Friends and subscribers, it is bittersweet to say this will be my final edition of FinTech in Focus before passing it along to my wonderful colleague Arnav Kumar. After nearly two years, I am leaving the Milken Institute to pursue a new opportunity but will terribly miss my friends at the Institute.
It's not goodbye—it's see you later! Please feel free to follow me on LinkedIn to stay in touch!
Much love,
Kate
Without further ado, back to our regularly scheduled programming:
Non-Fungible Tokens
At their core, non-fungible tokens (NFTs) are digital receipts that prove ownership of an asset. As we’ve seen with the popular Cryptopunks NFT project, buyers can purchase artwork and receive the equivalent of a digital certificate on the blockchain that says, “I own this, and here is proof.” But here’s the catch: Ownership in this case doesn’t mean that the buyer can claim intellectual property rights or even use their Cryptopunk commercially. As noted by Protocol, this is a pretty traditional understanding of physical art ownership; if you were to buy a drawing from an artist, you would own that one copy but not the artist’s idea. This concept doesn’t seem to be as simple and straightforward in the digital world, and there is very little consensus on whether NFT projects carry the equivalent of a Creative Commons license or a full-blown commercial license, as sneaker and luxury goods marketplace StockX recently came to find out. StockX started selling “Vault NFTs” like this as a way to allow users to own a digital version of a good on the blockchain while still retaining ownership rights of the underlying physical asset stored in the company’s “vault.” Buyers can sell and trade this NFT to others, or they could choose to redeem the physical good from the vault and have their token burned.
Not only is this a creative way to build an exclusive user base for additional rewards, but it is also an easy way to trade sneakers without packaging and shipping. However, Nike wasn’t happy with this idea of “Vault NFTs” for Nike sneakers and claimed that StockX has illegally appropriated its intellectual property and goodwill by minting these tokens without its consent. StockX has fired back, stating that the NFTs are just a more efficient extension of its normal trading services and that it never explicitly said the initiative was tied to a third-party brand. While we won’t have an outcome from the lawsuit for some time, it is clear NFTs have further complicated an already divisive intellectual property debate in legal circles.
Blockchain Infrastructure
Blockchain development platform Alchemy raised $200 million in a recent Series C1 round that valued the company at $10.2 billion, according to TechCrunch. In about 10 months, Alchemy has increased its valuation by over $9 million, as popular Web 3.0 projects flock to its platform to construct their visions efficiently.
Just as Amazon Web Services has provided the “piping” needed for cloud computing on the internet, Alchemy is attempting to become the go-to platform for teams looking to build a new product or service on the blockchain. The company’s most prominent offering is its Supernode solution, which allows decentralized app creators to implement a distributed infrastructure on the blockchain, providing creators with a low-cost way to scale their platform without sacrificing reliability. This model replaces the usual node architecture system that requires costly engineering and constant maintenance, allowing developers to focus on building core app functionality. To date, 70 percent of the top Ethereum applications run on Alchemy, including prediction market Augur and video game Cryptokitties.
Alchemy wasn’t the only blockchain infrastructure company to secure additional funding, as digital asset custody provider Fireblocks recently raised $550 million in its Series E round, according to Cointelegraph. Fireblocks facilitates interaction with digital assets through secure wallet custody, fast on-chain settlement across many exchanges, and integrated anti-money laundering and know-your-customer compliance. Like Alchemy, Fireblocks has secured top clients across the financial services industry, such as Revolut and BlockFi.
Crypto Regulation
Securities and Exchange Commission (SEC) Chairman Gary Gensler may be turning up the heat on digital assets again as the agency implements a new 654-page proposal to broaden the definition of an “exchange,” according to the Financial Times. The new definition has been expanded such that decentralized exchanges like Uniswap could fall under SEC purview, even though this recent guidance was technically not directed at the digital assets ecosystem. But Gensler’s statement that the new rules are intended “to cover platforms for all kinds of asset classes that bring together buyers and sellers” seems to make it clear that exchanges facilitating the trading of coin and token assets were part of the thinking behind this updated guidance.
The new proposal could reverse the regulatory gray area decentralized finance applications have lived in, giving the SEC broader enforcement control in the space. As Forbes notes, the proposal technically only applies to exchanges that already trade “treasuries and other government securities,” but pro-crypto SEC Commissioner Hester Peirce has stated her belief that it is still a backdoor mechanism for the agency to bring further regulation to cryptocurrencies. This sentiment is echoed by the Association for Digital Asset Markets in a letter to the SEC, in which it stated the proposed amendments “have the potential to impact and expand SEC authority over spot digital asset markets and peer-to-peer decentralized networks in ways not publicly mentioned or discussed in the Proposal.”
Central Bank Digital Currencies
India recently floated the idea of a 30 percent tax on cryptocurrencies and NFTs, as Prime Minister Narendra Modi’s government has seen the opportunity to generate significant tax revenue while also discouraging young kids from rampant trading, according to The Washington Post. As part of this two-fold strategy to both capitalize on and regulate new technologies, India is rolling out a digital rupee to facilitate more digital transactions. While the announcement positively influenced markets and was met with relief by blockchain enthusiasts, The Washington Post notes that the implementation of the digital rupee could also be a way to undercut the popularity of more volatile privately-issued cryptocurrencies.
In the United States, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) released their initial technical research on several different design mechanisms for a potential central bank digital currency. As reported by Blockworks, the first phase of this research was intended to test technical details like blockchain infrastructure, privacy controls, and payments capabilities. In a blog post, the team noted that it designed an architecture supporting over 1.7 million transactions per second, but the catch is that it did not support an order history of transactions or any cryptographic verification. This was done as a tradeoff for scalability, as any additions and requirements for the architectures could slow it down significantly. For Phase 2 of what has been dubbed “Project Hamilton,” the Federal Reserve Bank of Boston and MIT will continue exploring alternative designs and architectures, while also researching potential technical additions like smart contracts and offline payments.
Digital Lending
Over the last few months, I have written about the Consumer Financial Protection Bureau’s (CFPB) crackdown on the Buy Now, Pay Later industry and misleading digital lending practices. Now, consumer protection advocates are lobbying the CFPB, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to stop banks from facilitating oftentimes predatory “rent-a-bank” schemes. A letter from these advocates criticizes the persistence of such schemes, which have allowed FinTechs to circumvent state limits on loan interest rates through partnerships with banks. They state that “rogue banks” have enabled non-bank lenders to disburse loans with up to a 225 percent annual percentage rate, much higher than the suggested 36 percent rate that has won support in several large states. While FinTech and bank partnerships are invaluable to the ecosystem, these exorbitant rates are not. While short, the letter carries a serious tone with demands to curtail what they deem as irresponsible and unfair practices causing significant harm to consumers.