Brex says bye to SMBs; APIs enable embedded finance opportunities; Crypto exchanges slash jobs as market turmoil triggers trading downturn;

In this edition:

  1. SEC opens investigation into insider trading on crypto exchanges
  2. APIs enable embedded finance opportunities
  3. Celsius appoints Citigroup to advise on possible solutions after withdrawal freeze
  4. Banks investing in crypto
  5. Brex says bye to SMBs
  6. Crypto exchanges slash jobs as market turmoil triggers trading downturn
  7. Crypto industry braced for fallout after weekend meltdown
  8. Get to grips with payment initiation services (PIS)
  9. Open Banking Readiness Index 2021

SEC opens investigation into insider trading on crypto exchanges

The SEC has reportedly launched a probe into whether crypto exchanges are doing enough to prevent insider trading.

At least one major crypto exchange has received a letter requesting information about safeguards on the platform, according to a Tuesday report from Fox Business that cited a person with direct knowledge of the inquiry.

SEC chair Gary Gensler has previously expressed concerns about crypto exchanges offering multiple services such as market-making, custody, and offering a trading venue, that then cause conflicts of interest.

“Crypto’s got a lot of those challenges — of platforms trading ahead of their customers,” he said in an interview with Bloomberg last month. “In fact, they’re trading against their customers often because they’re market-marking against their customers.”

Decrypt has approached the SEC for comment.

The letter to crypto exchanges cited by Fox Business was sent after last month’s collapse of Terra’s UST and LUNA.

However, it is not yet clear whether the inquiry is being led by the Office of Compliance Inspections and Examinations, which frequently looks into areas of potential interest, or the SEC’s enforcement division. If it is being conducted by the latter, this would suggest the regulator is concerned about the possibility of serious violations.

The SEC has been active in its scrutiny of the crypto space in recent months. Most recently the regulator was reported to be looking into whether Terraform Labs, the firm behind UST and LUNA, violated investor protection rules in the way it marketed the tokens.

Reports have also suggested that federal investigators are looking into potential violations in Binance’s 2017 initial coin offering.

However, the SEC could be set to lose oversight of the sector if a new bill passes through the Senate, which aims to hand over authority to the U.S. Commodity Futures Trading Commission.

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APIs enable embedded finance opportunities

Open API technology is enabling real-time data accessibility to meet ever-evolving treasury needs in the digital era Forward-thinking transaction banks and treasurers have recognised.

Open API technology as a key technology that can overcome today’s shortcomings of legacy channels. It can fundamentally change how treasurers can access and process data and related products and services from their banks.

Open APIs provide opportunities across all domains of treasury services.

API technology enables transaction banks to provide core cash management services like account statements and balance reports in real time, to pre-validate and execute transactions in seconds and to support seamless self-service management of bank accounts, users and settings. With account information becoming available in real time, liquidity management can also move towards real time, with APIs enabling self-service management of cash pool settings and on-demand sweeps. Even risk management can become more dynamic with the availability of real-time feeds for FX rates and automated hedging solutions.

New payment methods are leveraging API technology to enable faster and cheaper collection and management of disbursements with virtual cards and accounts. Moreover, APIs show great potential to digitise other areas of treasury services like trade finance or supply chain financing. The automated exchange of data between multiple participants can replace current cumbersome manual processes for exchanging paper-based information and improve due diligence with enriched data. These examples illustrate that APIs will enable opportunities across all domains of treasury services provided by transaction banks.

APIs enable embedded finance opportunities to enhance the customer experience.

APIs also open up the possibility to work together with technology partners to seamlessly integrate the services outlined above with the preferred systems that treasurers use daily, such as Enterprise Resource Planning (ERP) systems, Treasury Management Systems (TMS), e-commerce platforms and a variety of specialised fintech applications.

Treasurers can ‘embed’ financial products and services at the point of relevance, create a holistic and centralised real-time overview of the company’s financial situation, automate processes to manage risk and liquidity, and perform cumbersome administrative tasks in minutes rather than hours.

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Celsius appoints Citigroup to advise on possible solutions after withdrawal freeze

Celsius has appointed banking giant Citigroup to advise on possible solutions after the troubled crypto lender paused customer withdrawals on Sunday, two people familiar with the matter told The Block.

Celsius has hired Citigroup in “an advisor capacity” but “it’s not like Citi is going to give Celsius money out of their balance sheet,” said one of the people.

They went on to say that Citigroup is advising Celsius “on potential financing” options.

The investment bank is also advising Celsius on offers such as one from rival Nexo, the person said. Earlier this week, Nexo made an offer to Celsius to acquire its “remaining qualifying assets of Celsius, mainly their collateralized loan portfolio.”

Citigroup and Celsius are not new to each other, according to the source. They said the bank also advised Celsius on its mining subsidiary’s business and initial public offering (IPO) plans.

Last month, Celsius announced that its wholly-owned bitcoin mining subsidiary, Celsius Mining, confidentially submitted a draft registration statement on Form S-1 with the U.S. Securities and Exchange Commission (SEC). The registration statement is expected to become effective after the SEC completes its review process, subject to market and other conditions.

Citigroup declined to comment to The Block when contacted and Celsius did not respond to a request for comment by press time.

Celsius has also hired restructuring attorneys from law firm Akin Gump Strauss Hauer & Feld LLP to advise on possible solutions for its, the Wall Street Journal reported yesterday. The Block reached out to Akin Gump on the report but didn’t receive a comment by press time.

Celsius abruptly halted withdrawals, swaps and transfers between accounts on Sunday because of extreme market volatility. As a result, its customers’ funds have been stuck.

Celsius tweeted Tuesday that it is “working around the clock for our community.” Earlier this week, Celsius said it will share information as and when it becomes appropriate.

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Banks investing in crypto

Back in August 2021, we highlighted how 55% of the top 100 banks (by assets under management, AUM) invested in companies operating in the blockchain and/or digital currency spaces, either directly or through subsidiaries.

Since then, the crypto blockchain market has experienced considerable levels of volatility, prompting us to revisit the activity of the banks we tracked and see what they’ve been investing in since.

Around 23 banks have made at least one investment in blockchain/crypto-linked entities in the cycle from August 2021 to May 2022 that we cover in this edition of our updated analysis. Of these transactions we tracked down, 6 involved new investors with first-time deals in the ecosystem, whereas the rest featured returning investors such as Morgan Stanley, BNY Mellon, and Goldman Sachs.

In this current cycle, the most active investors based on the number of investments in blockchain companies are KB Financial Group (8), United Overseas Bank (7), Citigroup (6), Goldman Sachs (5), and Commonwealth Bank of Australia (4). Please note the total deals take into account any investments made by the above organizations as well as subsidiaries and corporate venture arm.

In most cases, we cannot determine how much money these banks have invested, as they participate in funding rounds with multiple or many other investors.

As a proxy of this, we can look at the total funding amounts of the rounds they participated in. Based on this, the investors active in the biggest funding rounds are Morgan Stanley ($1,100M in 2 rounds), Goldman Sachs ($698M in 5 rounds), BNY Mellon ($690M in 3 rounds), Commonwealth Bank of Australia ($421M in 4 rounds), and Citi ($215M in 6 rounds).

As of May 2022, a total of 61 banks (55 in previous update + 6 new investors in the current cycle) now have invested at least once in this space. Therefore, the proportion of banks that stay invested in the ecosystem and the gradual entry of new investors indicate a stable outlook and is expected to drive more investment participation from banks in the near future.

Where banks are investing the most:

Custody Solutions and Custody Tech Providers

Custody solutions and technology providers, as expected, maintain their popularity among the top banks, having raised some of the largest funding rounds since August 2021. These deals include: NYDIG ($1B), Fireblocks ($550M), Gemini($400M), and Anchorage Digital ($350M).

This came as no surprise as the market cap value of cryptocurrencies grew to an all-time high in Nov 2021, resulting in more demand and amount of digital assets held by custody providers. Since the beginning of 2019, assets under custody (AuC) have grown an impressive ~600%.

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Brex says bye to SMBs

Three months after announcing it would make a big push into software and enterprise, fintech giant Brex is apparently abandoning the very segment it started out to serve — small and medium-to-sized businesses.

Startup customers report that they got notice they would be booted off the platform on August 15. Brex published a brief explanation on its website, saying that it is constantly evolving its business and as it does, it has become “less suited to meet the needs of smaller customers.”

In that missive, Brex told its SMB customers that their accounts would remain active until August 15 — giving them time to move their money to an external bank account “or other alternative platform” and transact on their Brex card. The company provided the same deadline for topping up any deficit that may exist in their account.

The company ends its explainer by simply saying: “We’ve appreciated your business and wish you all the best in the future.”

For the unacquainted, Brex is one of a number of companies in the corporate spend management space that has grown increasingly crowded — and competitive — in recent years.

Originally, Brex was a startup focused on startups. Specifically, it provided corporate cards aimed mainly at startups and SMBs. Brex gradually evolved its model with the aim of serving as a “financial operating system” for companies. Historically, it has generated its revenue from interchange fees.

But earlier this year, the company announced it is making a “big push” into software, which means its revenue generation will be more diversified as it will now be making money off of recurring revenue from subscriptions to its software, in addition to interchange fees. Brex is also placing greater emphasis on moving upmarket to serve larger customers,

Its move to stop servicing SMBs is shocking to say the least, and one can only assume as market conditions have shifted, it no longer wants to take the risk of serving less cash-rich customers as a way to limit their own credit risk. Talk about a fair-weather friend.

Earlier this year, Brex confirmed a $300 million raise that valued it at a staggering $12.3 billion. The company as of March had about 1,100 employees, saw 100% YoY revenue growth in 2021 and a customer base “into the 50,000s,” according to CEO Henrique Dubugras. He has declined to reveal hard revenue figures, but previously told TechCrunch Brex was still focused on growth and not yet profitable.

The company also told TechCrunch in March that the majority of Brex’s revenue still came from interchange fees, but that it expected that the proportion of SaaS revenue and “other revenue lines” would grow over time.

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Crypto exchanges slash jobs as market turmoil triggers trading downturn

Major digital asset exchanges are shedding hundreds of workers in an abrupt reversal from the industry’s breakneck expansion as a two-year hot streak gives way to a crypto chill.

US-listed Coinbase on Tuesday announced plans to lay off nearly a fifth of its workforce, amounting to more than 1,000 people, joining rivals including Gemini, Crypto.com and BlockFi in cutting headcount as this year’s tumble in crypto prices stifles the trading activity that is the industry’s lifeblood.

The market value of the world’s 500 biggest crypto tokens has slumped from a high of $3.2tn in November to less than $1tn this week, wiping out years’ worth of gains in major coins such as bitcoin and ether.

The pullback mirrors a broader decline across global financial markets but has been more severe in the most speculative asset classes at a time when central banks are backing away from the stimulus they supercharged in 2020.

Crypto investors tend to trade much more actively during bull markets. Now, sliding volumes are eating into the once juicy fees exchanges earn by facilitating trading.

Spot trading volumes across major crypto platforms averaged around $800bn a month from March to May, less than half the level for the same period in 2021, according to Financial Times calculations based on CryptoCompare data.

Coinbase had expanded to around 6,000 employees from 3,730 at the end of last year as it rode the exuberance in crypto markets.

Rivals that boomed in recent years are also tearing up their growth plans. Crypto exchange Gemini said in early June it would lay off 10 per cent of its staff in “turbulent market conditions” that the founding Winklevoss brothers said may “persist for some time”. In recent days Crypto.com also said it would cut 5 per cent of its workforce, around 260 people, and crypto lending platform BlockFi will lay off a fifth of its workforce, roughly 170 people.

Charley Cooper, managing director of blockchain software company R3, warned that “hubris” often enveloped the crypto industry.

“The laws of economics apply to crypto too. It’s very hard to convince people in mainstream finance that you’re serious about business if you constantly believe that your asset class is immune from the laws of economics,” he said.

Crypto exchange FTX, which has 300 employees, said it remains “strongly profitable”. Binance, the largest exchange by volume, said it will continue its pace of hiring. “We believe that cooler markets offer the best opportunity for organisations to invest in or acquire great projects at a more favourable price point,” Binance said.

OKX’s financial markets director, Lennix Lai, said the exchange plans to add 30 per cent to its 2,800-strong workforce in the next year.

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Crypto industry braced for fallout after weekend meltdown

Bitcoin, the world’s most actively traded cryptocurrency, fell as low as $17,628 on Saturday before rebounding, according to data from CryptoCompare.

Investors and executives have been anxiously watching the token’s price, fearing a drop below $20,000 may prompt forced liquidations of large leveraged bets. Bitcoin, which acts as the main benchmark for the broader cryptocurrency market, has come under acute pressure in recent months as central banks and governments shifted from a prolonged period of ultra-low interest rates to a fight against surging inflation.

“This is a dark winter ahead for crypto as the era of free money comes to an end with this weekend another brutal sell-off across the board. Risk assets are all getting thrown out the window,” said Daniel Ives, managing director and senior equity analyst at Wedbush Securities.

The hunt for returns has shifted as big central banks, led by the US Federal Reserve, boost borrowing costs and bring to an end the pandemic-era efforts to stimulate economic growth.

Traditional financial markets have been rattled this month as traders fretted that the aggressive action could snarl global growth or even trigger a recession. Last week was the worst for global equities since the darkest days of the pandemic in March 2020.

Bitcoin has fallen about 70 per cent from its all-time high of nearly $70,000 last November to just above $20,000 as of Sunday afternoon eastern time. Ether, another actively traded token, dropped as low as $900 over the weekend, meaning its price has fallen by four-fifths since its peak late last year.

In the last month, so-called stablecoin terra and its sister token luna — popular with crypto traders seeking ultra-high yields — collapsed, two lending platforms prevented depositors from withdrawing their assets, and crypto hedge fund Three Arrows failed to meet margin calls in the wake of lender demands.

The weekend’s sell-off prompted more than $600mn worth of leveraged positions to be liquidated, according to data from Coinglass, as traders who had borrowed money to take supercharged market bets failed to post more collateral and were wiped out.

Analysts expect these losses will put further pressure on traders and lenders’ balance sheets, because many users took out loans against their crypto asset holdings.

The troubles in the crypto market have rippled back into corners of the mainstream financial market. US-listed MicroStrategy a tech group which is a major investor in bitcoin, has tumbled almost 70 per cent this year. Shares in crypto miners, which earn fees for validating crypto transactions, have also dropped sharply.

Analysts expect these losses will put further pressure on traders and lenders’ balance sheets.

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Get to grips with payment initiation services (PIS)

So what is PIS? Put simply, payment initiation services are account-to-account (A2A) credit transfers that run on top of the existing interbank infrastructure. A good way to understand how PIS works is by comparing it against the classic card payment model.

In the classic “four-corner model” for card payments, the four main parties (consumer, merchant, issuer, and acquirer) exchange information among themselves. The card schemes facilitate this exchange and manage clearing and settlement, as well as setting the rules.

The PIS model brings an inherent simplicity of design as it sits alongside the card model rather than trying to replace or interrupt it. PISPs like Tink typically have contracts with either the merchant or the consumer, but rarely with the bank. In any case, what happens is that the PISP gets consent from the customer to initiate a payment from their bank account.

The connections that PISPs have with the banks are especially crucial, as the reliability can vary across banks and markets. The quality of the bank connections and the available redundancies goes a long way in determining the strength of a PISP’s coverage as well as the user experience and payment success rates.

Given the variety of the connections offered by banks, any PISP worth their salt should be investing heavily in testing and optimising these connections. So far it’s been clear that it’s not the API, but the ability for PISPs to create a differentiated proposition is that is driving demand for payment initiation services.

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Apple and Google both want to replace your traditional wallet with a smartphone. See how both companies are adding features to make it possible.

Open Banking Readiness Index 2021

Mastercard’s September 2021 study, “The Future of Open Banking in Europe”, revealed five tiers of Open Banking readiness, with the Nordic markets ranked as most advanced, followed by the UK and other leading European economies such as France, Italy, Spain and Germany. Other European economies such as Poland and Hungary were also seen to be readying Open Banking as a means of leapfrogging from legacy infrastructures to fully digitalized finance.

In just eight months since Mastercard published original study, the situation has developed fast. In the UK, 15 new Open Banking products were launched between November 2021 and February 2022 for a total of 124 products in the market, with seven new providers (336 total) and six new third party providers, or TPPs, for a total of 244.

Examples include faster merchant onboarding for marketplaces, more secure payments and simpler refund processes. The number of consumers using open banking products in the UK also rose from three million in November 2021 to five million by the end of February 2022.

In France and Germany, meanwhile, national standards for Open APIs such as The Berlin Group’s NextGen PSD2 Open API framework have successfully proliferated, paving the way for the introduction of the first Open Banking products in these countries later this year.

As of May 20223 France hosted 26 TPPs, and 89 of its financial institutions had fully opened their API infrastructures to other players. Germany hosted 38 TPPs and had 80 banks with fully open API infrastructures. For Italy and Spain, the corresponding numbers of TPPs and banks with open APIs were 13 TPPs and 69 banks (Italy) and 9 TPPs and 46 banks (Spain).

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Sam Boboev

Sam Boboev

Fintech fan with product and technology background. Subscribe https://samboboev.substack.com/