What happened to neobanks?; Cryptocurrency fallout delivers sharp kick to decentralised finance dreams; Distinguishing DeFi;
In this edition:
1️⃣ What happened to neobanks?
2️⃣ Cryptocurrency fallout delivers sharp kick to decentralised finance dreams
3️⃣ Crypto crash survivors could become tomorrow’s amazons, BOE says
4️⃣ Meta Pay is here finally
5️⃣ CBDCs, not crypto, will be cornerstone of future monetary system, BIS says
6️⃣ Latin America’s crypto conquest is driven by consumers’ needs
7️⃣ Distinguishing DeFi
8️⃣ What are stablecoins, and why are people so freaked out about them?
What happened to neobanks?
It would be easy to attribute the negative neobank press to the overall fintech funk permeating the industry right now. But there are market factors impacting neobanks that are closing the door to new neobanks coming into the market:
1) The megafintechs have better economics and business models
Cornerstone’s research found that only about half of the top 10 neobanks’ customers — 17.6 million consumers — call their account with those fintechs their primary checking (or spending) account.
In contrast, more than 15 million consumers call PayPal or Square Cash App their primary checking or spending account provider. That’s just a small percentage of the roughly 272 million accounts Americans have with these “megafintechs.”
Do the math: Neobanks have to acquire two customers to get one primary spending account customer.
Fintech Business Weekly reported that Varo’s cost of customer acquisition is $45. That means it costs Varo $90 to acquire a primary (i.e., engaged) customer.
The megafintechs, on the other hand, already count nearly every smartphone-carrying American adult under the age of 55 as an account holder. Their cost of increasing engagement has got to be less than $90 per existing customer.
2) Interchange isn’t a reliable revenue source
Speaking of revenue diversity (or lack thereof)…
I don’t know who said relying on interchange for revenue was a good idea, but in every argument I’ve had with a neobank supporter where I’ve brought up the shortcomings of an interchange-reliant business model, the response has typically been, “they’ll expand into other revenue sources at some point.”
We’re past “some point.”
Chime should expand beyond financial services and sell other digitally-deliverable products and services — e.g., cell phone damage protection, subscription management, identity theft protection — to diversify its revenue sources.
The Fintech Brain Food newsletter echoes this call for revenue diversification, suggesting things like tips, real-time payments, subscriptions, and lending.
So what are the neobanks waiting for?
3) The Niche Affinity Play is Played Out
I’ve been a supporter of the niche affinity approach to neobanks where community fintechs like Kinly , Daylight, and Panacea Financial serve the unique financial needs of specific consumer segments. This approach requires neobanks to:
Identify a segment’s unique financial needs. Easier said than done. Witness the coming and going earlier in this century of online banks for women. None were able to define women’s unique financial needs — in no small part because “women” is not a marketable, definable segment (it’s the aggregation of a number of segments).
Be the dominant affinity. Neobanks’ claims of how big their affinity groups are are misleading because most of us belong to multiple affinity groups. If you’re a gay African-American doctor, do you bank with Kinly, Daylight, or Panacea?
Cryptocurrency fallout delivers sharp kick to decentralised finance dreams
Crypto networks that pledged to put users in control have put themselves in charge as they try to survive the deepening crisis gripping the digital asset market.
In the past week, three decentralised finance groups have stepped in with emergency plans to protect their projects and users from economic pain in the face of tumbling cryptocurrency prices.
The three platforms — Maker DAO, Bancor and Solend — are not household names. But they are prominent in the world of decentralised finance, a corner of the crypto world aiming to build an alternative financial system without a central decision-making authority.
Last weekend, users of Solend, a lending platform built on the Solana blockchain, proposed taking control of the wallet of its largest user. The operators feared the repercussions if the Solana coin, which dipped below $27, dropped to $22.30, a price that threatened the platform’s economics.
“[The wallet] has an extremely large margin position that is putting Solana protocol and its users at risk,” it warned. If Solana fell below $22.30, the ripples through the market meant “Solend could end up with bad debt”, it warned.
Solend withdrew the plan for emergency powers following criticism from users but said it was “committed to protecting user funds, transparency, and doing what’s right”.
Bancor meanwhile cited “hostile market conditions” as justification for temporarily pausing a service that meant users were no longer protected if their deposited tokens were subject to big market swings. The Bancor team said it would ask those that hold the voting power to ratify the temporary pause.
And Maker DAO, a collective that runs the Dai stablecoin — a crypto token that is designed to be pegged to the dollar — voted to freeze a link to lending platform AAVE, because of the latter’s exposure to another struggling lending platform, Celsius.
Running a trading network through a consensus vote in theory means users have more say in the future of the project, according to Ingo Fiedler, co-founder of the Blockchain Research Lab and professor at Concordia University in Montreal, Canada.
But this is not always the case, he noted. “Governance is highly concentrated among a few players that can potentially co-ordinate to change the rules to their benefit and at the expense of other users,” Fiedler said.
A report by the Bank for International Settlements — BIS this week questioned whether DeFi projects could ever expand into an adequate monetary system because developers could not predict every market move.
“The impossibility of writing contracts to spell out what actions to take in all contingencies, requires some central entities to resolve disputes,” it noted. More efficient methods to speed up and handle greater volumes of payments also tended to lead to a greater concentration of computing power, it added.
Source Financial Times
Crypto Crash Survivors Could Become Tomorrow’s Amazons, BOE Says
Cunliffe compared the crash that has wiped more than $1 trillion off the value of Bitcoin and other crypto currencies this year to the dotcom collapse at the start of the millennium.
“The analogy for me is the dotcom boom, when $5 trillion was wiped off values,” Cunliffe said at the Point Zero Forum in Zurich on Wednesday. “A lot of companies went, but the technology didn’t go away.
It came back 10 years later, and those that survived — the Amazons and the eBays — turned out to be the dominant players.”
He stressed that crypto technology has “huge applications and potential within the financial sector” even though the market is wobbling at the moment.
“Whatever happens over the next few months to crypto assets, I expect crypto technology and finance to continue.” Cunliffe said. “It has the possibility of huge efficiencies and changes in market structure.”
The BOE is developing plans for its own retail central bank digital currency and will deliver a consultation paper at the end of the year.
One key issue under investigation is whether to produce a fully independent CBDC with an “on or off ramp to fiat” money or just “something that is flexible enough” to be used in private stablecoins.
Cunliffe gave an example of stablecoins that are integrated into supply chain and logistics systems to maximize efficiency. “We couldn’t provide something that does all those things,” he said.
“The question is, are you better off having private stablecoins to be more optimized in certain areas, which then link back to a central bank ledger in some way? Or should we provide the base?” Cunliffe said.
The big philosophical question regulators face is whether to allow “fully disintegrated settlement,” which would mean regulating the AI code behind the crypto technology.
“I have the same confidence in that as a fully automated pilotless plane from London to Zurich, or a fully driverless car,” he said. “I want to know where the liability is — if the algo goes wrong and I crash.”
“My sense is that will be very difficult for the regulatory system to cross in the near future.”
Okay, Meta Pay is here finally
According to TechCrunch Meta CEO Mark Zuckerberg announced this week that Facebook Pay has officially been renamed Meta Pay. The current product features and overall user experience that people are used to with Facebook Pay will remain the same across Facebook, Instagram, WhatsApp and Messenger. The change is rolling out in the United States and will then launch globally over time.
Zuckerberg says although the service will remain the same, the rename represents Meta’s first step toward creating a digital wallet for the metaverse. He says his vision for a digital wallet in the metaverse will let users securely manage their identities, what they own and how they pay.
“In the future there will be all sorts of digital items you might want to create or buy — digital clothing, art, videos, music, experiences, virtual events and more,” Zuckerberg said in a Facebook post. “Proof of ownership will be important, especially if you want to take some of these items with you across different services. Ideally, you should be able to sign into any metaverse experience and everything you’ve bought should be right there.”
My thoughts are that Meta has been a little late to the wallet game. Other big techs such as Apple and Google have taken the game to the next with a wide range of functionalities in their wallets e.g. payments, personal ID, personalised services and others.
However, Apple and Google target more of the fiat world and from Zuckerberg’s comments, it seems like Meta Pay will be more of a digital wallet for the crypto and the web3 world. And even here we have strong players e.g. MetaMask, Coinbase wallet and others that purely specialise in crypto.
I believe competition will be quite tough for Meta in the payments and wallet markets. Meta could potentially limit other wallets in its metaverse and other platforms such as Instagram, WhatsApp or metaverse. But wouldn’t it be against the user’s interest to be made to use what providers make you use?
According to TechCrunch Zuckerberg’s comments come a few weeks after Meta’s head of fintech, Stephane Kasriel, said Meta is in the “very early stages” of considering what a single wallet experience may look like. He said that in terms of its early thinking, Meta is looking at how you can prove who you are and carry that identity into different experiences in the metaverse.
Source: Techcrunch and Personal thoughts
CBDCs, Not Crypto, Will Be Cornerstone of Future Monetary System, BIS Says
Crypto’s structural flaws make it an unsuitable basis for a monetary system, according to the Bank for International Settlements — BIS (BIS). Instead, monetary systems could be built around central bank digital currencies (CBDCs), which are digital representations of central bank money.
The BIS, an association of the world’s major central banks, dedicates a 42-page chapter in its “2022 Annual Economic Report” to laying out a blueprint for the future of the global monetary system. In that vision, there is room for only some of crypto’s underlying technical features, like programmability and tokenization, not for cryptocurrencies themselves.
“Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better,’” said Hyun Song Shin, an economic adviser and head of research at the BIS, during a press briefing on Monday.
The chapter, which will be published Tuesday ahead of the full report, identifies a number of limitations of crypto, including the lack of a stable nominal anchor. In monetary policy that is a variable — such as a currency peg — that can be used to control price levels.
Stablecoins, cryptocurrencies pegged to the value of assets like sovereign currencies, are the crypto world’s search for such an anchor, Shin said. Stablecoins attempt to “piggyback on the stability of real money issued by central banks.”
Shin said the recent crash of terraUSD, a dollar stablecoin with a market capitalization of $18 billion in early May that rapidly lost its peg, illustrated how stablecoins, despite their name, are unstable and don’t make good units of account.
Unlike other leading stablecoins, such as USDC and USDT, which are reportedly backed by dollar-denominated reserves, terraUSD is an algorithmic stablecoin backed by another cryptocurrency (in this case LUNA) with an algorithm in place to regulate supply and demand of the stablecoin and maintain its peg.
“The second important finding is that crypto and stablecoins fail to achieve the full network effects that we normally expect of money,” Shin said.
Money, Shin said, is the perfect example of a virtuous circle of greater use and greater acceptance. Crypto’s decentralized nature, on the other hand, achieves exactly the opposite, namely fragmentation.
In early June, BIS economists published a paper arguing that crypto cannot fulfill the role of money because costly transactions and scalability restrictions lead to the crypto world splitting into competing blockchains and ecosystems.
“Network effects mean ‘the more, the merrier.’ Crypto achieves the opposite: ‘the more, the sorrier’.”
Latin America’s crypto conquest is driven by consumers’ needs
The digital payments revolution that began during the pandemic is consolidating and driving Latin American interest in cryptocurrencies. 51% of consumers in the region have already made a transaction with cryptoassets and more than a third say they have made a payment for an everyday purchase with stablecoin, reveals Mastercard’s New Payments Index 2022, a survey conducted between March and April of this year among more than 35,000 people around the world.
The New Payments Index annually evaluates consumer behavior concerning emerging payment methods. In its second edition, the study shows that financial innovation -cryptocurrencies, DeFI solutions, blockchain, NFTs- registers significant activity in the region, with consumers eager to learn more about this ecosystem.
In Latin America, 54% of Latino consumers are optimistic about the performance of digital assets as an investment. Meanwhile, two-thirds of Latinos want greater flexibility to use crypto and traditional payment methods interchangeably in their day-to-day operations.
The survey shows that consumers in Latin America and the Caribbean would feel more confident investing (69%) and making/receiving payments (67%) in cryptocurrencies if they were issued or backed by a trusted organization. Another 82% acknowledge that they would like to have cryptocurrency-related functions available directly from their current financial institution.
My personal thoughts.
I think even though most of the top crypto companies are based in developed countries such as the US, the EU and China the main driving force behind the adoption of cryptocurrencies and everything related to it will be emerging countries/economies.
Unlike the US where the monetary system has very old roots and is difficult to change or adapt just like the legacy banking technologies, they have El Salvador moved forward with the adoption of the bitcoin as the legal tender.
Perhaps it is not a very correct comparison but practice shows emerging economies are more willing to take risks and it could be that they would set the course of the regulation and adoption of cryptocurrencies.
Source: Mastercard & My own thoughts
Blockchain and crypto, two foundational components of DeFi, are already disrupting the financial services industry in profound ways. Traditional finance (“TradFi”), which refers to conventional banks and other financial institutions that are regulated by various national agencies and that work with central bank-issued fiat currency, has started to evolve.
While TradFi remains the foundation of the global financial system, and provides overall stability, it has already started to evolve as a result of digital advancements. For example, blockchain and crypto innovations have given way to centralized finance (“CeFi”), which uses blockchain to serve customers while still operating under the control of various regulatory governing bodies. CeFi systems are regulated like TradFi, with centralized governing bodies maintaining the responsibility for safeguarding transactions.
Although its services may mirror or overlap with those of TradFi and CeFi, DeFi operates in a largely decentralized manner. While varying degrees of decentralization exist, DeFi’s peer-to-peer structure limits the ability of any single stakeholder to make changes to the application and reduces intermediaries within the transaction. As DeFi is now serving customers in areas that have been historically dominated by TradFi, such as borrowing, lending, and exchanges, its impact and influence stands to continue to grow, subject to supervisory limitations.
At the current stage of the development, one of the most challenging aspects of DeFi seems to be compliance. A recent DeFi market turmoil that includes such players as Celsius shows that regulatory bodies have been slow in implementing regulations. As a result, people who are often less informed and make a majority of DeFi usage customer base received the most of the financial damage.
According to Washington Post, the crisis at Celsius may accelerate the regulatory crackdown. Financial watchdogs appear to view crypto lenders as some of the lowest hanging fruit in their attempt to bring law and order to the broader crypto industry. After all, with firms like Celsius there’s a clear entity to sue, which is not always the case in DeFi transactions.
Source Delloite & My own thoughts
What are stablecoins, and why are people so freaked out about them?
Stablecoins are supposed to be everything tokens like bitcoin and ether aren’t.
Whereas bitcoin’s price fluctuates sharply, stablecoins are designed to be worth the same as something else — usually the U.S. dollar. Many stablecoins are also issued directly by companies, whereas bitcoin operates independently of any central authority.
Recent events have shown that not all stablecoins are as stable as they’re made out to be. TerraUSD, a so-called “algorithmic” stablecoin, fell below its peg dramatically, eventually crashing to a fraction of a cent and bringing an associated coin down with it.
The debacle has led to fresh scrutiny from regulators, who are worried stablecoins will one day get so big they could cause damage to the larger economy if they fail.
Tether, the world’s largest stablecoin, is a $70 billion juggernaut in the crypto world. But the company, which claims each of its tokens can be redeemed for exactly one dollar, has long faced doubts about the assets that underpin it.
Watch the video to learn more about stablecoins and why they’re so controversial.