This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.
If there is any fintech company out there right now that can seemingly accomplish whatever it tries, it’s Revolut. (OK, also Square, but definitely Revolut.) As FIN noted briefly last week, the UK-based money app recently announced a fresh $800 million (!) Series E round that gives the company a staggering $33 billion valuation. No other fintech in the UK—and not many worldwide—comes close to that. The six-year-old Revolut boasts that it has 16 million customers worldwide and processes 150 million transactions a month.
True, Revolut used some questionable accounting to report its 2020 performance. But the overall growth is multiyear and not seriously in doubt. The big questions for Revolut’s future are: How does it accelerate its growth beyond the UK, and how can it expand the idea that it is a “superapp”—that is, that users will use Revolut instead of other apps for a wide variety of services? As FIN covered in April, lots of other companies—from obvious players like PayPal and Square, to other pretenders, like Google and Facebook—also seek that superapp Holy Grail.
This week Revolut took a swing at these questions, by introducing “Revolut Stays,” a feature that allows app users to book travel accommodations (with flights and car rentals down the road). To entice users, Revolut is offering a 10% discount on travel bookings.
Directionally, this move sort of makes sense: It’s entirely possible that Revolut will create a travel app making it very convenient for existing Revolut customers to book travel and pay for it with money they’ve already parked with Revolut. It’s also possible that some of those customers will be so enamored with Revolut Stays that they will stop using, say, Trip Advisor. It’s also possible that expanding Revolut’s services will increase the amount of money that Revolut squeezes out of every existing and new user.
Those are laudable business goals. But the huge problem with the superapp storyline is that it only works if you assume no incumbents. The reality is, travel booking is a huge, commoditized sector dominated by multiple international deep-pocketed players (Travelocity, Expedia, Booking.com, etc). Most companies entering now will not command meaningful market share. A company like Airbnb was able to break through by offering something that no one else was doing at the time (and even that massive innovation can be commoditized; Travelocity today offers plenty of opportunities to rent privately owned apartments and homes).
You have to believe that Revolut fully understands this (FIN asked Revolut for comment but got no response). In a March interview with American Banker, Ron Oliveira, Revolut’s US CEO, was very candid about how the company finds new business: “We almost never get customers from fellow fintech organizations. We acquire our customers from legacy or traditional banks.”
This same incumbent domination exists in just about every sector, financial or nonfinancial, that Revolut might try to enter: insurance, mobility/transportation, food delivery, etc. The US and European markets are fundamentally different from China, where WeChat and Alipay grew up organically offering payment platforms alongside other services that now number in the millions. FIN follows the superapp race very closely, but sincerely doubts that Revolut, for all its strength and momentum, is going to become a major player in the travel booking game.
When FIN read Securities and Exchange Commission (SEC) chairman Gary Gensler’s speech this week to an American Bar Association committee, we couldn’t help but wonder if he was responding to our 7/18 edition, which noted regulatory concern about stablecoins and predicted that some kind of US action is imminent. Gensler made a fundamental point, that a digital coin pegged to the dollar is by definition a financial instrument that falls under SEC’s jurisdiction:
There are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives.
Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime. If these products are security-based swaps…rules…such as the trade reporting rules, will apply to them.
Gensler has said versions of this before, but this might be the most explicit statement since he took over the SEC that he and many of his colleagues view at least some stablecoins as in fairly urgent need of regulation. As FIN noted last week, the largest and arguably most problematic USD-backed stablecoin is Tether.
There has been a modest US movement in recent years to handle the crypto/stablecoin problem by restricting the power to issue these instruments to federally chartered banks. The intent here may be salutary, but logistically it’s a kludge. Bank charters are very hard to come by and few existing banks seem to want to get into this business.
A far more logical approach is to register stablecoins as a security, and regulate them through the SEC. Among other virtues, this approach aligns with international guidance on stablecoin regulation.
For an investment instrument to be classified as a security in the US, it needs to pass the four parts of the Howey test, derived from a 1946 case in which the Supreme Court upheld an SEC action after a lawsuit called into question what is a regulated security. Do stablecoins pass the test? Let’s review all four:
1) Investment of money. Not gonna waste your time; of course people who purchase Tether and other stablecoins do so by spending money.
2) Common enterprise. The Howey precedent is fascinating because the case had nothing to do with stocks or bonds or how securities are typically understood; it was about purchases of land in a Florida citrus grove. Most of the investors were out-of-state, and had no experience with farming.
From that arguably arcane enterprise comes a vital insight: the object being invested in doesn’t matter in its definition as a security. One important aspect that does matter: Is it a team structure—do investors understand that profits and losses will be shared collectively? On its face, investing in a publicly traded stablecoin—prices fluctuate every second, creating losses and gains that are distributed according to ownership share—meets this criterion. And an SEC framework published in 2019 states explicitly, in footnote 11: “Based on our experiences to date, investments in digital assets have constituted investments in a common enterprise because the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter’s efforts.”
3) Expectation of profits. This could be the trickiest of the four tests. It’s entirely conceivable that a purchaser of a USD-backed stablecoin would say “I did not buy this coin because I expected, or even wanted, to make a profit. I bought it as a store of value,” or “I bought it because it was a seamless, low-fee way to move my money from Bitcoin to Ethereum without having to convert back into fiat currency.” Those arguments are logical but essentially untested in this context. The case law here seems to hinge on how the investment is pitched to the investor. If you look at Tether’s Web site today, it uses phrases like “Add more value to your business” and “Start reaping the rewards of stable currency on the Blockchain,” which aren’t exactly get-rich-quick traps, but certainly imply some kind of profit. A flock of lawyers is going to make tons of money arguing over this.
4) Value determined solely by the efforts of others. On its face, a stablecoin pegged to the value of the dollar or anything else meets this criterion; there is nothing legal that a consumer-level purchaser of Tether could do to affect the value of that investment. Also, the case law here seems like a slam dunk.
So, taken as a whole, the SEC would appear to have a strong case to regulate Tether and other stablecoins as securities. The outstanding questions: Can this be accomplished without new Congressional action? (The apparent answer would be yes.) Is this aligned with what the Fed and other regulators want? (Although there will probably be some dissent, broadly yes.)
Given the drumbeat about Tether/stablecoins, it feels like action will come this year, although probably not before the Fed’s September release of a report about central bank digital currencies.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.
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