Embedded finance in practice for SMBs; DeFi’ing the skeptics; What is decentralized identity?;
In this edition:
1️⃣ “It’s time to build.”
2️⃣ Embedded finance in practice for SMBs
3️⃣ FTX Collapse: How Did It Happen So Fast?
4️⃣ What is decentralized identity?
5️⃣ The lapse in FTX’s collapse
6️⃣ New payments players attract SMBs with value-added services
7️⃣ TrueLayer is partnering with Coinbase to let UK users top up their accounts via banking app
8️⃣ How the Buy Now, Pay Later landscape is shifting
9️⃣ Here are the NFT-related rules of thumb to consider when filing your 2022 taxes
🔟 DeFi’ing the skeptics
And many more….
“It’s time to build.”
That’s a phrase you hear a lot in the cryptosphere at times like these, when a crisis or market slump — or both — saps confidence in digital assets and causes many who flocked to the space to retreat. The idea is, when user demand is low, companies have more time to improve their products for the next round of buyers. The only problem is … well, what exactly are they building, and how are they paying for it?
Ideally, crypto technicians are building the banking systems of the future, along with some out-of-this-world fan experiences and blockbuster video games, all on the blockchain. But much of what’s actually been built so far by the industry’s biggest companies is trading infrastructure: exchanges, lending protocols and decentralized finance apps that only appeal to crypto cognoscenti. Meanwhile, the things that have been built for the average consumer, like metaverse environments and NFT ticketing, are both poorly used and too technically challenging to get enough bang for your buck.
As for investors — and now more than ever, thanks to the collapse of FTX — they are unlikely to be hungry for more crypto. Some of the VC industry’s biggest backers, such as Sequoia Capital and SoftBank Group Corp., have been forced to write down their investments in the bankrupt crypto exchange to near zero. If they didn’t spot the warning signs in FTX’s balance sheet when signing those deals, what’s to say they’re confident they could spot it in newcomer projects?
Since crypto’s bear market firmly set in earlier this year, venture capital funding for crypto projects across the board has plunged. Of those that did obtain financing in the third quarter, blockchain gaming projects were among the more notable recipients, largely because of their potential to solve for the lack of easily digestible consumer options for crypto — but in the wake of FTX’s demise, even that’s starting to sour in certain ecosystems.
During this period when the money for “building” hasn’t been forthcoming from Silicon Valley or Wall Street, the industry has responded to the call. This year, crypto companies took it upon themselves to finance their own rescues, ranging from FTX CEO Sam Bankman-Fried’s now-defunct deals with BlockFi and Voyager Digital, to Binance’s bailouts for Axie Infinity creator Sky Mavis and later a (hastily retracted) offer for FTX itself, to name but a few. Others like Coinbase, Gemini and Crypto.com sought to use their funds simply to keep their own companies above water.
If the industry is to grow back to its original size and then some, the crypto community needs to figure out how it can attract those outside its peripheral vision with usable products and convince external investors it’s worth waiting out the storm. Plus, it must do this even as it fends off regulators and seeks to avoid the centralization and concentration risks that all of the above may create.
Source Bloomberg News
Embedded finance in practice for SMBs
Betty owns a small bagel shop on Lox Lane. She’s a first-time restaurant owner who has decided to follow her passion: delicious bagels and locally-sourced coffee. She’s already up and running with a SaaS platform to simplify her business operations, but is still encountering pain points on the banking side.
Here’s how a SaaS platform can solve common financial pain points for their users
Betty’s financial pain points:
1. Betty struggles to reconcile her daily sales with her bank account and has a hard time foreseeing cash flow due to unpredictable and slow payment schedules.
2. Like many SMBs, Betty faces obstacles accessing financing from her bank due to the size of her business and her limited time in operation.
3. Betty needs to access multiple tools and portals in order to keep track of incoming and outgoing funds; she lacks a centralized view of all things finance.
With embedded finance
All in one place
Betty logs in to her platform where she can immediately see an overview of her daily store operations. Now she can access all of her financial reporting from the same place.
Actionable financial insights
Betty can now combine operational and financial data in order to receive timely prompts about low stock items, so she can better forecast her spend and properly stock up to keep serving customers.
Accelerated access to funds
In case Betty has no cash at hand to buy missing ingredients, she can instantly request accelerated access to pending funds, so she doesn’t miss a sale.
Streamlined cash flow and spend management
Now with funds in hand, Betty can choose to spend directly from her platform’s bank account and pay suppliers via a transfer or use a platform-branded card.
Betty can also make use of a pre-qualified cash advance, since her platform already knows her risk profile. She’ll use it to promote a new bagel flavor and will have repayments dynamically collected from her daily sales.
With all that taken care of, Betty can now focus on what she really cares about: beans, bagels, and growing her business.
FTX Collapse: How Did It Happen So Fast?
What is decentralized identity?
Decentralized identity is a type of identity management that permits people to control their own digital identity without being dependent on any service provider.
A decentralized identity system is made up of three pillars: blockchain, verifiable credentials (VCs), and decentralized identifiers (DIDs).
A DID enables a verifiable, decentralized digital identity. The controller of a DID is the entity (e.g., a person, organization, thing, data model, or abstract entity) that has the capability to make changes to a DID document. DIDs also work across different Web3 platforms and can be used to prove ownership of non-fungible tokens (NFTs), social media accounts, and other assets on the blockchain.
A DID is a string of letters and numbers known as “identity wallets.” These wallets contain verified credentials and data that users generate on the blockchain. The identity wallet grants its owner access to applications and works as a quasi-anonymous identifier for that owner. A private key protects each DID. Only the owner of the private key can control or prove their identity. An entity can own different DIDs for all its activities. For example, an owner can have a DID for an online shopping platform and a separate one for a gaming site. This feature reduces the extent to which an entity may be tracked across its different activities.
VCs are a series of attestations issued for a DID by other DIDs. These certify certain aspects of the DID, such as age and location. The issuers of VCs cryptographically sign them, enabling the owners of the DIDs to take custody of and store the credentials themselves. This reduces reliance on third-party profile providers, such as Google and Meta.
What are some examples of VCs?
VCs have several applications, including:
- Self-sovereign identity (SSI)
- Data monetization
- Data portability
SSI implies that entities can store and control their identity data on their own devices independent of central identity authorities such as registration and certification issuers, identity providers, nation states, global organizations, and companies. An SSI allows an entity to choose which pieces of its data to share with validators.
Data monetization refers to the potential value that can be gained from user-generated data. Ceding control of personal data to third parties implies that they may profit from it. In contrast, blockchain-based SSIs attribute data generation to DIDs, giving owners control over their personal data; this gives owners the potential to profit from the sale of their data to advertisers or corporations.
Data portability gives owners the ability to move their personal data freely between data controllers. According to Article 20 of the EU’s General Data Protection Regulation (GDPR), data subjects have the right to data portability whenever it is technically feasible.
The lapse in FTX’s collapse
As global investigators and regulators prepare to delve deeper into the collapse of Sam Bankman-Fried’s now-defunct crypto empire, others in the digital-asset industry are keen to show that they have everything in order. But once authorities are done with the most immediate problem that FTX presents — including possible criminal behavior — their next action will likely be to crack down on bad habits that are rife throughout the sector.
Lackluster risk management, slippery governance and incomplete disclosures can be found across crypto, a direct result of it still being a young industry with a lot of freedom and not enough scrutiny.
While not always illegal, these things would be frowned upon in more traditional sectors that have been subject to longstanding oversight by regulators. They also include opaque financial disclosures, a complex web of offshore entities, or suspiciously close relationships with sister companies — all things found in a new FTX bankruptcy filing on Thursday.
One issue in particular that seems in need of addressing is antitrust, and preventing the monopolization of an industry by any single player. Binance, as the largest crypto exchange by several orders of magnitude, is an obvious contender for finding itself under the microscope.
Bankman-Fried had already amassed a very large presence across much of crypto and finance, as demonstrated by the graphic below. FTX and Alameda Research both had sizeable venture capital arms, and others have since commented on how having an exchange-issued token like FTT can present both competitive and risk-management concerns.
FTX’s new CEO John J. Ray remarked in its filing on Thursday that “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” If and when the crypto industry finds itself under a more stringent regulatory spotlight, one would hope companies won’t be as prone to such lapses.
Source Bloomberg News
New payments players attract SMBs with value-added services
Digitalization has opened the door to newage players actively introducing innovative value propositions across the B2B payments value chain. The global B2B commercial spend in 2019 was USD150 trillion, with 5% of the total market served by PayTechs. The remaining USD140 trillion or more ran over legacy domestic and cross-border banking rails. So, it’s only natural that more new-age payments players will seek to cash in by leveraging technology expertise to enable faster and richer integrated payment flows.
As a result, innovative offerings are up, with a significant focus on and exponential growth in mature categories, such as B2B cross-border payments.
The global B2B cross-border payment market will likely reach USD35 trillion in 2022. Yet it is highly fragmented with low transparency, resulting in risks for SMBs. The traditional process can involve at least six intermediaries — the payer and payee, their respective banks, and two correspondent banks — with high transaction costs and low process visibility.
New-age payment firms are targeting these intermediary roles. For instance, Banking Circle and Currencycloud target correspondent services with global virtual payment and account networks. PayTechs such as TransferMate aim for end-user cross-border payments propositions. Wise, a cross-border payments specialist, offers global multi-currency wallets to SMBs that significantly reduce transfer costs with a higher degree of automation. Wise moves about USD18 billion per year of B2B payments (as per 2021 data) across borders.
Many large banks are tr ying to retain cross-border payments dominance to counter growing FinTech influence. For instance, HSBC launched multi-currency Global Wallet in May 2021 to mitigate traditional pain points and eliminate beneficiary and correspondent bank charges to offer SMB clients a competitive cost advantage. Likewise, Citibank offers Citi Global Collect to ease cross-border payment inefficiencies.
However, traditional banks have difficulty convincing happy and satisfied SMBs to switch from their FinTech provider. To add to the complexity, mature FinTechs are stepping up their B2B engagement with an ecosystem play. Leading challengers — Stripe, PayPal, Starling Bank, Revolut, Block (formerly Square), and Wise — are orchestrating an ecosystem through bundling core payment services with other financial products (insurance), near-banking products (capital management and advisory), and beyond-financial products (legal services, HR,and more) to offer a convenient one-stop value proposition for SMBs.
TrueLayer is partnering with Coinbase to let UK users top up their accounts via their mobile banking app
This is part of a broader push into digital assets as the open-banking company eyes adding a stablecoin product to its crypto-focused offering.
Open banking is seen as a challenger to established card-based payment systems through its ability to facilitate account-to-account transactions. For crypto, its use-case has so far been used primarily to enable easy payments from fiat to digital currency.
Through this partnership with Coinbase, UK users will be able to link their bank accounts directly to Coinbase, authenticate via a banking app and then confirm payment. This will be rolled out progressively across Europe in the coming months.
“It’s cost-effective for merchants. Any company that deals with processing crypto assets pays a big premium to card networks,” said founder Francesco Simoneschi in an interview with The Block, adding: “Open banking removes that fee structure for merchants.”
Simoneschi also said that transaction fees from the consumer side are a fifth of what the cost is for transacting via Apple Pay or card payments depending on the amount.
This partnership, however, comes at a time when there’s heavy scrutiny of centralized exchanges amid FTX’s ongoing troubles after filing for Chapter 11 bankruptcy protection on Friday. He admitted that TrueLayer had discussions with FTX at one point but said it’s not currently an active customer.
He said they were attracted to Coinbase for its reputation as a publically traded company.
The great British stablecoin?
Simoneschi said that TrueLayer is powering ahead with its crypto products despite a current slump in the market spurred by the collapses of Terra, Three Arrows Capital and FTX.
TrueLayer itself has also suffered amid current market conditions, cutting 10% of its workforce in September. Simoneschi said that the company doesn’t currently need to raise and has a runway for the next several years.
Along with the Coinbase partnership, the company said in January that it’s been working with Ziglu and Luno.
A year ago, the company designated crypto as a key area of focus — with a dedicated team focusing on bridging the gap between traditional finance and DeFi.
Simoneschi sees the lack of prevalence of a British pound-denominated stablecoin as a problem the company would like to set out and solve. He hinted that TrueLayer is interested in developing a GBP stablecoin, saying that other regions apart from the U.S. should have the option of diversifying their currency.
In terms of how this might function within an open banking product, Simoneschi said it isn’t hard to imagine a product that moves fiat money into a stablecoin on a crypto wallet that can then be used to make purchases.
How the Buy Now, Pay Later landscape is shifting
Share prices are plummeting, valuations are being slashed and we’ve seen significant workforce cuts.
Just what is going on with Buy Now, Pay Later right now?
FTX Collapse Will Reverberate Throughout The VC World For A Long Time
The sudden rise and fall of FTX seemingly caught everyone by surprise. However, as fast as it happened, the effects of FTX’s collapse are not just sudden, but likely will be continuous and long-lasting.
For perspective, Theranos had raised about $1.3 billion in funding and had a $10 billion valuation at its peak before the walls came tumbling down and a story started to unfold that everyone still talks about now and gave us a movie.
By comparison, FTX and FTX US had raised a combined $2.2 billion at a $32 billion valuation and $8 billion valuation, respectively, before everything fell apart.
Many of those investors already are willing to face reality. It’s been reported Sequoia Capital and Paradigm have written down their stakes to zero. The Ontario Teachers’ Pension Plan Board said the $95 million it invested in FTX should have “limited impact on the plan, given this investment represents less than 0.05% of our total net assets.”
Others seem ready for a more prolonged fight, as it has been reported some VC firms are considering suing Sam Bankman-Fried for alleged fraud — although that seems like a Hail Mary to try to save face.
What does seem certain is that FTX’s collapse will not be forgotten by New Year’s. Such a fall from grace that involves so many marquee names in venture will likely have a ripple effect when those same firms look at their next Web3 or crypto investment. How eager will they be for that investment? How eager will their LPs be to see another deal in crypto? It may even affect their due diligence process outside of crypto deals.
Even crypto-specific firms like Paradigm and Multicoin Capital could suffer from a type of “post-FTX syndrome” when looking at their next crypto deal.
The effects of FTX’s fall will be long lasting — and you can bet there will be a movie made.
Alameda’s far reach
Aside from the FTX collapse’s effect on big-name venture firms, it also likely will have a significant impact on the crypto and Web3 ecosystem Bankman-Fried sought to foster.
Bankman-Fried’s other trading firm Alameda Research — also in bankruptcy — was a prolific investor in the crypto startup scene.
Per Crunchbase data, starting in 2019 the firm made 180 investments. In 2021 alone, the firm completed 100 deals. Those investments totaled $2.3 billion. This year, Alameda Research slowed that pace, making only 55 investments, but those totaled $2.1 billion.
It is important to note Alameda Research did not invest that amount, but rather simply took stake in rounds that totaled that amount.
However, it was an investor, and it is never ideal for a young startup — many of Alameda Research’s deals were seed and pre-seed rounds — to have an early investor declare bankruptcy.
What Is Headless Commerce?
E-commerce platforms were originally built for desktop-based shopping — the only available platform for many years — using a monolithic architecture with tightly coupled back-end and front-end components. However, the growth of mobile commerce over the past decade and the more recent emergence of numerous other forms of e-commerce have pushed brands and retailers to look for a more flexible approach like headless commerce.
The main differentiator for headless commerce architecture is that the back-end and front-end components are decoupled systems that communicate through an API (application programming interface) layer.
A company can use back-end databases, with information from sources like customer relationship management platforms, to handle features like product information, marketing logic behind promotions and discounts, and checkout, among others.
This output — think product images, prices, “buy now” buttons — is then pushed using APIs to front-end experiences, which can include any digital user interface. This can make it easier for companies to allow shoppers to transact using mediums like mobile apps, Instagram store pages, or even interactive kiosks.
IMPROVED USER EXPERIENCE AND NAVIGATION
Using an API-based architecture like headless commerce makes it easier for merchants to deliver front-end experiences using Progressive Web Applications (PWA) technology, which can significantly accelerate page load speed and therefore boost sales conversion rates by reducing page abandonment.
At the same time, headless commerce platforms allow for the same information to be available on — and optimized for — a broad range of devices and contexts. This particularly matters for mobile commerce.
DIFFERENTIATED DIGITAL EXPERIENCES AND FASTER DEPLOYMENT
Adding commerce capabilities to more digital touchpoints.
Customers today can find themselves shopping on social media pages, smartwatches, connected cars, and much more — every medium requires a tweaked approach but also casts a wider net and can offer users more convenience and a better customer experience
Enabling personalized shopping experiences across touchpoints.
Removing data silos between touchpoints means that customer data is more easily accessible and actionable, thus allowing brands and retailers to make better use of their predictive analytics capabilities
Facilitating the adoption of new business models.
Trending approaches to commerce, like subscriptions or rentals, can be enabled by discrete modules — as opposed to having to update an e-commerce site’s entire back-end infrastructure
Source CB Insights
Here are the NFT-related rules of thumb to consider when filing your 2022 taxes
To date in 2022, the NFT market has seen more than 8.61 million ETH in trading volume across 2.7 million wallets.
According to CoinMarketCap the sector’s total market cap amounts to over $13 billion. And yet, despite the industry’s astronomical size and continued growth, there remains a lack of clarity around NFT taxation for both creators and collectors alike.
For the 2022 tax year, the Internal Revenue Service updated Form 1040 and replaced the term “virtual currency” with “digital assets,” a broader label to encompass both NFTs and cryptocurrencies. The IRS treats digital assets as property, meaning they are subject to capital gains tax rates.
While the guidance remains somewhat murky, below are the general NFT-related rules of thumb to consider when filing your 2022 taxes in the U.S. Note that there is not yet any official guidance from the IRS on commissions or royalties received from downstream NFT resales, but they would most likely be considered income.
Disclaimer: This is not tax advice, and we strongly recommend engaging with a tax professional before filing your 2022 tax return.
DeFi’ing the skeptics
The vast majority of on-chain wealth is staked in DeFi apps. These smart contracts attempt to mimic the fiat securities markets, allowing users to invest in crypto derivatives and exchange coins and other tokenized assets. Like the stock market, DeFi apps create the liquidity needed to fund the growth of other Web3 products and services that could create long-term value and drive adoption of crypto. But unlike the fiat world, DeFi is largely unregulated. Those vulnerabilities were highlighted during the recent downturn as consumers lost billions from investments in high-risk assets.
From November 2021 to September 2022, the total value locked (TVL) in DeFi platforms fell 67%. The space has been rocked by falling asset prices and the collapse of high-profile crypto projects. In May 2022, the algorithmic stablecoin Terra became unpegged from the US dollar, resulting in a cascade of other project failures. High-profile hacks, like the $625M breach of the game Axie Infinity, have also plagued crypto, inviting greater scrutiny from regulators. A quarter of all fraud losses reported to the Federal Trade Commission (FTC) from Q1 2021 through Q1 2022 were tied to crypto.
In light of these risks, a growing faction in crypto is going beyond the call for industry standards and inviting regulations. In June 2022, a poll of crypto owners1 found that 48% want crypto regulated at similar or stricter levels than other financial assets, up from 42% in January. One promising area of DeFi that could lead to broader mainstream adoption is collateralized stablecoins. Unlike algorithmic stablecoins, these asset-based coins are backed by fiat reserves. A Treasury Department report from 2021 said stablecoins like USD Coin (USDC) hold the potential to support “faster, more efficient, and more inclusive payments options.”
Source Silicon Valley Bank