PayPal's Stablecoin is just the beginning

Plus; The Fed's Novel Activities, Rightfoot fixes open banking & fixing fixed income

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 32,630 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

We live in an age of attention boom-and-bust cycles (or fooms).

A foom is an internet phenomenon when the world’s attention becomes so hyper-focused on that one thing.

Superconductivity was a thing, and then it wasn't.

Generative AI would scale so fast that it would create a utopia, wipe out the species, (or both?!).

Now every Government is wrangling with how to regulate it as its innovators slow down their releases. 

The annoying thing about progress is that, for the most part, it compounds. It doesn't explode. If you remove the recent product releases and the "If you're not using AI, you're getting left behind" hype, you see a steady J curve of productivity and progress when a technology's time has come.

(So grab an herbal tea, chill. You're not getting “left behind” with AI, but there are zero downsides to playing with it.)

We won't have superconductivity next week, but we now have the world's attention focused on trying to make it happen.

Because the fooms are getting people to pay attention to the big problems in society and the big opportunities we have to improve those things, that will take work, dedication, and time. 

The progress trend line is good.

That gives me hope and optimism. 

As you know, I believe financial services are the incentive mechanism for the economy. The economy is the incentive mechanism for the species. 

Some of our species' biggest problems, like human trafficking, energy security, and conflict, are all massively impacted by financial services.

If we can alter how finance works, we have an outsized impact.

We have work to do.

The same week the world's OG Fintech company PayPal launched a Stablecoin, we saw the arrest of the $4.5bn money laundering rapper. Fintech foomed.

The Federal Reserve has announced its Novel activity guidance, which is the most important thing to happen in embedded finance and Crypto because its timing follows the banking crisis from earlier in the year. Fintech doomed.

Then Rightfoot fixed open banking without credentials. Everyone wants to know how. Foom!

So welcome to Fintech from food, I guess?

The Fintech and Crypto space is becoming more legitimate, regulated, and harder to execute overnight successes. But financial services is the world's largest profit pool. "Person works hard" might not be as hype as superconductivity, but if you want to attack that profit pool. That's what it's going to take.

And I think tokenization, Crypto, or whatever you want to call it, is the platform shift that gets us there.

This week's Mini Rant is shorter and more Ranty than usual. Because I am just damned tired of the same old arguments for and against tokens, Crypto, digital assets, whatever you want to call them, it's time for us to move on and actually get productive with this stuff.

PS. I’ll be at Fintech Devcon on Wednesday for the day. See you there?PPS. Going to Techcrunch Disrupt has been an honest to god life goal of mine for more than a decade, and I can’t be there this year. But you could, with 50% off 👀

Here's this week's Brainfood in summary

📣 Rant: PayPal's Stablecoin is just the beginning

💸 4 Fintech Companies:

  1. Pyro - GenAI for underwriting models 

  2. Pebble - Build your own ETF

  3. Croissant - Guaranteed buybacks of e-commerce items

  4. Superfi - Debt management and prevention app (UK)

👀 Things to Know:

📚 Good Read:

Weekly Rant 📣

Mini Rant: PayPal's Stablecoin is just the beginning

Two things are happening at the same time. 

Crypto is creeping toward credibility as a wall of institutional interest is waiting for the dam to break. 

Yet, depending on where you stand on either topic, chances are your reaction is one of three things.

  1. Institutions are stupid, and it's just an evolution; they will lose. 

  2. Crypto is stupid, speculative, and doesn't solve any problems; it will get regulated out of existence. 

  3. Tokens are a platform shift in finance; the winners and losers are still undecided.

That 3rd perspective is insanely rare. Yet feels intuitive. 

We live in a complex world that we try to reduce to binary outcomes. 

Winners and losers. 

Black and white. 

The way to overcome that is with data and context. 

One of the things that frustrates me most in life is how much context another human needs before I can begin to argue a point with them. Most of the Rant section of this blog is 80% context and 20% the argument I wanted to make.

The scene in The Matrix where Neo is taught Kung Fu in seconds through a switch in the back of his head always appealed to me.

There is no "I know Kung Fu" version of spending the last decade in the middle of the Venn diagram overlapping regulators, global financial institutions, Crypto native firms, and the weird world of DeFi. 

This creates several issues.

  1. Most actors in the market (Degen to financial institutions) define themselves by being adversarial to the other. The DeFi was antagonistic to TradFi and vice versa. 

  2. Every time a regulator starts to understand the nuance, they're hired by the private sector for 10x their public sector salary. Leading to a negative feedback loop in progress.

  3. Crypto has an annoying habit of behaving like a toddler and being full of scams, hacks, and fraud. It's also atrocious at acting like a grown-up industry or open-source community and solving that.

  4. Whenever I post something marginally bullish about Stablecoins or Tokens, the rent-a-compliance-officer crowd appears to correct me with the same damn comments "What problem does this solve." 

Because everyone, at some level, lacks context. 

My perspective is coloured by

  • Having led Crypto R&D for a bank. In that job, you're rolled out in front of internal departments, regulators, bank clients, and government folks to explain this stuff. You also find yourself in trade association meetings with your peers.

  • Helping organize early crypto meetups in London (2014 - 2016). In doing that, while working for a bank, you meet some very, very interesting people.

  • Founding a non-profit partnering with Governments, financial institutions, and crypto native firms on best practices in Crypto (2017 - present).

  • Running a podcast on Crypto with Visa (from 2017 - ~2021).

  • Now writing Brainfood, the audience is a mix of bank C-suite and MDs, degens, Fintech nerds, and VCs. Who reaches out. A lot. 

That gives me a unique dashboard of what's happening.

It is one signal, and you should consider it's one person's perspective. Like all data, run it through your filters.

But here's the thing.

Look past the noise, and this stuff is converging. The biggest challenge is the narrative war and most market actors' default adversarial positions. 

So let's do this.

  1. The tech is a much-needed upgrade, regardless of how we implement it.

    1. Let's recognize that the existing infrastructure is critical

    2. But let's also acknowledge that it's so incredibly broken

    3. The "war" between Crypto native vs. tokenizing existing markets is distracting

    4. "Tokenization" is a massive upgrade; however, we do it

    5. Many people are trying to upgrade the system, creating a format war

  2. Some parts of the Crypto industry are getting their act together.

    1. Regulation has arrived, and more is coming

    2. The Crypto industry is getting its act together in places

    3. Brands aren't leaving the NFT space

  3. There's a dam of institutional interest waiting to break.

    1. Tokenization is coming

    2. The institutional PR machine is in action

    3. The question is, what is the catalyzing event?

  4. The tech does solve real problems. Just maybe not your problems.

    1. Stablecoins are amazing if you live in the Global South

    2. "That's all theory." No, it isn't

  5. Slowly, then suddenly

1. Tokenization, DLT or Crypto - It's a much-needed upgrade

There are a few things here.

a) Let's recognize that the existing infrastructure is critical. The financial services infrastructure that the global economy runs on is a marvel. It successfully runs trillions and quadrillions of dollars and works. It might not always be efficient or fair, but let's tip the hat to the large institutions and industrial machinery. This stuff is complex. Changing it is hard, and the consequences of getting it wrong can be disastrous for the global economy.

b) But let's also acknowledge that it's so incredibly broken. Most of the world's contracts live in PDFs. During the financial crisis of 2008, banks didn't know what their exposure was and if they were solvent. The tech inside banks and the networks that connect them was mostly built before the advent of modern software engineering. This is a lost opportunity for innovation and new revenue, creating an enormous cost. Middle and back office cost in financial services runs into the billions per organization. And most of it is stupid stuff like trying to reconcile what payment belongs to what trade.

And don't get me started on Trade Finance

c) The "war" between Crypto native vs. tokenizing existing markets is distracting. I dislike binary perspectives, and the idea that crypto-native firms will "win" and incumbents will "lose" or vice versa is stupid. The landscape will shift; there will be winners and losers; some of those will be incumbents, and some will be Crypto natives. 

d) "Tokenization" is a massive upgrade; however, we do it. The virtues of tokenization are that it creates a global financial infrastructure, 24/7, Programmable, Permissionless, and Composable. Today we have national infrastructure that is programmed but not programmable. If you enter a contract for a mortgage, to buy t-shirts from China, or for an interest rate swap, all of the data in that contract has to find its way into 10+ systems in different organizations. 

The contract and the money are not smart. If we make assets smart by turning them into tokens, we get a global (hopefully private) CRM of where every asset is. This would solve our global financial crisis challenge of not knowing what exposures were, making an order of magnitude cost reduction vs. existing middle and back office processes.

If those assets or the money is programmable, it can also faithfully automate the clauses in the contract. Don't hate, automate.

e) Many people are trying to upgrade the system, creating a format war. PayPal uses Ethereum, and Cash App uses Bitcoin Lightning. There are at least 20 standards for tokenizing securities. Payments work differently on Solana to Ethereum, which differs from the various private Blockchain networks.

That's why we need standards.

I’m reminded of the classic XKCD comic:

(That's why the Open Standards Council initiative is so important to me; we need standards but already have plenty. The big issue is ensuring they are global and widely adopted, hit reply if you want to help).

These will, one day, inevitably interoperate. But I fear we might recreate the maze of existing financial markets if we're not careful.

2. Creeping credibility of Crypto

a) Regulation is coming. MiCA and the UK's financial services and markets bill give much more clarity to regulation. Even the Fed's new announcement about "novel activities" provides some framework for banks to interoperate more with the Crypto industry. (If you're interested, through the non-profit GDF, we have a MiCA working group helping US companies understand how MiCA applies to them, hit reply if you want more info)

b) The Crypto industry is getting its act together in places. PayPal didn't do a Stablecoin for the PR (although it got plenty). In the shadow of FTX and Terra/Luna, it's interesting to see how quiet the army of Crypto naysayers has been. The inevitable consequence of big companies entering is the hard yards of compliance, risk, and regulation are thought through. On the opposite side of the spectrum, DeFi markets continue working to become compatible with regulated financial institutions. The bank of international settlements (BIS) just released a paper on how central banks would use DeFi infrastructure (or something like it). 

c) Brands aren't leaving the NFT space. NFT prices are at long-term lows and continue to slide, but big brands like EA Sports, LVMH, and Nike have stayed committed. In the 2021 hype, you could argue this was trend-chasing, but what about now? There were also many "ecosystem funds" where platforms would give money to brands to try NFT projects. That's less the case now too. 

3. A damn of institutional interest waiting to break

a) Tokenization is coming. Estimates place the assets to be tokenized over the next decade between 5trn and 15trn. Broker Bernstein estimates Stablecoins will explode from $125bn today to $2.8trn in the next 5 years. Tokenized deposits remove intermediaries, eliminating manual processes. Unlocking $4tn of funds held in accounts at correspondent banks. 

b) The PR machine is in action. Whether it's Blackrock applying for an ETF, PayPal now announcing their Stablecoin, or Bloomberg and CNBC continuing to cover Crypto. Bitcoin isn't going away. Ethereum isn't going away. It would be a gigantic waste of effort if there wasn't demand beyond speculation. If you're a financial institution getting into tokenization, the logical starting point is Crypto. Even if that isn't your logical endpoint. 

c) The question is, what is the catalyzing event? As one bank CEO recently said over lunch, "We all know tokenization, Stablecoins, and eventually CBDCs will all happen; the question is, what is the catalyzing event?" That's a great question. Market shifts tend to be slow then sudden, but if you ignore the signs, you suddenly leave behind. The standards and infrastructure of tomorrow are being built today. 


4. This stuff is solving real problems - just not for you.

a) What problems do Stablecoins solve? It depends on who you ask. If you live in Argentina and get paid by US companies, being paid in Stablecoins is much more convenient than opening a US bank account and trying to convert the currency. It's also far lower cost. If you look at the adoption of Stablecoins by consumers, it is overwhelmingly in the global south. 

If you're a merchant in Africa or LATAM selling to the US client base, getting instant liquidity as a Stablecoin that you can convert with your favorite local Fintech app is super handy. Stablecoins are the low-hanging fruit of Crypto. When 1:1 is backed with USD, the regulation is relatively simple and clear, especially in Europe, the UK, Japan, and Hong Kong, which have dedicated laws. 

Could you do all of this with netting and other rails? Yes. Are people using Stablecoins anyway? Yes. A consumer and merchant-first US dollar rail that only needs software to interact with is a massive tech shift. It doesn't solve everything, but it solves some stuff. Just not for you.

Cross-border payments cost corporates $120bn in fees in 2020. 1/3rd of payment data gets validated manually. Why wouldn't you use this near-free, instant, global payments rail if you could as a merchant? It's sitting right there. All you need is software.

The problem was the distribution of US Dollars. PYUSD, with its 200m potential users, could go a long way to changing that.

b) "That's all theory." No, it isn't. It might not feel like a "killer application" or "iPhone moment" because you're not looking at it from the global south or inside the walls of the industrial scale machinery attempting to build tokenization in Dubai and Hong Kong. 

5. Slowly; then suddenly

The regulatory mood music isn't quite as negative.

The FTX and Terra/Luna collapse are yesterdays news. 

The industry is learning lessons.

The stupid stuff is getting fleshed out, and the real work is getting done.

"Person works hard for a decade" without credit doesn't generate headlines or fooms like superconducivity or GenAI.

But on my radar, the signal-to-noise ratio is getting much better.


4 Fintech Companies 💸

1. Pyro - GenAI for underwriting models 

With Pyro, users create a create model using natural language like "Use the existing personal loan model as a reference, consume the application, and collection data from the database and show values where the non-performing loan threshold is 2%." This will create Python (or other) code to run the analysis for the credit team without engineering support.

🤔 GenAI as the future of low-code, no-code, and workflow? Turning credit experts into data scientists is a great spot to be, and doing so in natural language makes sense. I can't escape the sense that this is a feature every underwriting engine should have more than a business. But it also reinforces my view that for Fintech, GenAI is way better robotic process automation. (Small plot twist, the company's partners are in the middle east, and it was incorporated in 2002, low key WTF?) Maybe re-inventing what you do as GenAI is a great way to revive a business that didn't have a GTM.

2. Pebble - Build your own ETF

Pebble lets users build custom portfolios through its mobile app interface. Users can start with an index (like NASDAQ) but remove a specific company (like AstraZeneca). Users can use an existing theme (like FANG), craft a thematic ETF like "all companies in Solar," or be more technical, like looking for stocks with P/E ratios or EBITDA that fit your desired window. Pricing is based on a flat fee and starts at $5 per month, going up to $25 per month for anything above $250k. 

🤔 This feels like the prosumer successor to Robinhood. With the recent Robinhood results and their erosion of active users, I've been wondering what comes next in consumer-grade wealth. Pebble might just be well placed for a generation that started investing during meme-stock mania, who learned finance on Youtube, and who grew up in the shadow of the banking crisis. Also, you gotta love a flat fee structure for the user that scales super well, especially if it starts to apply to their retirement funds. Think about the number of freelancers and non-traditional careers that will manage their money outside of a traditional account. Pebble could have good timing.

3. Croissant - Guaranteed buybacks of e-commerce items

Croissant lets consumers know an item's "buy back" or secondary sale value at checkout to remove the anxiety of buying a high-value item. Users opt-in to guarantee value for up to 12 months. Once they have created an account, they ship any items they want to have repurchased to Croissant and receive cash or credit in return. The service is live with a handful of boutique merchants.

🤔 This helps conversion at checkout and reduces buyer's remorse. It's common for buyers of luxury items to re-sell items after wearing or use. Luxury goods are more likely to retain their value than mass-market goods. One of the ways younger consumers use BNPL is for the "free returns in 28 days." Croissant is acting as an alternative to BNPL for this market segment but delivering many of the same potential benefits like potentially higher order values and conversion. 

4. Superfi - Debt management and prevention app (UK)

Superfi allows users to aggregate their debts into a single app, including cards, BNPL, and overdrafts. The app shows users when they will be debt free and calculates the fastest way to repay. The app has payment reminders or allows users to pay directly from the app. It backs this up with features like roundups to pay off faster and support services like debt consolidation loans and advice partners.

🤔 Debt management apps are appearing rapidly at the seed stage. They consistently consolidate debts, help pay them down faster and manage re-financing. They're like if Clearscore and Nerdwallet had a baby. The visibility is the consumer feature, but the re-financing is the revenue. In this category, I like the team at Incredible (just slightly nicer execution), but we need more of these). I'm also seeing a lot of TrueAccord (debt collections services) for lenders and FIs appear. It's almost like Ohad saw this coming. (PS, how did this team get Skynews coverage and appear everywhere in my timeline lately with a $1m pre-seed?)

Things to know 👀

In the wake of the banking crisis, the Fed has established a Novel Activities Supervision Program designed to oversee Cryptoassets, banking as a service, and "DLT" based partnerships between banks, Neobanks, and technology companies. The Fed notes these innovations, while good for consumers, can lead to rapid changes in the balance sheet position and relative safety of a given bank. The level of supervision "intensity" will vary by the amount of novel activities an organization engages in. 

🤔 Perhaps the most important signal is that this is supervision, not an attempted ban. Recognizing that the broad category of innovations in Crypto, DLT, and Banking as a Service is good for consumers is a quiet yet huge win for the Fintech industry.

🤔 In the wake of Silvergate, Signature, and the stress on the banking sector it's not surprising to see Crypto singled out. The collapse of those banks took countless business and consumer accounts with them until the Government stepped in. By its nature, Crypto is an ultra-high-risk activity subject to volatility. A bank holding consumer and business deposits is part public utility and part business. These risks can be managed. But need to be done so thoughtfully, and now the regulators are watching. 

🤔 If you do BaaS as a bank, expect questions related to this in your next supervisory exam. The Fed will periodically examine which banks fit within the "novel activities" category. For context, there are smaller banks whose deposit bases are dominated by their partnerships with Neobanks. 

🤔 The banking system needs these innovations. Competition is good. The US banking sector's smaller banks have been dying or merging over the past decade. The revolution in Banking as a Service and "novel activities" allowed them to collect more deposits and punch above their weight. We didn't see the big banks lean into this until the smaller ones proved it was possible.

Starting this week, eligible PayPal customers will be able to buy "PayPalUSD or PYUSD," transfer it to PayPal users and "other compatible external wallets, send P2P payments using PYUSD, and pay at checkout with PayPal. PYUSD is fully backed 1:1 by dollars held at Paxos depository trust and is initially available only to users in the United States. 

🤔 Stablecoins have a shot at Mainstream with PayPal. Stablecoins were niche and harder to use than regular payments for most consumers. They had a reputational issue associated with "Crypto" and were not widely adopted by wallets. PayPal has 430m active accounts and ~200m MAU Venmo has 78m users of its P2P service in the US

🤔 A narrative shift on Stablecoins. After the collapse of Terra/Luna Stablecoins became a dirty word. Tether has been shrouded in controversy, and Crypto generally has gone through a long, painful "winter" period in which its long-term viability has been questioned. PayPal is a major global player with heft, and if they open up to international, it could become the "Venmo for the world." 

🤔 Other wallets like Cash App and Apple do not support Stablecoins natively. Will they? Cash App users can buy Crypto, but the Jack Dorsey-founded company focuses on Bitcoin-based Lightning for its future global payments and Stablecoin projects. This contrasts with PayPal, which uses an Ethereum-based (ERC20) standard for their Stablecoin. Apple has been much more weary of Crypto to date. 

🤔 The US Dollar has a shot at global competitiveness. Dollar dominance is falling, with BRICS countries avoiding the US dollar due to sanctions following Russia's invasion of Ukraine. There is a fear in Washington that this is weakening US influence on the global stage. Whichever nation has the best payment systems could win the middle ground between the China/US polarization of the world. Stablecoin's primary consumer use is in the Global South (LATAM, Africa). Here it functions as a store of value & way to transact internationally. Winning this use case would be in the strategic interests of the US.

Rightfoot is building an API for access to consumer-permissioned data and payments. Unlike open banking, users do not supply credentials like a username and password but provide “consent.” 4 out of 10 users drop out of an onboarding process in open banking, and Rightfoot aims to fix this.

🤔 Everyone in Fintech wants to know how this work. This is the LK-99 of Fintech; everyone wants to understand it. It’s Rightfoot’s secret sauce, so they’re staying tight-lipped and lawyered up. The press release says, “As a substitute, they leverage data the financial services provider already has on file.” So imagine I sign up for a new Fintech App and provide details to open that account. If it matches my underlying bank account’s PII, blam! I’m in. Without authenticating with my bank, the question is, how is Rightfoot fetching the data to match it?

🤔 The conversion problem is real, and Open Banking needed fresh blood. 40% drop off is massive. I’m excited to see new approaches. I hope they can be super buttoned up on compliance and make this work.

Good Reads 📚

The US Corporate Bond market is 3x larger than the US Equities market ($130Trn vs $44Trn). While there are 4,500 listed US equities, 66,000 corporate bonds from over 2,000 issuers, and over 1m municipal bonds. While 23% of household wealth is held in stocks, just 3% is in bonds, mainly due to the lack of technology and friction involved. As interest rates have risen, bonds have become more attractive, but the market needs innovation.

🤔 Bonds are so hot right now. With high-interest rates for the first time in decades, a generation of investors and companies wants to allocate to fixed income (like bonds and treasuries). Fast-acting Fintech companies have made these available to growth companies by papering over the cracks of the infrastructure but imagine what we could do if we fixed the infrastructure. 

🤔 Financial markets investment is showing signs of life. Having worked near and close to financial markets for ~10 years, it never felt compatible with "Fintech." My Fintech friends would squint and tilt their heads and then talk about payments again; my cap markets buddies would always say, "Financial markets are too big and too complex." My gut said that was a matter of time.

🤔 Now is the time. Whether it's building your own ETF, private banks for consumers, or treasuries for growth companies, Fintech companies are nibbling away at traditional investment bank products. If you remember that image of the Wells Fargo home page with a Fintech company doing everything? We're at that stage but for Goldman's core business. 

🤔 Infrastructure change is harder than market segmentation. Serving new customers in new ways is classic market disruption. Market displacement is harder, and to get the real landscape shift in all of the financial services, we have to go to the very heart of Wall St. Dusty old fixed-income desks and middle and back offices are where it's at. 

That's all, folks. 👋

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a (3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only. (4) I'm not an expert at everything you read here. Some of it is me thinking out loud and learning as I go; please don't take it as gospel—strong opinions, weakly held.