Oct 12, 2022
Mastercard is tracking where, and how, cardholders buy crypto; Binance blockchain suffers $570mn hack; Asset tokenization;
In this edition:
1️⃣ What can Neobanks do to avoid past pitfalls and steer their ventures toward profitability?
2️⃣ But making a super app is hard. Can Musk turn Twitter into one?
3️⃣ Asset tokenization and how it will impact institutional investors
4️⃣ Embedding finance: Marketplaces with David Barton-Grimley | 11:FS Explores
5️⃣ Binance blockchain suffers $570mn hack
6️⃣ Connecting digital islands: CBDCs
7️⃣ Mastercard Is Tracking Where, and How, Cardholders Buy Crypto
8️⃣ FTX v2 will go live in November and will feature an improved order-matching engine
9️⃣ Bringing Web3 to life: Automated lending as an example of what may change
🔟 Coinbase beat out other large firms to provide crypto services in Singapore
What can Neobanks do to avoid past pitfalls and steer their ventures toward profitability?
First of all, even before launching a venture, profitability should be at the core of all major decisions. Moreover, banks need to follow certain best practices across their three core life stages: launch, growth, and monetization. This includes starting with an ambitious, yet realistic business case to guide strategic action, smart product, and market choices during the growth period. Upgrading to industry-leading monetization efforts once reaching scale.
Simon-Kucher & Partners has identified 10 moments of truth across a Neobank’s lifecycle, which we’ve condensed into a playbook for profitability. Managing these well is the key to success.
Get out there:
- Smart pain point identification — focusing on those where customers have a high willingness to pay for solving them
- Building ambitious yet realistic business cases — with breakeven reachable after max. of three to five years
- Startup mentality and organization — agile approach, planning from milestone to milestone and managing tight budgets in between
Get reach:
- Wise market and segment focus — home markets first, international expansion at the right time, and following clear prioritization rules
- Innovation / Trendspotting capability — moving beyond user experience and hook products, detect profitable product trends, and expand product range accordingly
- Growth hacking excellence — combining digital marketing and data competences to grow client base at minimal customer acquisition costs (CAC)
Get rich:
- Apply modern pricing strategies — copying ideas from successful digital unicorns outside of banking, e.g., subscription plans
- Develop a monetization playbook –
From Free-to-Fee initiatives
Loyalty programs
Product bundling or De-Bundling
Data-driven cross-selling campaigns
- Leverage behavioral nudges — to match products with customers (e.g., use the “Panini effect” to help customers identify missing or underrepresented products)
- Expandpartnershipsandecosystems–leveraging the increasing attractiveness of the bank’s own brand
Neobanks that get all or most of these elements right should not only reach scale and clients, but also sustainable profitability.
Source Simon-Kucher & Partners
But making a super app is hard. Can Musk turn Twitter into one?
An interesting opinion article by Parmy Olson.
Musk is not simply buying Twitter to make it better. He claims a much grander plan: creating an “everything app” that does whatever you need.
The idea is not preposterous. Several so-called “super apps” have long existed in Asia. More than a billion Chinese citizens use QR codes through Tencent’s WeChat to do all manner of tasks, from buying groceries to booking a dentist appointment, sharing photos with friends or playing video games. They can access a government-issued ID card through WeChat too.
But making a super app is hard. For one thing, Americans make mobile payments far less than their Chinese counterparts. And WeChat’s success as a daily hub came down to launching at the right time, in 2011, when smartphone sales in China were exploding, and then riding the wave of its expanding network effect.
Manufacturing a new user base as large as WhatsApp, Facebook or WeChat is all but impossible now. It would be like trying to replicate the explosion of New York’s growth into a megacity during the 19th century. The boom time has passed; the networks are entrenched.
Silicon Valley has also toyed for years with trying to build its own super apps on the notion that a strong payments platform could power sprawling services in the same way WeChat Pay does. But Facebook’s efforts to build payment services, including with a crypto platform called Libra, fell apart, and while WeChat’s dominance comes in part from working in lockstep with the Chinese government, US Big Tech firms have an altogether different relationship with regulators and the state: they’re facing calls to be broken up.
If Musk were truly determined, he could try and buy PayPal, closing a meaningful loop for himself after co-founding PayPal’s predecessor more than two decades ago. It was named x.com. Twitter historically adds incremental features to its platform, so a comprehensive payments service would probably need to be bought and bolted on.
But Twitter co-founder Jack Dorsey could have already done that back when he was leading both Twitter and the payments giant Square, now called Block. Why didn’t he merge the two and create a super app when he could? Most likely, because he recognized it wouldn’t work: US consumers weren’t ready for a Swiss Army knife of apps, and it’d raise hackles with regulators too says Parmy.
Source Bloomberg Opinion
Asset tokenization and how it will impact institutional investors
While cryptocurrencies are the most popular tokenized digital assets, the space is expanding to include tokens for real estate, cars, and traditional financial assets like bonds, funds, or corporate stocks.
How does asset tokenization work?
Asset tokenization refers to the process of representing real-world assets (such as real estate, stocks, and bonds) as digital “tokens” on a blockchain, where transactions are more secure and efficient.
Blockchain creates verifiably scarce digital tokens to split up assets and makes them easier to trade. This leads to better experiences for traders, with more money flowing around assets; this, in turn, stabilizes prices and makes it easier to buy and sell assets in larger volumes. Blockchain also provides customers the ability to monitor and manage the entire lifecycle of a token.
The entire tokenization process takes between 3 weeks to 3 months. The most time-consuming parts are finding the correct stakeholders involved with the entire asset lifecycle, creating documentation, and setting up compliance and legal structures.
What are the types of assets that are most likely to be tokenized?
The types of assets most likely to be tokenized are stocks, bonds, real estate, digital assets, and currencies. There are four different types of tokens, each with a unique use:
- Security tokens — A token that represents another asset (e.g., a share, a bond, or an interest in a real estate asset)
- Utility tokens — A token that gives the right to perform a specific action
- Non-fungible tokens (NFTs) — A token that represents ownership of a unique digital asset (e.g., a tweet or an in-game item)
- Currency tokens — Blockchain-based currencies (e.g., cryptocurrency or stablecoins)
Why do we tokenize assets?
You might expect any digital asset to have a historical trail. However, that is not how it works. If businesses have different standards for tracking assets, there will be issues when an asset changes owners, which is why global supply chains are so complex.
A blockchain can be a common standard for tracking assets; this makes it appealing to those who want to improve asset-related business processes. A typical list of benefits includes the following:
- Broader investor bases
- No borders
- Lower costs
- Fewer intermediaries
- Enhanced liquidity for traders
- Transparency regarding the asset’s lifecycle
These advantages provide a more efficient and secure way for people to make transactions when trading stocks or crowdfunding.
In addition to improving current transactions, asset tokenization introduces new ways in which people can engage in financial activities such as quicker settlement, higher liquidity, improved risk management, and lower costs. Due to these benefits, asset tokenization is expected to gain significant traction in the coming decade.
Source BLOCKDATA
Embedding finance: Marketplaces with David Barton-Grimley | 11:FS Explores
David Barton-Grimley looks at how embedded finance works, what it is, and why we should care.
He also dives into embedding finance into marketplaces: why marketplaces are so important for embedded finance, why you would embed finance into marketplaces, and what’s in it for the marketplaces.
Binance blockchain suffers $570mn hack
Hackers have stolen around $570mn in tokens from Binance, in a rare blow to the world’s biggest crypto exchange and another dent to the troubled digital assets industry struggling to regain trust after a collapse in prices.
Binance initially estimated on Friday that tokens worth about $100mn to $110mn had been taken, pausing the operation of the affected blockchain for approximately eight hours.
However, the exchange later disclosed that the hacker had taken around two million of the cryptocurrency BNB, Binance’s own digital token, with a value of around $284 each. The hack targeted BSC Token Hub, a bridge between two Binance systems.
It comes at a time when digital assets are trying to recover from a credit crisis that wiped nearly two-thirds off the value of its most high-profile tokens such as bitcoin. Industry data have also indicated that theft from projects is soaring this year.
Cyber criminals had taken nearly $2bn this year to the end of July, nearly double the total in the first seven months of last year, according to data from Chainalysis. High-profile thefts included $600mn from the blockchain behind popular crypto-gaming platform Axie Infinity. Many hacks have been traced to state-sponsored actors in North Korea.
Binance’s position as the world’s largest crypto exchange means Friday’s exploit represents a significant blow to the digital assets industry.
In a series of social media posts Changpeng Zhao, Binance’s founder and chief executive, told users: “The issue is contained now. Your funds are safe. We apologize for the inconvenience and will provide further updates accordingly.”
Binance asked the affected network’s validators, who secure the system, to pause their work. The funds were taken from BSC Token Hub, a bridge that allows customers to transfer tokens tied to one chain to another. The hack exploited a weakness that created extra BNB tokens on the network, according to Zhao.
Many of the world’s most widely used blockchains, such as Binance Smart Chain and Ethereum, run on separate technologies or use different tokens. That means investors and developers cannot easily move their tokens to a different blockchain to use or trade them elsewhere.
Binance’s security team and other crypto network operators have steadily been freezing the stolen assets. By Friday afternoon a Binance spokesperson said there was around $100mn of unrecovered funds.
Source Financial Times
Connecting digital islands: CBDCs
Swift says that it has demonstrated that Central Bank Digital Currencies (CBDCs) and tokenised assets can move seamlessly on existing financial infrastructure — a major milestone towards enabling their smooth integration into the international financial ecosystem.
The findings, from two separate experiments, solve the significant challenge of interoperability in cross-border transactions by bridging between different distributed ledger technology (DLT) networks and existing payment systems, allowing digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.
This important step forward builds on SWIFT’s core capabilities and means that as CBDCs and tokens develop, they can be rapidly deployed at scale to facilitate trade and investment between more than 200 countries and territories around the world.
Mastercard Is Tracking Where, and How, Cardholders Buy Crypto
In Mastercard’s latest step into crypto, the credit card behemoth is leaning on a recently acquired blockchain analytics company to do due diligence on digital asset merchants.
Mastercard, the company said Tuesday, is leveraging data from CipherTrace, a Mastercard company , acquired in 2021, to launch a solution that ought to keep Mastercard compliant with crypto regulation. It’s supposed to work by providing actionable information to craft risk profiles of more than 2,400 blockchain-based firms in an effort to determine approved purchases.
The initiative, dubbed Crypto Secure, functions as a dashboard designed to track where cardholders are purchasing crypto products. It also has the ability to identify crypto exchanges, plus measure transaction approvals and declines — as well as provide risk metrics and benchmark ratings for comparison to a peer group of financial institutions.
Ajay Bhalla, president of Mastercard cyber and intelligence, said in a statement that the launch ought to add transparency and trust to the growing business of crypto.
“Trust is our business and with cryptocurrency more intertwined in our daily lives this is an exciting next step in our journey,” Bhalla said.
Mastercard has been actively making strides in crypto over the past few years.
The payments giant recently partnered with cryptocurrency and fiat exchange hi to launch a credit card that allows users to customize their own NFT avatars.
The company also partnered with crypto exchange Binance to offer a prepaid crypto card in Argentina and Middle Eastern digital asset gateway Fasset to expand its services to Indonesia.
These efforts, alongside its expansion in blockchain technology subsidiary companies, include the following:
- Finicity, a financial data aggregator company
- Ekata, a global customer identity verification and fraud prevention company
-RiskRecon, a firm working to vet the security mechanisms of counterparty vendors
Source Blockworks
FTX v2 will go live in November and will feature an improved order-matching engine
A new version of the FTX crypto exchange will go live on Nov. 21, featuring an improved matching engine aimed at addressing complaints from users about the performance of the current one.
“We’ll be rolling out a whole new order matcher, lower latency API pathways, a whole slew of other features,” FTX CEO Sam Bankman-Fried tweeted today.
Crypto exchanges, like other asset trading desks, use matching engines to match buy and sell orders. This process is what facilitates the buying and selling of crypto tokens on exchanges.
FTX’s matching engine has long been the subject of complaints from users. These complaints have been about the high latency and low throughput of the platform’s matching engine. Latency in the context refers to how fast the matching engine can match the buy and sell orders of users. Higher latency means slower trade execution which can be detrimental for users as profitable trading positions can be lost due to high latency.
According to Bankman-Fried, these improvements will double FTX’s order throughput while reducing the latency by 50%. He stated that these upgrades have been in the works for most of the year and are almost ready for release on the platform.
FTX suffered a downtime last month due to what Bankman-Fried described as web interface-related issues. The glitch prevented users from accessing the crypto exchange’s website in the immediate aftermath of the September U.S. consumer price index report going live.
Source The Block
Bringing Web3 to life: Automated lending as an example of what may change
To illustrate the disruptive potential of Web3, it is best to start with the use case where Web3 found its first product-market fit: financial services. Lending may demonstrate one of the most compelling implementations of Web3 to date.
In today’s legacy financial services, lending relies on the bank as the trusted intermediary to safeguard funds and originate loans.
With Web3, depositors still seek to earn interest on their deposits, but instead of entrusting their funds to a bank or nonregulated platform, they themselves hold their funds in a noncustodial wallet that represents an account on the blockchain. All ownership and transaction data reside on the blockchain rather than with the bank or nonregulated entity. Customers no longer entrust their funds to a company to lend them out; instead, they can deposit their funds as liquidity into a smart contract. The smart contract effectively escrows these funds and only disburses them when preestablished conditions are met. Borrowers still look for loans but can only receive funds from the smart contract (which were originally provided by the depositors) after the borrower has posted sufficient collateral. By taking out a loan against collateral, borrowers can still enjoy potential price appreciation of the collateral and create liquidity without incurring a taxable event (which would occur when selling).
All terms of the loan, including the loan-to-value (LTV) ratio, interest paid, and liquidation thresholds, are predetermined by the logic in the smart contract and are available transparently to all participants. Borrowers still pay interest rates on their loans, but these interest rates no longer accrue to management and shareholders. In this instance, the contract has neither management nor shareholders; it is governed by a DAO that often has no claim on any of the revenues. The interest on loans is paid into the smart contract and disbursed back to the original depositors of the liquidity. Credit risk is minimized because of overcollateralization requirements and automatic liquidations.
More than $200 billion in loans was disbursed last year from the largest Web3 lending platforms — and cumulative bad debt is currently roughly $1 million, despite significant volatility.3 Web3 lending platforms continued to operate even during the market turmoil. No deposits were lost or frozen, and withdrawals continued to occur.
Web3 effectively enables traditional revenue streams to accrue to the users of a platform, enhancing the user value proposition relative to their Web2 equivalents. The lending example also shows how Web3 may enable services to be delivered more cost-effectively and 24/7 through shared infrastructure, compliance, and automation.
Source McKinsey & Company
Coinbase beat out other large firms to provide crypto services in Singapore, which continues to send mixed messages to crypto firms.
Coinbase has received regulatory approval from Singapore’s central bank and financial watchdog, the Monetary Authority of Singapore (MAS), to provide payment services in the country.
The in-principle approval will allow them to offer regulated digital payment token products and services, regulated under Singapore’s Payment Services Act.
The news comes after Coinbase first launched a tech hub in the South East Asian country in November 2021. The firm currently has around 100 employees in the country, mostly comprised of product engineers.
Not all the major crypto firms who applied have managed to successfully gain regulatory approval in Singapore, and Coinbase joins the relatively small number who have achieved in-principle approval in the country, including Crypto.com, Luno, and Paxos.
In February 2022, Binance Singapore withdrew its application for a license to operate in the country. But it hasn’t just been Binance that has been snubbed by Singapore regulators.
According to reporting by Nikkei Asia, over 100 of the around 170 businesses that applied to the MAS for licenses to offer digital payment token services were denied.
Despite the recent approval, crypto firms operating in Singapore are likely to continue to be under strict watch.
The MAS’ managing director Ravi Menon said the central bank would consider “further measures to reduce consumer harm” when it came to cryptocurrency investment in August 2022.
The executive said cryptocurrencies do not currently represent a “viable form of money or investment asset” due to their volatility; however, he noted that digital assets have “transformative potential, not unlike securitization 50 years ago.”
Despite the win, Coinbase still won’t be able to advertise in the country.
The MAS released guidelines at the beginning of 2022 banning crypto platforms from promoting their services to the general public, for example on buses on TV advertisements.
However, they will still be able to advertise on their websites and social media accounts.
The dive for international expansion comes despite widespread lay-offs in the firm.
Coinbase announced in June it was axing 18% of its workforce, citing the widespread collapse in crypto asset prices.
Source Decrypt
