Metaverse funds top $2bn, what this could mean; How do Apple Pay and Google Pay handle sensitive card info?; Tokenomics deep dive;
In this edition:
1️⃣ Metaverse funds top $2bn, what this could mean
2️⃣ Making a cross-border payment remains an inefficient and cumbersome system
3️⃣ Slumping NFTs Still Have These Big-Money Fans
4️⃣ The prevailing activities in the institutional DeFi system
5️⃣ New UK bill allows financial authorities more ability to “seize, freeze and recover” cryptocurrencies
6️⃣ Tokenomics deep dive
7️⃣ Jamie Dimon Slams Crypto Tokens as ‘Decentralized Ponzi Schemes’
8️⃣ How do Apple Pay and Google Pay handle sensitive card info?
9️⃣ European Central Bank preparing for broad digital currency adoption ‘scenario’
🔟 SWIFT Pilots Blockchain Project
Metaverse funds top $2bn, what this could mean
Metaverse is one of the hot topics in the tech world and just like any other emerging technology this caught the attention of the investors. I believe big announcements by Meta and its commitment to metaverse as well as NFT sales surge also contributed to the growth of hype around this technology. As a result, the fear of missing out (FOMO) pushed investors to pour money into metaverse companies.
There were 39 metaverse funds that oversaw assets of just over $2bn worldwide as of the end of July, according to Morningstar, up from $179m across just six funds as of the end of August 2021.
However, in the current downturn market conditions and investments in the metaverse just like any tech sector experiencing difficulties. Total assets peaked at $2.6bn at the end of March, but have since dipped according to a Financial News article.
Will investments foster innovation or have the opposite effect?
I think string backing by investors will drive innovation in the metaverse. We can already see how financial services are developing in the metaverse. Banks opening up their virtual branches and payment companies are building new payment routes.
Metaverse has strong potential to create its own economy or I would say a virtual world economy where people would exchange goods and services similar to the real world. Companies such as Nike are already selling their virtual goods and companies of different kinds are buying land plots in virtual worlds and building presence. All these show strong interest and potential to innovate further.
However, we should be careful and prevent metaverse from being owned by a selected number of big corporations and driven by their ambitions.
Other this can lead to Metaverse ‘bubble’?
I believe to avoid Metaverse ‘bubble’ investment companies need to ensure that companies ensure that their worlds are inclusive and open to different types of creators from small and individual to big corporations.
Of course, any investment firm should do their due diligence and analyze the business model of metaverse companies which actually could be different since metaverse works with creators and has in world economies.
I would be happy to learn more opinions on the future of the metaverse. Share your thoughts.
Making a cross-border payment remains an inefficient and cumbersome system
To better understand this, picture a bank in Mexico and a bank in the U.S. that both have customers who want to send payments to each other. Because these banks aren’t leveraging the same local payment networks, these banks can’t directly pay each other. Instead, to complete the transaction, the banks rely on correspondent banking and must stitch together a shared ledger between disparate banking and payment networks.
This shared ledger results in Nostro accounts, the account of Bank A’s money that is being held in Bank B, and Vostro accounts, the amount of Bank B’s money that is being held by Bank A. These accounts tally debits and credits between correspondent banks. Therefore instead of actually “moving” money from country to country, central banks use local payment rails to settle what’s owed between parties. All of this is tied together by SWIFT (Society for Worldwide Interbank Financial Telecommunication), the secure messaging system that helps these stakeholders communicate. These two aspects — money not actually “moving” and SWIFT not actually sending money anywhere — are common misconceptions when it comes to global payments.
So, if money never moves, why do cross-border transactions take so long and cost so much to complete? As you might guess, the distributed global ledger is to blame.
First, to complete a transaction, originating institutions (“payers”) must manually complete a number of tasks to ensure they are collecting proper documentation and adhering to the compliance methodologies of the receiving bank. As there are few ways to reliably share this collected information (SWIFT’s simple messaging, for example, cannot), receiving banks often have less information on transactions than they want. This exposes them to various regulatory risks and the potential loss of their Nostro Vostro account.
Each transaction also requires payment network interoperability and numerous intermediaries to complete each transaction. This leads to transactions taking 2 to 30+ days to clear, slowing down financial institutions and customers alike. Furthermore, these delays assume the transaction is even possible. As Nostro Vostro requires bank accounts, unbanked individuals often have little recourse when they want to move money across borders.
How should future cross-border payments look?
Source Andreessen Horowitz
Slumping NFTs Still Have These Big-Money Fans
The disparity between VCs’ appetite for NFT-related deals and the dwindling interest in these assets among consumers raises an important question: What do they know that the market doesn’t?
For venture capital firms investing in digital-asset startups, NFTs are a gateway to broader mainstream usage of crypto. Games involving these tokens are often fun, low-stakes ways to introduce people to blockchain. The widespread success of one could ultimately legitimize and popularize NFTs to the point where they find a firmer real-world presence and represent things like airline tickets, house deeds or music singles.
The rise in funding for NFT-focused startups reflects this kind of optimism, despite the fact that this sector has experienced some of the industry’s most high-profile struggles during the downturn. To name a few, there’s the hack involving Bored Ape Yacht Club NFTs, the fact that blue-chip NFTs took bigger price hits than Bitcoin, the embarrassingly rocky debut of Coinbase’s NFT marketplace and the graveyard of abandoned NFT projects in Hollywood.
Gaming NFTs have seen their own slew of setbacks in the past year. NFT game Axie Infinity faced a $600 million hack in March. In April, buyers sent transaction fees soaring on Ethereum as they raced to buy Otherdeeds NFTs, representing virtual land plots in a Bored Ape-related game called Otherside. But after investors shelled out thousands of dollars on the assets, their price steeply dropped. It’s also hard to ignore that many players in the traditional gaming world don’t want anything to do with NFTs.
Recent history has shown the damage that can ensue when the crypto hype machine fuels big investments in platforms that fail — the Terra implosion being one glaring example. With NFTs, the stakes are arguably even higher.
The complexity of an algorithmic stablecoin may not draw in a non-crypto-native audience, but colorful cartoon apes embraced by celebrities like Snoop Dogg and Eminem already have. And the collapse of a major NFT platform flush with VC money could do a lot to cool enthusiasm among this crowd. After all, this winter isn’t over yet.
Source Bloomberg News
The prevailing activities in the institutional DeFi system
To date, most applications have been built on Ethereum because of its capabilities and widespread adoption by developers. However, many other Layer 1 blockchains, such as Solana, Avalanche, Terra, and BNB Smart Chain, and Layer 2 scaling solutions, such as Polygon Technology, Optimism, and Arbitrum, are gaining traction in 2022.
Cross-chains enable information to move seamlessly between networks. For instance, the DEX Mangata Finance is built on a Polkadot network but is linked with Ethereum to provide low fixed fees and miner-extractable-value-free trading.
The main reasons for the increased number of institutional DeFi transactions are the following:
- Increased number of partnerships among DeFi participants to increase efficiency
- Consistent improvements and updates in security measures
- Zero or reduced transaction fees by support service providers
- Registration of firms (as per legal authorities) to gain customers’ trust
- Collaborative platforms that allow easy monitoring and reporting of assets
- Increased use of DeFi data analytics platforms by institutions
- Liquidity mining protocols that enable users to maintain liquidity and receive native tokens as rewards
- Yield farming protocols that combine staking, lending, and borrowing to optimize earnings and investments
- Innovators are adding new institutional DeFi-specific features for lending, borrowing, trading, and payments, to improve organizational adoption.
DeFi participants are continually adding these innovative characteristics to their product and service offerings.
Uniswap is considerably active in this area. The company expanded its product portfolio to include both ERC-20 token standardsand non-fungible tokens (NFTs). It acquired Genie, an NFT marketplace aggregator, to allow institutional users to buy and sell NFTs across major marketplaces. This brought DeFi products to NFTs, improving access to digital ownership and value in the growingdigital economy.
Uniswap also launched Swap Widget, a React component that can be easily imported into any React project and to Web3 apps such as Friends With Benefits, OpenSea, and Oasis. This allows DeFi platform developers to perform all activities without leaving the app, including embedding Uniswap’s token swapping functionality, wrapping digital assets, and joining a decentralized autonomous organization (DAO). In addition, Uniswap launched Auto Router, a smart order routing algorithm that finds suitable prices for tokens to simplify the buying process.
Circle (a payments and treasury platform provider) supports Polygon USDC for stablecoin-based transactions for both institutional and retail users. Circle’s institutional clients can also convert fiat deposits to Polygon USDCs within their Circle accounts.
New UK bill allows financial authorities more ability to “seize, freeze and recover” cryptocurrencies
A new anti-money laundering bill introduced in the UK today is intended to make it easier for law enforcement to seize digital assets, as part of a broader crackdown on money laundering.
“Domestic and international criminals have for years laundered the proceeds of their crime and corruption by abusing UK company structures, and are increasingly using cryptocurrencies,” said National Crime Agency Director General Graeme Biggar in a release touting the bill. “These reforms — long awaited and much welcomed — will help us crack down on both.”
After the first reading of the new bill which took place today in the House of Commons, a second reading is anticipated for October 13, the next necessary step for the bill to become law.
The effort is part of a broader crackdown on illicitly gained funds and assets parked in the UK, an issue that came to the forefront following Russia’s invasion of Ukraine. Russian oligarchs have long lived in and parked assets in the country, which began sanctioning and seizing those assets — including Chelsea Football Club — as part of an effort to punish Russian leadership and cut off financial means to continue the war.
In addition to addressing cryptocurrencies, the bill also calls for people registering a company in the UK to verify their identities, and amps up the power in the hands of the national registrar, Companies House, to monitor and crosscheck the legitimacy of companies, an effort to limit the use of shell companies to launder money.
Source The Block
Tokenomics deep dive
◆ Tokenomics can be defined as the study of determining and evaluating the economic characteristics of a cryptographic token
◆ Key aspects of token supply: Allocation, vesting period, and emission
◆ We find that Layer 1s have seen Public Sales token allocations go down in favor of higher allocations towards Ecosystem Incentives in recent years
◆ Centralized risks, participation rewards, and Foundation design are key questions every founder needs to answer
◆ Data shows that vesting periods and cliff lengths have generally increased over the last couple of years. Traditional technology companies appear to be taking the opposite route
◆ While most Layer 1s are inflationary, we note a few that employ burn mechanisms. Understanding the emission schedule of a token is crucial, illustrated by case studies on high FDV / low market capitalization tokens and high DeFi APRs
◆ Companies are increasingly using interesting distribution methods to allocate airdrops. We highlight a few recent cases, including Hop Protocol and Optimism
◆ Many protocols underestimate the demand side, paying too little attention to the incentive function of the token
◆ Transparent and healthy governance can offer a lot of utility and drive token demand
◆ Trust plays an essential role in the utility of tokens
◆ Tokenization represents a form of digitalization of value. The utility comes from a token fulfilling one of multiple purposes
◆ A two-token model helps to specialize the use cases for each token by separating the “ecosystem” from a purpose-solving token
◆ In the long-run good projects with strong fundamentals and product-market fit will always win over those with bad fundamentals
Jamie Dimon Slams Crypto Tokens as ‘Decentralized Ponzi Schemes’
Jamie Dimon didn’t mince words when a US lawmaker mentioned the executive’s history of criticizing cryptocurrencies.
“I’m a major skeptic on crypto tokens, which you call currency, like Bitcoin,” the JPMorgan Chase & Co. chief executive officer said in congressional testimony Wednesday. “They are decentralized Ponzi schemes.”
Stablecoins — digital assets tied to the value of the US dollar or other currencies — wouldn’t be problematic with the proper regulation, and JPMorgan is active in blockchain, Dimon said.
The comments represent the latest criticism leveled against digital currencies by Dimon, who once called Bitcoin “a fraud” before eventually saying he regretted the comments.
House Financial Services Committee Chairwoman Maxine Waters and Ranking Member Patrick McHenry have been working to reach an agreement on stablecoin legislation. Under the latest version of the bill, it would be illegal to issue or create new “endogenously collateralized stablecoins” such as those similar to TerraUSD, the algorithmic stablecoin that collapsed earlier this year, according to a copy obtained by Bloomberg News.
While Dimon has been a vocal critic of Bitcoin, the firm has been focused on using blockchain for financial services. J.P. Morgan uses its custom blockchain and token, JPM Coin, to conduct intraday repurchase agreements, which allows other financial institutions to take out short-term loans using high-quality collateral. JPMorgan was also the first Wall Street bank to launch a presence in the metaverse in February.
Dimon deemed Bitcoin a fraud in 2017, comments he later said he regretted. In October, he said it was worthless but that he’d follow clients and recently acknowledged that decentralized finance — where banks are replaced by algorithms — is “real.”
Source Bloomberg News
How do Apple Pay and Google Pay handle sensitive card info?
The diagram below shows the differences. Both approaches are very secure, but the implementations are different. To understand the difference, we break down the process into two flows.
1 Registering your credit card flow
2 Basic payment flow
1. The registration flow is represented by steps 1~3 for both cases. The difference is:
Apple Pay: Apple doesn’t store any card info. It passes the card info to the bank. Bank returns a token called DAN (device account number) to the iPhone. iPhone then stores DAN into a special hardware chip.
Google Pay: When you register the credit card with Google Pay, the card info is stored in the Google server. Google returns a payment token to the phone.
2. When you click the “Pay” button on your phone, the basic payment flow starts. Here are the differences:
Apple Pay: For iPhone, the e-commerce server passes the DAN to the bank.
Google Pay: In the Google Pay case, the e-commerce server passes the payment token to the Google server. Google server looks up the credit card info and passes it to the bank.
In the diagram, the red arrow means the credit card info is available on the public network, although it is encrypted.
What are payments rails?
Ever wanted to know what’s going on behind the scenes every time we make a payment?
Very insightful video by 11:FS.
SWIFT Pilots Blockchain Project
SWIFT, the messaging system used by financial institutions globally to convey instructions on tens of millions of transactions each day, is testing out blockchain.
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT for short, is piloting a project with fintech company Symbiont Inc., according to a post seen by Bloomberg. The collaboration, which includes Citigroup Inc., Vanguard and Northern Trust, is aimed at driving “efficiencies in communicating significant corporate events,” like dividend payments and mergers, SWIFT said in its post.
As a global financial artery, SWIFT delivers secure messages among 11,000 companies in over 200 countries and territories, directing trillions of dollars in transactions. The operation gained much attention earlier this year as war broke out in Ukraine following Russia’s invasion. The US and Europe cut a number of Russian banks from SWIFT, hurting their efforts to move money and operate globally.
With the latest pilot project, SWIFT will automate corporate action workflow using Symbiont’s technology platform called Assembly, it said in the post. SWIFT will use the platform’s smart contracts and blockchain capabilities to “create a network effect that leverages our 11,000 plus institutions connected to SWIFT globally,” it said.
Under the effort, corporate action data from SWIFT messages will be translated by SWIFT’s translator tool and uploaded in Symbiont’s blockchain. Symbiont’s smart contract technology will then compare information shared between participants, flagging “discrepancies, contradictions or inconsistencies across custodians,” Tom Zschach, chief innovation officer at SWIFT, said in the post.
SWIFT’s work with Symbiont, a US financial technology company, follows other efforts to innovate in the payment space. SWIFT has already partnered with the Bank of International Settlements to explore the benefits of using a common language for cross-border payments.
SWIFT was set up to make it easier for banks in various countries to communicate with one another. The private network was designed to be more secure, and its messages followed a protocol so they could be quickly understood by banks anywhere in the world. But it hasn’t been immune to hacks: It’s been used by cybercriminals to commit heists, showing any system can be vulnerable.
Symbiont offers its blockchain technology to solve inefficiencies in the financial marketplace.
The pilot is in development and with a select group of participants that will test it and provide feedback in September. If it’s successful, SWIFT will extend it to cover more corporate events and assess bringing it to the wider SWIFT community.
Big bank leaders arrived on Capitol Hill Wednesday for day one of their semi-regular grilling by Congressional leaders
Though the hearing focused on traditional finance, the daylong affair included rounds of questions from lawmakers on two big fintech topics: peer-to-peer payment systems and a digital dollar.
There was some early shade thrown at big-name fintechs.
- The Financial Technology Association, a trade group that counts PayPal and Block as members, called Demchak’s comments misleading. “As the banking CEOs know, non-banks are regulated at the federal and state levels and uphold robust consumer protection standards, including for privacy and fraud responses in electronic funds transfers,” CEO Penny Lee told Protocol.
- Regulators are homing in on complaints of fraud on P2P services and banks appear to be distancing themselves from tech players. The Bank Policy Institute, a think tank representing the financial institutions, released a report earlier this week that said Zelle had the lowest rate of disputed transactions among P2P payment platforms. Their own report, though, showed Venmo’s fraud rate was only 0.004 percentage points higher than Zelle, and it didn’t examine all P2P transactions — just the ones at eight large banks surveyed.
- Bank leaders said that they reimburse customers for “unauthorized” transfers but the broader question is whether banks are responsible for scams that trick customers into sending money. The Wall Street Journal Journal reported that the CFPB is considering requiring banks to reimburse customers tricked by popular scams, such as someone pretending to represent the bank. Banks have pushed back, saying that could actually encourage more scams.
Big Banks are financial “leaders,” multiple representatives said, but they won’t take the lead on adopting a CBDC. Banks took a passive approach when asked about a digital U.S. dollar, signaling they will not proactively push implementation along. The crypto industry, meanwhile, has been rallying around asset-backed stablecoins.
- JPMorgan Chase & Co.’s Jamie Dimon said he thinks CBDCs are a fair idea, but doesn’t expect the Federal Reserve to implement its use smoothly. He described the Fed as less nimble than private institutions, and ill equipped for something so technically complicated.
- DeFi, meanwhile, increasingly relies on stablecoin providers. After the luna crash earlier this summer, the importance of having a genuinely stable digital dollar became clear. Circle’s USDC has increasingly become the stablecoin of choice for DeFi, though Tether, with more questionable backing, still has the highest market cap.
European Central Bank preparing for broad digital currency adoption ‘scenario’
The European Central Bank (ECB) is analyzing options for integrating decentralized ledger technology (DLT) into existing payment settlement systems, Fabio Panetta, an executive ECB board member, said in a speech on Monday during a symposium in Frankfurt dedicated to the topic of settlements.
But the senior central banker suggested that the ECB will not be a first-mover in the space, instead monitoring how widely stablecoins and central bank digital currencies take hold.
If stablecoins and central bank digital currencies become more widely adopted, the ECB will look at creating bridges between existing European real-time payments systems or its own digital euro, said Panetta.
Bankers see the most potential for stablecoins in large daily wholesale transactions that take place between banks internationally due to the existing complications of cross-border and cross-currency payments, Panetta said. But he noted that the ECB, which exists in part to ensure a stable euro, is wary of the fact that major blockchain networks primarily exist in areas outside of Europe, “which raises concerns about strategic autonomy,” Panetta said.
“But despite the uncertainties surrounding DLT’s potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement,” said Panetta. “We must ensure that, in such a scenario, central bank money would still retain its role as the settlement asset for wholesale transactions.”
Panetta implied that the ECB’s path forward will largely depend on how prominently stablecoins or central bank digital currencies figure into payments. The central bank’s current research efforts are more focused around continuing to “anchor” the euro as a stable currency by being poised to build infrastructure better connecting existing payments rails to stablecoins, CBDCs, or more decentralized networks if needed.
Panetta noted that the European financial system already has real-time payments, a major selling point of stablecoins, and that blockchain-based payments will need to “prove” that they are superior to other existing technologies. Furthermore, “implications for governance, settlement efficiency and liquidity management need to be carefully assessed.”
The ECB is amping up resources towards digital currencies and its use cases. It kick-started a two-year investigation into the digital euro in July 2021, and announced the partners in the prototype development earlier in September. The evaluation and results of the project is anticipated in March 2023.
Source The Block