Navigating institutional participation in DeFi and Web3; Binance flexes muscles; Global investment in fintech falls to $107.8 billion;
In this edition:
1️⃣ Blockchain Association on Biden Crypto Executive Order
2️⃣ Navigating Institutional Participation in DeFi and Web3
3️⃣ Open Banking: Why Now? An Inflection Point in Banking
4️⃣ Gary Gensler Wants to Regulate Crypto
5️⃣ How has crypto banking’s competitive landscape changed this year?
6️⃣ Foundations for Successful Fintech Infrastructure (and Several Tradeoffs to Consider)
7️⃣ Binance flexes muscles
8️⃣ Global investment in fintech falls to $107.8 billion despite robust VC funding
9️⃣ DeFi Projects Look to Replenish Treasuries After Crypto Collapse
🔟 FTX CEO Sam Bankman-Fried on upcoming Ethereum merge, interest in Robinhood deal
Blockchain Association on Biden Crypto Executive Order
Navigating Institutional Participation in DeFi and Web3
Entering the DeFi space is not without its challenges for organizations. To better understand how to navigate participation, ConsenSys map out the adoption cycle noting the role of compliance and regulation. The company uses a mental model of the transaction flow process to identify institutional needs and challenges.
Securit y: Custody and Risk Management
Different institutions of different sizes face different challenges. Yet, there is one aspect that unites the entire institutional world regardless of regulatory oversight or assets under management (AUM): Risk. Risk management within DeFi takes on several dimensions. At the base of our institutional needs pyramid is security. This entails the safe storage of private keys, which are most often held on HSMs or MPCs custody tech, or with qualified custodians.
Today, many tools exist in the market to track Know Your Transaction (KYT) risks, identifying the flow of funds risk. Yet, the depth and breadth required to step into DeFi pools require analysis of all transfers within a transaction, and not just the transactions themselves. This means it?s important that any tools evaluated in the market need to provide risk management within DeFi itself.
The next layer in the pyramid is access. DeFi access can be achieved through two main execution venues. The first is indirect via the limited number of centralized crypto exchanges, offering access to (often, a limited number of) tokens from some well known DeFi primitive. Yet, to access DeFi directly, which means access to the tens of thousands of DeFi tokens and DeFi protocols that exist today, institutions will require the second, direct venue: a Web3 wallet.
Three years ago all trading by crypto funds occured through CEXs. Yet, with the rise of DeFi, direct access has increased, offering a more efficient route into the asset class? but this brings challenges. As institutions leave their walled custodian gardens, they need to ensure that they are able to track their assets, yields, attribution of annual percentage yields (APY), and risk management around their positions.
Reporting makes up the fourth layer in the pyramid, which includes a variety of new challenges for the institutional world: A new financial world gives rise to new conventions? from airdrops to governance tokens. For example, yield farming actively across DeFi entails building complex trading strategies that include staking reward tokens across multiple primitives. These positions generate capital gains, additional governance tokens, and APYs.
In order for institutions to safely and effectively engage with DeFi, it is crucial that each of the six challenges above are addressed, and investment processes are made secure, compliant, and efficient.
Open Banking: Why Now? An Inflection Point in Banking
The digital revolution has changed the way financial institutions engage with their customers, putting the industry at an inflection point of increased competition and increased opportunities to engage with customers. Open banking augments this inflection point on both of these fronts by making it easier for consumers to choose the services they want most — an essential move in an era where customers no longer stay at a financial institution for loyalty alone.
What this means is that the customer is increasingly the center of the financial services ecosystem — having the ability to pick and choose the combination of services they personally want most.
How do the other players in the ecosystem fit in?
Online banking providers, which have traditionally worked with financial institutions to manage the flow of customer data, will continue to have a large role as data storehouses among other things.
Industry working groups, such as FinancialDataExchange.org and FDATA.global, have been and will continue to be the most active in terms of moving both interoperability forward from the FDX perspective as well as policy discussions forward from a financial data perspective. These industry working groups were created because federal and state government regulators in the US have said they want the industry to come up with their own industry-led solutions. These industry working groups are taking a lot of the heavy load that in other countries has been born by government groups, which means that smaller institutions in particular must get involved if they want to remain relevant.
Consumer advocacy organizations are split on this topic. Some consumer organizations are very much onboard with the idea that customers should own their data. Others believe that privacy will become the right of the rich only. So there is still a lot of education and advocacy that needs to happen on behalf of consumers around this specific issue.
To summarize, the financial services ecosystem under open banking is complicated, with a lot of parties involved. The more voices at the table, especially through the industry working groups and advocacy organizations, the better.
Gary Gensler Wants to Regulate Crypto
How has crypto banking’s competitive landscape changed this year?
Table below examines today’s market leaders, the services they provide, and how they are integrating with traditional financial ecosystems through merchant integrations and credit cards.
Below, BLOCKDATA explores some of the key trends and developments we’re seeing among the current market leaders to highlight how the competitive landscape has changed.
Users: From October 2021 to May 2022, Crypto.com saw its user base grow from 10M to 50M, an increase of 400%. Similarly, the number of Nexo users doubled from over 2M to over 4M from September 2021 to May 2022. Crypto lending has surged over the last two years and publicizes a vision of financial services where lenders and borrowers avoid the traditional financial firms that position themselves as the gatekeepers for loans or other products.
Company size: While some crypto banks are facing hiring headwinds, others are unperturbed amid the market volatility. In June 2022, BlockFi announced a 20% layoff — company headcount dropped from about 850 in January to about 680 by the end of July. Meanwhile, Nexo’s LinkedIn headcount has jumped nearly 60% since January 2022.
Interest and other earnings: Apart from pooling investments into cryptocurrency, most of these banks provide customers with earning opportunities in traditionally aligned frameworks.
For instance, Nexo allows its users to buy and build portfolios of diverse digital assets and trade (swap and exchange) them when prices hit a markup. The company also provides them with the option to earn up to 16% in annual interest. Institutions such as BlockFi and Crypto.com also enroll customers in rewards programs that enable them to receive non-currency rewards for every transaction or purchase.
Cards: Many crypto banks have their own cards and allow users to earn interest and take out loans on their cryptocurrencies. These cards also offer rewards: Nexo, for example, issues its own Mastercard-powered credit and debit cards that give users up to 2% back in cryptocurrency with each purchase. Nexo also allows users to spend without having to sell their digital assets such as bitcoin, which are used as collateral to back the credit provided.
Integrations: Platforms such as BlockFi, and Nexo, integrate Know Your Customer (KYC) and anti-money laundering regulatory protocols to reduce risk.
Crypto banks have also diversified their service portfolios along the lines of institutional services, wherein they provide businesses with crypto-backed loans, short-term credit options, etc. However, the current market scenario has negatively impacted investor confidence, making it critical for crypto banks to streamline their processes to restore trust.
Foundations for Successful Fintech Infrastructure (and Several Tradeoffs to Consider)
Would your customers be materially disrupted (or even forced to halt operations) if your service went down? Or are you merely a nice-to-have? The answers to these questions directly determine the pricing power, defensibility, and overall stickiness of your product. The deeper you’re embedded — and oftentimes, the stricter your uptime SLAs! — the harder it is to replace you. While certainly not all successful infrastructure businesses will become 100% mission critical, we believe it’s easier to drive higher customer LTV when the core service you provide is absolutely essential to day-to-day operations. Typically, within fintech, this means that your product is a key enabler of either onboarding and account opening/funding.
A narrowly defined initial use case:
To get from 0 to 1, it’s our opinion that solving one discreet pain point significantly better (or cheaper!) than anyone else is superior to building proprietary IP that has many potential use cases, especially if none of them are clear on day one. Plaid did a phenomenal job of this; it set out to facilitate basic account aggregation with broader coverage and offer a better developer experience than what the incumbent solutions had in market. While Plaid could have immediately gone full throttle after all the use cases enabled by better open banking connectivity it very deliberately built its core business around account opening and onboarding (the /auth, /identity and /balance endpoints) for neobanks and payments wallets.
Neutrality across customers:
If you’re doing your job well, you’ll likely have many tough decisions to make with respect to deepening your relationship with anchor tenants. In the early days of dLocal, many merchants wanted to advertise their product to dLocal’s user base in exchange for direct payment or a larger contract. While it was surely a tempting offer (especially for a startup that had managed to secure massive customers like Uber and Nike early in its journey), the offer would have likely precluded dLocal from going on to serve other important enterprises (Lyft or Adidas, for example) that competed with these early customers.
License-based businesses tend to yield steadier growth and more predictable revenue (every SaaS investor’s dream), while usage-based businesses are more susceptible to market peaks and troughs, and therefore, commonly thought to be riskier. However, while the latter may not be as reliable for true annual recurring revenue, it can result in more revenue and better customer retention over time (especially when paired with thoughtful minimum commitments in master service agreements (MSAs)). Another advantage to usage-based pricing is it aligns cost and value, resulting in zero friction for increased real-time adoption of your product.
Source Andreessen Horowitz
Binance flexes muscles
On Monday, Binance said it would automatically convert customers’ deposits of the USDC stablecoin, run by Circle, into Binance’s own native stablecoin, BUSD.
Binance said it would do the same for deposits of smaller stablecoins USDP and TUSD. For good measure, it will also remove specific spot trading pairs from rival stablecoin providers Tether and Paxos from its platform.
Binance said users would continue to be able to withdraw funds in USDC, USDP and TUSD. Even so, customers won’t be able to trade quite as freely as they used to. The switch takes place at the end of the month.
Stablecoins are the fuel of the crypto market. They are normally pegged to the world’s biggest and most stable currencies and act as a bridge between the crypto and traditional markets. Keeping assets as stablecoins makes it faster and easier for traders to buy and sell digital tokens.
Binance explained its decision was to “enhance liquidity” for users. The move is intended to make the market deeper and more liquid by consolidating trading around one stablecoin — its own.
Paxos said Binance had made a positive step for the safety of its customers. Circle felt it was a more straightforward commercial decision because its stablecoin, USDC, was being increasingly actively traded on Binance, alongside Binance’s own stablecoin. Jeremy Allaire, chief executive of Circle, said Binance’s move “probably wouldn’t fly for a regulated market in the US, and certainly not how I would have handled [it]”, but added that it might make USDC on Binance “more attractive”. Binance said the move had been discussed and agreed with Circle/USDC and other third parties before taking the decision.
Beyond the entertaining corporate spat, Binance’s decision goes to the heart of an awkward issue for crypto. The vision of a decentralised marketplace, where customers can freely and seamlessly trade or move their funds from one place to another, becomes irrelevant when large sums of money and rival marketplaces are involved.
“It’s more of a competition story, Binance is feeling a bit of heat from other players and wants to carve out space for itself and ringfence its system,” said Ilan Solot, partner at venture capital firm Tagus Capital.
Some still see abandoning decentralisation as akin to a cardinal sin.
Binance has been using this quiet time after the tumultuous spring and early summer to bolster its already dominant grip on the digital assets market.
Last month it beefed up its existing free spot trading initiative to include the cryptocurrency ethereum, which Binance said would give users the chance to trade around the historic Merge on the ethereum blockchain.
Market onlookers weren’t convinced at the time, telling me the move was tantamount to a market leader trying to entrench its dominant position.
Source Financial Times
Global investment in fintech falls to $107.8 billion despite robust VC funding
- Fintech deals volume and total global fintech investment drops in H1’22
Global investment in fintech fell from $111.2 billion across 3,372 deals in H2’22 to $107.8 billion across 2,980 deals in H1’21, mirroring the decline in investment experienced in the broader technology sector. Total fintech investment and deals volume declined in both the Americas and EMEA regions, while the AsiaPacific region attracted a new annual high of fintech investment amidst a decline in the number of deals. The new Asia-Pacific record was driven almost entirely by three large M&A transactions: the $27.9 billion acquisition of Australia-based Afterpay by Block, the $2.1 billion buyout of Japan-based Yayoi by KKR, and the $1 billion merger of Australia-based fintechs Superhero and SwiftX.
- VC investment in fintech remains robust as Europe sets new record
While VC investment globally declined from $66.5 billion in H2’21 to $52.6 billion in H1’22, compared to all periods outside of 2021, the amount was incredibly robust. While the Americas attracted the largest amount of VC funding ($27.2 billion), EMEA saw a new record high level of funding for a 6-month period ($16.6 billion), led by the world’s two largest fintech rounds in H1’22: a $1.1billion raise by Germany-based Trade Republic and a $1 billion raise by UK-based Checkout.com. Fintech-focused VC investment in the Asia-Pacific region remained quite soft at $8.7 billion.
Downward pressure on valuations brings IPO activity almost to a halt, could spark downrounds
The turbulence in the public markets globally had a major impact on the valuations of many public tech companies in H1’22, including fintechs. This, combined with other challenging market factors, brought IPO activity almost to a halt — a trend expected to continue through H2’22. With the IPO door closed, H2’22 could see downrounds as companies that had planned to exit in 2022 look to raise capital under less than optimal circumstances.
Investors looking for the next big fintech opportunity
In 2021, investment in fintech was quite extraordinary as investors flocked to make investments in the sector. While investment has dropped back to levels seen in previous years, the space is expected to remain a strong focus for investors in H2’22 and into 2023. Fintech investors, however, are expected to become more discerning with their investments — focusing more on profitability and cash flow when evaluating opportunities. Investors are also expected to pay more attention to areas adjacent to traditional financial services offerings, such as open data and decentralized finance. The B2B space is also expected to be a high priority for investors.
Download Report KPMG
DeFi Projects Look to Replenish Treasuries After Crypto Collapse
Some of the largest projects left standing in decentralized finance, created as a parallel universe to traditional lending but minus intermediaries such as brokerages and banks, appear to be still feeling the pinch of the springtime collapse of the sector.
Aave Companies, the main developer behind the biggest DeFi lending project, is seeking $16.28 million from the so-called decentralized autonomous organization that governs the protocol. It is the first time the development team ever asked for money from the Aave DAO, according to a proposal. A vote on the plan, which will close on Sept. 8, has already received the quorum needed for approval.
“As the Aave protocol has grown into what it is today, costs associated with development have risen substantially,” the proposal said. “Building an innovative, secure and battle-tested version of a protocol such as Aave V3 requires experienced builders across a variety of skill sets that are fairly compensated for their work.”
Aave’s developers aren’t alone in seeking to weather DeFi’s ongoing liquidity crunch. Lido DAO, which manages Lido finance, one of the biggest projects as measured by the total value of crypto locked on the platform, recently approved a proposal to sell 10 million of Lido’s native token to the venture capital firm Dragonfly Capital Partners, LLC. The sale followed the rejection of several proposals put before its community on how to manage its assets in order to cover two years worth of expenses.
At its height earlier this year, money woes seemed like the last problem DeFi would have. The sector attracted billions of dollars in investment and saw activity surge, generating million of dollars in revenue. The value of the treasuries of top DeFi projects have come down significantly in tandem with token prices during the current bear market, according to blockchain data provider Nansen.
Aave DAO’s liquid assets stand at $378 million, compared with over $800 million in April. Lido DAO saw its liquid assets’ value drop to around $344 million from about $800 million. Uniswap, one of the most popular decentralized exchanges, also saw the value of its DAO treasury drop to about $1.7 billion, from $2.5 billion five months ago. The three are among the wealthiest DeFi projects based on the value of their treasuries.
Unlike the typical tech startup, the treasuries of DeFi projects are usually comprised of their native tokens as well as other cryptocurrencies. Aave’s proposal is mostly for stablecoins.
“We’ve seen protocols being just too bullish on crypto and having all their treasury in Ethereum” or Bitcoin, said Diogo Mónica, co-founder and president of crypto platform Anchorage Digital “Whenever crypto goes down, their treasuries also go down, which materially changes their ability to run their protocols, businesses, treasuries and foundations.”
Source Bloomberg LP