How traditional custodians can derive value from digital asset custody; Why using your credit card is getting more expensive;

In this edition:

1️⃣ Why Using Your Credit Card Is Getting More Expensive

2️⃣ Regulatory landscape for big techs

3️⃣ A new report of Tether’s reserves reveals it holds $28.9 billion in US Treasury bills

4️⃣ Security or Commodity? Crypto Would Just Like To Know

5️⃣ The opportunities for banks in embedded finance

6️⃣ FTX’s revenue in 2021 was 10 times what it was in 2020

7️⃣ How traditional custodians can derive value from digital asset custody

8️⃣ Is code the law in DeFi? No, seriously is it?

Why Using Your Credit Card Is Getting More Expensive

Every time you pay with your credit card, it costs the store a small percentage in fees: usually around 3%. And in 2022, Visa and Mastercard raised those credit-card fees again.

Now, more businesses are adding surcharges for customers that use credit cards, or posting signs that they prefer cash, or just raising their prices overall to make up for the growing costs.

A Republican and Democratic senator have proposed a bill to inject more competition into the credit industry and therefore lower these fees. But banks and the credit networks are arguing this might mean fewer reward options.

The Wall Street Journal explains the hidden fees behind swiping your card and what Congress is trying to do about it.

Regulatory landscape for big techs

There is no specific regulatory treatment of big techs operating in finance. Rather, it depends on their specific business model, in particular the type of financial activities they are engaged in. This means big techs are subject to a combination of: (i) regulations specific to the financial industry and therefore applying to the types of services provided, such as banking, extending credit or transmitting payments; and (ii) general laws and regulations that apply to financial and non-financial activities. These two types of regulations have been referred to as finance-specific regulations and cross-industry (or cross- sector/horizontal) regulations, respectively.

In terms of finance-specific regulations, when providing financial services, big techs are generally subject to the same requirements as other market participants. Like them, big techs, or more accurately individual entities within a big tech group, need to hold appropriate licences to perform specific regulated activities. Yet differences in the regulatory treatment of banks and non-bank financial institutions (NBFIs) may have an implication for what type of financial services big techs choose to provide and how to provide them.

With respect to the modalities under which big techs provide financial services, they may obtain their own licences, or partner or form joint ventures with other financial institutions. Table 2 gives an overview of the approaches taken by 11 big techs to provide banking, credit and/or payment services in different regions. In general, the requirement to obtain a licence depends on what concrete activity an entity performs along the financial services value chain.


Four out of the 11 big techs covered in this paper have fully or majority-owned entities in their group that hold banking licences in the European Union and Hong Kong SAR.19 In addition, in China and Hong Kong SAR, there are four entities with banking licences that are joint ventures of big techs with other companies, with big techs holding only minority stakes.


Apart from in China, it appears that big tech entities do not hold non-bank licences for granting credit (without taking deposits), but operate in partnership with other licensed institutions.21 In some cases, however, entities that engage in granting loans are not regulated under financial law and may only be subject to requirements under commercial law.


All big techs have entities in their groups that hold payment licences and thus are authorised to conduct payment services and/or issue e-money in at least one jurisdiction. In Europe, these licences have mainly been issued by authorities in Ireland, Lithuania, Luxembourg and the United Kingdom; in the United States, by regulators at the state level.

Source BIS

A new report of Tether’s reserves reveals it holds $28.9 billion in US Treasury bills

Stablecoin issuer Tether on Friday published results of its latest quarterly assurance opinion, completed by public accounting firm BDO.

A quarterly assurance opinion is a method used by stablecoin issuers to assure the market that their coins are backed by real assets. It involves assessing and analyzing different operations, processes, and procedures.

The report reveals it holds $28.9 billion in US Treasury bills, $6.8 billion in money market funds, cash and bank deposits of $5.4 billion, reverse repurchase agreements of almost $3 billion and non-US Treasury bills of $397 million.

It also shows a more than 58% decrease in Tether’s commercial paper holdings over the prior quarter from $20 billion to $8.5 billion.

“As previously announced, the exposure to commercial papers will be down to 200m by the end of August 2022 and to zero before the end of the year,” a post on Tether’s website says. “During the same period, Tether has increased its holdings of cash and bank deposits by 32%.”

“The utility of Tether continues to be supported by the transparency of its reserves and has been a leading source of stability allowing us to build a tool for the global economy,” said Paolo A., CTO of, in a statement. “Our commitment to transparency and the community is a long-standing pillar in the underlying ethos of the company and aligns with our responsibility as a market leader.”

The report comes weeks after the stablecoin issuer said that it holds no Chinese commercial paper.

Source The Block

Security or Commodity? Crypto Would Just Like To Know

Commodity vs. security

It’s probably important to have a cursory understanding of the differences between commodities and securities before delving too much further into why it’s important to crypto.

In layman’s terms, a security produces return from a common enterprise or company. Commodities are typically a “basic good” that can be bought, traded or exchanged — think grain, beef or gold.

Commodities often are considered stores of value because they hold their value over time — unlike, say, shares of Webvan back in the day, which were securities.

Some crypto assets such as Bitcoin certainly share the traits of a commodity. They are by their very nature designed to be decentralized and therefore do not produce a return from a common enterprise or company. Cryptocurrencies also were created as something that can stand in place of money, like the U.S. dollar, which makes it a store of value.

Those traits have led to crypto being regulated by the U.S. Commodity Futures Trading Commission — not the U.S. Securities and Exchange Commission.

So what’s up with the SEC and Coinbase?

That’s what makes the SEC charges concerning to the industry. SEC Chair Gary Gensler has issued stern warnings and offered skepticism about the digital asset market in the past. While agreeing Bitcoin is a commodity, Gensler points out things like initial coin offerings bear more than a passing resemblance to securities since they are attempts to raise capital for a business or project.

Being viewed as a security could change the industry. Commodities are generally considered more lightly regulated, while securities demand greater transparency and increased reporting by companies in that market.

For that reason, the general feeling is it would be a win to keep crypto under the CFTC’s view.

For its part, Coinbase made clear where it believes it stands regarding the SEC action.

“Coinbase does not list securities on its platform. Period.” wrote Coinbase’s Chief Legal Officer Paul Grewal in a blog after the SEC announced charges.

The SEC action even attracted the attention of CFTC Commissioner Caroline Pham, who tweeted the action was “a striking example of ‘regulation by enforcement” by the SEC.

Where we are

Where the SEC’s action and the increased talk this year of crypto and regulations lead is anyone’s guess. However, it seems likely the discussion of how crypto and digital assets are defined and categorized is only starting.

It also is possible crypto may not fit with any definition and needs to be regulated in a different way — something many in the industry believe. Even Gensler said earlier this year his agency is considering how to share oversight of the industry between the SEC and CFTC.

Although that may make sense, both agencies are overseen by different senate committees, so that may be a difficult road to map.

Source Crunchbase

The opportunities for banks in embedded finance

There are two basic models for embedded finance that banks must evaluate, which are not mutually exclusive

In the first, the provider owns both the non-financial and the financial elements of the customer journey.

The second, more conventional model involves a partnership between a provider of non-financial products or services and one or more finance providers, which embed their financial services within the non-financial proposition.

Which one to choose will depend on the banks’ strategic priorities and specific capabilities, especially in digital product development — the process of designing and building new products and services in-house, integrating third-party fintech capabilities into the proposition and opening up the bank’s existing back-end infrastructure and services so that they can be easily consumed by partners. But much will also depend on the balance of power between the bank and the brands with which it forms partnerships. The ability to design an embedded proposition that delivers clear value to the partner by helping it reach its business goals will have an obvious bearing on the outcome.

In effect this leaves banks with several potential commercial strategies for embedded finance. Whichever they choose, however, a key challenge will be to scale the proposition quickly and efficiently so that they can onboard large numbers of new clients smoothly and handle high transaction volumes. And at the same time they must also meet the requirements of multiple commercial partners with different technology profiles and shorter update and release cycles than most banks are used to. Unless they can scale the proposition efficiently while also remaining extremely partner-centric, the economics of embedded finance is unlikely ever to become an attractive proposition from the bank’s perspective.

It is therefore essential to unpick the key capabilities that underpin embedded finance propositions and identify where the bank can realistically expect to play. We can visualize the partnership-based model of embedded finance as a series of layers, each comprising a set of capabilities required to deliver the proposition effectively. The commercial partner hosts the customer journey and has the primary relationship, while beneath that are the financial layers that support the embedded finance proposition — product manufacturing, access to banking infrastructure, balance sheet and regulatory permissions, which are provided by a bank or in some cases a fintech.

Source Publicis Sapient

FTX’s revenue in 2021 was 10 times what it was in 2020, according to a new report

Crypto exchange FTX generated more than $1 billion in 2021 revenue after making only $90 million the year before, according to a new report from CNBC.

The growth was driven by its global trading business, according to the report, which cites internal documents. It also states that FTX raised its operating income from $14 million in 2021 to $272 million last year, and its net income rose from $388 million to $17 million in the same time period.

FTX generated $270 million in revenue in the first quarter of 2022 and was on track to generate $1.1 billion this year, according to an investor deck seen by CNBC, which notes that it is not clear how the market crash from earlier this year affected the firm.

Founded in 2019, FTX quickly rose to become a leading exchange under the leadership of CEO Sam Bankman-Fried.

Lately, Bankman-Fried has been pursuing acquisitions and has stepped in to lend money to crypto companies facing liquidity crises. In July, FTX US struck a deal with crypto lender BlockFi that gives FTX an option to buy the firm and was in talks to buy South Korean crypto exchange Bithumb. That followed the acquisitions in June of crypto trading firm Bitvo and the clearing firm Embed.

FTX declined to comment to CNBC on the leaked financials. But Bankman-Fried appeared to confirm on Twitter that the numbers in the report are in the “correct ballpark.”

Source The Block

How traditional custodians can derive value from digital asset custody

Custodian banks can leverage their existing solutions and deliver immense value to cater to the investor demand for single consolidated portfolios. An increasing number of banks are including the option of crypto custody in their service offering.

This is a huge opportunity for traditional custodian banks to service their asset management clients looking to offer institutional investors exposure to crypto trading services. Case in point: While BlackRock uses BNY Mellon, Citi, and J.P. Morgan as custodians for traditional finance, it chose to partner with Coinbase Prime to provide crypto trading, custody, prime brokerage, and reporting services to Aladdin’s client base (BlackRock’s portfolio management software).

Despite the volatile nature of cryptocurrencies, traditional bank custodians must see adding crypto custody services as an expansion of their value proposition, as well as a method for rationalizing involvement with a wider portfolio of digital assets.

Below, we’ll look at the moves traditional custodian banks have made with respect to providing custody services for digital assets.

Traditional custodian banks offering digital asset custody services

According to research from NYDIG, more than 80% of customers and clients that hold bitcoin would consider moving it to their existing bank if that bank offered secure bitcoin storage. NYDIG also found that 71% of bitcoin holders would switch their primary bank to one that offered Bitcoin-related products and services in addition to regular bank products.

This reinforces why traditional custodian banks would consider offering custody services that cover both traditional finance and digital assets. The space has already started to become competitive as major banks expand their offerings.

To offer custody solutions to investors, banks are either building their own crypto custody capabilities, acquiring crypto custody technologies and services, or outsourcing to sub-custody service partners.

What does the future hold for traditional custodians?

The increasing focus on regulating cryptocurrencies and institutional investors’ rising interest in digital assets will lead to crypto custody being offered as a tag-along service by banks. This will help banks retain existing customers who are investing in digital assets and eventually increase their share of wallets.

To this end, crypto custody offers significant business opportunities for banks. However, banks should be mindful of fraud and loss of private keys, which are major challenges when dealing with digital assets. Also, to remain competitive, they should continue to evaluate emerging technologies that offer scalable, secure custody services.


Is code the law in DeFi? No, seriously is it?

I came across interesting thoughts by Byron Gilliam of Blockworks in the Blockworks newsletter.

Byron says if you are a depositor to a DeFi protocol, you have no rights as a creditor, beyond what is hard coded into the smart contract.

If you own a token issued by a protocol, you have no legal claim on the protocol’s assets.

You don’t even really “own” that token — you have no enforceable property rights.

And, if you feel any of those non-rights have been violated, there is no court to appeal to other than the court of public opinion that is always in session on Twitter.

That’s where DeFi’s Social Contract was debated over the weekend after the founders of TribeDAO proposed that the high-profile protocol be shut down.

Amongst other measures, the proposal foresees TribeDAO paying out all of its assets to token holders, except for about $14 million set aside to compensate users who were victimized in an exploit.

Not all users would be made whole, however: Frax Finance, for example, would be compensated for just 2% of its losses.

That prompted Frax founder Sam Kazemian to label the proposal “fraud.”

In DeFi, fraud is in the eye of the beholder — there are no laws to violate, so fraud in a legal sense is not really possible.

It is, however, possible to violate the Social Contract of DeFi, and I think that’s what Sam K. is accusing the Tribe founders of doing: He thinks Tribe’s users should be treated as creditors.

Depositors to Tribe’s Fuse pools, like Frax, were not formally creditors to Tribe — they were just users interacting with smart contracts that Tribe had coded and deployed. Tribe has no legal responsibility to reimburse users of that code.

You could even argue that their fiduciary responsibility is to TRIBE token holders, who are arguably entitled to receive all of Tribe’s assets. Except that there is no fiduciary duty in crypto — because there are no laws.

There is only Social Contract, which is open to interpretation.

So how do you interpret it?

Source Blockworks



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