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

For centuries, the relationship between individuals and investment has been almost entirely siloed. There is you, and there is your banker, and there is a lot of legal and structural scaffolding to make sure that no one gets in between that relationship. Widening out a bit, there are stocks and bonds and other ways of pooling financial resources, yet even then the individual usually invests through a broker, and the typical shareholder doesn’t know much or anything about other shareholders.

That model of an isolated, single-channel connection to financial value is changing dramatically. In the near future, it seems obvious there will be financial assets that are not only shared but genuinely interactive—and in some important sense created by the investors themselves (which is not true of existing securities available to most individuals). Instead of, say, buying a stock and regularly checking its performance, many future investors will log into a collective financial playground, figure out what investments make the most sense, and in essence create and market them together in real time. Investing will look less like a savings account, and more like an Instagram pile-on or a fantasy sports league.

There are sketches of this future all over the place, notably in NFT and crowdfunding markets. This week a London-based company called Visionrare launched a platform allowing people to invest fantasy shares in tech startups, to be awarded payouts in real cryptocurrency. As Sifted (the must-read fintech publication from the Financial Times) put it in a somewhat hyperventilating article:

Today a new fantasy startup investment game launches. Players can buy and trade virtual shares in promising startups, and earn real crypto dollars for collecting the best portfolio. It’s like being a VC — players scout companies, place bets, watch them boom or bust — without any of the pitching, board meetings or… equity. 

“We’re on a real mission to democratize access to the excitement of startup investing,” says Jacob Claerhout, cofounder of the platform, Visionrare.

The Visionrare platform is very cool, a bit like EquityZen but with many more options. The list of startups available to invest in is the Y Combinator cohorts from Winter 2018 to Summer 2020, and investors can choose whether to get in at pre-seed, seed, Series A stages, etc.

Before projecting this model too far forward, though, there are several asterisks that belong next to it. One is that of course some versions of collective investing have existed for some time. It’s evolved over time, but Motley Fool’s CAPS community has been around since the ‘00s, and allows stock investors to compete based on the performance of fantasy portfolios.

Another asterisk is that what Visionrare launched is almost certainly illegal in this form, and it’s clear the founders did not think through the implications of what they have created. Not 24 hours after coming online, a Visionrare blog post said:

For the last couple of weeks we worked on building the minimal viable product of a game that brings this idea to life. However, during this process we underestimated the legal complexities and decided it is best to hold off on some of the initial dynamics. We are convinced that startup investing is a fascinating, exciting and educational experience that should be available to a wider audience, but we want to make sure we build a product that is mindful of all the intricacies that come with this mission.

There at least two problems with the original version of Visionrare: one, NFTs that derive their value from a company’s performance looks a lot like a security, and allowing them to be bought and sold would require Visionrare to register with numerous regulatory agencies where it does business. Two, Visionrare didn’t even have permission from the companies themselves.

Nonetheless, the Visionrare platform is the logical culmination of a number of fintech trends. For starters, there is equity crowdfunding, which is still tiny in the United States but is on a pace to hit about $500 million invested this year, and is growing at a 70% annual pace. Then there are the sites—like Carta and EquityZen—that allow accredited investors to buy shares in private companies. And then there are outfits like Republic, which allow investors to put money into music and artists and get paid on the basis of future royalties.

It’s a safe bet that transferring value between individuals and various institutions—equity markets, decentralized autonomous organizations—and between various cryptocurrencies and traditional money will get easier and cheaper over time. Despite Visionrare’s stumble into the market, it gives a clear glimpse of where investment is headed.

The Atlas of Bitcoin

CNBC.com has published a fascinating deep dive into where Bitcoin mining is happening in the United States, particularly in the wake of China’s crackdown. The highlight is this map, provided by the Bitcoin mining advisory company Foundry:

It may surprise some to see New York State in first place, given a) the perception that everything in New York is expensive and b) the New York State law implemented in 2015 that pushed a lot of crypto business out of the state. Less surprising is the prominent role of Kentucky; earlier this year, its state government implemented generous tax benefits to Bitcoin miners. What the CNBC article makes clear is that this map can also be read as a guide to cheap, plentiful and renewable energy, which Bitcoin mining eats a lot of. The article also notes that the movement in New York State to ban Bitcoin mining for three years pending an environmental assessment seems to have cooled off.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

This week witnessed major fintech pullbacks by two of the largest multinational companies in the world. The Spanish banking giant Banco Santander is shutting down PagoFX, the cross-border money transfer service it announced last April to considerable fanfare. The service allowed consumers in the UK, Spain and Belgium to transfer money overseas and was intended to compete with Wise and Revolut. Santander, which is the 16th largest bank in the world, said it is closing the service following a “strategic review.”

Then on Friday, the Wall Street Journal revealed that Google is pulling back on its wildly ambitious plan to expand Google Pay into Plex, which was supposed to offer a wide variety of banking and payment services around the globe.

The short digital lives of these fintech megaprojects provide an object lesson in why it is so hard for big multinational institutions to truly innovate. (The corporate backtracking trend also casts doubt on Visa’s announcement this week for a global network of interchangeable central bank digital currencies, with Visa at its center.) The problem is not a technology deficit; if Google can’t figure out how to be a market-leading digital payments company, then no one can. It’s not usually a regulatory problem, although it’s probably true that huge, public companies will be more sensitive to acquiring new regulator concerns than scrappy startups are.

No, the culprit is usually misaligned incentives: if you’re trying to create something new and disruptive within a big company, there is a decent chance you’re threatening some existing revenue source. In Santander’s case, the conflict appears fairly explicit. Back in 2017, the Guardian published a leaked memo from Santander showing that nearly a tenth of Santander’s 6.2-billion-euro profit in 2016 came from money transfers, and that the bank was charging six times as much as the company then called TransferWise was charging for a transfer of 10,000 pounds. PagoFX’s competitive transfer rates were designed to close that gap, but perhaps the “strategic review” determined that Santander doesn’t really want to close it.

In Google’s case, the pullback of Plex is less obviously about threatening existing revenue, and more about the type of business that Google ultimately wants to be.

A Google spokesperson gave the standard statement to FIN:

We’re updating our approach to focus primarily on delivering digital enablement for banks and other financial services providers rather than us serving as the provider of these services. We strongly believe that this is the best way for Google to help consumers gain better access to financial services and to help the financial services ecosystem connect more deeply with their customers in a digital environment.

Digging a little deeper into this enabler vs. provider dynamic, the WSJ story says:

Bill Ready, a former PayPal Holdings Inc. executive who joined Google a little over a year earlier to head up its e-commerce operations, took over and set a new course, people familiar with the matter said. Mr. Ready was concerned that Plex could make other banks think that Google was out to compete with them since it played a lead role in building the product, one of the people said.

The notion of bank competition is real enough; as some stock analysts noted Friday, Google has a lot at stake in offering cloud services to banks, and must expect that business to grow. (The Plex news, which broke when the market was open on Friday, had no obvious impact on Alphabet stock.) Still, it is kind of a weird explanation that makes Google look slow-witted—We didn’t understand that by offering bank accounts and issuing credit cards we might be perceived as…competing with banks…oh wait—and it may not represent the entire truth. Yet within the meandering logic that often guides corporate strategy, it sort of makes sense: a giant company chases the fintech bandwagon only to realize that, if they do it in a bold way at significant scale, it eventually and awkwardly redefines the company in a way that conflicts with its core identity. In this sense, it will be a miracle to see the Facebook-driven stablecoin Diem actually come to life, although Facebook’s exhaustive assertions that “It’s not us, it’s the Diem Association” might be a way of squaring that circle.

Google will still be intimately involved with money transfers, of course; Google Pay claims 150 million customers in 30 countries use the service, although the revenue it generates is dwarfed by Google’s advertising revenue. The whole point of Plex was to build up that part of Google’s business, but it’s not as if the failure to do so threatens the company as a whole.

Santander, however, has no such excuse. It’s a bank, and if it can’t find a way to compete against the fintech upstarts, eventually it’s going to see those lucrative transfer fees dry up.

Crackin’ Down on Kraken

The US regulatory lightning bolts are coming down fast and often these days, not completely illuminating the full oversight philosophy but certainly providing ample evidence that the Biden Administration insists that fintech and crypto companies play by the rules. With almost every enforcement action, the inadequacies of the regulatory system and the effects of years of unintelligent neglect are on display, but the intent is clear and even the industry’s biggest players will not get a pass.

This week, the Commodity Futures Trading Commission (CFTC), an agency not often considered at the forefront of fintech regulation, slapped a $1.25 million fine on Kraken, one of the oldest cryptocurrency exchanges in the country (and world). Kraken’s sin was offering “margined retail commodity transactions,” which the CFTC has clearly said can only take place on a designated contract market. In several of its details, this action shows what’s right and what’s missing in so much of crypto regulation.

This was not Kraken’s first brush with regulators. Back in 2018, Kraken declined to cooperate with a New York State inquiry into virtual markets. Kraken CEO Jesse Powell said at the time that his company had pulled out of New York when the state imposed its BitLicense requirements, and since it wasn’t doing business in New York it could ignore the Attorney General’s request for information. Powell infamously compared New York to being stalked by an “abusive, controlling ex.” The state, for its part, called Kraken’s failure to cooperate “alarming.”

This time the tone was much more conciliatory. Kraken sent FIN a statement that reads in part: “We appreciate that the settlement acknowledges our cooperation and engagement on the issue. We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally — one that allows the crypto space in the U.S. to flourish, while protecting the interests of individuals and the integrity of the industry.”

Kraken, while clearly in violation of the law, could be forgiven for feeling a little persecuted here. As CFTC Commissioner Dawn Stump pointed out in a concurring opinion, the application of the law in this fairly arcane area is not exactly transparent. With its focus on a single aspect of Kraken’s business, the CFTC resembles the recent SEC action against Coinbase; the cops catch you on a parking ticket to demonstrate that they’re coming after your mansion.

But at the same time, it’s hard not to see Kraken’s actions as self-inflicted wounds. You’re in business for ten years, you are offering what any competent compliance lawyer should tell you is a futures contract…so why not register with the appropriate agency? Wouldn’t that make things easier for everyone?

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

Perhaps we were not paying the closest attention—shouldn’t-this-have-happened-months-ago?—to who would be nominated to head the Office of the Comptroller of the Currency (OCC), that backwater financial regulator that is part of Treasury and is impervious to reform because its statutory empowerment dates to the Civil War. The last we had dialed in, there was a pundit battle about whether President Biden would or should nominate former Treasury official Michael Barr versus Mehrsa Baradan, who is, among other things, the author of the vital book The Color of Money.

This week, Biden surprised a lot of people by nominating Saule Omarova, a singularly fascinating figure who is: a Cornell Law Professor; an accomplished scholar with a radical critique of the American financial system; a former lawyer at the white-shoe firm Davis Polk; and a former Treasury official in the George W. Bush Administration. Oh, and she was born in what is now Kazakhstan and was educated in Moscow.

Omarova as OCC chief would be a trifecta of identity politics: the first woman, the first person of color, the first person born outside the United States to grace the OCC throne. In the fintech and crypto worlds, however, people are freaking out. “Omarova is another Gary Gensler and possibly worse,” tweeted one crypto commentator. Reuters’ Breakingviews labeled her “a dubious choice.”

Why all the fear? Well, there is her proposal for a “people’s ledger” which does seem like it would eliminate banking as we’ve historically understood it. Omarova’s point of view about fintech and cryptocurrency might seem at first blush ludicrously broad, but it reflects a wariness about the stability of the overall financial system, clearly an overhang from the 2008 economic breakdown and ensuing Great Recession. Her perspective contrasts notably with most of SEC chief Gary Gensler’s public comments about crypto, which tend to focus on investor protection. Omarova is concerned that fintech and cryptocurrency accelerate already-existing threats to what she calls the “New Deal” framework of financial regulation, and indeed to the economy as a whole.

Her “New Deal” frame can be inadequately summarized like this: Forged in a crucible of global economic meltdown, the New Deal’s approach to financial markets was to strike a balance between market activity—consigned almost exclusively to the private sector—and public-sector responsibility for market stability (including backstops of last resort), and consumer protection (such as FDIC deposit guarantees) that propped the whole thing up. This structure, while fragile, was able to propel the US economy through the strife of the Depression and World War II to a period where sustained prosperity was at least theoretically possible.

The model, though, has been breaking down for decades (she doesn’t say so, but FIN would argue the 1971 closing of the gold window and subsequent breakdown of Bretton Woods was the first knockout blow). Omarova fear about systemic stability focuses more on developments in the ‘80s and ‘90s, emphasizing the development of derivatives and other ways of “synthesizing assets.” In her her 2019 paper in the Yale Journal on Regulation, Omarova categorizes the aspects of new financial products that made the system more unstable: pooling, layering, acceleration, and compression.

So: this is the lens through which Omarova views cryptocurrency and the blockchain. Almost everything that crypto advocates tout as a revolutionary breakthrough—more efficient transactions! decentralization!—she sees as a potential threat to global financial stability. Here is a crucial passage from testimony she delivered to the Senate in 2018:

If [blockchain technology] succeeds in making wholesale payments, clearing, and settlement instantaneous, easy, and cheap, it will enable potentially exponential growth in the volume and velocity of trading in securities and other financial assets. To put it simply, in a fully frictionless world of blockchain-powered transaction processing, overtly speculative trading will also be faster, easier, cheaper, and thus more voluminous.

It’s not quite Mo Money, Mo Problems, but it’s close.

How much, though, would Omarova’s academic opinions truly matter in a regulatory position that’s both modest and constrained? It’s important to remember that the OCC has effectively no jurisdiction over any important cryptocurrency producer or exchange. It’s also entirely possible that the Senate won’t approve Omarova’s nomination, although her Bush administration history might earn her some cred with a Senate Republican or two.

It would be dim-witted, though, for the fintech or crypto community to celebrate a shootdown of Omarova’s nomination as a meaningful victory. The day of reckoning between crypto/blockchain and the state is coming. It could be entirely authoritarian; China this week officially declared all cryptocurrency activity illegal. It could be more constructive; also this week, Britain’s Financial Control Authority announced it would work with the Bank of England to use blockchain technology to speed up regulatory reporting. Most likely it will be a mixed bag, but the path will be easier through thoughtful, experienced regulators like Omarova; instead of reflexive opposition, the fintech and crypto worlds should look for ways to engage her.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

These days, it seems like male pattern baldness and menopausal hot flashes are about the only ailments that could not be remedied by the purchase of an NFT. Built on the foundation of crypto and blockchain, NFTs are being touted as the cure for just about everything that can or will ail us–from combatting climate change to improving artists’ compensation, including benefitting charitable causes solving the economic crisis and fighting crime. Not since the Internet itself has a single concept opened up so much opportunity, speculation and conversely, trepidation. 

The idea is mind-blowingly simple and deeply profound at the same time. NFTs (the acronym for non-fungible tokens) are blockchain-based digital codes signifying the ownership of a digital asset.  When you buy an NFT, it becomes your certificate of ownership. But even though the digital “thing” you paid money for (typically you pay with cryptocurrency)  belongs to you, just like the Mona Lisa belongs to the Louvre, the world is free to view it, reproduce it and share it.  You cannot do or control those things any more than anyone else can. What you do own is the right to call it yours and resell that right to others. Assets “sold” in this way include digital possessions like avatars, digital fashions, images of celebrity autographs, digital artwork and more — anything with a perceived value in a digital format is fair game.

We Were Made for NFTs

Speculation is part of our collective DNA.  So is acting like lemmings. We love following early adopters up the next rung of cultural Darwinism. In the 1800s, when speculative opportunities for getting rich quickly on the East Coast waned, the rallying cry “Go West Young Man” sent thousands in search of their fortunes panning for gold nuggets on a new coast. Many died or became impoverished, a few struck gold, but some of the more clever built the services to support the rush — general stores, saloons and other outposts, or even a “dry goods” company called Levi’s, that helped clothe the miners. In the NFT world, the equivalent of saloons are NFT galleries like OpenSea, Dapper  and Rarible. Examples of outposts today profiting from the NFT gold rush include staid establishments like Art Basel, the Christies and Sotheby’s auction houses, and newly-created metaverse software platforms that sometimes sell pieces of their digital land like Ertha.

NFT cheerleaders are showing unbridled enthusiasm for minting NFTs and selling them on NFT marketplaces. If you can collect it, and there’s a hope it might keep or grow in value, it will be “minted” as an NFT. Some of the earliest NFT bonanzas have come from sports, art and fashion, arenas which have always spun off high-priced collectibles. Joey Graziano, SVP of Global Events for the NBA, went whole hog embracing NFTs as a new revenue stream and a way to present new value to get people returning to events. Balenciaga, the luxury brand of luxury brands, is joining Fortnite to create NFTs for fashionistas.   (I wrote an earlier piece about NFTs for Techonomy when I noticed the gold rush approaching.)

Today, brands of all feathers are whipping up recipes for new NFTs faster than you can say “non-fungible.” Mattel just announced its HotWheels Garage NFT adventure. Neopets announced its NFT this week. Taco Bell, Pizza Hut, Pringles, and even Charmin toilet paper have released NFTs selling for oodles more than any of their real world goods.

The astronomical prices and the sophomoric quality of many NFTs are baffling to self-respecting real-life investors. One-of-a-kind renditions of Punks, Apes, Kitties, and Akira avatars are being bought and hoarded faster than toilet paper at the beginning of the pandemic. Owning a digital ape from the Bored Ape Yacht Club on your Twitter feed is a contemporary status symbol. A pair of NFT Bored Apes sold for over $24 Million in Sotheby’s auction.

Top Moments in NFT Crazy?

Not a day goes by when you don’t read about an over-the-top NFT sale and then, the next day, it goes more over the top. In March of 2021, Mike Winkelmann, aka Beeple, sold a piece of digital art for nearly $70 million. It even took him by surprise, but he realized that whatever people want has value. Clip art images of pet rocks were some of the earliest NFTs. Recently one sold for 400 ether, or about $1.3 million.  Visa bought a $150,000 CryptoPunk NFT  as a way to learn more about NFT investment strategies.

Entertainment, retail, and the art worlds are wide-eyed with the expectation of entirely new revenue streams. Gary Vaynerchuk, an ardent believer in the value of NFTs, said in a recent talk, “When new shit happens people either decide to go all in on ‘yes’ or all in on ‘no’. If you’re someone who’s going in on no then your framework is fear and insecurity.” But caution is warranted. A primer on the kind of markets you can join and the legal licensing ramifications of each is a humbling read. 

It’s increasingly clear that NFTs will be part of the currency and business models of the metaverse. If you collected stuff while you were young—Barbie dolls, Pogs, Hot Wheels, electric trains, comic books—then you are temperamentally suited to NFT investing.  But if you can’t keep a password straight and you’re not following this regularly you’re also in trouble. Going all in is either for the visionary or the foolhardy.  

Writer and investor Jeremiah Owyangcreates a sort of personality profile for the brands and investors most likely to succeed in this gold rush.  And trust me, the SEC and other regulators are wringing their collective hands worrying about how to account for and manage this burgeoning industry. It may be messy, but it’s going to be interesting.

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

While there are probably few superior alternatives, 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. Not only are answers infrequently in direct response to the questions posed, there is a kind of competition to formulate questions that *can’t* be answered, usually because they are asked in bad faith.

That sorry dynamic was on full display this week as Securities and Exchange Commission (SEC) chair Gary Gensler testified before the Senate’s committee on banking, housing and urban affairs. A striking amount of time was spent discussing cryptocurrency, which is a little strange, given all the other issues at hand—such as mandating that public companies disclose their climate risks—and given that the same committee devoted an entire hearing to cryptocurrency as recently as July. It appears that the fury created by proposing a cryptocurrency tax as part of the infrastructure put the issue on several Senators’ agendas.

Senator Pat Toomey (R-PA) honed in on an issue FIN has covered regularly: are cryptocurrencies securities, from a regulatory standpoint?

I’m frustrated by the lack of helpful SEC public guidance explaining how you make this distinction—what makes some of them securities while others are not securities?….Why wait to make the SEC’s views known only when it swoops in with an enforcement action, in some cases years after the product was launched? This is regulation by enforcement, and it’s very objectionable.

These are, superficially, legitimate questions, even if Toomey had to know that Gensler was not going to answer them in any greater detail than he or the agency have many times before. “There is a small number that aren’t” securities, Gensler said—presumably referring to the Bitcoin and Ethereum exceptions the SEC articulated in 2018—“but as [previous SEC] chair [Jay] Clayton said when he was in front of Congress, I think very many of these facts and circumstances are investment contracts.”

This points to a reality that doesn’t fit into the hearing’s theatrical requirements. Although the SEC has very broad authority granted by Congress, it’s a fairly small agency with limited staff. There are an estimated 6500 cryptocurrencies in existence, with new ones being created every day. It is simply not possible for the SEC or anyone to examine the conditions of every existing crypto coin, much less apply the appropriate tests to determine whether or not they are securities. To lay down universally applicable rules is practically a guarantee of obsolescence, given how fast the space evolves. The SEC has tried, through actions like the charges against Ripple, to send the signal that many such coins are securities—and for that it gets damned by Toomey as “very objectionable.”

At another point, Toomey hit on another favorite FIN topic. “To me, a stablecoin doesn’t meet the second prong of the Howey test, that there has to be an expectation of profit from the investment,” Toomey said. This concern-trolling seems at a minimum a little late; FIN dealt with this prong of the Comey test applied to stablecoins in our 7/25 installment:

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….A flock of lawyers is going to make tons of money arguing over this.

Toomey asserted to Gensler: “Stablecoins do not have an inherent expectation of profit, they’re just linked to the dollar….Is it your view that stablecoins themselves can be securities?” Unsurprisingly, Gensler responded: “I think, Senator, they may well be securities,” reminding his audience that “the laws that we have right now have a very broad definition of security.”

Toomey’s grandstanding reflects a too-common stance in and around the crypto community that Gensler is hostile to cryptocurrency and blockchain technology. “I’m not negative or a minimalist against crypto,” Gensler said, somewhere between befuddled and perturbed. Reviewing the Senate hearing, a Coindesk podcaster, citing a tweet, said “[S]ome astute observers noted…Gensler’s use of a term that literally has never been used before: “stable value coins” in place of “stablecoins’.” The implication of outrage seems to be that this phrasing is supposed to justify SEC regulation of stablecoins by way of its oversight of stable value funds.

But, er, no: Gensler used this exact term in his August remarks to the Aspen Security Forum. It’s silly to pretend that Gensler is engaged in some kind of linguistic drip-by-drip plan to crack down on stablecoins. Financial regulators have been warning about the systemic dangers of stablecoin growth for months, and this week the Treasury Department got in on the act. At some point the industry and its supporters are going to have to live with a truth that Gensler, in his low-key way, tried to articulate: wanting to regulate a financial product or company does not mean that you oppose its existence.

Why Trust Matters

As a general practice, FIN does not cover the world of NFTs very much, but this week’s developments at OpenSea, the largest NFT exchange, make an important point with potentially far-reaching consequences. An anonymous Twitter account began posting accusations that Nate Chastain, head of product at OpenSea, used secret Ethereum wallets to purchase NFTs before they were promoted on the OpenSea home page. This is akin to what in the stock market is called “front-running,” a time-honored practice that is usually banned. On Wednesday, OpenSea published a blog post, admitting that the story was true and saying that it had asked for and received Chastain’s resignation: “We have a strong obligation to this community to move it forward responsibly and diligently.” Remarkably, as Frank Chaparro of The Block points out, what Chastain did is probably not technically illegal—precisely because OpenSea is not a registered exchange and NFTs are not regulated as securities. This is exactly the point that Gensler was trying to make to the Senate; if you have innovation for too long outside the regulatory framework, consumers will get burned and trust in the technology will erode.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

Consider, for a moment, the US Supreme Court, where the value of dissenting opinion is widely understood and praised. After all, given the shift over time in politics and values, today’s dissenting opinion is sometimes, very crucially, tomorrow’s presiding wisdom.

In a different category, arguably, is the small regulatory agency, appointed by the executive branch and approved by Congress but designed to be independent of any given administration or political party. These agencies include the Federal Communications Commission, the Federal Election Commission, and FIN’s subject today, which is the Securities and Exchange Commission (SEC).

Such agencies were designed to avoid partisan domination; in the case of the SEC, there are five commissioners, no more than three of whom can belong to the same political party. Assuming then, that dissent (both partisan and otherwise) is built into the leadership of such agencies, do they operate best if they try to forge consensus? Or should they, like the Court, encourage open dissent as a public service?

Over the last three years, as the SEC (alongside other federal regulators) has issued fintech and cryptocurrency policies in fits and starts, at least one commissioner—Hester M. Peirce, who joined the commission in January 2018—has been unusually vocal and occasionally witty in expressing her opinion that the SEC has failed to articulate clear and consistent rules for companies to follow. Her advocacy for financial sector innovation has earned her the nickname “Crypto Mom.”

The SEC, both during the Trump years and in the early months of Gary Gensler’s tenure, has issued a handful of decisions that have earned the scorn of many in the fintech and crypto communities. One notable example was denying the Winklevoss-owned Gemini’s request for a Bitcoin-based exchange-traded fund (ETF) in July 2018. Peirce issued a lengthy dissent with 26 footnotes. Not only did Peirce say that the proposal should have been approved, she accused the Commission of “engaging in merit regulation,” that is, the idea that the government prohibits anyone owning a particular security, even if they are willing to take on the risk. She issued a similar dissent when the SEC denied the New York Stock Exchange’s application to allow it to list a Bitcoin-backed ETF. Even when Peirce agrees with a given SEC action, she may well issue a statement indicating her concerns about some aspect of it, as she did this January regarding enforcement against Wireline’s fraud.

Given that she is a Republican hostile to Dodd-Frank and appointed by Trump, it is tempting to pigeonhole Peirce as reflexively pro-finance and anti-regulation. But that’s a mistake. First of all, by design in contemporary America, the SEC is going to have Republican commissioners, and they could be much worse than Peirce. Indeed, Barack Obama first nominated Peirce for the SEC in October 2015, although the nomination was scuttled by Capitol Hill bickering.

And while FIN may have multiple policy and doctrinal disagreements with Peirce, she seems genuinely interested in making the American financial regulatory system work more efficiently and effectively (as opposed to simply wanting to dismantle it). She is a full-on financial nerd; in elementary school her hobby was plotting stock prices.

On individual issues, her views not only have to be reckoned with but are at least partially right. FIN wasn’t around in 2018, but can’t currently see any reason for the SEC to continue to prohibit a Bitcoin- or crypto-based ETF. As we’ve previously noted, Canada and Brazil have already approved Bitcoin-backed ETFs, and billions of dollars have successfully been invested in them. It’s hard to see any remaining technical issues that haven’t been resolved or at least addressed.

The SEC, though, isn’t the Supreme Court, and there’s some reason to think that dissent undermines action. This week, Axios’s Felix Salmon called SEC chief Gensler “the most important financial regulator in the world,” but the Commission is not an autocracy and having Perice constantly bickering in public cannot make his job any easier. Of course, there is little that Biden or Gensler can do with Peirce, given the mandate for Republicans on the Commission and the fact that her appointment isn’t up until 2023.

The problem that the SEC and Peirce are going to run into, and fairly soon, is that simply saying “there ought to be rules” isn’t adequate in the long run. This week, Pierce told Roll Call’s Sarah Wynn: “We’re trying to force those underlying bitcoin markets to look like our securities markets that we’re so familiar with and I just don’t see that as being a requirement under the Exchange Act or a product approval, so that’s the concern that I’ve raised.” OK, but assuming that an unregulated status quo for cryptocurrency isn’t viable, if it isn’t a security, then what is it? (Peirce did not respond to a FIN interview request.)

Peirce’s stances resemble a political party that’s always been in opposition and never had to govern. It is hard to find in Peirce’s many public utterances a vision of a system that would effectively regulate 21st century finance. In 2017, when she worked for George Mason University’s Mercatus Center, Peirce and two colleagues issued a response to a call for comment from the Office of the Comptroller of the Currency on bank charters for fintech startups, in which they wrote:

A regulatory framework for fintech companies should not focus on the survival of any individual company, but on keeping barriers to entry low and ensuring that firms have workable and effective plans in place to protect their customers in event of failure.

It’s an appealing juxtaposition, but it’s entirely unclear what framework Peirce and her colleagues were referring to here, nor what relationship the idea bears to actually existing fintech failures. The Wirecard fiasco might be an extreme example, but how exactly would regulators ensure customer protection without requiring the kind of registration and oversight that Peirce opposes?

In an ideal world, Gensler and his allies would work with Peirce to find some kind of regulatory compromise. And maybe the SEC is looking for some face-saving way to finally say yes to a Bitcoin-backed ETF. Most likely, though, the future is going to see a lot more Crypto Mom dissents.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

Very high up on the list of jobs I’ve been adjacent to but am SO glad to never hold is daily stock market commentator. Granted, telling people why the market goes up or down on a given day can be a lucrative business, as long as you are willing to abandon any consistent relationship to truth. 

The reality is that most modern market behavior is too large and diverse to lend itself to neat summary. Sure, there are Pearl Harbor days when it’s obvious why stocks trade as they do. But most days, market activity is ambiguous, multifaceted and unknowable, which pushes commentary to vague cliches; the market “skyrockets” or “plummets,” as do individual stocks, except when they “hover.” More challenging and embarrassing are the explanations when the market goes down. “There were more sellers than buyers” is a shopworn go-to, which on one important level makes zero sense; every transaction requires a buyer and a seller. The oft-heard “profit-taking” is a subtler, but no more valid, explanation; it implies that investors have rationally and collectively decided, within a defined time frame, that their gains off a stock or stocks are sufficient, and they sell to lock in those profits. But it’s unclear how such sales look any different to an external observer than, um, just ordinary stock sales—some of which have been at a loss. The only way to authentically report these movements would be to have real-time access to the algorithms of a handful of market-making institutional traders; absent that, CNBC and various stock sites just fill space with so much blather.

Even so, at least stocks are regulated securities that trade on established exchanges; the idea of producing timely market commentary on cryptocurrency is even more dubious. And yet, when you’ve got an asset class worth $2 trillion, people will be tempted toward those same beloved market cliches—which is how the world ends up with headline gems like this week’s from Crypto Briefing “Bitcoin, Ethereum Uptrend Tempered by Profit Taking.”

It’s less that the commentators are obviously wrong than that the overwhelming evidence of cryptocurrency market history argues that it is impossible to know one way or another. Take “uptrend,” an admirably slippery word. Certainly, since the beginning of crypto trading or since the beginning of 2021, Bitcoin and Ethereum have pursued an “uptrend.” Start the clock in March or April of this year, however, and they have been on a “downtrend,” which might be the result of “profit taking,” or lots of other factors (such as increasing regulatory scrutiny or concerns about crypto’s effect on the environment). The interesting wrinkle in crypto market commentary is the ostensible visibility that commentators have into the wallets of Bitcoin “whales,” the activity of which is said to indicate or predict price movements. That was the basis for the Crypto Briefing story; blockchain analyst Will Clemente, whose Twitter profile says he is 19 years old, had noticed that something like 27,000 Bitcoin had moved from whale wallets to exchanges, and that is supposed to be a big bear signal to markets, because illiquid supply is associated with higher prices and liquid supply is associated with lower prices. Maybe, but on the morning of Sunday August 29 as FIN was sent out, the price of Bitcoin is higher than it was on August 25, when the Crypto Briefing article was published. The best conclusion seems to be that profit taking makes crypto prices go down—until it doesn’t.

All of this analysis needs to be taken with gigantic grains of salt. To be fair to Crypto Briefing, its CEO Mitchell Moos recently wrote: “Crypto is still a very new asset class and the industry changes very quickly. Looking back at the top 10 coins on Coinmarketcap in early 2018, only five are still in the top 10 today, and 2 of them are not even in the top 20 anymore.” That kind of perspective is crucial to understanding how little can be reliably predicted about these markets.

Can’t Get No Customer Satisfaction

Customer satisfaction in the fintech space can be pretty hard to wrap your head around. Maybe that is largely a function of the space’s novelty and rapid change. Nevertheless, one encounters a fair amount of data that seem on their face contradictory. For example, last week FIN wrote about the potentially high amount of fraud that took place with PPP loans routed through fintechs as opposed to traditional lenders. You might assume that people who got loans through fraudulent means would be pretty happy with their experience. And perhaps they were, but what little data we have on PPP recipients who got their money through fintech companies is not especially positive. 

A similar head-scratching dynamic exists with credit cards and Buy Now, Pay Later. Obviously in several large countries, BNPL is a payment option that tens of millions of customers have begun using just in the last couple of years. Much of that uptake has to do with dissatisfaction with credit cards, which has increased since the COVID pandemic struck. According to a J.D. Power survey issued earlier this month:

The industry missed the mark on supporting customers’ changing needs when many were facing significant financial challenges. Whether through blunt actions, such as tightening credit limits at the very moment when customers were most reliant on their cards as a source of short-term funding, or through lack of customer service accessibility, credit card issuers experienced declines in overall satisfaction, trust, brand perception and Net Promoter Scores this year.

Despite the ripe opportunity for BNPL, however, evidence repeatedly emerges that these theoretical BNPL advantages don’t match up to how consumers actually experience and perceive BNPL. Once you can convince shoppers to use BNPL, they too often find that they can’t make the payments during the time period that makes the credit free or low-cost, and thus end up with fees that can be just as onerous as credit cards or worse. There are lots of data to support this; among the most cautionary was a study from C+R Research which found that 66% of American consumers think BNPL is “financially risky,” and 59% of those who have used BNPL say that they purchased an unnecessary item that they couldn’t otherwise afford.

This consumer wariness puts powerful limits on how BNPL can be effectively marketed to new customers (and gives pause about Square’s massive purchase of Australia’s BNPL giant Afterpay). This week, when Klarna issued a first-half earnings report, its CEO said “The credit card model is simply unsustainable for consumers, in fact, it’s unsustainable credit.” That prompted a tough retort from the financial comparison site money.co.uk, whose editor said that Klarna’s lack of visibility with credit agencies could make it a worse option for consumers.

Some of the gap between widescale consumer adoption of BNPL and dissatisfaction may stem from the fact there are different types of BNPL borrowing with different levels of consumer happiness, but that surveys dump them all into the same bucket. Regardless, it seems like BNPL is far from a panacea either for consumers or the companies trying to profit from it.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

It’s coming! The not-entirely-Facebook-led-cryptocurrency-formerly-known-as-Libra is coming soon!

Or is it? On August 16, The Block’s Frank Chaparro (subscription required) reported that Novi, the cryptowallet that is supposed to help people hold and spend the Facebook-backed, yet-to-launch stablecoin Diem, was trying to find another coin to work with. The reason, Chaparro said, is that Novi is running into regulatory hurdles (which would not be hugely surprising, given all the grumbling from US regulators about stablecoins lately). An unnamed source told Chaparro that the Diem Association, which is supposed to oversee the Diem payment network, is now “effectively a zombie organization.” According to Chaparro, the Diem Association has yet to begin minting Diem stablecoins, despite a triumphant announcement in May that Silvergate Capital would be the exclusive issuer and manager of the Diem coin.

On the morning of the 17th, Silvergate’s stock began to tumble, and as of August 20’s close was still down more than 9% from where it was before Block’s story published. (Still, FIN can’t find a mainstream media outlet that’s confirmed the story, or even picked it up.) On August 18, Novi’s head David Marcus published a long, earnest defense of Diem and Novi, promising that everything is fine:

Novi is ready to come to market. It’s regulated, and we’re confident in our operational ability to exceed the high standards of compliance that will be demanded of us. We feel that it’s unreasonable to delay delivering the benefits of cheaper, interoperable, more accessible digital payments.

Marcus is a credible person who has been with the Facebook currency efforts from the beginning; for the moment most people are taking his word that Diem/Novi will launch soon, presumably before the end of the year. Whether it will have much impact is another question.

The whole Diem exercise highlights a curious aspect of the West’s current heated attempts to build a “superapp”, as well as a financial path for Facebook that might have been, but wasn’t. Accept for the sake of argument that masses of customers want to consolidate the money-connected (and other) services they currently use on their phone into a single one-stop app. Then think about the mobile “banking” landscape, say, five or ten years ago. PayPal, not exactly a bank, was around and a market leader; Square, Stripe and Zelle were nascent, as were loan companies like SoFi; big national banks were putting out primitive apps. But no single financial company was anywhere near dominating the space to a point where you would put down your digital chips and say “Yeah, that’s the financial superapp of the future.”

Instead, the thinking in the earlier part of this century was: don’t build a financial app and draw users to it—better to build a financial app on top of where users already are—which means Facebook.

Recently FIN interviewed Zor Gorelov, the cofounder and CEO of Kasisto, a New York-based software company that creates interactive financial services. The firm recently announced a $15 million Series C fundraising round; NCR is both a strategic partner and an investor.

Gorelov recalled that not long ago, many of the biggest financial players looked to Facebook Messenger as a banking and payments platform. In 2016, for example, TechCrunch excitedly reported that

MasterCard account holders will soon be able to check on their accounts, track their spending, review past purchases and more right in Facebook Messenger. That’s right – MasterCard is the latest company to embrace Facebook’s chatbot platform as a new means of interacting with its customers in an automated, but A.I.-enhanced way.

As recently as 2017, Citigroup launched a Facebook Messenger chatbot pilot in Singapore; American Express and PayPal also wanted to join the Facebook Messenger financial space. Gorelov can easily rattle off these examples because Kasisto was involved in most of them. With Facebook’s billions of users, it’s not hard to see the appeal.

And yet, do you know anyone who currently uses Facebook for payments or banking? True, Marcus’s blog post is quick to remind us, Facebook is still a player in the payments space, with $100 billion in payments volume conducted over the last four quarters. (A good chunk of that is presumably through WhatsApp, which is a bigger player in many of the largest non-US markets; in May, for example, WhatsApp relaunched its money transfer program in Brazil, after the central bank for a time had banned it.) Even so, fees from payments make up less than 3% of Facebook’s overall revenue.

Why did Facebook’s financial platform plans slow down to a crawl? Gorelov has a simple explanation: “But then Cambridge Analytica happened and all the banks very quickly walked away.”

It’s a fascinating connection that’s not often seen: Facebook was arguably on a trajectory in the financial space to create the first non-Chinese superapp. But more than any other service, handling people’s money requires customer trust, and the Cambridge Analytica scandal shattered Facebook’s trust. Perhaps Diem can help restore that, but it’s an uphill climb.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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

The crypto-payments firm Circle has made a big splash recently. In July, it announced that it would become a public company, traded on the New York Stock Exchange, via an Irish-based SPAC. This week, the company announced, sort of, that it intends to become a fully-regulated, chartered bank in the United States. According to its blog post:

Circle intends to become a full-reserve national commercial bank, operating under the supervision and risk management requirements of the Federal Reserve, U.S. Treasury, OCC, and the FDIC. We believe that full-reserve banking, built on digital currency technology, can lead to not just a radically more efficient, but also a safer, more resilient financial system.

This is potentially a big deal. Circle—based in Boston but incorporated in Ireland—operates USDC, one of the largest stablecoins in the world. Circle’s blog post continues:

With USDC at more than $27.5 billion in circulation, and building on our long-standing commitment to trust, transparency and accountability in the dollar-denominated reserves backing USDC, we are setting out to become a U.S. Federally-chartered national commercial bank. 

This vision of a regulated digital currency is highly compelling, and close to unique although, as far as FIN can tell, Circle’s actual applications for this fascinating goal have yet to be filed. Axios’s Felix Salmon argues that “Circle’s USDC stablecoin could become a de facto central bank digital currency….In Circle’s case, the “depositors” would be holders of USDC, and the collateral backing up USDC would be the money on deposit at the Fed. Circle would pocket for itself the interest that the Fed pays on bank reserves.”

It’s crucial to understand just how preliminary and provisional this idea is. There are at least two major reasons to doubt that a Circle bank charter will be approved any time soon.

First, a huge question mark looms over Circle’s much-hyped but quickly dumped acquisition of the crypto exchange market Poloniex. Few commentators on Circle’s imminent public market debut have noted this, but it’s hard not to conclude that Circle’s aborted dance with Poloniex stemmed from a lapse in judgement and/or due diligence. Strong evidence exists that Circle/Poloniex was conducting business in countries that are prohibited by US law, hence the companies’ apparently still-pending negotiations with the US Office of Foreign Assets Control (OFAC), a division of the Treasury Department that deals with trade sanction violations.

Asked about Circle’s questionable due diligence, a company representative said: “We cannot comment on legacy legal matters.” OFAC did not respond to a FIN inquiry for documents pertaining to Poloniex.

So let’s review the Circle-Poloniex timeline as best we can now construct it:

• December, 2017: The US Securities and Exchange Commission (SEC) files a complaint against Poloniex related to “the trading of cryptocurrencies that may be characterized as securities.” The SEC maintains that even after the agency issued a major rule-establishing report in July 2017, Poloniex “made available for trading…digital assets that were offered and sold as securities as defined by Section 3(a)(10) of the Exchange Act, generating millions of dollars in revenues from transaction fees charged to Users,” without registering with the SEC as legally required.
• February 26, 2018: Circle announces it has acquired Poloniex “to accelerate the emerging token economy,” for a reported $400 million. (The “token economy” was collapsing at the time.) Circle CEO Jeremy Allaire tells CNBC: “These markets are still in their infancy but they hold enormous promise. Maybe the first $1 trillion company in the world will be created in this space.” (Or maybe not.)
• April 10, 2018: Just six weeks after Circle’s announced acquisition, OFAC serves Poloniex “with an administrative subpoena requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Iran.” Here’s the crucial question: when Circle was researching the Poloniex purchase, did it not see Iranian accounts as a red flag? Or did it miss them?
• December 14, 2018: Circle responds to OFAC’s Iran-related subpoena.
• September 11, 2019: “OFAC serve[s] a second administrative subpoena on Poloniex, LLC requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Cuba, Syria, North Korea, Crimea, and Sudan.” Again, a competent compliance department should have detected these legal thorns—what did Circle know, and when did it know it?
• October 18, 2019: Circle announces it is “excited” to announce a Poloniex spinoff. BUT: “Unfortunately, in order to be competitive in the global market, we will not be able to include US customers in the spin out, so Circle will be winding down operations for US Poloniex customers. Beginning today, US persons will no longer be able to create new accounts on Poloniex.” This seems like an obviously legally required carveout, and leaves US-based Poloniex customers to vent on various complaint sites. Meanwhile, the new owner of Poloniex is Polo Digital Assets, which may or may not be controlled by the Chinese entrepreneur Justin Sun, and which has repeatedly fallen afoul of Canadian regulators.
• July 2021: Circle announces its intention to go public via a SPAC, noting that it has set aside more than $10 million to deal with the SEC charges against Poloniex.
• August 9, 2021: The SEC fines Poloniex more than $10 million for security law violations that took place before and during Circle’s ownership of the company. “Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange,” says Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit.  “Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology.” Circle agrees to pay the fines without admitting or denying the SEC charges.

There exist relatively benign interpretations of these events, but the legacy is there and regulators are going to want the full story. And so are potential investors: Circle’s SPAC filings indicate that the company lost $156 million on the Poloniex acquisition, and that’s not even a final number until all the fines are assessed and legal fees paid.

So if you are Biden’s financial regulators, do you really want to give a bank charter to a management team with this track record? And that’s the second reason to doubt this charter will be approved: at least in year 1 of the Biden Administration, there is little reason to think that digital-first “banks” are going to be approved as real-world banks. When acting comptroller of the currency Michael Hsu testified before Congress in May, he was clearly skeptical about the handful of bank charters that went to fintech companies under the Trump Administration. Most legal and regulatory commentators concluded that OCC under Hsu has “hit the brakes” on cryptocurrency. And that’s only one agency; it seems impossible that Circle could be granted a bank charter without the Federal Reserve and FDIC weighing in.

Of course, it’s entirely possible that FIN is misreading this. Maybe Circle’s USDC is now simply too big to ignore. Maybe the new compliance officer that Circle hired in May has made some friendly inroads through Janet Yellen’s working group. Maybe if Circle agrees that USDC is a security and will be regulated as such, that will create a path for the Biden administration to resolve the whole question of how to handle the dramatic growth in stablecoins that regulators have been fretting about in recent months. But don’t bank on it.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.