In this Newsletter

Crypto Regulation 
Metaverse Real Estate 
NFT Exclusivity 
Digital Lending 
Buy Now, Pay Later  

Crypto Regulation

More regulatory clarity surrounding cryptocurrencies may be coming to Capitol Hill soon. According to Bloomberg, Senator Cynthia Lummis (R-WY) plans on introducing a comprehensive bill next year to establish a cryptocurrency regulatory framework outlining tax structures, agency oversight, and consumer protection guidance. As noted by Decrypt, one of the biggest features of the proposed bill is the creation of a crypto regulatory body jointly overseen by the Commodity Futures Trading Commission and the Securities and Exchange Commission, which have both fought for authority in the digital assets space. While Lummis' bill has yet to be introduced, it is a highly anticipated piece of legislation that many in the crypto community have been awaiting. 

Metaverse Real Estate

Real estate, long considered one of the prime physical asset classes available for investment, has gone digital. New metaverse projects like Decentraland and The Sandbox have become hubs for digital media experiences from gaming to live concert performances, and virtual plots of land are at the center of this new economy. Global consulting firm PwC recently purchased land on The Sandbox for an undisclosed amount, making it the first major institution to do so on the platform, according to Bitcoin.com. Why would a consultancy buy virtual land? It's all part of the move toward Web 3.0's vision of decentralization and a new digital economy based around the use of non-fungible tokens (NFTs) as a mechanism for recording and proving ownership. On The Sandbox, institutions and individuals can purchase land out of the 166,494 available plots in the form of NFTs. From there, owners can customize their plots by building out immersive games or other media experiences that can be monetized as other players flock to participate. For those struggling to understand why people would pay such exorbitant prices for tiny plots of intangible land, it may be helpful to think of The Sandbox metaverse as a new metropolis undergoing its initial wave of construction. Just as movie theaters, restaurants, theme parks, and hotels would want to acquire land as inexpensively as possible to serve their commercial interests in a new city, buyers view The Sandbox's plots as entries into the metaverse's potential. In a New York Times article, co-founder of the Metaverse Group Michael Gord notes: "Imagine if you came to New York when it was farmland, and you had the option to get a block of SoHo…[i]f someone wants to buy a block of real estate in SoHo today, it's priceless, it's not on the market. That same experience is going to happen in the metaverse." Tokens.com CEO Andrew Kiguel expressed similar sentiments regarding the potential of the metaverse real estate market, according to The Wall Street Journal, saying, “This is like buying land in Manhattan 250 years ago as the city is being built." 

NFT Exclusivity 

The Bored Ape Yacht Club (BAYC), a self-described "limited NFT collection,” has long remained an enigma to those who don’t understand why people pay such high prices for esoteric digital renderings of dressed up apes. Why would anyone pay $300,000 for a JPEG file that I could just right-click to save on my desktop? While each NFT in the BAYC collection derives its value from the different expressions, clothing, and colors represented in the ape’s portrait, the lofty valuations are driven by the caliber and status of other owners, as noted by the Financial Times. This isn’t exactly a new concept, as limited-edition watch owners sometimes develop a pseudo-fraternal bond over shared luxury goods and their relative scarcity. However, BAYC is one of the first major players to bring a new idea of luxury to the blockchain. Owners within the collection have begun organizing their own parties and events, making BAYC a prominent example of how exclusivity in the metaverse and the blockchain has started to transition to exclusivity in the physical world. In an interview with Rolling Stone, BAYC’s anonymous founders noted that they are also trying to set up an annual “Ape Fest” and various yacht parties and charity dinners, further demonstrating the power of the metaverse’s new enclaves. 

Digital Lending

In September, I wrote about the recent lawsuits LendUp has faced regarding potentially misleading claims about the benefits of repeated borrowing on its platform. After failures to comply with repeated warnings dating back to 2016, LendUp now finds itself facing its harshest penalty to date. On December 21, the Consumer Financial Protection Bureau (CFPB) shuttered LendUp’s operations and barred the company from originating new loans, citing the company’s repeated illegal marketing techniques as the primary driver behind its decision. As the American Banker notes, over 140,000 repeat borrowers were promised larger loans and lower interest rates, but their rates often increased even after making multiple loan repayments on time. While LendUp will be forced to pay a $100,000 penalty, the CFPB plans on using its Civil Penalty Fund to pay over $40 million to affected consumers who were misled about their payment schedules due to false advertising.

Buy Now, Pay Later 

New signs of a slowdown in the Buy Now, Pay Later (BNPL) market have emerged as customer interest in previously hot markets like Australia have dwindled. The Australian BNPL sector lost over US$700 billion in 2021, which has fueled over 70 percent declines in several companies’ share prices over the last year, as reported by The Guardian. Of the 12 BNPL companies listed on the Australian Securities Exchange, zero make any profit, and even Afterpay, which has agreed to be acquired by Square for almost US$30 million, reported an almost $112 million loss for its 2021 fiscal year. After a 54 percent increase in its net income in 2020, Afterpay’s $112 million loss represents a nearly 690 percent decrease in net income, showing how the path to profitability in the space may be more difficult than previously imagined. With looming regulation potentially limiting revenue streams for BNPL companies like Afterpay, opportunities for margin expansion are quickly narrowing for the once budding industry. After concerns began to mount around BNPL’s effects on consumer behavior, the CFPB officially launched a formal investigation into Affirm, Afterpay, Klarna, PayPal, and Zip, according to CNBC. The CFPB has requested that each of these firms turn over information about their practices to better understand their business models and assess their risks to consumers. As Nasdaq notes, the CFPB also has its sights set on understanding these companies’ data collection practices and how they may influence the predatory targeting of younger consumers who are more prone to accumulate unsustainable debt.  

Credit card networks have also begun to catch up to BNPL firms, as companies like Mastercard have established competing services that also allow consumers to pay in installments with merchants in their existing network. Card issuing banks also have an incentive to partner with card processors like Visa and Mastercard, given that they have lost an estimated $8 billion to $10 billion in revenue due to FinTech’s dominance in the BNPL space, according to SeekingAlpha. As reported by Reuters back in September, a third of consumers utilizing BNPL services reported falling behind on payments, with Gen Z and Millennial users reporting the highest rate of missed payments among all age groups.