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Fintech in Focus — June 28, 2021
In this Fintech in Focus
Industry Developments
Cryptocurrency
The Bitcoin Mining Council recently began working to establish a better environmental and social framework for the future of cryptocurrency, according to Bitcoin.com. Led by MicroStrategy Co-Founder Michael Saylor, the council will attempt to better educate the public on the positive impacts of Bitcoin mining while also advancing the dialogue around curtailing its energy usage. The council's formation represents a current social and political climate that is increasing skepticism of Bitcoin's use cases in everyday life. After Tesla's decision to suspend its acceptance of Bitcoin as a payment method, Senator Elizabeth Warren (D-MA) discussed her criticism of the cryptocurrency's troublesome environmental track record during a Senate committee hearing on Central Bank Digital Currencies (CBDCs). She reported figures supporting assertions that cryptocurrency energy consumption is greater than that of the Netherlands. She also claimed that one Bitcoin transaction uses the same energy as the average household consumes over one month. Warren also used phrases such as "useless mathematical puzzles" and "pump and dump manipulation" to describe the blockchain verification process and recent cryptocurrency market activities. It's important to note Warren's clear opposition to cryptocurrency's rising prominence in the United States, given her influence on banking and finance reform in Congress.
Iron Finance's TITAN token experienced the first cryptocurrency "bank run," as the coin crashed to nearly $0 just a day after reaching a high of $65 following an unprecedented sell-off, according to Coindesk. The TITAN token was a casualty of Iron Finance's new project to create a partially collateralized IRON coin backed 75 percent by USD Coin (USDC) and 25 percent by TITAN. The coin was supposed to be pegged to $1, but as investors engaged in a massive sell-off, the peg became unsustainable. Since IRON was 25 percent backed by TITAN, which was dropping in value rapidly, investors began to withdraw liquidity from their investments in IRON as well, creating a massive oversaturation of TITAN supply in the market. After TITAN's dramatic fall, Mark Cuban, one of the coin's most popular investors, criticized the lack of stablecoin regulation, according to Markets Insider. Cuban isn't alone: This dramatic crash in the stablecoin market has investors and regulators questioning whether consumers are adequately informed of the risks they are taking on, as reported by Bloomberg. Stablecoins are marketed as safer and less volatile investments because of their pegs to currencies, commodities, or a basket of other coins; however, TITAN's crash seems to suggest there are still considerable risks involved with these coins.
Chip producer NVIDIA has adjusted its product offerings in response to recent cryptocurrency mining-induced swings in demand, as reported by Bloomberg. The company's new graphics cards have been engineered specifically for their original gaming customer base, leaving out the functionality useful for cryptocurrency mining. NVIDIA still plans on building a dedicated chip for mining, but the company wanted to avoid the dramatic shifts in demand from miners that have caused issues in the past. When cryptocurrency prices were on the rise in 2017, miners suddenly ditched the NVIDIA gaming graphic cards in favor of more powerful and customized chips, leaving NVIDIA scrambling to adjust.
Central Bank Digital Currency (CBDC) Updates
The Senate committee hearing on CBDCs represented an important step in advancing the dialogue around digital currency implementation in the United States. Several major themes were clear, with China, ransomware, and regulation dominating the discussion among Senators. Almost all speakers throughout the two-hour hearing brought up concerns over recent increases in ransomware attacks, which Bitcoin payments have fueled. There was a general sense of fear that embracing a digital currency could lead to more cybercrime, leaving the US financial system open to hackers from foreign opponents in Russia and Iran. Despite these fears, most Senators agreed that research into a potential CBDC must continue for the US to keep pace with Chinese innovation. While some committee members like Senator Cynthia Lummis (R-WY) and Senator Mark Warner (D-VA) raised the economic reasons for studying a CBDC, like faster online commerce and payments and lower transaction costs, geopolitical strategy still dominated much of the conversation.
The Task Force on FinTech in the House of Representatives hosted a similar conversation. Related themes emerged but with increased opposition to the proposed "Fed Accounts" program becoming increasingly clear. In short, the "Fed Accounts" proposal would allow Americans to open a bank account directly with the Federal Reserve just as they would with a private bank. Supporters of the proposal argue that it would reduce the number of unbanked Americans and directly facilitate stimulus and welfare payments to those in need. Several members were strongly opposed to the idea of the Federal Reserve turning into a retail bank for consumers, citing that they didn't want the nation's central bank competing with private banks. They also added their belief that this would be a massive government overreach into citizens' data.
Capital Raising and M&A
JPMorgan Chase acquired UK-based digital wealth management firm Nutmeg at a valuation of around $1 billion, as reported by The Wall Street Journal. The move is inspired by JPMorgan Chase's desire to expand its digital banking services in regions where it may not currently have physical branches. JP Morgan Chase will be able to combine its existing consumer banking infrastructure with Nutmeg's technical expertise in investing users' general funds and pensions across a diverse portfolio of Exchange Traded Funds (ETFs).
Algorithmic decision making has officially made its way into online storefront buyouts, according to a report from Bloomberg. OpenStore, a pseudo-private equity firm led by OpenDoor Technologies co-founder Keith Rabois, has raised $17.5 million to acquire and successfully combine Shopify stores into a larger commercial enterprise. Rabois plans on deploying bots to analyze Shopify stores' business data and key financial metrics, which will eventually turn into an automated buyout offer based on the findings. For entrepreneurs, OpenStore is an easy way to sell their businesses quickly without the limitations of typical private equity and venture capital firms. For Rabois, it's an opportunity to combine businesses and find synergies in consumer relationships, geographical market share, technological innovation, and supply chain logistics.
Global Developments
Paytm IPO
Despite registering losses upwards of $200 million in the last year, Paytm announced plans to raise $3 billion via an IPO in India's public markets, according to TechCrunch. As competition from multinational corporations like Google and Facebook has intensified, Paytm has lost some of its market share in the payment services landscape. In response, the company has attempted to increase profits by offering its point of sale devices and software and payment gateways to merchants across India. Paytm's mission is to facilitate financial inclusion by lowering some of the software and hardware barriers to conducting commerce. The company's innovative use of QR codes as payment gateways is just one example of how it strives to rethink typical business transactions in India. As more Indians become equipped with digital wallets, companies like Paytm will need to ensure businesses are equipped with a digital infrastructure that can support high transaction volume.
Buy Now, Pay Later
As reported by Bloomberg, Indonesian digital lender Kredivo and Dubai-based startup Tabby both recently completed a round of debt financing to fund their expanding "buy now, pay later" (BNPL) models. Due to increasing youth interest in non-traditional banking mechanisms, RBC Capital Markets predicts that the BNPL market will grow to $166 billion by 2023, making up 5 percent of all global e-commerce. A C+R research report revealed that 51 percent of surveyed respondents used BNPL during the pandemic, and 56 percent of people found BNPL preferable to paying with a credit card. BNPL services offer customers more flexibility with how much and when they need to pay installments of their debt, possibly driving the increasing demand, according to Nerdwallet.
Australian InsuraTech
Honey Insurance, backed by the Royal Automobile Club of Queensland, recently raised about $12 million USD in capital prior to its initial launch in the Australian market, according to Techcrunch. The company is seeking to bring significant change to the outdated insurance industry in Australia by giving customers smart sensors for their homes to monitor theft, flooding, and fires. These sensors are useful in helping users reduce risk and manage any potential threats to the home, which benefits both parties. In exchange for using these smart sensors in their home, users receive an 8 percent discount on their monthly premiums. While other insurers have also offered customers smart sensors, they haven't been as quick to build their business models around them.
Honey also plans on using satellite data in conjunction with smart sensors to inform the policies they offer to customers. This is an important step in avoiding what Professor John Macomber of Harvard has described as the potential next financial crisis in an interview with the Harvard Business Review. Macomber states that the financial system, especially insurance companies, has not properly modeled the environmental risks that climate change could pose for properties. Customers are paying below-market premiums in at-risk regions, leaving insurers vulnerable to widespread natural disasters in regions they cover. FinTech companies like Honey that are embracing new business models will be important in protecting at-risk populations from the environmental risks of the 21st century.
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