Fintech in 2022: CBDCs, Superapps, and Regulation

Regulation is coming, the West’s superapp quest will continue, CBDCs are coming soon, and more fintech predictions for the year.

Fintech will have a tough time topping 2021 (which might be a good thing—the world doesn’t need a repeat of the Robinhood-enabled Gamestop Götterdämerung, or Better.com’s CEO accusing hundreds of employees he Zoom-fired of “stealing” from the company). Private investment in fintech is likely to retreat slightly, at least in the US and China, although investment in crypto-related startups will almost certainly increase. The bloom is off the SPAC rose a little, meaning some large fintech companies will stay away from the public markets in 2022.

On a more detailed level, here are some fintech predictions for 2022:

Regulation is coming, on a variety of fronts.

The biggest development is India’s still-in-proposal-phase threat to ban cryptocurrency. As we noted in December, Modi’s government is displaying a lack of resolve: dates for submitting the bill have come and gone, and various leaks about draft revisions keep cropping up. India’s main securities regulator had approved in November an ETF offering exposure to global blockchain technologies, but then hit the brake, lest the fund contradict whatever rules are supposedly coming. The vacillation is not that hard to understand; there are an estimated 15 million holders of cryptocurrency in India, and the government knows from previous attempted bans that compliance is hard to achieve. FIN expects that some kind of bill will pass this year, but that it will either be short of a full ban or be rescinded once India gets its own central bank digital currency (CBDC); a pilot program may launch as early as this year (more about this below).

In the UK, greater scrutiny of Buy Now, Pay Later (BNPL) schemes seems nearly certain this year. In October, the Treasury began a consultation period on proposed BNPL regulations, particularly around educating consumers and preventing excessive debt; that period ends on January 6. Similar measures may be adapted in Australia and the European Union, although possibly not in 2022.

US regulators should begin tackling several issues this year, notably stablecoin. Even if Fed chair Jerome Powell and Treasury Secretary Janet Yellen can’t yet agree on the form that stablecoin regulation should take, the US government broadly agrees that the meteoric rise in the use of dollar-denominated stablecoin presents a genuine risk to the stability of the financial system. Look for legislation on this issue to be introduced in 2022; whether a bill can actually pass and have an impact is a separate question.

Aside from occasional enforcement actions, US regulation of cryptocurrency has been at a standstill for several years, in part because Congress has failed to take up the issue in any meaningful way. Senator Cynthia Lummis (R-WY) wants to change that, and has pledged a comprehensive bill that would spell out clearly the qualifications for different asset classes and create a crypto-specific regulatory agency. It’s far from guaranteed to become law, but it should generate some productive debate.

The West’s superapp quest will continue, perhaps pointlessly.

There are several drivers of fintech consolidation, but one of the strongest is the race to create a superapp—that is, the overarching, one-stop app in which consumers not only make payments but also buy stock and crypto, book car rides, order food delivered, etc. While WeChat and Weibo enjoy this status in China, during 2021 FIN (see item #2) has become increasingly pessimistic that a genuinely transformative Western superapp can be built simply by bolting handy services onto an already successful product. That won’t stop many from trying, although Facebook and Google seem sufficiently chastened by recent misfires to sit out for a little while (although if Amazon were to make a major move in 2022, particularly outside the US, it would grab our attention). In the meantime, look for fintech giants like PayPal and Square (now Block) to acquire specialty companies in an attempt to boost their superapp standing.

DeFi will eat further into mainstream fintech.

For all of the hype in the second half of 2021, Decentralized Autonomous Organizations (DAOs) are truly in their infancy. Most American states, for example, don’t even recognize DAOs as companies (by contrast, Singapore and Switzerland actively court DAOs and other blockchain companies). As DAO interfaces become more user-friendly, a small but growing group of consumers will adopt DAOs, which in turn will put pressure on traditional financial services and neobanks to compete. will move more toward the mainstream in 2022.

CBDCs are coming soon…or kinda here?

As FIN predicted a year ago (see #5), China’s digital yuan has continued to expand, if somewhat more quietly than anticipated. If you believe Chinese state sources,

more than 140 million personal digital wallets for e-CNY have been created and another 10 million company digital wallets were opened as of Oct 22. More than 150 million transactions have been made via digital wallets, with the total transaction value approaching 62 billion yuan ($9.73 billion).

Even if those statistics are twice as high as reality, the number of people with digital yuan accounts is already larger than the adult population of the vast majority of countries on Earth. The digital yuan will clearly grow in 2022.

India, as noted above, may not be too far behind; a government report issued this week called CBDC “a safe, robust and convenient alternative to physical cash.”

This week, the Mexican government tweeted out its plans for a pilot program in 2024:

https://twitter.com/GobiernoMX/status/1476376240873517061

The international CBDC movement—for what it’s worth the US is conspicuously years behind—raises what for FIN is perhaps the most fascinating, as-yet-unanswerable question for 2022: When the world’s largest economies have fully operational, widely distributed CBDCs, what will happen to the “private” cryptocurrency market of Bitcoin etc? Will there, for example, still be a need for dollar-denominated stablecoin like USDC? Will there be a bifurcated market in which authorized CBDCs are used for payments, while Bitcoin and other coins are still attractive as speculative assets, or illegal activity? 2022 might be the year that we figure this out. Tell the FIN community what you think in a comment.

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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Can Democracies Truly Ban Crypto?

A lot of countries would like to bury Bitcoin and other cryptocurrencies. But can it realistically be done?

In an era of polarization, it’s always useful to examine where views overlap. This year, FIN has heard conservative-libertarian people predict that the US government will eventually ban Bitcoin and cryptocurrency (because they distrust government and think that it will always seek to crush any threat to its power); and heard people on the left argue that government should ban crypto (because it’s used for nefarious purposes and it undermines monetary policy.)

Both sides, curiously, assume that the US government—or, presumably, the national government of any large democracy—has the power and authority to shut down an asset class now estimated to be worth some $3 trillion. This is a highly questionable assumption. There are a handful of countries that formally ban cryptocurrency, including Bangladesh, China, and Ecuador, but they are almost uniformly authoritarian nations with long histories of similar capital controls. Could a democracy actually pull off a crypto ban?

Obviously, in a purely logistical sense, a democratic government can pass a law outlawing cryptocurrency—just as a democratic government can pass a law outlawing alcohol, or marijuana, or sunlight. Most 21st century democracies avoid passing laws that can’t be enforced, yet the perceived cryptocurrency threat continues to tempt many to at least consider the proposition. For months, it has been forecast that India—often considered the world’s largest democracy—intends to ban cryptocurrency, even threatening violators with being arrested without bail.

Yet the momentum behind this effort seems to be fading, as the Indian government begins to recognize that any effective ban would need to be international in scope. In a surprisingly short speech on Dec. 11, at the virtual Summit for Democracy, India’s Prime Minister Narendra Modi said, “We must also jointly shape global norms for emerging technologies like social media and cryptocurrencies so that they are used to empower democracy, not to undermine it.” Subsequent news reports have indicated that the crypto ban bill may be delayed for weeks.

In the US, there have been next to no formal proposals to ban crypto. The challenge is not merely technological, but also political. A recent Pew Research Center poll found that 16% of American adults—approximately 32 million people—have used cryptocurrency in some form. To create a criminal class that large would be daunting.

For better or worse, capital controls have never been a consistent American policy approach. There are a few historical exceptions, the deepest and longest-lasting of which is the “Gold Prohibition” instituted by FDR a few days into his first term. As part of a wider attempt to get a hold of the Depression economy, FDR and Congress made it illegal for anyone in America to own gold in any financially meaningful way (tooth fillings, jewelry and works of art did not count). 

There are several aspects of that history to consider in the crypto context:

1) It was hastily passed legislation in an emergency setting; essentially no one in Congress read the bill because there were no copies of it. There were no hearings, there was no floor debate.

2) There was no confiscation system in place or even envisioned: gold-owning Americans were asked to turn in their gold to Treasury for a set rate, and by all accounts, many did (although there is no way of knowing what percentage took their chances and held on). A handful of cases were brought against people known to own gold, but as best I can tell—and I’ve looked—no one went to jail or even paid a substantial fine for refusal to comply. If anyone had, you can be sure that today’s goldbug movement would celebrate them as martyrs. 

3) While there may be a defense of what FDR did as a temporary measure, there is not one iota of evidence that anyone in the administration wanted or expected this Prohibition to last for 40 years—but it did. The distortions that Gold Prohibition created, domestically and abroad, are incalculable. 

If you try to apply these lessons to the “banning” of crypto, you immediately run up against confusion and infinite complexity. Would Americans be asked to “turn in” their crypto holdings? Would the US government be able to chase after Americans who own crypto and confiscate it? Through what method would the government be able to confirm that any given individual still held crypto? Right now, crypto market capitalization is estimated at $3 trillion. If the US (or any) government wanted to acquire that, where would the money come from? At what rate would crypto owners be compensated?

One further historical note to underscore the technology problem: As legislative and market resistance to Gold Prohibition began to gather steam in the ‘60s and ‘70s, one creative channel was that US citizens would buy gold in Canada and have it stored in a Canadian bank’s safety deposit box. This was an expensive and clunky process, and it seems unlikely that any more than a few hundred or thousand US citizens did it. But the analogous crypto effort—move a digital wallet to a cloud location outside US borders—can be done at a click.

Countries including India may pass legislation outlawing decentralized cryptocurrency as part of their efforts to roll out digital currencies run by their own central banks (the digital yuan experiment is well underway). But it’s an illusion to think that such legislation will actually get rid of cryptocurrency. In February, Nigeria banned its licensed banks from conducting crypto transactions. Within a few months, crypto transactions in the country tripled.

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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We Need Digital Money For the Global Economy to Thrive

I’m a payments innovator who has worked for a large global bank for nearly 20 years. Here’s why I believe in stablecoins.

I’m a payments innovator who has lived and worked around the world for a large global bank for nearly 20 years. For a long time, the best way to improve payments for businesses and consumers was to build on top of the existing financial infrastructure.   But what is clear is that we now need a truly digital form of money:  thoughtfully constructed and appropriately regulated fiat-currency-backed stablecoins.  Just as a range of previously physical things have gone digital in our lives to provide better experiences and instant gratification, so must money.

It’s easy to see why the current payments infrastructure has endured.  Trillions of dollars of payments are reliably and securely processed each day around the world.   Cross border and domestic payments globally have become cheaper, faster and easier for many people over the last five to ten years.  This happened because of the arrival of fintechs, technology advancements, regulatory support to increase competition, the launch of domestic instant payments schemes in markets around the world, and because banks invested in improved payments capabilities.  But these improvements have not gotten us where we need to be.  The digital form factors of money that do exist, like credit cards, are insufficient to support where the world’s economic activity is going.

To be able to finally crack the code on today’s unsolved payment challenges of cost, time and access – and for the new digital economy to thrive, money around the world that consumers and businesses use daily needs to go fully digital.   Tweaks and incremental improvements to today’s analog money won’t get us there.   

Trusted stablecoins like USDC are digital versions of the money you use every day.   Unlike other cryptocurrencies, stablecoins have the price stability and value referenceability of commonly used and held fiat money – like the U.S. dollar – to make them relevant for consumers and businesses in everyday commercial transactions.  And because stablecoins are entirely digital, they can do things your existing money can’t do today.   

Stablecoins are globally mobile across economic ecosystems, enabling instant settlements, micropayments, and are always on, 24×7, 365 days a year.  This means the digital properties of stablecoins will address the current pains of remittances and cross-border payments, for example, by enabling inexpensive instant settlement across borders. This alone will offer tremendous value for a large number of people worldwide.       

All stablecoins are not the same, however. I serve as a special advisor to Centre, founded by Circle and Coinbase. It is a stablecoin standards organization providing a reliable, replicable framework for stablecoin issuance based on the principles of transparency and integrity, starting with USDC.

Digital money is essentially code, enabling programmability. So transactions can be seamless for users – if I receive the asset, then you will receive the funds, without anyone having to issue manual instructions or an institution intervening.  

The benefits will be many. Stablecoins will ensure, for another example, that content creators for the first time will be able to reliably enforce their intellectual property, as the assets they create are shared, trade hands and potentially rise in value.  Stablecoins will power micro-entrepreneurs who sell products online through videos, and enable advertisers to efficiently make instant micropayments to influencers. Real-time global digital commerce, which people everywhere are increasingly participating in, requires real time digital settlement across borders.  Access to money will be democratized– if you have a phone, you will be able to have an operating account to receive payments and send money. You’ll also be able to participate in decentralized finance (known as DeFi) to access credit and grow your wealth.

While most national governments are currently assessing issuing digital currency (known as central bank digital currency or CDBC), there are many profound design considerations.  For example, how private will citizens want or need CDBC to be?  What will commercial banking’s role be if you leave your deposits at the central bank, and who will provide lending? So it will take a long time for many countries to issue CDBC, and it will likely be largely focused on domestic use cases and priorities.  Meanwhile, we need digital money that will work globally today, and the private sector is moving forward with solutions.

Contrast the opportunities offered by digital money and the emerging digital economy with the payments systems we have today. They are fragmented, with very limited interoperability and restricted access.  Payments generally work well when you are within a specific ecosystem, but they stop working well whenever you leave it. It’s expensive, time consuming, painful and sometimes technically impossible to move money across ecosystems. So for both consumers and businesses, sending wire payments from country A to country B is too costly and difficult. For those people sending remittances of hard earned funds home to their families, it costs too much and takes too much time. It is still expensive for a merchant to accept digital payments from customers. And there is an urgent matter of fairness: access to financial services is still largely limited to those consumers and businesses that can afford it. That is inconsistent with the democratization of access that the internet otherwise enables.   

The world is hurtling towards a new phase of the digital economy, well beyond the traditional e-commerce activities of merely buying physical goods online. We are entering a new and critical chapter of the internet’s evolution, sometimes called Web3. This move means we are going from accessing a world of information (“read”) and publishing all kinds of content (“write”), to an internet that will enable true ownership. Read, write, and own.   

This next-generation global digital economy means that the impressive and wonderful creativity of humans can be appropriately and fairly rewarded. For the first time unique digital assets will be created, bought and enjoyed by anyone else in the world. It also means that most folks will be spending even more time online. We are living increasingly digital lives, in digital worlds. The metaverse is a real thing, and you may want to own a digital piece of land and a digital wardrobe, perhaps even more than you will want many physical goods. You are likely to be spending more of your discretionary income in the future on digital assets that reflect your passions and hobbies, which may enable you to experience and enjoy these interests more dynamically than by owning static physical goods.   

The digital economy, digital assets, and the metaverse are by definition global, transcending our physical locations. While we are still in the very early days of this future world, the implications on the future of money are profound. Trusted, well-designed and well-implemented stablecoins will be an important part of the answer.  

Morgan McKenney held a variety of senior executive roles globally in payments innovation for businesses and consumers at Citi for the last nearly 20 years.  She is currently a special advisor to Centre, established by Coinbase and Circle to support the development of trusted stablecoins globally, starting with USDC.  Morgan is also a Limited Partner Advisor at Nyca Partners, a leading venture capital firm focused on connecting innovative companies to the global financial system, an Executive-in-Residence for Global Blockchain Business Council (GBBC) and a Bain External Advisor. 

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Art Basel Meets the NFT Cool Kids

NFTs continue their invasion of the art world, most recently at Art Basel. The rich, newly-rich, and JPEG-rich converged in proximity to Basquiat et al.

If life imitates art (Oscar Wilde) then NFTs imitate both art and life. NFTs, if you haven’t heard, are digital things — art, music, video, and even, sometimes, physical things, that you can purchase, collect, own and display. Your proof of ownership is stored on a blockchain and you can trade or sell whenever you can find somebody else to buy it.  But the NFT craze, which along with its crypto parent has created much new wealth, is decisively blending with the traditional worlds of wealth.

Earlier this month, at Art Basel in Miami, the crypto and art worlds converged, in a  multitude of parties, events, conferences and glitz-outs. At a minimum, Miami reinforced its status as the hottest place (in all senses) for everything wealthy and glittery. Ultimately, Art Basel may have been transformed, perhaps forever, by the technorati. And the NFT contingent insisted that NFT art will be attached to the world of high art forever after, for better or worse. 

Miami for those few days in early December was reminiscent of the story of the blind man and the elephant, depending on which part of the festivities you touched. Jon Wayne Gurman, the father of WooshiWorld, a new NFT property he hopes will become a physical property and series of merchandise, attended both the Art Basel show and the many surrounding NFT events. “Art Basel was very boring compared to the energy and excitement generated at the NFT events,” he said. 

Jordan French, editor of Grit Daily and an events producer, took a page from the Art Basel playbook by co-locating there the Token Society, a crypto-VIP gathering. Its speakers spanned both the art world and that of NFTs. The soiree included creators, comedians, TV hosts, and as well as the usual hangers-on. French promoted it as a “classy” event, worthy of Miami’s see and be seen vibe.

Meeting of the Token Society (photo by Jordan French)

Akbar Hamid’s PR firm, 5th Column, is a rising star for helping NFT properties get launched and noticed. What jazzed him the most in Miami Beach was the feeling that he was witnessing the birth of a work in progress. “You know you were hearing brilliant ideas that have not been realized yet, “ he told me. Hamid’s clients included  Sandbox, whose party-event featured Blond:ish.  His other client, Wax, appeared at NFT BZEL event that Hamid helped organize. Wax’s William Quigley was a featured speaker. It aimed to cross-pollinate entertainment, investment, and collecting to create a conference covering a spectrum from “NFT for newbies” to a roadmap to the future. Aku — a helmeted digital explorer whose story is told across 10 NFT “chapters” – was unveiled by former MLB player Micah Johnson (who made $2 million during his own debut NFT sale in March). Fans and collectors of Bored Ape Yacht Club, whose owners include a roster of celebrities, celebrated their newfound status over BAYC-branded beers.

With 4000 attendees, NFT BZL was probably the largest of the numerous NFT soirees. (Confusingly, both #NFTBASEL and #NFTBZA were other events.)

The DNA connecting NFTs and the art world is clear. You create a piece of art and instead of framing it, mint it into an NFT, which you can sell at any number of sites like Rarible and OpenSea.  This past March, the gavel heard round the world was sounded by the venerable Christies auction house, when when it sold an NFT created by the relatively-unknown Mike Winkelmann, aka Beeple,  for an astonishing $69.3 million. With that gavel thump, Beeple became the third most valuable living artist at auction, after Jeff Koons and David Hockney.  At Art Basel, 255–year-old Christie’s partnered with 6-month-old  nftnow in Miami to produce The Gateway, a music art celebration heralding the NFT world.

The Miami Art Week is summed up in a tweet from Janet Lee.

 

NFTs weren’t the sole province of sideshows. Humans + Machines: NFTs and the Ever-Evolving World of Art exhibited at Art Basel proper, with an interactive show built on the energy-efficient blockchain Tezos. Guests created their own NFTs by fusing their video-captured likeness with an algorithm and then selecting the visual image they found most engaging. More than 4,500 unique NFTs were thus populated.

Growing the NFT Ecosystem

Daniel Mikesell, an art collector-cum-technologist, seized the moment with his company Blackdove.  It has a top-of-the-line platform aiming to create world-class display frames for NFT art. It wants to liberate NFT art from its paltry home on your mobile phone and turn it into a beautiful true collectible displayed in the same way you’d display any piece of fine art.  “I’m not judgemental about the importance of the value of art, “ says Mikesell. “It’s in the eye of the beholder,” he says when comparing NFTs to physical art. (Many NFTs are not the slightest bit visually or artistically sophisticated.) But, Mikesell believes NFTs need to be showcased somewhere else than the screen of a phone to be enjoyed and properly shown to others.  “When you buy a painting, you don’t carry it around with you. Why would you want artwork you collect to stay on your phone?”

Mikesell suggested that this year’s Art Basel Miami was not a takeover of traditional art fairs but rather the beginning of a true melding of the worlds of physical artworks and NFTs. Many artists,  he noted,  are showcasing real-life artworks side by side with NFT digital counterparts.

The Great Co-mingling

For the FOMO crowd, it was hard to know where to be. The Information reported on the scene in a piece called The NFTS that Ate Miami: “The Winklevoss twins sauntered through a private waterfront mansion dressed identically. DJ Khaled bellowed “Gem-in-i” and “Cryp-to” from the stage. NFT pioneer Beeple, pop star Macy Gray, and Larsa Pippen, ex-wife of Scottie and ex-friend of Kim Kardashian, all made appearances.”  Artist Jason Keath, founder of NFT Fresh, summarized for The Information:“A lot of people walking around with millions of dollars of JPEGs in their pockets.”

Even Time Magazine and Conde Nast went ga-ga over the high celeb quotient and meteoric  rise of NFTs. Interviewing Diplo, the Grammy Award winning DJ, Conde Nast explained what inspired him to buy a Bored Ape NFT: “I like the apes the most because they remind me of the stuff I collected as a kid, like Ninja Turtles. And it feels cool to have one — I can show it to Post Malone at a party, and he’ll be like, “Oh cool, you got that one?” It’s kind of silly, but it’s a flex — like buying a really nice outfit.”

Andy Fischer Wright, an academic, nails some of the oddities of the moment in his treatise   “Art Imitates Life, NFT Verifies Art.”

Alas, The Rich are Not Immune

Seeing, being seen, and being seen owning the trendiest most whimsical and perhaps evanescent collectible may have come at a cost to some who were there. The rich and connected are no more immune to COVID-19 than to a money-drenched fad. One investor in the know told me that many of the crypto crowd were using fake proof of vaccinations cobbled together from QR codes. Another told me that eight of his colleagues left Miami with the Omicron variant.

Favorite tweet:

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How Fintech Is Integrating Hyper-Personalization Into The Financial Sector

At the Health+Wealth of America Conference, Betterment’s Sarah Kirshbaum Levy joined Cognizant’s Kevin Pleiter and Clarim’s Jim Ledbetter to explore fintech’s continued integration into financial services.

Published in partnership with Worth.

From checking your online statements to trading stocks, digital finance has quickly become something that we cannot live without. At the recent Health+Wealth of America conference hosted by Techonomy, CDX, and Worth, industry experts Sarah Kirshbaum Levy, CEO of Betterment, and Kevin Pleiter, managing director of capital markets at Cognizant, joined a panel to discuss the ways in which fintech will continue to permeate and improve the financial sector at every level.

The fintech revolution has opened the doors to a broad array of financial possibilities that have democratized aspects of wealth management that have previously been difficult to access. Kirshbaum Levy said she is hopeful that technology advancements will lend themselves to long-term thinking about retirement benefits, democratizing the process and allowing everyone to plan for the future with ease and understanding. Pleiter sees the rapid advancements in financial technology as an opportunity to provide not only education but valuable, high quality wealth advice to a broad audience at a fraction of the cost. He also noted that the capacity for hyper-personalization of wealth management is made possible by advancements in the fintech space, effectively breaking the mold of traditional wealth management techniques that consisted of portfolio silos with each client being delivered the same model portfolio as thousands of other clients.

Through the advancement of technology, personalized financial strategies can be tailored to each individual’s needs and circumstances. One of the practical ways personalized portfolio management has improved due to technology is through machine learning and AI. Kirshbaum Levy pointed out that machine learning has dramatically streamlined the process of portfolio management by tailoring and rebalancing your financial portfolio, which can also be overlaid with rules about risk tolerance and tax preferences. 

Over the course of the past two years, most everyone’s personal and financial needs have shifted in a way that legacy banks could not navigate without the aid of fintech startups. As moderator of this session and Clarim Media’s chief content officer James Ledbetter pointed out, startups in the fintech industry market themselves as revolutionaries that are here to replace big banks; however, the reality of a forced adjustment to online banking and wealth management is that without the innovation of these startups, legacy banks would not have been able to deliver the same level of service to their client bases over the course of the pandemic. Thus, partnerships between fintech and legacy banks were a crucial step toward the survival of these two competitors. 

While fintech brings a lot of benefits to the financial sector as a whole, Ledbetter pointed out that there are also downsides—such as the gamification of investing and trading. Kirshbaum Levy and Ledbetter discussed that, as a fiduciary, Betterment is obligated by law to advise their clients to act in their own best interests, whereas financial services and platforms that promote ease of transaction may be taking advantage of their users. “Nothing is ever really free,” she says, noting that when you are dealing with platforms that encourage ease of transaction over a long-term holding strategy, the user becomes the product.

The effects of fintech on the financial sector as a whole are pervasive and largely beneficial. Through the advancement of technology, AI and machine learning, the fintech revolution has the power to help create hyper-personalized portfolios, democratize aspects of financial planning that might otherwise remain obscure and allow legacy banks to work in tandem with new tech to provide high-value service at a fraction of the cost. However, with great power comes great responsibility and that power has been placed in the hands of the consumer. The gamification of investing and trading opens the door to a host of dangerous possibilities that may place the unknowing user at risk.

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The Future of Crypto Politics

45 percent of Democrats and 58 percent of Republicans don’t know or have no opinion on cryptocurrency regulation. But that picture may change as crypto companies with important policy issues at stake become bigger players in the political arena.

In September, after watching nonresponses to disingenuous Senate questions, FIN wrote:

a Congressional hearing is typically a poor venue for gaining insight into the American financial regulatory system. Even when the events are not contentious, they can seem like experiments to concoct a maximum number of ways for people to talk past one another.

Those remain reliable watchwords, but a recent House Financial Services Committee hearing on cryptocurrency showed that it doesn’t always have to be an exercise in bad faith. The four-plus-hour hearing, with several crypto executives as witnesses, was almost entirely civil in tone—if anything, some of the witnesses could have been grilled much harder—and touched on a wide range of subjects in ways that were genuinely edifying. We’ll get to a broader, arguably troubling theme in a moment, but it’s worth cataloguing several legitimate policy issues aired during the hearing.

At what point should we be concerned about the possibility of a bubble? With the massive growth of cryptocurrency, this question from Al Green (D-TX) seemed pretty relevant. Brian Brooks, the CEO of Bitfury and the former acting Comptroller of the Currency, provided a solid, if not bulletproof, answer: crypto volatility stems a lot from being a relatively new and thinly traded market. Much of what provides stability in, say, equities markets is an ecosystem that provides a lot of price discovery: mutual funds, futures, derivatives, etc. He also claimed that some 80% of Bitcoin holders, for example, have never sold any of their holdings, and therefore days or weeks when Bitcoin tumbles can often be attributed to a very small number of people (even one) selling. Therefore, he argued, what the crypto market needs is more liquidity and price discovery, not less.

What effect will the growth of crypto have on community banks and minority-owned depositary institutions? This question from Greg Meeks (D-NY) turned into a bit of a commercial for Circle Impact, an ambitious initiative announced last month by Circle, which operates USDC, the second-largest dollar-denominated stablecoin. Circle CEO Jeremy Allaire explained that because Circle isn’t a lending institution, it intends over time to allocate billions of dollars worth of USDC to minority-owned and community lenders, to shore up their balance sheets and, ideally, create more capital for underbanked communities. The program has yet to get off the ground, but using crypto to enhance financial inclusion is an area where Congress can at least theoretically play a useful role.

Does cryptocurrency represent a threat to the dollar’s status as the world’s reserve currency? This concern came from Blaine Luetkemeyer (R-MO), and presents a tricky challenge to the way that a lot of people think about crypto. That is, US crypto advocates talk about the need for monetary innovation, and the need to keep that innovation inside the US, not drive it abroad. But if the US dollar—even in a future digital form—has to compete in a global marketplace on the basis of its features (as opposed to the hegemonic status that Bretton Woods conferred upon it), then there is no guarantee that it will beat Bitcoin, or the digital yuan, or some currency that hasn’t been invented yet.

Brooks, at a minimum, has thought about the question. “I’ve said for a long time that the secular reduction in dollar holdings as a percentage of global central bank holdings is alarming,” he said. Actual solutions, however, seemed in short supply.

Should stablecoins, until future legislation might deem otherwise, be regulated as commodities? Sean Casten (D-IL), referring to the federal government’s recent report on stablecoins, asked this, noting that the legal protections to make stablecoins behave like a currency are not now in place. Allaire gave a reasonably plausible “no” answer, pointing to a number of existing regulatory requirements that treat USDC the same way that cash transactions on Square or PayPal are handled.

Largely absent from the hearing was the kind of swashbuckling, Muskian sneering at the very idea of regulation. Indeed, FTX CEO Sam Bankman-Fried said explicitly that there were certain consumer protections around crypto trading that he would welcome, and that would benefit the crypto industry.

Despite such comity, the hearing did surface a burgeoning theme of conflict. Ranking member Patrick McHenry (R-NC) alluded to it in his opening statement: “My fear is that we’ll have a partisan divide.” Some Democrats, he said, may already have made up their minds about crypto, and intend to file regulatory laws that will stifle or kill crypto innovation in the US. A cynic might point out that McHenry may actually welcome such a divide; at least since the middle of the year, there has been a palpable sense in some public settings that Republicans want to champion and enable the cryptocurrency ecosystem, while Democrats want to attack it, or at a minimum regulate and tax it.

An opinion piece this weekend on the Decrypt site used the headline “Democrats Are Blowing the Bitcoin Vote.” It argued:

Republicans are becoming the party of crypto, while Democrats are earning a reputation as anti-crypto….This is a terrible mistake….Why are Democrats opposed to crypto? Their hostility may be rooted in the libertarian leanings of many early crypto adopters, few of whom are inclined to support a party associated with big government. What they’re missing is that Bitcoiners will happily support any politician who supports Bitcoin, no matter how flawed, from Nayib Bukele to Ted Cruz.

There are some questionable assumptions here, such as the idea that “the Bitcoin vote” represents in any given non-national election a sufficient, freestanding constituency of any importance. It does seem to be the case, at least for now, that crypto owners have no automatic party allegiance. A Morning Consult poll released this week found that “61 percent of crypto owners say they voted for Biden last year, compared to 32 percent who say they voted for former President Donald Trump.”

And neither is it clear that regulation is an especially partisan issue: “Notably, 45 percent of Democrats and 58 percent of Republicans didn’t know or had no opinion on the amount of cryptocurrency regulation.”

But that picture may change as crypto companies become bigger players in the political arena. Especially this summer when it emerged that the proposed (and now passed) infrastructure law targeted crypto brokers, the crypto industry has frantically increased the amount of time and money it spends on federal lobbying:

Membership has risen from 28 firms to 65 since January 1. Meanwhile, the 2020 budget that was just shy of $2 million has gone up to nearly $8 million, according to executive director Kristin Smith and the association’s most recently filed 990 forms. Among the most recent members are Solana Labs, Republic, Dapper Labs, Tacen and Messari. 

Here’s a safe bet: with Congressional elections coming next year, that $8 million figure is going to balloon. Indeed, with all of the cyberwealth looming around the cryptocurrency industry, it is increasingly likely that individual members of Congress will raise substantial piles of campaign cash from crypto firms.

Cynthia Lummis may be a small indicator of what the future looks like. Elected last year as the junior senator from Wyoming, Republican Lummis has developed a reputation as a crypto advocate. Keeping in mind that Wyoming campaign spending is relatively small and that Lummis doesn’t face re-election until 2026, it’s still interesting to note who is donating to her campaign. A recent investigation by The Block (behind a paywall) found that a majority of the individuals who have donated to Lummis’s campaign work for firms that The Block deems either “crypto native” (such as the CEO of Kraken) or “crypto adjacent.” The crypto industry has lots of money to spend, and important policy issues at stake; look for more Lummis scenarios in next year’s elections.

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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Elizabeth Warren’s Bitcoin Climate Crusade

The crypto industry has been on a global lobbying offensive this year, successfully circulating the message that blockchain technology could help boost growth in renewable energy. Senator Elizabeth Warren is not having it. Plus, Wise storms the US market.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

It’s merely an impression, but it feels like the climate criticism of cryptocurrency mining has been less prominent in the second half of 2021 than in the first half, even as cryptocurrency itself has continued to skyrocket. In May, for example, the New York State legislature considered a bill that would have imposed a three-year moratorium on cryptocurrency mining until an environmental impact study could be concluded. That bill died quickly, and there’s been not much formal action since then. In part, this may be because the crypto industry has been on a global lobbying offensive this year, successfully circulating the message that blockchain technology could help boost growth in renewable energy.

US Senator Elizabeth Warren (D-MA), however, is not having it.

This week she sent a remarkably detailed letter to Jeffrey Kirt, the CEO of Greenidge Generation Holdings, a publicly traded Bitcoin mining company headquartered in Dresden, New York, in the Finger Lake region. Warren asked for information about Greenidge’s operations and “the resulting impacts on the environment and local communities.” What makes Greenidge especially interesting—and this is starting to become common among large Bitcoin miners—is that the company doesn’t merely use energy by mining Bitcoin, it also produces the energy, in its case primarily through natural gas, and sells some to state residents.

For Warren, this might represent the worst of both worlds, energy and crypto. The Senator strongly implied that Greenidge’s stated commitment to sustainability is, at best, lip service: “Your company claims carbon neutrality through the purchase of carbon offsets, but its Dresden facility is still putting hundreds of thousands of metric tons of carbon dioxide into the atmosphere that would not be emitted otherwise.”

Greenridge is, to put it mildly, an unusual company. It describes itself as a “vertically integrated Bitcoin mining company,” but Greenidge only began commercial Bitcoin mining last year. It grew out of a consortium of coal plants in upstate New York that date back to the 1930s. A lack of electricity demand bankrupted the plant in 2011, but it reopened a few years later and converted to natural gas. The company has faced pressure around the state air permits for its main plant but, intriguingly, it has strong public support from the local electrical workers’ union. Earlier this year, Greenidge also purchased a public company called Support.com, which operates remote call centers.

You might think that a company at the heart of the cryptocurrency explosion would be, well, minting money. In reality, though, Greenidge is fairly small and, while growing fast, unprofitable. In the third quarter, Greenidge mined 729 Bitcoins, not quite 3x what it mined the year before. At current prices, that comes out to about $36 million. Given Bitcoin’s market capitalization of about a trillion dollars, you get a strong sense of how decentralized Bitcoin mining is. Greenidge is not only far from being a global leader in Bitcoin mining, it’s not even the largest in the US. (That honor would appear to belong to the Whinstone mine in rural Texas; in October CNBC.com reported that it was mining more than 500 Bitcoin a month.) Greenidge’s most recent earnings statement showed a Q3 loss of about $8 million on revenues of $35.75 million. Greenidge did not respond to FIN’s request for comment.

Nonetheless, the company clearly plans for meteoric growth, which provides some basis for Warren targeting it; Greenidge is also planning to open a power/mining plant in Spartanburg, South Carolina. FIN predicts that it’s going to be a while before Greenidge responds. Warren’s six-page, single-spaced letter delves pretty deeply into the details that one might expect from a former law professor. For example:

How does your impingement data compare to the Environmental Protection Agency’s (EPA) proposed numeric performance standard of limiting fish impingement mortality to no more than 12% on an annual average and 31% on a monthly average, and how does your entrainment data compare to the EPA standard for new units of reducing entrainment mortality to the equivalent of 90% of reductions achieved by closed-cycle cooling?

Warren’s legislative goal here is unclear, especially because this Congress seems unlikely to pass any new laws cracking down on crypto mining. Still, it’s far from impossible to envision a future in which large renewable energy companies generate power for free for their local grids, and subsidize that social goal by mining cryptocurrency. After all, cities like Miami have already made millions by issuing their own crypto coins. If Warren’s grilling can push toward that outcome, then let’s see more of it.

Wise Storms the US

Wise is one of Europe’s most successful fintech startups (OK, it’s based in London, but back when it launched in 2011 and was known as TransferWise, London was still part of Europe, plus the founders are from Estonia). Wise made a splash by offering crossborder currency exchanges at rates far lower than traditional banks and, while the company has had a bumpy ride since going public in July, it’s been profitable for years and is one of very few European fintechs worth billions of dollars.

Now, Wise is making a serious push into the North American market. This week, the company launched a “Wise card” in Canada that allows customers to spend money in US dollars and other currencies without any transaction fees. Wise also announced that it is opening a major office in Austin.

Currently, about a fifth of Wise’s business is in North America, but the company is pushing for more. Wise CTO Harsh Sinha told FIN “the US is one of our fastest-growing markets, and obviously a very large market.” Sinha says Wise chose Austin in part because “there are a lot of people who are a little bit fed up with the Bay Area.”

How much does it matter to Wise that, especially since the COVID pandemic, Americans travel less outside their own monetary borders than Brits and Europeans do? Sinha acknowledges the issue, but argues that 1) younger Americans are more internationally focused, and 2) Leisure travel per se is a limited use case. Wise will focus on businesses and remittance payments in the US market.

Even so, N26’s very recent abandonment of the US market has to give any outside fintech companies pause. Sinha makes a very reasonable point that for a banking relationship to work, many people psychologically need to feel that their money is somehow close by (there are a few large multinational banks with prominent roles in the US, including Banco Santander and HSBC, but Sinha maintains that they function as if they were domestically controlled). By contrast, he argues, a payments/transfer business is intrinsically virtual, and consumers will be attracted to a good deal.

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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Fintech and the Giving Season (Year 2)

Cryptocurrency investors are more generous givers than average investors. American megafoundations have enabled crypto donation and NFTs are increasingly powering the world of charity. Plus, what the hell happened to PayPal’s stock?

FIN’s favorite post from 2020 was, hands down, Fintech and the Giving Season, in which we explored the many ways that fintech is transforming the world of charitable giving.

It’s pulse-pumping to survey the landscape in 2021 and realize how much has evolved. As with so many other aspects of financial life, the COVID pandemic accelerated digital charitable giving. Overall, charitable donations in the United States grew 2% in 2020, but online charitable donations rose 20.7% (even so, online donations still only make up 13% of all donations, and of those, 28% are made using a mobile app).

There is, naturally, much more to say this year about cryptocurrency and NFTs in the world of charitable giving. Plummeting markets in recent days may have left many crypto investors feeling Scrooge-like, but in general, according to a 2021 survey by Fidelity Charitable, cryptocurrency investors are more generous givers than average investors:

With eager donors like that, it’s not surprising that recently, American megafoundations such as American Cancer Society and Save the Children have enabled crypto donations. An organization called The Giving Block has helped hundreds of nonprofits set up a cryptodonation ecosystem.

Increasingly, NFTs are powering the world of charity. This year’s Macy’s parade, for example, gave away 9500 NFTs, and is auctioning off NFTs based on ten historic, parade-specific characters (as opposed to, say, copyrighted cartoons), with a portion of the sales going to the Make-a-Wish Foundation. Bids are open until November 30; as of Sunday morning, the NFT of a spaceman balloon from the 1950s had a bid of $340,000. Similarly, in September StreetCode Academy auctioned what it called “pNFTs,” philanthropic NFTs. The nonprofit pointedly said:

The NFT was selected because it’s a great example of how tech can benefit any creator, delivering a format where folks from any background can create, claim and benefit from their content, combating a pattern of art being co-opted and monetized without credit to the original creators.

StreetCode, according to a news account, received 60 bids and raised $15,000 between Sept. 15 and Sept. 30, a record pace.

Moving beyond the blockchain, in the realm of charitable giving, fintech is especially good at least two things. The first is making charitable donations into a group activity, something that would-be donors often want—especially in the wake of disaster—but are seldom set up to do.

In 2017, Hurricane Harvey devastated the city of Houston; at one point, a third of the city was underwater (nationwide the storm cost $125 billion, second only to Hurricane Katrina). The NFL defensive end J.J. Watt, then playing for the Houston Texans, organized a crowdfunding campaign for Houston that raised an unprecedented $41.6 millionJonathan Shugart, an Alabama-based “recovering tax attorney” looked at Watt’s effort—and similar crowdfunded charitable campaigns—and realized that much of what Watt raised was not in the form of a charitable donation. The Internal Revenue Service (IRS) treats such transactions as a peer-to-peer gift—with no tax deduction available—and worse: if the donation is over $15,000, the donor technically has to file a gift tax return. Shugart told FIN that he had a light-bulb moment: “There’s got to be a better way if we want to do crowdfunding for charitable good.”

He launched B Charitable this year after about a year of wrangling with the IRS to get its 501c(3) status. B Charitable allows individuals or groups to set up a charitable giving fund and realize an immediate tax benefit. Once a campaign is created, others can join in and also get tax deductions for their contributions. The funds can be dispersed all at once or over time. Shugart argues that most technology enables charities to pull money in; he wants B Charitable to act as a push on donors. B Charitable itself is a nonprofit that tries to keep the overhead low; it contracts out for services and Shugart says it hopes that some donors will include B Charitable along with the target charities: “We ask for tips, we don’t require them.”

The second thing is integrating charitable giving into everyday life. The outfit once known as Pledgeling did at least two big things in 2021: it changed its name to Pledge and became a fully integrated partner with Zoom, which has become an essential part of everyday life. Now, when a nonprofit holds a Zoom call for interested parties, it can easily include a DONATE button powered by Pledge. The nonprofit raised $3 million in seed money this year for its video efforts.

Perhaps the grandest charity fintech of all is the Washington, DC-based Goodworld. New Zealand native Dale Nirvani Pfeifer told FIN that she realized a technology gap in nonprofit fundraising shortly after she moved to the US. She met her cofounder John Gossart at the DC startup incubator 1776, and by 2018 they had investments from the city of DC and Mastercard. Since COVID hit, Goodworld has focused on building out donation software for businesses and nonprofits. Increasingly, Pfeifer says, small- and medium-sized businesses want to integrate giving to social causes into their daily commerce: “What is expected of companies is changing and, you know, it’s really being demanded by consumers and by employees.” Goodworld’s next step, she says, is taking its operation global.

PayPal’s FreeFall

Through most of the first half of 2021, the following sentence was all but inconceivable: It is possible, indeed likely, that PayPal stock (PYPL) will close 2021 below its year-opening price of $231.92 a share.

As the chart below shows, PYPL has had a disastrous second half:

Aside from the obvious premise that the stock was overpriced, it’s hard to pinpoint exactly what caused it to tumble. Yes, there was a sugar-high aspect to the benefits brought on by the COVID lockdown (which made contactless payments more appealing) and then stimulus payments. But that is also true for rival Square, which hasn’t been hit quite as hard. On November 17, Bernstein downgraded PayPal stock from a buy to a hold, citing increased payment competition from the likes of Amazon and Shopify: “PayPal now risks getting disrupted vs. being a disruptor.”

What’s curious, even confounding, about the Bernstein downgrade is that it could have been issued any time over the last several months. More important, the downgrade clearly didn’t cause the PYPL free fall, only accelerated it. PayPal shareholders are no doubt hoping that management has better answers than that bizarre, quickly abandoned move to buy Pinterest.

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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Why Andreessen Horowitz’s DAO Idea is DOA

This is a hell of a week for news about venture capital. A report in the Times detailed a high-octane lobbying effort by Andreessen Horowitz to shape the way that cryptocurrency—in which it is heavily invested—is regulated.

This is a hell of a week for news about venture capital, which is of course joined at the hip to fintech. Sequoia Capital, the storied VC firm where I worked for a time, announced that it will pool all of its investments into a single fund. Instead of creating funds that last seven or ten years and then close out, the limited partner investors will be able to cash out more or less whenever they want. Sequoia is also registering as an investment advisor, which will remove some restrictions on how it can invest.

Perhaps predictably, FIN sees this announcement very much in line with a two-part series we are producing for the Observer about the death and future of venture capital; part I was published (before Sequoia’s bombshell) on October 14 and part II will publish in a day or so.

Then on Saturday a front-page New York Times story detailed a high-octane lobbying effort by Sequoia’s neighbor Andreessen Horowitz to shape the way that cryptocurrency—in which A16z is heavily invested—is regulated. The Times story quotes a law professor saying “This is a classic case of asking the fox to design the henhouse.”

While the specter of manipulative Sand Hill Road titans rewriting federal regulations to benefit their portfolios is a great and important premise for a story, the Times article was light on the mechanics of how A16z, beyond hiring influential people, is going to accomplish this. The most detail that readers are offered is:

Certain crypto start-ups that A16Z is funding are being organized around a new type of entity called a decentralized autonomous organization, or DAO, which would be exempt from the act under A16Z’s plan.

This exemption is warranted, A16Z argues, because DAOs are supposedly run by the community of crypto users rather than for-profit executives. But the financial backers of these platforms still stand to make considerable profits because the founders of the crypto start-ups often own a sizable share of the special crypto tokens that can, in some cases, grant voting power to help govern these platforms.

The A16Z proposal would also limit the ability of the Consumer Financial Protection Bureau to regulate DAOs beyond requiring certain disclosures. It instead proposes that the federal government consider relying on an industry-created “self-regulatory organization” to define and enforce how consumers are treated. And it would give preferential tax treatment to DAOs, limiting information they have to turn over to the Internal Revenue Service and making so-called member dues that they collect tax exempt.

That all sounds scary from a public policy point of view, but the reality is more complicated. A16z provides two fundamental rationales for its proposal, both of which contain at least half a truth. The first is basically: crypto and DAOs can be built pretty much anywhere, and if US regulation makes it difficult or impossible to do here, the industry will take its wealth elsewhere. That may not be a good enough reason to allow the industry to regulate itself, but it’s hardly a crazy assertion.

The second rationale is that current regulations are a confounding hodgepodge of overlapping jurisdictions that could benefit by the clarity that A16z so generously supplies. The section of the proposal where this is discussed is about as funny as crypto lawyers get:

For corporate law purposes, when two or more persons engage in an endeavor, the imputed structure is that of a general partnership or an unincorporated association….However, while DAOs may be analogous to partnerships, they are not partnerships. For instance, DAOs can be comprised of hundreds of thousands of pseudo-anonymous persons and are not necessarily operated with for-profit intent. Similarly, they may be analogous to corporations, and yet are not corporations; they may be analogous to joint tenancies, and yet are not joint tenancies; and they may be analogous to mutual agencies, and yet are not mutual agencies.

Again, one need not agree with the A16z prescription to acknowledge that the diagnosis is fairly unimpeachable.

Yet while crypto lawyers are lavishly paid to argue the appropriateness or inappropriateness of analogies, there is in fact a concrete history of how the federal government treats DAOs. It’s understandable why A16z lawyers don’t mention this history, but its absence is the biggest flaw in the Times’ generally enlightening story. Way back in 2017, the Securities and Exchange Commission (SEC) issued a full report regarding an unincorporated organization called, conveniently, The DAO. The DAO was built on the Ethereum blockchain and raised $150 million in token sales from more than 11,000 investors. Before it could do anything with the money, however, a group or individual hacked The DAO’s code and diverted about a third of the money.

The SEC investigated the incident, and while no fines or penalties were assessed, the conclusion was about as unambiguous as these things get.

Based on the investigation, and under the facts presented, the Commission has determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The Commission deems it appropriate and in the public interest to issue this report of investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to advise those who would use a Decentralized Autonomous Organization (“DAO Entity”), or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws.

There might be a little wiggle room there for some DAOs to get exemptions, but as a category the report was fairly clear. (Shortly after the SEC report was released, Canadian regulators issued a very similar guideline.)

And so, to come back to the Times story, the article’s influence scenario is that the (for now!) Democratic-controlled Congress—you know, with Maxine Waters as chair of the House Financial Services Committee, which AOC also sits on—is going to change the tax code to weaken a Trump-era SEC decision, in order to help out a Facebook-identified VC firm (which technically isn’t a VC firm anymore) because it has hired some friends of Joe Biden. This, as a political prediction, is not how anyone FIN knows—especially not in Silicon Valley!—thinks things are generally headed.

It could happen, theoretically, but it would require a supine response from current SEC chair Gary Gensler (who also is not mentioned in the Times story). The idea that Gensler is keen to overturn the SEC’s 2017 DAO ruling is far-fetched. Indeed, in an order and $10 million fine issued this August against Poloniex, Gensler’s SEC essentially said “Ever since we issued the DAO Report, you should have known that what you were doing was illegal.” Such track records are very hard and rather irresponsible to reverse, even if some charismatic VCs and their lobbyists would like them to be. If A16z genuinely wants to be helpful and productive on this front, it should offer a legal framework around DAO tokens as securities. Or maybe it’s waiting for a Republican Congress, but that doesn’t take care of the Biden/Gensler barrier any time soon.

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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