The Data Challenges Behind ESG Investment

The recent explosion of environmental, sustainable and governance investing has created a lot of opportunities for investors and financial institutions. But with no universally-accepted definition of ESG, how does anyone measure performance?

The recent explosion of environmental, sustainable and governance (ESG) investing has created a lot of opportunities for investors and financial institutions. The adoption of the Paris Accord and their recent amplification in Glasgow, along with the election of Joe Biden in the US, have accelerated the already-growing trend toward ESG. Annual cash flow into ESG funds has grown tenfold since 2018, and ESG assets under management are expected to account for one-third of all investments worldwide by 2025, or approximately $53 trillion. 

But this massive shift also represents a set of profound data challenges. With no universally-accepted definition of ESG, how does anyone measure performance? And with more companies and countries promising to reach carbon neutrality by a given year, how does anyone measure whether they are actually keeping up, much less standardize that performance across industries and national boundaries? The capture, organization, and modeling of data are too complex and too expensive for the vast majority of organizations to do on their own. 

ESG’s data challenges were the topic of a recent Techonomy virtual salon hosted by Red Hat, and moderated by James Ledbetter, Chief Content Officer of Clarim Media, parent company of Techonomy. The salon explored the roots of recent developments in ESG, how institutional players are tackling the new data challenges, and where the data approach to ESG is headed. 

Richard Harmon, vice president and global head of financial services at Red Hat, asserted that the company’s Linux/open source background lends itself well to the ESG data challenge. “From the roots of the open source community, open culture, which we [at Red Hat] have, topics like climate change and the wider ESG framework are natural things for us to dive into.” He noted that Red Hat had  joined a consortium called OS Climate, launched last year by the Linux Foundation to “address climate risk and opportunity in the financial sector.” It currently includes Amazon, Microsoft, Allianz, BNP Paribas, Goldman Sachs, and KPMG among its member base. This broad group of companies–many of which compete with one another–is necessary, Harmon said, because the “volume and complexity of the data that needs to be utilized is unmatched.” 

Lotte Knuckles Griek, head of corporate sustainability assessments at S&P Global, explained that she has been measuring company performance on ESG metrics for 15 years, with the company being involved in ESG ranking since the beginning of the 21st century. The tremendous growth in the sector, she added, has shifted the stakeholders that S&P serves, which presents a challenge on how to present data in the most useful way. “There’s a huge variety of investors out there looking to consume ESG data, and do very different things with them,” Griek explained. 

Some of the changes in recent years have been driven by changes in regulation and government policy. For example, in the United States the Biden Administration seems to favor some kind of uniform definition for what constitutes ESG investment. In Europe, the European Central Bank has already shifted the criteria for it massive pension investments toward “green bonds,” which in turn gives individual countries and companies an incentive to embrace ESG goals. 

For her part, Griek said that she always welcomes new government standards and regulations, because they help draw attention to important ESG issues. “But it also totally raises the complexity faced by companies, ”she continued. “One framework says report data in terawatt hours, another says report in megawatt hours…all these frameworks tend to cause confusion.” 

Andrew Lee, Managing Director and Global Head of Sustainable and Impact Investing at  UBS Global Wealth Management, put the data dimension into a broader context of how UBS (and other institutional investors) serve their clients, who are increasingly interested in sustainability. “Data doesn’t necessarily drive a determination of what’s sustainable or not, for us,” Lee said, explaining that UBS clients or other investors are ultimately seeking transparency into how their money is being invested. “Data is a critical input into a process that looks at how sustainability can be incorporated into investments.” 

One topic that recurred through the discussion is the need for data that not only captures performance to date, but that can be used to make reliable models for the future. Lee noted that, while everyone in the ESG ecosystem praises the idea of standardization, business imperatives require something beyond standardization. “As an investor, you want a little bit of standardization, but you want to create alpha, right?” (Creating “alpha” is a way that investment professionals describe their competitive advantage.)  “So certain things in your process, maybe it’s the forward-looking data or how you interpret that, give you that edge or ability to outperform.”

In the end, Harmon stressed the need for world-class analytics capability. “That’s what we see as the real differentiator, to solve this global problem that we’re all facing.” 

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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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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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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.

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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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Here’s The Difference Between ESG And Impact Investing

Investing experts Andrew Lee of UBS and Toniic’s Kim Griffin spoke at the Health+Wealth of America conference about why terms like ESG, sustainable finance and impact investing should not be used do interchangeably.

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If you’re reading this, chances are you already know what ESG is. In fact, you might even be invested in companies that meet ESG standards. And while using ESG can help investors invest more responsibly, it is not the same as impact investing. Whereas ESG is a set of criteria, impact investing is a strategy, and not necessarily one as focused on financial gain as much as positive social and/or environmental change.

“I think what a lot of people don’t understand about ESG is it usually is really focused on looking at those environmental, social and governance factors that are going to have a material financial effect on the company,” says Kim Griffin, member engagement director at Toniic, at the recent Health+Wealth of America conference, hosted by Techonomy, CDX, and Worth. “So it’s really still rooted in looking at the financial impacts of the company, which may or may not meet expectations of investors who want to solve the climate crisis and have more flexibility on financial risk and financial return expectations.”

Griffin often finds people think ESG is a broader framework than it actually is. Andrew Lee, managing director and head of sustainable and impact investing at UBS, continued with that thought, explaining that he thinks the terminology trips people up, but he wants investors to be more concerned with determining what their goals are with their investments and making sure their portfolio is set up to align with those intentions.

When it comes to impact investing, Lee defines it as “driving measurable positive change.” One of the key differences between ESG and impact investing is that impact investing is far more focused on the positive social/environmental outcome, whereas ESG usually warrants better financial returns. Of course, many investors are in it for the financial growth, but Griffin says that while there isn’t necessarily a trade-off for impact investors, we’ve arrived at a time where investing in the greater good can round out a diverse portfolio.

“We’re lucky that we’re at a time where the impact investing in the ESG market has matured and grown enough that you can build an entirely diverse portfolio that is aligned to impact in some way,” Griffin says.

Lee notes that there are opportunities for impact investing to deliver not only positive change, but also good financial returns.

“There are opportunities, certainly in the areas of climate, health, education and elsewhere, where the opportunity sets are so large that there are commercial solutions that can really deliver at above-market-rate returns while having that tangible positive impact. But it’s not everything,” Lee says. “There are some areas where you might have to take [a] longer time risk or perhaps the risk that the financial return won’t quite be there in order to really solve problems in certain geographies.”

For investors who want to do good while also maintaining a full portfolio, Lee says diversification is critical.

“I think there are a lot of opportunities for sustainable investors or people looking to drive impact, and it’s about being specific about that,” Lee says. “But diversification is good across full investment portfolios. So, it’s important to think about making sure there’s diversification so you’re not overly concentrated or exposed to specific risk.”

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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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Cruising the Payments Swingles Bar

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As holiday shopping season hits us, the whole payments space is starting to feel like a swingles bar at closing time: a lot of sudden pairings that may or may not make sense in the morning. FIN continues to think, for example, that Square’s $29 billion purchase of Australian Buy Now, Pay Later (BNPL) hegemon Afterpay was an extravagant indulgence.

But one player that is deadly serious is Amazon; its cost of payments is higher in the US than in any other country, and the company seems determined to fix that.

This week the global retail giant announced that, as of 2022, it will accept Venmo for payment. (This tryst could only happen now, since Venmo parent PayPal’s historic relationship with eBay prohibited it from getting hitched to another e-commerce platform.) Perhaps more stunning was the announcement that Affirm will be Amazon’s exclusive provider of BNPL purchases (of $50 or more) until January 2023.

It’s a striking partnership, especially given that Affirm seems to be following Amazon’s historic path of breakneck growth with no profit in sight (as part of the deal, Amazon gets the rights to buy a portion of Affirm stock). Affirm, which also announced a powerful deal with Shopify this week, now has more than 100,000 merchants on its platform, up from about 6500 a year ago. At the same time, its operating losses in 2021 were about three times as high as in 2019. This slide from a recent Affirm filing shows the tide of red ink continuing:

It stands to reason that Affirm and other BNPL providers will prosper during the holiday spending season. At some point, however, Affirm is going to need to deliver profits; how it does so without sacrificing some of the attractions it currently offers consumers is a well-kept secret.

Acima and the Darker Side of Fintech

Sometimes the more glamorous parts of the fintech world—players like Klarna who can splurge on Super Bowl ads—seem to rub elbows with the grittier characters in personal finance. In recent months, for example, while BNPL has received market accolades, some observers have pointed out its overlap with the considerably less celebrated world of rent-to-own.

The rent-to-own space has been quietly growing, particularly in noncoastal parts of America where the economy never really recovers, and where underfinanced Americans often lack access to credit. One of the dominant players is Acima (now owned by Rent-A-Center), whose model works like this: a customer identifies a product she wants—an appliance, say, or a piece of furniture—and applies to Acima. She then gets approved to spend a certain amount of borrowed money at a given store, and works out a lease with Acima to make regular payments (usually over a year more) until she owns it. Essentially all of this can be done on a mobile app.

Acima’s modest origin story has some unlikely turns. The company emerged from the “Silicon Slopes” hub of Salt Lake City, launching in 2013 as Simple Finance, a quick way for consumers with no or little credit to finance purchases. Cofounder Aaron Allred had no background in finance; for the first year or so the software he used to manage payments for leases was the system he used for his pest control company. In 2016 it took in a $10 million investment round led by Aries Capital Partners (also Salt Lake City-based) and it grew into a colossus. When publicly traded Rent-A-Center acquired Acima in December 2020, the pricetag was $1.6 billion. Acima recently announced a partnership with Mastercard to issue a “leasepay” credit card that simplifies its offerings even more.

Since that time, Rent-A-Center’s recurring regulatory filings have revealed that Acima seems to be constantly near or beyond the point of breaking the law. In October 2020, the federal Consumer Financial Protection Bureau (CFPB) served Acima with a Civil Investigative Demand, to see whether it was complying with various consumer financial protection laws. Acima shows up more than 600 times in the CFPB complaint database, but to date no charges have been publicly made. This week it was revealed that the attorneys general of 39 states are investigating Acima for possible violations of consumer protection laws. It’s a good reminder that when fintech companies boast about serving the underbanked, it’s not always with the purest of intentions.

Will Binance Be Sued to Death?

When you understand the vast amount of money tied up in stablecoins these days, it can be staggering—indeed frightening—to realize just how unstable the technology underpinning these coins is. The chart below comes from the recently released US Treasury Department Report on Stablecoins. Binance, which is actually the largest cryptocurrency exchange in the world, also has a coin which may be a distant third in size but still a significant player:

From that phenomenal growth one might readily assume that Binance has had a great year. Actually, however, in May Binance had a tech hiccup for which it’s still paying the price (and is under investigation or has been charged by regulators around the globe). With Bitcoin and Ethereum trading volumes very high, Binance disabled Ethereum withdrawals citing network congestion. As with Robinhood, Binance had shortchanged customer service and suddenly found itself under assault.

“We have way too many customer support issues on backlog,” CEO Brian Brooks said in an interview at the time. “I know it’s a big deal. We’re all over this and you’re going to see a different customer experience very shortly.”

Regulators, however, have a hard time pinning down an organization that has no headquarters or even licenses. Frustrated Binance customers have taken the matter in their own hands. It looks a little like one of those “Do you have mesothelioma?” ads, but Binance Claim is an active site that has had more than 2400 people sign up. Claimants are being represented by White & Case, and the proceedings will be handled by the Hong Kong International Arbitration Centre. It’s an open question what will happen to the Binance coin if the exchange is sued out of existence.

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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Venture Capital Admits It’s Obsolete. Now What?

Sequoia Capital, one of the oldest and most blindingly successful VC firms in the world is fundamentally changing the way it works. What’s next?

In Part I of this series, readers met Geoff Chapin, the founder of C-Combinator, a climate-tech startup that removes rotting, methane-emitting seaweed from Caribbean beaches and turns it into sustainable products. Chapin considered funding his company through traditional venture capital, but ultimately took other routes.

“Mostly, we’ve done convertible notes from family offices and angel investors, doing checks between $50,000 and $250,000,” Chapin told me. “We’ve raised almost $4 million in that way.”

The rationale for bypassing traditional VC was twofold. One, he didn’t think there were many VCs who were well-positioned to intelligently back C-Combinator’s mission. But perhaps more important, why should a founder surrender the substantial equity that VCs seize if she doesn’t have to?

Chapin’s funding dilemma illuminates the crisis moment that traditional VC is undergoing. On October 26, Sequoia Capital, one of the oldest and most blindingly successful VC firms in the world (and my former employer), announced that it is making fundamental changes to how its business is structured. Instead of creating a series of funds that open, invest and close after 7-10 years, Sequoia will now put everything it owns—private and public investments—into a single fund that will never close (some call it a “rolling fund.”) Its limited partners will have the freedom to cash out whenever they want.

Roelof Botha, the biggest cheese in Sequoia’s US office, said: “We think the VC model is outdated,” echoing the point made in the first part of this Observer series.

So what has made the historic VC model obsolete, and what will replace it?

Illustration by Meg Marco

Everybody Wants to be Part of the Act

Arguably, the first fissure in the titanium-reinforced 20th century VC model occurred in 2005, with the founding of Y Combinator. Paul Graham’s incubator/accelerator gave money to entrepreneurs in smaller amounts than “Big VC” typically had—often four-figure checks as opposed to seven or eight. But it wrote those checks to more people and also provided founders with services—office space, pitch advice, hiring help—that weren’t usually offered by traditional VCs. (Even then, though, big VCs were in the picture, making sure that they would have an early hand in any potential disruption; Sequoia Capital was an early investor in Y Combinator.)

Since that time, thousands of companies have passed through the Y Combinator gauntlet, and thus begun a democratization of the startup-industrial complex. (Although democratization does not necessarily equal diversification; most of the companies funded by Y Combinator still have white male founders.) That boost of the “supply side” of early startup capital broadened its reach, and helped spread the word about the outsized returns it could yield. In response, the “demand side” of VC has also exploded; as Shark Tank became a monster TV hit, millions of Americans convinced themselves that they knew as well as any VC how to assess the risk and reward of investing in an early-stage company.

Even if they couldn’t. For most of the half-century during which modern VC has existed, there was no easy, systematic way for anyone but the heaviest of hitters—pension funds, university endowments—to get in the startup game without becoming a limited partner in a traditional VC fund. It’s tempting, and not entirely wrong, to attribute that exclusion to “elitism,” but more fundamentally, the hurdle was legal: until quite recently, financial regulators looked at early-stage investing as far too risky to allow the vast majority of Americans to participate.

That exclusion changed profoundly with the JOBS Act, which became law in phases beginning in 2012. Today, millions of individuals and organizations can invest in startups and it’s logistically not much harder than buying shares of Tesla. If you’re a qualified investor, EquityZen will sell you a piece of a hot company (like Zipline) that has yet to go public, although typically you will need at least $10,000 to invest. Yieldstreet, an alternative investment platform, has recently created a channel that allows retail investors to buy chunks of the heavily coveted venture funds run by Greenspring Associates and others.

Milind Mehere, Yieldstreet’s founder and CEO, told me: “It’s impossible to get into their funds, they are incredibly fully subscribed.” When the company announced this in early October, it hailed “yet another advance that we are making to break the exclusive grip that the ultra-wealthy and institutions have.” Others take the social goals further. Another firm called A100x, which focuses on blockchain properties, is reserving a certain number of limited partner seats for women and minority investors.

Illustration by Meg Marco

How Can I Move the Crowd?

Even people with as little as $100 to invest can now easily find their way into startup investing through crowdfunding. Do you want to support the Chilean bakery that just opened up a few blocks from you? Browse through Mainvest and there’s a decent chance you can buy a piece of it.

There are several caveats here. Crowdfunding is unlikely to deliver the kind of 5x returns that draw institutional investors to traditional VC firms. It’s also no simple replacement for VC funding—the logistics of having dozens or hundreds of investors will be daunting to most entrepreneurs.

And of course equity crowdfunding is extremely nascent; for all of 2021, perhaps $500 million will go into US startups through this channel. By contrast, on average, VC firms invest more than twice that amount every single day. Still, the growth is remarkable—70% annually for the last couple of years.

More and more founders are turning to crowdfunding—less, perhaps, as a financial lifeline than as a buy-in marketing method that doesn’t depend on getting press coverage—a benefit that traditional VC firms are not always expert in. C-Combinator’s Chapin told me that crowdfunding is “a real minority of what we’re doing, literally about 5% of our funding. But it allows us to importantly create champions around the world who care about our company. It democratizes investments in solutions. That’s what we really care about.”

Goodbye to the Middleman

One way to read Sequoia’s recent reorganization is that limited partners–the big institutional investors who put money into VC firms–have not always been crazy about having their money tied up in funds for seven or ten years, even when the ultimate payoffs could be phenomenal. In the future, it seems like Sequoia’s LPs will be able to cash out on an annual basis.

Outside Sequoia, an increasing number of would-be limited partners are questioning whether they need traditional VC at all (and lots of non-VC financial players are trying to hone in on the venture space, to tell them they don’t). From the investor’s point of view, if you’re not paying the 2/20 fees, you don’t need the spectacular returns.

Big investors, including little-sung heroes of venture capital like insurance companies and family offices, can invest directly in startups without going through the VC middleman—or paying the fees to do so. One of C-Combinator’s largest investors, for example, is the venture arm of a family office, Baruch Future Ventures. The firm’s Jason Holt told me that he believes BFV’s specific focus on climate projects gives the founders it invests in an advantage they are unlikely to find at most traditional VC firms.

And matching founders and funders has never been easier. Blair Silverberg has created Hum Capital, an AI-driven investment platform that he compares to KAYAK, the travel search engine.

Silverberg, a veteran of legendary VC firm Draper Fisher Jurvetson, emphasizes that while there will always be startups for whom venture capital is the best route, most companies can find more efficient funding—usually in the form of debt/loans—that doesn’t dilute their holdings. Hum Capital takes a cut of the transaction but doesn’t as a rule take equity in the companies.

“We work with some insurance companies that are literally direct investors in over 200 venture capital funds, all the ones that you’ve heard of,” Silverberg told me. “So why don’t they invest directly in those companies? It’s not that they don’t have the interest or capital. They just don’t have the manpower. As it’s become easier to quantify what’s happening in businesses, by connecting into the SaaS systems they use, you don’t need as much manpower.”

Can all these developments overturn traditional VC, force it to change, or transcend its historic blind spots discussed in Part I? Sequoia’s dramatic announcement suggests that the answer is at least maybe.

“I remember being a man and an old school venture capitalist; ‘Does this product for women resonate with me? I don’t know. Maybe I’ll ask my wife’,” Silverberg told me. “It’s really hard to assess that. Now we can just say: the data shows this product is resonating and it’s completely irrelevant what we think about it. ’Cause we’re not the target customer.”

In a recent LinkedIn post, Silverberg contends that Hum’s insistent focus on performance data could remove much or all of the bias that has guided VC investment to date. “46% of companies signed up on our Intelligent Capital Market are outside Silicon Valley and the “coasts,” signifying how there are plenty of opportunities in the US outside of the traditional tech hubs where entrepreneurs with innovative, forward-thinking companies are looking to scale. Removing bias is a huge part of our mission to connect great companies with the right capital.”

Join the Techonomy and Observer Roundtable on The Death (and Future) of Venture Capital on Thursday, November 18 at 1 PM ET. RSVP HERE.

James Ledbetter is the Chief Content Officer of Clarim Media, and the editor and publisher of FIN, a newsletter about the fintech revolution. He is the former Head of Content at Sequoia Capital.

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