EU to require exchanges to identify most crypto transactions; Can crypto contagion infect mainstream finance?; Klarna from $45 billion to $6.5 billion

In this edition:

1️⃣ The new financial services industry emerging

2️⃣ EU to require exchanges to identify most crypto transactions

3️⃣ What happens if a crypto platform such as Coinbase or Celsius goes bankrupt?

4️⃣ Klarna from $45 billion to $6.5 billion

5️⃣ Can crypto contagion infect mainstream finance?

6️⃣ UK Finance fraud report

7️⃣ Chinese tech giants to require ID checks for NFT purchases

The new financial services industry emerging

So financial services is expanding and growing in all sorts of ways, attracting capital from many sources and garnering more and more involvement from big tech. There are opportunities galore, but the nature of these opportunities has changed. Oliver Wyman breaks out the emerging industry into the following service segments:

Risk intermediation services.

Oliver Wyman defines this as any service that involves matching those who have money with those who need it, while the provider takes some financial risk along the way — be that credit risk, market risk, interest rate risk, and so on. Of course this is the core of the incumbent industry, risk intermediation services are now extremely high capital intensive, and with ultra-low interest rates for a decade they have been in low-growth mode. No doubt the shift to rising interest rates will change this and lead to better returns for risk intermediation services, but the penetration of risk intermediation services with customers is mature if not saturated, so the growth is akin to a rising tide lifting all boats, not new value creation as defined by new services to new customers.

Value technology services.

Oliver Wyman defines value-technology as technology that is being used to deliver a new service to an end customer, rather than just improving an operation or function. The industry has experienced a 10-year explosion in growth in payments and transaction-related services, most of which were garnered by merchants including big tech companies such as Alibaba, Amazon, and eBay, as well as new players like PayPal, Square, and Circle. Focus is now shifting toward monetizing new technology such as digital assets, tokens, and decentralized finance. At the same time, both incumbents and new players are looking for winning models in wholesale services such as through banking as a service (BaaS) and insurance as a service.

Connected data services.

Oliver Wyman defines these as services that rely on using data or connecting different sources of data to create value for customers, such as helping customers manage their financial health or making it easier to manage logistics, real estate, mobility, health, and so on. Initiatives like open banking have not yet led to the sort of data-sharing explosion envisaged, but the acceleration in growth in wallets, financial life coaches, embedded finance, and so on all show that the potential from connected data services is being realized.

Personal thoughts:

I really all these three categories and particularly “Value technology services”. It seems to me most of these new types of financial companies e.g. fintechs, neobanks and even DeFis were mainly focused on improving or adapting existing services to new interfaces and technologies but the services themselves remained the same.

Value creation is about changing existing services in a way that benefits customers no matter in what way they use them.

Source Oliver Wynam

EU to require exchanges to identify most crypto transactions

According to Blockworks EU policymakers reached a deal Wednesday on a new bill that seeks to track crypto transfers, with no minimum threshold requirements or exemptions for low-value transfers, on exchanges and similar platforms.

The ruling, aimed at crypto asset service providers (CASPs) under the Financial Action Task Force’s “Travel Rule,” will require information relating to each transaction to be stored on both sides of the transfer.

Dubbed the Transfer of Funds Regulation, the bill seeks to apply wire transfer obligations to crypto transfers by requiring CASPs to collect and send customer data with transactions.

CASPs will also be required to provide information to relevant authorities if an investigation is conducted into money laundering and terrorist financing, according to a statement on Wednesday. CASPs include the likes of custodians, exchanges and regulated trading platforms.

Transactions from wallets that are not based on exchanges — what regulators call “unhosted” — will also be covered under the new rule when an individual interacts with wallets managed by CASPs. Peer-to-peer transfers between individual wallets will not be covered under the legislation.

EU lawmaker Ondrej Kovarik said in a tweet on Wednesday the agreement on the regulation, “strikes the right balance in mitigating risks for fighting money laundering in the crypto sector.” The lawmaker also said it would not hinder or overburden innovation and businesses.

The legislation is part of the union’s anti-money laundering package and will be aligned with the Markets in Crypto-assets rules (MiCA), the policymakers said.

It’s the latest development following MiCA, first introduced to parliament in 2020, which sets out common rules for crypto regulation across all 27 EU member states. The latest bill complements existing measures currently being pursued within the bloc including clamping down on what it perceives as shady crypto activity.

“This new regulation strengthens the European framework to fight money-laundering, reduces the risks of fraud and makes crypto-asset transactions more secure,” said Ernest Urtasun co-rapporteur of the bill. “This regulation introduces one of the most ambitious travel rules for transfers of crypto assets in the world. We hope other jurisdictions will follow the ambitious and rigorous approach the co-legislators agreed today.”

Source Blockworks

What happens if a crypto platform such as Coinbase or Celsius goes bankrupt?

When cryptocurrency lending platform Celsius froze user accounts amid a plunge in valuations, it sent ripples across the industry and raised questions about what happens to user assets if a crypto platform files for bankruptcy. The Wall Street Journal’s Vicky Ge Huang explains.

Klarna from $45 billion to $6.5 billion

According to Techcrunch Swedish buy now, pay later giant Klarna is reportedly close to inking a new round of funding that would slash its valuation to $6.5 billion — about 1/7 of what the company was valued in June of 2021.

The The Wall Street Journal reported today, citing anonymous sources, that Klarna was “negotiating to raise about $650 million mostly from existing investors led by Sequoia Capital.” Sequoia Capital chairman Michael Moritz is also chairman of the embattled payments giant.

The deal is still in the works, reported the Journal. But if completed, it will represent a big fall from grace for Klarna, which was riding high last year when it raised $639 million in a round led by @SoftBank’s Vision Fund 2 at a $45.6 billion valuation.

Klarna has been making a big push into the United States, competing with the likes of publicly traded Affirm . In early June, Klarna said that over the past year, its “U.S. customer base has grown by over 65%, reaching over 25 million consumers.” The whole BNPL (buy now, pay later) segment has taken a hit as of late, but still, the huge drop in valuation for Klarna gives new meaning to the phrase “down round.”

Source

Can crypto contagion infect mainstream finance?

This is actually an excellent question by Financial Times. As we can read from the article, most regulators are claiming that banks and traditional finance companies are safe.

“This contagion did not extend into the traditional banking and finance sector,” the acting US comptroller of the currency @Michael Hsu told the Financial Times.

“This is due, at least in part, to federal bank regulators’ continued and intentional emphasis on safety, soundness and consumer protection,” he said.

Andrea Enria, the European Central Bank’s top banking supervisor, told a European Parliament committee on Thursday there were “still very limited” connections between crypto and banks.

Paschal Donohoe, Irish finance minister and president of the eurogroup of finance ministers, said officials were not concerned at the moment, but added: “I can imagine that in a year’s time we will be as focused on cryptocurrencies as we are on climate risk, which is among our top concerns.”

On Thursday, global regulators in Basel went further — proposing tougher rules to cap crypto exposure at 1 per cent of a bank’s assets.

The Federal Reserve, which recently released the results of its annual stress tests showing the largest US banks could suffer more than $600bn in losses and still exceed government-mandated capital levels, sees limited bank exposure to crypto markets, according to Fed officials.

Yes, banks and mainstream finance companies are safe and I would say for now. And the next question we should ask should be for how long?

Last crypto winter was almost unnoticeable because outside a small group of crypto enthusiasts nobody was involved in crypto. However, as time goes on crypto is getting more exposure in the traditional financial world.

Andrea Enria also said that “I notice increased interest by the banks to maybe enter these markets as they see younger populations potentially very interested . . . I also see, in general, greater instability in the sector so the sooner we can regulate and give clear guidance, the better.”

“Banks do have to go where the customers want them to go, so had there been customer pressure they might have engaged in more [crypto] activity,” said Mitch Eitel, managing partner of the financial services group at Sullivan & Cromwell LLP.

On the other hand, even though banks are not directly involved in crypto they are already behind most of the crypto companies. Large regulated banks have found ways to offer crypto products to clients. JPMorgan Chase & Co. helps crypto exchanges Coinbase and Gemini with deposit and withdrawal transactions;

As demand increases banks and traditional finance companies will have to step in. There could be a risk that the next crypto contagion could affect wider aspects of the population and the economy is much higher.

We can already see that regulation is far behind the market if the situation doesn’t it can really negative consequences.

Source Financial Times

UK Finance fraud report

UK Finance has released its latest fraud report covering 2021. The report shows the scale of fraud taking place as well as how criminals took advantage of people’s doubts and fears during the pandemic to commit fraud, often by exploiting weaknesses outside of the banking system.

2021 fraud losses

Unauthorised fraud: here the account holder themselves does not provide authorisation and the transaction is carried out by a criminal (for example, the victim’s card details are used without their knowledge or consent).

Unauthorised financial fraud losses across payment cards, remote banking and cheques totalled £730.4 million in 2021, a decrease of 7% compared to 2020.

Victims of unauthorised payment card fraud are legally protected against losses. Industry analysis shows customers are refunded in excess of 98% of all confirmed cases.

Authorised push payment (APP) fraud: here the customer is tricked into authorising a payment to an account controlled by a criminal.

In 2021, criminals impersonated a range of organisations such as the NHS, banks and government departments via phone calls, text messages, emails, fake websites and social media posts to trick people into handing over their personal and financial information.

They subsequently used this information to convince people into authorising a payment.

There were 195,996 incidents of APP scams in 2021 with gross losses of £583.2 million, including:

£214.8 million lost to impersonation scams, whereby criminals impersonate a range of organisations to trick people into giving away their personal and financial information. This was the largest category of APP losses.

£171.7 million lost to investment scams, the second largest category of APP losses.

99,733 cases of purchase scams, which means this was the most common type of scam — accounting for 51% of all cases — although total losses were £64.1 million.

A total of £271.2 million of losses were returned to victims of APP scams, accounting for 47% of losses.

UK Finance also collects data on cases assessed under the APP voluntary code. As a subset of the total amount refunded above, £238.1 million of losses were returned to victims under the APP code, accounting for 51% of losses in these cases.

Source Payments Cards & Mobile & UK Finance

Chinese tech giants to require ID checks for NFT purchases

According to Decrypt Tencent, Ant Group, Baidu, Inc., JD.COM, and several other leading Chinese tech companies last week issued a “self-disciplined development proposal” for the “digital collectible industry” that would introduce real-name authentication for users that issue, buy, and sell non-fungible tokens (NFTs), according to a South China Morning Post report.

According to a statement by the China Cultural Industry Association, the signatories of the agreement also acknowledged and reaffirmed the existing regulation which bans the use of cryptocurrencies, stressing that platforms offering digital collectibles — the term used in mainland China to describe NFTs — can “only support legal tender as the denomination and settlement currency.”

Digital collectible platforms should also hold relevant regulatory certifications, ensure the security of underlying blockchain technologies, and bolster intellectual property protection.

Although the document doesn’t mention the resale of NFTs, the initiative pledges to avoid setting up secondary marketplaces for NFT trading and “firmly resist speculation.”

The latest initiative for China’s NFT space originates from private companies and as such is not legally binding; however, it could still mark an important step toward more regulatory clarity. State agencies responsible for developing industry standards may take the proposals into consideration.

Last year, Chinese authorities cracked down on crypto businesses in the country, not only banning crypto transactions, but also forcing many Bitcoin mining operators to move abroad.

The crackdown, however, was not extended on the NFT space, with China’s state-backed Blockchain Services Network announcing in January the creation of its own platform for launching tokenized digital collectibles — albeit running on permissioned, non-public blockchain infrastructure with no crypto transactions allowed.

Personal thoughts:

China’s tech industry is relatively closed and regulated by the government which makes it easier for the government quickly act and take control over the technologies they believe harming the consumers.

On its own China could show how other governments could regulate the crypto market that is required by the market. Yes, every market has its own uniqueness but as a draft, one could look at what China is doing.

Source Decrypt & Personal thoughts

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Sam Boboev

Sam Boboev

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