In this Newsletter
Payments
Diem
CBDC
Metaverse + Web 3.0 Criticism
Payments
Many startups have looked at the data and found that over 26 million Americans lack access to the formal credit economy, showing a profound opportunity to build products that enhance financial inclusion and better integrate credit invisible individuals. So, instead of running a credit check and obtaining a FICO score for a given applicant, these startups are now using “alternative credit scoring,” which utilizes a much wider range of criteria such as spending habits, education, and income for determining creditworthiness. However, this push toward economic parity may actually perpetuate biases via algorithms and hurt lower-income minorities more than it helps.
As The New York Times notes, the algorithms used in these new credit scoring mechanisms are often vague or opaque, leaving questions about whether the marketed equitable distribution of credit is actually happening. Applicants must also consider just how much data they are forking over to a private company that doesn’t have to reveal its internal processes due to intellectual property protections. But these modern-age credit scoring techniques are features, not bugs, and are ways for startups to differentiate themselves from competitors in a crowded market.
Access to credit is considered foundational to economic mobility, so it’s not surprising to see just how many companies are trying to get in on the action. Even Goldman Sachs, which has historically been known for its investment banking and trading arms, is expanding its retail banking portfolio and racking up new partnerships with the likes of Walmart and Apple. Goldman’s partnership with Apple was its first prominent foray into the credit card space, but it has now launched a new credit card with General Motors (GM) after acquiring the portfolio from Capital One for $2.5 billion. As noted by Reuters, this is Goldman Sachs’s most recent attempt to expand its lending business among all three million GM credit card holders. The follow up to the Apple Card makes sense for Goldman Sachs; revenue for credit card issuers has increased 66 percent in the last decade, and competitor bank JPMorgan Chase recorded over $10 billion in card revenue and lending-related and deposit-related fees in 2020.
But Goldman Sachs isn’t the only financial services company expanding in the credit card space. Coinbase has partnered with Mastercard to enable cardholders to buy non-fungible tokens (NFTs) on Coinbase’s upcoming marketplace competitor to OpenSea, the current leader in NFT exchange volume. This partnership comes almost a year after Gemini launched a similar program with Mastercard and saw over 150,000 waitlist signups to receive the credit card. The partnership with Mastercard for both companies marks a massive shift from how NFTs are currently bought. Right now, blockchain-based NFT marketplaces like OpenSea require users to convert fiat money into a cryptocurrency, establish a wallet, deposit cryptocurrency into this wallet, and then purchase the NFT while also paying a hefty gas fee to facilitate the transaction on the blockchain. Coinbase and Gemini are essentially introducing some sense of centralization to a movement that originally began with the intention of removing credit card companies from the equation. For the people who aren’t crypto enthusiasts and just care about getting their hands on an NFT, this is a great option that eliminates some friction.
As Coinbase attempts to make NFTs more accessible with its Mastercard partnership, OpenSea is also trying to go mainstream with its recent acquisition of crypto wallet provider Dharma Labs. Dharma Labs allowed users to connect their bank accounts directly to their wallets, providing many users with an easy, decentralized finance onboarding experience that circumvented centralized cryptocurrency exchanges. As reported by Cointelegraph, Dharma Labs’s wallet app will be shut down on February 18, but the company’s co-founders will take on executive roles at OpenSea. It’s not exactly clear how OpenSea will integrate the wallet provider, but a recent blog post announcing the acquisition seems to indicate a goal of developing a more inclusive Web 3.0 and NFT ecosystem with an emphasis on community investment.
Diem
After several years of tumultuous conversations with regulators, Meta (formerly Facebook) seems to be pulling the plug on Diem, the project that pledged to peg its stablecoin to different international currencies and attracted significant funding from some of the top venture capital firms across the globe. According to Bloomberg, Meta has begun deliberations about how to best sell Diem’s intellectual property and return some money to investors after failing to receive a nod of approval from the Federal Reserve (the Fed). After Diem project leader David Marcus left Meta in late November last year and the Department of Treasury released its report on stablecoins, things haven’t exactly been looking up for the project. As I noted in a previous FinTech in Focus, the stablecoin report seemed to take a direct shot at Diem by noting regulators’ concerns about large technology companies controlling currencies.
CBDC
The Fed released its long-awaited white paper exploring the possibility of a United Stated central bank digital currency (CBDC). For those who haven’t been tuned into previous conversations around CBDCs, this paper does a solid job outlining their relevance, and their ability to support financial inclusion and cross-border payments. The most interesting part of the paper, however, is the “Potential Risks and Policy Considerations for a CBDC” section. Here, the Federal Reserve outlines a CBDC’s negative consequences for financial market structure and safety, monetary policy implementation, consumer privacy, and cybersecurity. The report details how an interest-bearing CBDC could significantly reduce deposits at financial institutions and cause more severe bank runs due to their ease of transferability and relative liquidity during times of economic uncertainty. Moreover, one of the major concerns about a digital currency rollout is the potential need to expand the Fed’s balance sheet and bolster reserves to support surges in CBDC demand. There isn’t an exact consensus about how a CBDC will specifically alter monetary policy, but there is general agreement that an interest-bearing CBDC could become a new tool for the Fed. As Reuters notes, the Federal Reserve avoided taking any specific policy stances in this report and instead chose to kick decision-making over to Congress, which still remains divided on the issue.
Metaverse + Web 3.0 Criticism
Prominent technology writer and Uncanny Valley author Anna Wiener recently wrote a piece for the New Yorker titled “Money in the Metaverse,” in which she offered a thorough critique of the metaverse’s current structure and the new kind of rentier capitalism that has been associated with it. She argues that while this movement may have begun as a way to democratize finance, it has evolved into a corporate minefield full of constant financialization hidden by utopian rhetoric. The metaverse is capturing both good and bad attention nowadays, and it seems like we are witnessing a divide amongst those who are excited about the bridge to digital revolution and those who are worried about putting their lives on the blockchain. I wanted to highlight Wiener’s piece here because it’s representative of the many debates that we will be having around Web 3.0 as the construction and deployment process begins.
And Wiener isn’t the only one to be somewhat bearish on the metaverse movement, as even cryptographer and Signal messaging app founder Moxie Marlinspike shared some of his thoughts on the shortcomings of Web 3.0. Marlinspike exposes some of the fallacies in the “decentralized” model in the linked blog post by demonstrating how the NFTs that many people are buying right now are merely URLs directed toward data on a separate server; in other words, the URL is being stored on the blockchain, not the actual data. In his NFT experiment, Marlinspike was able to mint one NFT that displayed as a different image depending on which platform the user was on and altered the image such that it would display as a poop emoji once in a wallet. His point here was that many NFTs are prone to alteration at any point.
To be sure, Marlinspike still finds Web 3.0 to be a meaningful ecosystem, but thinks components of centralization have already crept into a movement that was originally about disintermediation. In his view, NFTs are now all about following where the money is, without much of the original enthusiasm for its technological underpinnings, which is why using credit and debit cards (centralized mechanisms of transacting) to buy NFTs is now accepted. Matt Levine of Bloomberg follows up on this by arguing the distributed consensus mechanism that takes recordkeeping out of the hands of central entities is not necessarily catching on because of great technological wonders, but more so due to the social contract that comes with it. Marlinspike and Levine aren’t bashing Web 3.0 or conceptions of the metaverse, but are providing a reality check on a nascent idea that will need some fine-tuning to reach its initial goals.