 2022 - The Crypto Executive Order, Consensys raises @ $7bn, Stripe does Crypto & Putin's Geopolitics

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 12,255 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech nerds 👋. I hope this finds you as well as we can expect in weird times. One of the big inspirations for this newsletter is how excited I get by great entrepreneurs and great content. It's impossible to fit it all in, so each weekly read is just a summary of my brain trying to keep up with the sheer volume of great stuff happening. 

There's a fantastic piece by Ben Thompson on Stratechery that I didn't get to in time for this week, but next week I want to re-look at how the new global order will reshape financial infrastructure and vice versa. When you add that to this week's good read on Putin's war and China, and moves by Saudi to accept the Yuan, and the recent "embracing" of Crypto by the US Government executive order, the puzzle of how the future could play out starts to come together. 

We live in unique economic times. Inflation from the pandemic is ripping through the economy as war pushes up commodity prices and China enters another lock-down (further impacting inflation). The cost of living squeeze will impact those vulnerable hardest. Those on low incomes in the global south struggle to afford the basics, small businesses can't afford supplies, and all of this distracts from the existential risk of climate change. 

Yet I'm optimistic. 

Since starting this newsletter, I've met so many of you doing incredible things. I still fundamentally believe that if we understand how finance and technology work, we can find better solutions to the world's problems.

As a species, we do best when challenged.

Maybe the next few years (decade) will be rocky, but we're so close to sustainable clean energy, medical breakthroughs, and becoming a space-faring species. Why can't we economically empower billions of people and fix broken incentive structures with tokens if we can do that? 

It has to be worth a shot.

🔌 Speaking of broken incentives, the music industry has plenty of those. Artists and operators in the entertainment industry are now considering NFT as a major source of revenue and a change of business model. This episode of Blockchain Insider was possibly our best ever, diving into the music industry and how NFTs could change the game.

Weekly Rant 📣

The Executive Order heard around the Cryptoworld.

The Biden Executive Order and the European Parliament vote on Crypto have to be seen as a massive win for the industry. Both could have contained nasty surprises (like a ban on proof of work mining, for example), but neither delivered.

Everyone in Crypto assumed these rulings would turn out bad.

They didn't.

Many in finance thought Crypto would eventually be banned.

It won't.

Instead, we have an industry growing up and gaining political (and geopolitical) importance.

Politics and Crypto are strange bedfellows. Perhaps because Crypto's birth came with a middle finger to the establishment, but also because some people just want to find reasons to hate Crypto, divorced from fact.

That's changing. Like how the Beatles, Video Games, and even Hip Hop went from dangerous mind viruses damaging our children to mainstream industry, Crypto is also growing up.

Crypto's radical beginning.

The very first block of Bitcoin's blockchain contained a message that read:

Referring to a newspaper headline during the global financial crisis and the failure of the banking industry at that time.

Much of the intent in the early Crypto (and specifically Bitcoin) movement was to compete with central banks, governments, and commercial banks who were seen as failing the people. (For many, that still is the intent).

Central banks printed money, bailed out the banks, and ultimately devalued the dollar in real terms. While this may have averted economic disaster, the cash we use every day has suffered massive inflation. This squeezes the middle class but often benefits the Government and establishment. (Let's set aside here how averting economic disaster benefits society too for a moment).

That adversarial intent did not go unnoticed. Just as NWA released a song called F*ck the Police, and many saw art and astute political commentary, others saw the risk to maintaining any sense of institutional credibility and social order.

Now hip hop stars are in their 40s and appearing in the Superbowl half-time show; their message is a part of history. They've grown, but so has the world around them (although we could argue it has a long-ass way to go). The problems NWA pointed at haven't gone away, and neither have the systemic issues of money printing and its impact on savers or the lower-income sections of society.

This adversarial beginning shapes chat we see on Twitter from the Crypto community. Believing anything a government does must be wrong. But now, the adversarial message is being overshadowed by a new generation, new narratives, and new opportunities. Crypto now has publicly traded companies, countless decacorns, and sports stadiums named after its brands. 

These new market entrants are not as absolutist as the original Bitcoin creators (or many of the early adopters). They may share some of the world views, but they're also willing to compromise, implement government rules, and most importantly, play the game of politics and lobbying.

Lobbying gets a bad rep. 

Sometimes with good reason.

Well-funded industries with limited social utility can gain favor and attention from politicians by campaigns of financing and getting office time to "educate" them or suggest legal text for upcoming bills and laws.

The banking sector has been accused of being good at "regulatory capture." This is where a regulator and the Government that oversees it becomes more effective at serving the industry than the public interest it was set up to protect. 

Those with the most cash get to shape the laws and rig the game.

It feels unfair.

But the reality of lobbying is that it depends on what the issue is and how you feel about it. If you want more green space in urban areas, someone lobbying for that is good. Your union lobbying to keep the coal power stations open is in your interests if your job is as a coal miner. 

Perspective matters.

Lobbying is a fact of life, and it informs how rules get made, and the Crypto industry has, for the most part, now understood it. Whether it's appearances in Congress, visiting politicians on the hill or in Brussels, or simply the long game of education, the industry is working to get its message across. And the result is an executive order that could not have come out better for the industry and a disaster averted in Europe.

The Fintech industry has been particularly poor at lobbying. But Crypto may just be getting its act together. And you can see that in recent moves in Europe and the US.

The Biden Executive Order

On March 9th, the White House released an executive order that essentially says (paraphrasing)

1. Private digital assets (Crypto) is now a big industry ($3trn market cap in November 2021)

2. Other countries (China) are developing central bank digital currencies (CBDCs)

3. Crypto has risks to consumers and financial stability, but these should be managed with disclosures and safeguards on cybersecurity.

4. Crypto has risks to sanctions breaches, particularly internationally where the implementation of AML controls are less stringent or developed.

5. The US needs to be at the forefront of innovation and gains significant power from its tech sector. Crypto is how the US can take the lead in the global financial system.

6. Crypto can help with financial inclusion and make the payments infrastructure more efficient.

7. Crypto must balance privacy and security (as should any CBDC)

8. Various government departments need to collaborate much more than they have to date on this issue.

9. The Treasury (and countless other departments and regulators) have 180 days to write a report on the benefits and considerations of building a CBDC.

There's a ton of other detail in there, but my takeaway is that this is a "get your shit together" order to various departments and yet remarkably balanced in tone for the industry.  

Some bits could have been scarier.

Sanctions and AML controls: There was nothing new here. We know there's a move to push self-custodial wallets to automatically report KYC data, but that didn't appear in this order. It could still appear in future reports from Treasury, but I sense that's unlikely. The policy world has been well educated (outside of a few vocal politicians). Given how hot button sanctions are right now, this is essentially buying time.

It says very little on Stablecoins: Since Diem / Libra died, so did the Stablecoin boogeyman. It is now clearly China and the potential risk for a CBDC / currency arms race. 

Other parts of the EO actually have me feeling optimistic.

The Government is being kicked to get its act together on policy: The US has a patchwork of rules that aren't clear. New York has its own Bitlicence, meaning many companies choose not to operate there. The SEC refuses to allow a spot Crypto ETF, but there are derivatives EFTs available because the CFTC declared Bitcoin and ETH are commodities.

The SEC is also sending countless requests for information to Crypto companies that may or may not mean an investigation is happening. It has taken on the role of government bad cop without a clear mandate. There's a pushback coming from congress (which the lobbyists undoubtedly helped with).

But the Government is looking across tech, science, consumer protection, Treasury, and just about every other department to produce a slew of reports. This is far from half-assed. 

There's a real push on CBDCs: A significant portion of the EO talks to the need to develop a CBDC. The CBDC could use a mix of public and private technology infrastructure and should be developed in partnership with the G7 and G20 countries. The G20 (and organizations like the Bank of International Settlements) have been researching, trialing, and reporting on CBDCs for half a decade. 

The Bank of England, Swiss Central Bank, and Swedens Riksbank have pointed to CBDCs potentially being a significant upgrade to institutional and inter-bank payments and trade. The jury is out on the consumer use case but given China is pushing ahead with its CBDC, other countries keep investigating it. 

Regular readers will know I believe that CBDCs are likely to be something used by big banks (and possibly Fintech companies). Private Stablecoins are much more likely to be used by consumers and SMBs.

If I were to recommend one thing to the US Government: seriously consider the policy framework legitimizing US Dollar-based Stablecoins. Then get out of the way as the market innovates.  

This is a long way from purely adversarial.

What about Europe?

Again it seemed my Twitter feed was losing its shit about a last-minute change to the MiCA regulation that would have banned Proof of Work based mining in the 27 EU member states. 

That didn't happen. But MiCA did get passed. 

And MiCA matters if you want to do a Crypto thing in Europe.

What the heck is MiCA?

1. MiCAs stated aim is to create a unified legal framework for digital assets. (Europe is big, and in theory, one license would allow a business to "passport" into 27 member states).

2. The European Securities regulator (ESMA) and Banking regulator (EBA) will have supervision of "asset referenced" and "money" tokens.

3. "Asset referenced tokens" include tokens like DAI (from MakerDAO), the stablecoin that uses ETH and other assets to maintain a stable peg. This is also how Libra was initially intended to work. These would be licensed by ESMA, and this license could be withdrawn if there were any risks to financial stability or consumer protection.

4. Token whitepapers will be registered and reviewed by the securities regulator (ESMA) for any token offering over 1m Euros. 

5. "Service providers" (e.g., exchanges or market makers) will have to be authorized with a license. This would also include minimum liquidity requirements to ensure they can safeguard funds and recover from hacks.

6. Service providers (e.g., exchanges) will also be expected to manage risks of insider dealing, market manipulation, disclosures, and regulatory reporting against these activities.

7. Service providers will also be expected to manage consumer protection, including appropriate advertising, custody (safeguarding), advice, and trading of Crypto assets. 

Right off the bat, you can see Europe's legislation is much more detailed than the US executive order and, for better and worse, gives a clear set of licenses to the industry. Where the US Executive Order talked about things it would do, Europe went ahead and legislated. The problem now is that legislation will take years to filter down to member states. 

Some takeaways

Sense prevailed on Proof of Work: MiCA will not pass any new requirements on Crypto mining operations. Instead, Crypto mining (and specifically proof of work based mining) will be considered on a broader look at energy-intensive activities by the EU Commission. That "taxonomy for sustainable activities" will also look at gaming, entertainment, and social media use of data centers. 

This is precisely the right lens to look at the sustainability issue through. There are tons of energy-intensive activities in technology; Crypto is just one of them. And Crypto, more than most, has an incentive to switch to the cheapest possible energy supply. With the right incentives, it could lead the way. 

This legislation legitimizes Stablecoins in Europe: You get the sense much effort was applied in response to the Libra announcement given the sheer percentage of the 460+ pages dedicated to asset referenced tokens. The capital requirements on Stablecoins are a little punchy, but the reality is they're now also legitimate. This is important for dollar-backed coins (like USDC or USDP) but massively significant for asset-backed tokens like MakerDAO or FEI. 

The licensing and reporting required by "Services providers" is onerous but will function to legitimize Crypto further in Europe: Service providers now have similar requirements to any ESMA regulated market participant. It's still unclear to me where the responsibility of one service provider ends, and another begins. The industry has several forums to communicate about risks they see in the system (e.g., Coinbase says to FTX, hey, we spotted what looks like fraud, do you see this?). Coinbase's responsibility ends, especially if much of the activity is on self-custodial wallets?

I think there's a role for an industry utility here. Crypto on-off ramps can manage their own risks but cannot be expected to manage risks happening in the system outside of their control. 

MiCA says nothing about DeFi or lending: A big gaping hole. Not a massive issue today, but it could be as Crypto scales.

I'd wager the US Government's new rules (if it passes any) will look a lot like where MiCA has landed.

What happens now?

I think several things are true at once:

1. Consumers want Crypto: This summary by Ron Shevlin has some great data. While about 20% of Americans already hold Crypto, about half of those surveyed said they "plan" to buy Crypto, and the preferred place to buy would be from their bank. (This survey was done during a price run-up, but adjusting for that demand is still massive and unfulfilled).

2. NFTs are still the biggest use case: NFTs don't fit neatly in regulatory boxes, but they're the crossover hit of the Crypto and Web 3 world. I sense there will be some sort of regulatory issue there eventually. But also, there's so much opportunity where finance meets NFTs (e.g. reshaping how the economics work in the music industry).

3. The OG's are still adversarial: But ignore the noise on Twitter. The politicians at one extreme and the maxis at the other. 

4. There's a ton of opportunity in the middle ground: Policymakers in all jurisdictions need to understand that Crypto is global by default. Solving for the US alone won't bring us the new 24/7 digital economy, the cross-border payments, or financial inclusion benefits. 

5. And there's work to do: There's work to do on education, policy, and as an industry getting together on global solutions and industry utilities. Folks like Blockchain Alliance do a great job in the US, and Global Blockchain Business Council and GDF work to tie that together with other regional associations. 

The work of education is less fun than building (or investing in) the next new protocol or L2 scaling solution, but it's every bit as critical. 

For a perfect example, watch this video, in which the well-read but ultimately misguided Senator Warren tries to corner the industry's foremost expert on Crypto forensics.

It turns out Crypto is a major upgrade to the financial system.

But we have to play to its strengths.

And to do that, we're gonna have to take governments along for the ride.

Not everyone wants to (or can) be their own bank. Bad things will still happen in Crypto utopia. This is why people who get risk, fraud, and AML are the superheroes the industry needs. 

If you're that person, get in touch with GBBC or GDF to see how you can help.

ST.

4 Fintech Companies 💸

1. Zwitch - No code for embedded Finance (India)

• Zwitch allows non-finance brands to quickly create digital banking, cards, and payments experiences with no-code tools or API access. Zwitch users can build experiences by selecting which financial product they want as the base (e.g., debit, credit, or savings), customizing, and then pushing to production. Zwitch also has over 300 APIs allowing much more fine-grained product creation.

• 🤔 Zwitch is a spin-out from Open the business account used by 20k businesses in India (sorry VCs, Tiger, and Temasek already invested). Interestingly Open is a technology platform that sits above many existing bank accounts. Think of it a bit like how Unit abstracts many different partner banks. However, in India, the partner banks are some of the largest (ICICI, Yes Bank, etc.). I thought this was interesting because the "no-code" abstraction with Zwitch is comprehensive and cleanly executed. Lots to learn from here for other markets (Fintech and large banks).

2. Noble - The API for creditworthiness

• Noble allows customers to assess the credit risk of SMBs by pulling in enriched data from sources like accounting, bank accounts, and credit agencies. Noble has an inbuilt decision engine to create custom workflows that define auto-approve and flags for manual approval. Users can quickly create interfaces and manage via a single portal.

• 🤔 If everyone is trying to get into SMB credit Noble is expert mode underwriting that builds what every lender would otherwise have to. Pulling in those data sources, cleansing them, and getting the humans to define and tweak underwriting models is a great start for early-stage companies. But I could see this displacing a lot of internal tooling that doesn't yet use those data sources at mid-sized banks looking to do "digital SMB" offerings (which seems to be all the rage for 2022.

3. Igocnitia - Device and location intelligence

• Incognitia allows developers and Fintech Companies to recognize trusted users with real-time location and device intelligence tools. Incognita can flag the risk if a user suddenly tries to make strange transactions, changes how they type, or is transacting from a new location at an odd hour of the day. 

• 🤔 Device Intelligence is one of the critical new "authentication factors" (as discussed in last week's Rant) that helps us control fraud as an industry. It can improve customer experience (reducing SMS-based one-time passwords, for example) and reduce fraud. But Device intelligence alone is one piece of a bigger puzzle, especially as we look at the Crypto on/off ramps, transaction data, open banking data. The key differentiator is putting these data points together and driving decisions about what to block and allow. 

4. Cega - Exotic Derivatives for Defi

• Cega allows traders to take a risk on non-obvious changes in the market (like betting on volatility). The Crypto market derivative products also don't often bake in hedging, meaning traders can lose their principal investment if they're not actively managing their portfolio in real-time. For large traders used to complex derivatives, Cega reduces the operational overhead, but Cega could make derivatives a little safer by default for consumers.

• 🤔 The buyer beware / you can lose all of your money nature of DeFi is not for everyone. Cega is a sign of the space maturing as professional traders enter Crypto and bring their experience to make it both easier to use and potentially safer. We saw with Robinhood, derivatives and complex investment products can lead to a lot of consumer interest, but they can also lead to massive indebtedness and risk. There's a fine line between financial inclusion and financial irresponsibility. Historically regulators took the approach that consumers should be "protected" from risk, but the consequence is consumers were also "protected" from upside. Perhaps Cega can find more elegant solutions?

Things to know 👀

1. Consensys raises $450m at $7bn

• The latest raise by Consensys more than doubles its valuation from November 2021. Consensys is the creator of the Web 3 wallet Metamask, which now has over 30m monthly active users. Consensys also created Infura, a major development platform for Ethereum, which has 430k developers and managed more than $1trn in transaction volume. 

• 🤔 Consensys has the most used Crypto wallet and one of the most used developer platforms in the Ethereum ecosystem. If Eth and Web 3 is up, you'd expect Consensys to go up. But life hasn't always been easy for Consensys. They did exceptionally well in the last Crypto bull run but became a conglomerate. Building, investing, lobbying, incubating, and more. The bear market forced them to streamline and focus on the successful products, but I wonder if Metamask alone would be worth more if it weren't dragging Consensys with it.

• 🤔 Metamask is the gateway to NFTs, and NFTs are the gateway to Crypto. While other wallets (Rainbow and Phantom, for example) have better consumer UX, Metamask is still the wallet everyone uses. With 2021's NFT boom, the primary way to own NFTs became getting a Web 3 wallet. The primary Web 3 wallet was Metamask. 

• 🤔 The early adopter crowd just seems to have put up with Metamask, but if you believe NFTs and Crypto are here to stay, it's hard to see how Metamask becomes the default for everyone else. Is Metamask the Myspace of Crypto wallets? Is it too Eth ecosystem focussed? It's possible, but it has a trick up its sleeve (aside from consumer traction). 

• 🤔 Metamask institutional is aimed at regulated funds entering the Crypto space. The early adopter funds and family offices that were buying Bitcoin in 2018 are now looking to buy NFTs and enter DeFi for the yield opportunities. Metamask could find itself evolving to become the expert mode wallet. Another reason institutional investors are excited is "Staking" following "The merge." 

• 🤔 Ethereum plans to switch from primarily a Proof of Work (PoW) network to Proof of Stake (PoS). Where Proof of Work is performed by miners and requires lots of energy and sophisticated hardware, "staking" can be performed by anyone with 32 Eth. Like a stake in poker, participants "stake" their Eth to help the network reach consensus about the state of transactions. 

• 🤔 Eth is planning a network upgrade in ~June called the merge to enable staking rewards that are anticipated to be at least 5% APY. This is exciting for institutions and investors already exposed to Eth because it's a return for Eth they already hold, paid directly by the network. (There's a lot more to "the merge" that has been written about, and it's well worth looking into). 

• 🤔 While looking at this deal for Consensys, we should also hat tip Consensys Codefi, a managed service for staking. Perhaps one of the overlooked parts of the Consensys ecosystem, but one that could really gain popularity as staking does. (Also, if you're a fan of Fintech Blueprint, Codefi is the day job of the incredible Lex Sokolin). 

• 🤔 Infura is a development platform used by major DeFi projects like Compound and Uniswap to access the Ethereum network (rather than building directly). Think of Infura as AWS for Ethereum. Today it supports Ethereum and IPFS but may go wider in time. Infura's primary competitor is Alchemy which recently raised at an eyewatering $10.2bn and counts Circle, Opensea, AAVE, Dapper, and Axie Infinity as customers. Alchemy supports Eth, its L2s, and alternative Layer 1's like Flow (used by NBA Topshot, for example). I'd argue Alchemy has a clear lead, but the game is far from over. It's hard to change platform providers, but do you believe there will only ever be Eth or more?

• 🤔 Quicknode is the third option for developers to access Crypto networks via a single API platform. Unlike Alchemy, valued at $10.2bn and now Consensys at $7bn, Quicknode raised a $5.3m seed in June 2021 and seems to be winning hearts and minds with developers who value performance (like Dune Analytics or Paraswap). It also supports far more chains than either Alchemy or Infura (e.g., Solana, Flow, Eth, and its L2s). If you like infrastructure, you'll like Quicknode 🤷‍♂️ (FWIW, I have no shares in Quicknode or contact with the team, just calling it as I see it).

2. Stripe launches its Crypto use cases

• Stripe has set out its stall for Crypto companies and announced FTX and Blockchain.com as its first customers. Stripe hasn't launched new products but updated its existing ones to suit Crypto use cases. With Stripe Wallets, NFT projects and Exchanges can accept Fiat payments, make payouts, manage KYC and fraud. 

• 🤔 I'm a big believer in the idea that the right starting point for a Web 2 company to enter Web 3 is to do what you do well today, for companies who need what you do. The complexity of managing Crypto fraud or compliance risk is non-trivial and has a massive operational overhead for wallets or exchanges. Taking that pain away allows those companies to "hire the API." 

• 🤔 The friction in where the existing finance system meets Web 3 is massive and will continue to grow as new regulations appear. It's no surprise that the company specializing in making payments "just work" is now doing that for a new audience. But what's more intriguing is what could come after the no-brainer moves. 

• 🤔 Who's the best on-ramp to Web 3? It's a competitive space. Stripe is notoriously patient and thoughtful (perhaps painfully so!) Shopify has an NFT marketplace, Moonpay has a massive valuation and strong position with NFTs, and there is no clear winner yet in Stablecoins. 

• 🤔 someone followed the Eth address on the marketing page and ended up with a job offer. If you look at this link on the right-hand side, there's a wallet address in the image. If you copy that wallet address and look up its history, you'll find a couple of easter eggs. Firstly the wallet had a tiny amount of Eth deposited by a user called Ready-player-anon.eth. A hint at both future metaverse ambition and a nod to the Crypto meme "anon," a way of addressing an anonymous person in the Crypto community. When one developer looked up the contract source code for that Eth address, they also found comments directing to a job offer. Stripe is big, Stripe is regulated, but they're still very much Stripe. 

Good Reads 📚

1. Putins war and the role of China

• When looking at Russia and Ukraine, you have to look at the USA's role in the world, specifically in trade. Asia Pacific currently faces a regionally dominant China with an expansive trade policy. The US does not have an APAC trade deal, and successive attempts have failed to pass through Congress since the 90s. APAC-based countries want a deal that includes rather than excludes China. Why have rules if China isn't subject to them? With a lack of trade deals and ambivalence from India, China, and the region, what is next for the US dollar hegemony? 

• You would expect nations to move away from the dollar, but we've seen the reverse in the short term. As commodities like oil increase in price, traders want the standard currency (dollars) to buy as much as they can before the price goes up further. Don't forget that the largest holder of US Dollars is China, with over $3 trillion in reserves. 

• The Euro is not a viable alternative (as Russia saw with Ukraine), and printing its own currency to pay debts is also known as default. Ultimately if China wants its currency to become a global standard, it needs its largest trading partners (US, Europe, and ASEAN countries) to adopt it. And gaining adoption means being a good trading partner, not a bad one.

• 🤔 While there are technology and political tensions, the economic incentive for the US and China is more trade. It's striking that China abstained at the UN Security Council instead of vetoing the resolution against Russia. The RMB has a mountain to climb, and the dollar is at the top of that mountain, supported by the second biggest player, the Euro, third biggest (Yen), and fourth-biggest (GBP). 

• 🤔 The dollar needs trade to maintain its relevance. But the lack of trade deals in the ASEAN could lead to an ever more tense world. The ASEAN region accounts for more of China's trade than the EU or the US, and that share is growing. Over time the lack of trade could reduce the reliance on the dollar and increase the support for local currencies (like the Yen and Yuan). 

• 🤔 Speaking of trade, Saudi Arabia may start accepting the Chinese currency Yuan for oil exports. Slowly then, suddenly, the world changes.

• 🤔 We live in a world of cyber warfare, weaponized currencies, and private technology companies implementing sanctions. That has spilled over into real war that ultimately masks the long-term challenges. Our planet is warming, our food stability isn't guaranteed, and hundreds of millions of people will go hungry tonight. Financial services can create economic freedom and new innovative ways to finance solving our problems. So what do we build? What's the upgrade to NGOs and charities? How do we empower entrepreneurs to tackle these problems? Who's already doing this stuff? Hmu. 

Tweets of the week 🕊

That's all, folks. 👋

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