🍝🧠 - July 10th 2022 - Manufacturing vs Distribution in Finance, The central bank of FTX & why down rounds are good.

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 17,636 others by clicking below, and to the regular readers, thank you. 🙏

Also huge hello to the 931 new subs this week 🔥

Hey Fintech Nerds 👋

It feels like the ground is moving beneath the feet of everyone in financial services. Slowly, then suddenly.

Embedded finance fundamentally shifted how banking gets distributed. DeFi will change how it gets manufactured and distributed. 

In the US, regulators are debating the role of "Banking-as-a-Service" providers and partner banks in the wake of the Fintech and Neobank boom. This shift in the distribution has created new opportunities but new risks too. I think DeFi will shift how finance gets manufactured and distributed, making the challenge even harder. Unpacked in this week's Rant 📣

Also, holy crap, it's hard to keep up with the liquidations, bankruptcies, and bail-outs in Crypto, but I had a go this week in things to know 👀

Oh, and if you get time, this week's Good Read 📚 is the State of Web 3 report by Chainlysis, which is superb. Worth it for their breakdown of Terra alone, but their case study of how much EA would make from NFTs (and how that could benefit players!!) is a glimpse of the future.

PS. Taking the week off next week for some family festivities. Will be back at it the week after :) 👋

This week’s rant is long - but it had to be to fully unpack an idea. Your email client may clip it so click here for the website version

Weekly Rant 📣

Manufacturing vs. distribution in finance

If you scratch deep enough under every Fintech company, you'll find a bank quietly powering everything they do behind the scenes. 

Banks play a critical role in society. Governments and regulators rely on banks to be the police of money. But can they do that with antiquated systems and an out-of-date mental model about how the market operates? 

The core role of banks and financial institutions is changing. Banks are less likely to be the distributor of financial products over time. Everwhere from the USA to China, India, Europe, and LATAM, the market landscape has shifted, but often the business and operating models haven't

Now throw DeFi into the mix (which, per last week, I believe is inevitable and a massive upgrade to the global financial system), and you have to question: What is the role of a financial institution when every company is a Fintech company?

To get to this, I wanted to level set first.

• Manufacture vs. distribution in banking and finance

• How has embedded finance changed the game

• How could DeFi shift it further

• Product manufacturing & distribution in Fintech 2.0

• Product manufacturing & distribution in Fintech 3.0

Manufacturing and Distributing Finance

At the most abstract, grossly over-simplified level, banks do three things.

1. Store money (deposit or invest)

2. Move money (collect and disburse)

3. Lend money (fixed, revolving, secured, or unsecured)

It's helpful to start back at the simple branch structure in the 1800s; the ability to store money was valuable to people and businesses. The cost and risk of holding or transporting cash are high (if you don't believe me, try walking around with a $10m worth of gold; it's heavy and pretty conspicuous!). 

Storing money is hard. So banks build large concrete branches and specialist security vehicles and issue bank notes that can be used by local businesses. The principle here (that applies just as much today) is that most people and companies don't want the burden of storing and managing their entire net worth.

Thousands of banks were formed from the 1850s to the 1870s to finance the railroad boom. The steel and oil industry emerge, and this boom creates immense demand for lending. This lending comes from thousands of new nationally chartered banks and internationally from European banks. 

Most entrepreneurs had no cash to finance a steel company or buy land near a railroad, so they required lending. And trying to move gold or cash by railroad and horse could take months. Banks other two core functions moving money and lending money, have become increasingly critical for the global economy. They issue checks and slowly build networks for moving money across national and international borders.

Manufacturing finance in this simple form is the act of storing, moving, or lending. This meant holding gold and silver and printing bank notes and checks in return, all stored on a general ledger (GL). 

Distribution involves building branches, hiring staff, knowing customers, and underwriting. The branch clerk creates a customer record in the GL and identifies that customer. If the customer returned to collect their gold or bank notes, the clerk would clearly "know" that customer. They may also see a customer who wants to start a business and look to lend to that customer. To do this, they'd like to know if they were likely to get paid back and perhaps look at if this customer is credit-worthy. 

Manufacturing all revolves around changes to the balance sheet and ledger entries. Distribution relates to how stored, moved, or lent money interacts with customers.

But if it were that simple, we'd have no regulation. 

The 1800s also saw great panics (in 1857 and 1873 notably); the over-building of railroads and the over-extension of banks during the "free banking" era led to countless defaults and creditors calling in debts immediately. This panic saw unemployment in financial centers like New York peak at nearly 25% and run for decades. 

Left unchecked, contagion in the economy is a very bad thing. (coincidentally, that's what we're seeing in Crypto right now).

Accordingly, governments created regulators that look at the entire finance sector (macro-prudential) and supervise individual banks and institutions (micro-prudential). From the late 1800s until 1933, the US Congress considered various deposit insurance forms to manage the risk of bank runs.

Through the mid-1900s, banks had to develop new tools and ways of working to manage the risks of storing, moving, and lending money. 

As banks began issuing checks and sending payments via central banks and clearing houses, fraudsters became more sophisticated. 

The movie Catch Me If You Can with Leonardo DiCaprio is a fantastic snapshot of how new technologies continued to challenge change finances distribution. Our anti-hero Frank Abagnale allegedly conned banks and airlines into giving him millions of dollars through forgery. 

The benefit of changing distribution was that new technologies significantly reduced costs and increased scale. The manufacturing looked similar (store, move and lend), but technologies like the check, mainframe, ATM, and credit card flipped distribution. 

Banks became national, and as they grew, they became more efficient. One branch might have $1m in deposits and lend primarily to consumers. To make the math easy, assume they have theoretical maximum lending of $10m. 

That's a nice business. 

But what if there is no lending demand from consumers in one city but plenty in small businesses? Or what if another city has really high deposits from businesses but no lending demand? If one bank could manage these supply and demand miss matches on its balance sheet, it could find new ways to profit.

The manufacturing stays the same, but the new distribution (in technology and scale) creates new opportunities.

The more the distribution grows, the more banks can grow the balance sheet (increase deposits and lend more). 

This means diversifying 

• Types of customers they serve (from consumer, wealth, SMB, corporate, financial institutions, to entire countries)

• Types of deposits, lending and payment products they offer (everything from checking, savings, secured credit, unsecured credit, cards, and invoice finance to sophisticated debt facilities, financing infrastructure like roads and hospitals, and even complex capital markets contracts like swap, futures, and options 🤯).

• The markets they operate in (Geographies, each with its own regulators, laws, central banks, and payment systems)

Now plot a 3x3 matrix of the product, customer, and geo, and you can see how things get complicated.

But more segments, more markets, and more sophisticated and tailored product flavors = a more efficient balance sheet.

And more risks.

The wider the distribution, the wider the risk surface.

And managing risk is the endless game of whack-a-mole that bankers and regulators find themselves in. 

(It's also what you must understand most to get anything done with a bank).

Check forgery is just one risk banks still face today. Banks are now expected to be the police of money. They're on the hook to make sure:

• A customer is who they say they are

• Any transaction was really initiated by that customer

• That payment isn't going to a known criminal or terrorist

• Any loan a customer takes is affordable

• Any loan a customer takes is likely to be paid back

• Customers aren't discriminated against

Sounds easy?

It's not.

It's really fucking hard. 

Seriously, pour one out for anyone who works in a Fraud, Compliance, or Risk team in financial services. Their job is part detective, defense attorney, and prosecution. Fraudsters are motivated to find weak spots in financial services. 

The bank's ability to manage risk is as good as the data they have access to. And the data they have access to is often limited to what they can see about their customer or is available at a credit agency (like Experian or Equifax). 

More data, more history = better risk management.

This is changing, but finance manufacturing has been largely static for decades. No matter how simple or complex, a financial product usually winds up at a bank or with a bank on the hook for managing the risks.

And then along came Fintech companies, Neobanks, Embedded Finance, and Banking-as-a-Service to mix shit up. 🔥

Fintech, BaaS, and Embedded Finance

Bank Simple (later "Simple") was founded in 2009 along with a small handful of companies that offered consumers a mobile-only experience of "banking." As the name implies, the team worked to dramatically simplify the complexity of online banking at the time. 

Simple was one of the first to enable remote check deposits and the ability to search for transactions and tag them with hashtags. These simple UX upgrades were loved by users and later copied by the broader market. Simple was beginning to change banking distribution by upgrading the UX and is recognized as the first "Neobank."

Simple was acquired by BBVA Compass in 2014 for $117m and helped inspire a wave of copycats around the world who took the "Neobank" model and innovated on it. 

But what is a Neobank? Chime, Monzo, Starling, Transferwise, Varo, Current, Step, Revolut, Nubank, Brex, Ramp, Mercury, Shopify Balance, Uber's Debit card? The term has caused a lot of confusion. Even the Wikipedia entry is quite vague. 

Those things are very different beasts and suggest that most things we call "Neobanks" can manufacture banking products.

Most consumer Fintech companies that offer a debit card and a bank-like experience but do not yet have (or intend to get) a banking license/charter are called "Neobanks." 

Some have charters (Nubank, Monzo, Starling, Varo) and can manufacture lending. Many digital-only banks built their own infrastructure, and some (like Starling) have started offering "Banking-as-a-Service" to further change the nature of finance distribution.

But back to "Neobanks" for a second.

This explosion in consumer Fintech companies led to the development of specialist Fintech infrastructure providers who progressively reduced the time to market and cost of getting to market with a "bank-like" offering.

Initially, modern Issuer Processors like GPS, Marqeta, and Galileo helped clients like Square (sorry Block), Chime, Starling, and Monzo get to market faster and with differentiated features to traditional providers. In the UK, Wirecard allowed these companies to leverage their e-money license, and the US saw smaller banks "sponsor" and partner with the new "Neobank" companies help them get to market (hence sponsor bank/partner bank terminology). 

New, API-first providers continued to explode in number, offering open banking, card issuing, digital account opening, and the entire value chain of a Neobank and consumer (or SMB) Fintech company. 

In the US, a quirk of regulation also made it quite profitable to be a debit card operator with an app. The Durbin Amendment allowed smaller banks to offer higher Interchange (card swipe fees) to their Fintech company clients than the traditional banks would. After the financial crisis, the regulation was designed to allow smaller banks to compete with the ever-growing Megabanks but unintentionally created a consumer Fintech company boom.

To recap

• New providers reduce cost and time to market

• New Fintech consumer & SMB companies get built and have a viable revenue

• Non-bank companies launch their own apps and experiences

• Specialist providers called "Banking-as-a-Service" emerge to further reduce the time to market

• This becomes a flywheel with more VC cash chasing the growth

Neobanks change the distribution by fixing the UX, Non-finance companies change the distribution by embedding finance at the point of need, and Fintech Infrastructure companies change the distribution by making it API-first, lower cost, and improving time to market. 

Consumers and businesses can get paid early, have real-time notifications of changes, and see all of their accounts in one place. They can also move money globally at low rates and instantly buy stocks in real time. Businesses can even have the software automatically negotiate SaaS prices. 

Estimates for embedded finance as a sector often cite a $7.2trn market cap opportunity or $XXXbn in revenue potential, and these are all possible. Especially as the Banking-as-a-Service providers start aggregating different financial products from various manufacturing banks to allow Fintech companies to build "best in class" offerings.  

Take the best manufacturers, aggregate them, and package them as Fintech businesses. Great for the consumer, but not always for risk management, profitability, and long-term viability.

And the regulators are paying attention.

Are Fintech companies just arbitraging regulations designed for small banks for their own gain? 

Recent work by the bank of international settlements examined how Fintech companies have fundamentally shifted the financial services landscape. Banks are now the global financial system risk managers, potentially missing out on traditional profit pools that came from owning the distribution.

Fintech companies have dramatically reduced distribution costs but cannot generate the scale and revenue many incumbents do today from their balance sheets.

All of this happened by accident, and if we stand back and look at it. Is there a solution? And what are the responsibilities of everyone involved?

Fintech companies are the consumer interface and must ensure they implement proper risk, fraud, and compliance controls. Banks provide oversight of this activity. The infrastructure providers can help banks and Fintech companies do the job more effectively. But this is all happening piecemeal and as good as the bank, provider, or Fintech company can do.

We just don't know what the consumer harms of this model might be.

And for that reason, I expect policymakers to look to the industry to implement new standards and high watermarks.

If our starting place is learning from the 1800s, then risk, fraud, and compliance issues are universal in nature but nuanced in practice. Let's use the technology and get less competitive in doing this well.

Remember, a bank’s ability to manage risk is as good as the data it has access to and the experience it has managing that risk. This new distribution potentially limits that data visibility, but it doesn’t have to.

This is how banks become smart pipes. By intentionally using embedded finance, fintech providers and their risk experience to distribute their balance sheet.

How this changes in Web 3

As covered last week (worth a read before this section if you haven't already), I believe DeFi is creating an entirely new infrastructure for financial services. It is a massive upgrade that is natively global, 24/7, composable, more efficient, and transparent. 

But I also believe DeFi is changing the manufacturing of finance and distribution.

In the branch model of the 1800s, banks took deposits to manufacture lending and learned how to price the risk of being paid back (in both good times and bad). With Fintech companies and embedded finance, we have a generation who have changed distribution away from the branch and bank-centric model to being an app at the point of need.

But in DeFi, lending is manufactured by multiple actors. DeFi protocols automatically price risk and invite anyone to provide the deposit and earn a return. In effect, anyone who provides liquidity (Liquidity Providers or LPs) is manufacturing finance. They deliver the deposits and can "lend." 

And now, some companies and protocols aggregate deposits so that they can lend more efficiently. 

The manufacturing of finance has been broken into smaller component pieces.

Today, manufacturing is much cheaper in terms of operational and labor costs than traditional banking because it is doing less. The risk of default is actually being taken by the LPs (liquidity providers). 

Like the banks in the 1800s, these liquidity providers are learning that not all lending is created equal. But unlike those lenders, the risk is often priced by protocols, which are remarkably resilient. It is striking that despite the massive price drops, Compound, Maker, and AAVE continue to run flawlessly. 

But the cost of Capital in DeFi is still too high because loans are typically "over collateralized." While that is changing compared to the largest banks in the world, DeFi's cost of capital will struggle to compete with the balance sheet efficiency available to the world's largest banks and financial institutions.

In DeFi, a bank uses the ledger on the internet instead of running a paper ledger and branch. DeFi itself. To manufacture finance in DeFi, a bank would be a massive liquidity provider and would bear the risk of borrower default. This would mean learning new skills about who the borrowers are, what their risk is, and deeply understanding the relative risks they present.

But DeFi is volatile, and DeFi needs liquidity and people who understand the risks to unleash its potential.

Banks manufacture lending for real-world assets like houses, cars, bridges, businesses, and entire economies in finance today. By simply tokenizing these, the operational and labor costs might reduce dramatically. We'd also see waves of innovation building around these assets.

Because the nature of these assets sits in a web3 wallet.

And a web3 wallet is very different from a Fintech wallet or account.

Today in web3, all assets sit on a Blockchain network and are controlled by a wallet. That wallet may be operated by a centralized company (like Coinbase) or an individual using software (like Metamask or Rainbow). 

This could mean a consumer or business's total assets and liabilities are on a single global network (or network of networks). Perhaps their non-financial assets, like data and identity, would live on this network. 

The potential to build new experiences and business models becomes limitless if identity, data, and assets are all addressable through web3 wallets.

If the ability to manage risk is as good as the data you have access to, what if (with permission) you had access to all of the data you might need?

Risk management would really change

But that leaves another big risk.

What if the web3 wallet gets stolen? 

Wallets use keys.

And unlike the keys to your house, your wallet's private key could end up being the key to your house, the title to your house, your identity, and your entire net worth. 

In a radical vision, web3 might mean a world where not only are you able to be your own bank, you're able to be your own government, police, and land registry. 

I doubt it will come to that.

But in the 1800s, banks saw the opportunity to protect cash. Perhaps in the 21st century, the option is to help people protect, manage and recover keys, assets, and data. 

In web3, the opportunity for distribution is about managing keys, identities, and assets and their associated risks. 

In web 3, the opportunity for manufacturing is about pricing the lending risks and providing liquidity.

MakerDAO is currently running a governance poll to open a vault for real-world assets from Huntingdon Valley Bank. A bank may soon be providing liquidity to a DeFi protocol, and the market to buy and lend will begin to set the price on those assets. 

This is a baby step in distribution but could lead to much more significant structural manufacturing change over time.

Like in the 1800s, we've seen our own railroad boom of anyone can build a lending business in DeFi. 

But now it's time to figure out what comes next.

Will it be banks that provide liquidity, or will someone else win? Will incumbent banks move into key management, or will entrepreneurs? There are so many questions I don't know where to begin.

But for now.

Where does that leave us?

Regulation is still trying to get its head around embedded finance and DeFi simultaneously. But as ever with these things, often the industry is best placed to manage the risks before they happen.

Most entrepreneurs don't start a business to build for what could go wrong in finance. But in Fintech and DeFi, that is a responsibility.

Managing risk should be a hygiene activity, not a competitive dynamic. 

Different providers will compete on how effectively they can help a Neobank, Fintech company, Incumbent or web3 wallet manage risk. But we should find common ground and standards and speak as an industry. 

Growth at all costs is over in Fintech.

Leverage and degenerate risk-taking are over in DeFi (🤞).

Let's make a better industry.

Because finance is the incentive structure for the human species and the global economy. 

And if we upgrade it, everyone wins.

ST.

4 Fintech Companies 💸

1. Nibble Health - Employer-linked Healthcare Lending

• Nibble health allows employees to pay for healthcare expenses using the Nibble Card. Nibble immediately pays the healthcare provider and gives the employee a salary-linked advance that is paid back in installments. 

• 🤔 I like how this combines physical health and actual health into one. The anxiety about affording healthcare means people put off getting treatments they need that could prevent much worse issues down the line. Or they take out debt and now worry about paying that back. Healthcare providers miss revenue, employers lose productive staff, and the individual suffers worst of all. From a Fintech nerd perspective, I love that this took ideas that existed (payroll, salary advances, healthcare cards) and put them together into a package that makes sense in context. Context matters. 

2. Incredible - Open Banking Debt Consolidator

• Incredible users connect their accounts to see their total borrowing and interest payments due. Incredible then compares this with their single monthly consolidation fee that avoids multiple payment dates. From here, users pay Incredible once per month.

• 🤔 If this isn't the best Fintech glow-up of debt consolidation, then I don't know what is. That is 100% a compliment and not a criticism, by the way. This is the power of great design. Incredible Technologies was incorporated on June 21 2021, so this one is early (a long way from being regulated by the UK regulator or having bank/lender partnerships). But this design work is an excellent start.

3. Loop Crypto - Stripe for Crypto teams

• Loop is Smart Contract infrastructure enables features like "autopay" so DAOs and web3 businesses can collect recurring payments from their customers or communities. Loop will manage receipts, retries, and payment reminders automatically. 

• 🤔 In some ways, Stripe is Stripe for Crypto, but in others, no it isn't (yet). While Stripe is adding Stablecoins as a payout method, Loop is focused on building a set of smart contracts and having payments "just work" in Crypto the way Stripe made them work in TradFi.

4. Sava - Spend Management for African Businesses

• Sava provides instant and free access to virtual cards for teams in South Africa, Kenya, and Nigeria. It also allows companies to set spend management rules and categories and automates reconciliation against accounting tools like Quickbooks and Xero. Sava will move into offering credit and invoice finance as it continues to develop.

• 🤔 The freemium model is interesting but could work in context. Virtual cards cost way less to issue, and Sava still collects Interchange, so they grow their potential revenue by encouraging as many virtual cards to exist as possible. In addition, African digital businesses will likely prioritize virtual cards for SaaS tooling, which is often international and predictable. I hope they can do lending, if nothing else, to see its potential in the spend management use case (which I think we will see more of as the space matures).

Things to know 👀

1. FTX US to provide a $400m credit facility to BlockFi as Voyager Digital files for bankruptcy. 

• After weeks of speculation, BlockFi CEO Zac Prince announced on Twitter that FTX would provide a credit facility of $400m in "a deal worth up to $680m." The deal would also provide FTX with the option to acquire BlockFi for $240m. BlockFi, like other centralized Crypto lenders, has been hit hard by the liquidation of Three Arrows Capital and the struggles of rival Celcius.

• Voyager Digital has filed for Chapter 11 protection in New York after revealing it could lose the $650m it loaned to Three Arrows Capital. As of March 22, Voyager has $5.5bn of assets payable to consumers. Voyager has secured $200m in USDC and 15,000 Bitcoin from Alameda Research, the trading firm of FTX CEO Sam Bankman-Fried.

• 🤔 The real story is Three Arrows. Who lost big on Terra USD but also had two other big trades. The first trade was betting that GBTC would be an ETF (which did not happen), and the second was betting that stETH (Lido) would be positive. They borrowed massively to make these trades that went bad. They were also borrowed, levered, and long on most of the major Cryptoassets that also went down. And nobody knows how much money 3AC lost and who's exposed, and that fear has become a contagion. Also, is there another Three Arrows out there who kept doubling down on bad trades?

• 🤔 Sam Blankman-Fried and FTX-related entities are doing more to prevent consumer harm than any regulator. As the lender of last resort, being profitable and well-capitalized, FTX is backstopping the industry. 

• 🤔 BlockFi, Three Arrows, and Voyager aren't "DeFi." So seeing this as a "failure of DeFi" is incorrect. BlockFi isn't a DeFi protocol or web3 wallet, but it has been a market leader in consumer high-yield Crypto products. Consumers can use BlockFi to borrow and "earn" Crypto. BlockFi facilitates lending on DeFi protocols like AAVE or Compound, meaning the consumer doesn't have to go directly to those protocols with a Web3 wallet. This is crucial to understand because BlockFi & Voyager take a risk position. And part of their issue now is that market conditions have impacted them. 

• 🤔 FTX are the ultimate traders, and my speculation is they believe BlockFi must be reasonably competent at risk management to have agreed to this credit facility. And if the rumors are true, FTX has walked from lending to BlockFi competitor Celcius. BlockFi may be one of the safer long-term bets, given that its regulatory issues could be behind it. BlockFi agreed to pay $100m in penalties to the SEC and state regulators in February. 

• 🤔 BlockFi comes out of this bruised but not dead. That's good for their customers and the industry in the long run. Worst case, they get acquired by FTX for 90% less than their last round valued them at. Best case, this credit facility provides enough of a backstop to survive winter and build a sustainable business. Although holy moly, if they did get acquired for $240m, that's a heck of a down-round (although it probably says more about 2021's funding environment than BlockFi).

• 🤔 It's hard to say what happens next with Voyager. They have publicly traded shares that have fallen from C$2.7bn to C$66m ($51m) since the start of the year. If they get Chapter 11, customer funds should be protected, and perhaps they survive or get acquired. The contagion from Terra and Three Arrows will continue to rumble on for weeks. Long term, flushing this leverage out of the system is a painful but essential lesson for the whole ecosystem. 

2. Klarna and that down round

• In case you missed it, Klarna raised a new round at a valuation of $6.5bn, down massively from their peak of $45bn in June of 2021. This follows a major push by Klarna into the US, where its operations are loss-making, but it is seeing significant user growth.

• 🤔 This is less about BNPL and more about Macro. It says everything about the past 12 months that Softbank led the $45bn valuation and this down round led by Sequoia. Funds that came down into the venture re-priced the market way ahead of the long-term fundamentals, and now the OGs in venture are picking up the pieces in their portfolio. The long-term pricing reversion doesn't mean Fintech is dead, it's still massive, but the days of big rounds and "me-too" plays getting funded are over. That's a good thing.

• 🤔 Market entry and growth are expensive, but Klarna can get to good unit economics. The days of growing at all costs may be over, and growth means accepting higher losses on new customers in new markets. Yes, Klarna did lose more in 21' than '22, but in its home markets, its losses decreased by 30%. If they can continue (and accelerate) that trend, they're a business with plenty of brand awareness, demand, customers, and merchants.

• 🤔 BNPL is such a strong wedge product. I can't think of another payment type that grew as fast with as much brand presence on a global scale in the past two decades (aside from maybe Apple Pay). Over time there's much more BNPL businesses can be with the data they see and the merchant partnerships they have that always felt anemic with a credit card/ merchant partnership or loyalty scheme. 

• 🤔 The only thing people like more than a winner is a comeback story. We get too obsessed with top-line valuation and too little with profitability. If Klarna (and its competitors) can drive the consumer, merchant, and data flywheel and keep the trend line positive on unit economics, they become great businesses.

🥊 Quick Hit: 

• Europe Crypto regulation MiCA published. In short, DeFi and NFTs have been excluded from MiCA. Unhosted wallets will not be required to perform KYC. Still, whenever they interact with a centralized change or wallet above €1000, that centralized entity must confirm that the transfer came from their customer. 🤔 This wasn't as bad as it could have been. In effect, they're limiting the amount any individual can "off-ramp" from DeFi into centralized exchanges without admitting who's doing it. But you could transact in complete privacy so long as you stay in DeFi. I hope we see this space continue to evolve and take steps to balance privacy and risk.

Good Reads 📚

1. Chainalysis Web3 report

• The report opens with this line: "One day soon, all companies will become crypto companies, complete with a "Connect wallet" button on their homepages. And web3 is how they'll get there. " The report argues that the demand for Crypto will drive adoption, and web3 will unlock new use cases beyond today's financial services capabilities.

• At 109 pages, this is a beast. The collection of data here is exceptional and worth the download. For example, Stablecoins are involved in nearly 90% of all transactions. Decentralized Exchanges (DEX) have had more market share than centralized (CEX) for the past 15 months. In the past 12 months, DEX's did $244m of volume to CEX $175bn. Most DAO's governance is controlled by 1% of governance token holders; this means between 10 and 100 people are the only ones who can create a proposal. Most NFT buyers are from central and south Asia. 

• Illicit transactions are 0.15% of all transfers (LOUDER FOR THE PEOPLE AT THE BACK, 0.15% is way less than the 2% in TradFi). However, DeFi now makes up 99% of the hack and scam volume and needs work. This report also has a great breakdown of how five traders from two traders broke the Terra (USDT peg). 

• 🤔 Stablecoins today play a critical role in the DeFi financial infrastructure, but not yet in the TradFi global financial system. Because they're natively digital and international, we could unlock incredible new innovations with them, but we need to be very thoughtful on policy. MiCA in Europe limits Stablecoins operating in Europe to a reserve cap of $200bn. That's 4x bigger than the largest ones working today but a long way from their ultimate potential.

• 🤔 The report works through what it would look like if EA adopted a standard 5% revenue share on Fifa Ultimate Team (FUT) for secondary trades. FUT is a significant revenue generator for Electronic Arts, where users buy "packs" of soccer players and build their teams to go head to head with others. The "grey" market of secondary sales already exists and is lost revenue to EA, which could be worth at least $1.7bn in net new income. In addition, soccer players themselves could benefit from a pool of at least $1.5bn of additional revenue. It's an excellent hypothetical.

Tweets of the week 🕊

That's all, folks. 👋

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