In This Newsletter
Cryptocurrency
Payments
E-commerce
Digital Lending
Global Developments
Cryptocurrency
The world’s largest decentralized exchange, Uniswap, is being investigated by the US Securities and Exchange Commission (SEC), according to The Wall Street Journal. For a while, decentralized exchanges were somewhat insulated from any regulatory scrutiny, given that by their nature there is no central entity backing the platform, and there was a natural question of who would be punished if charges were ever brought for violating securities laws. But Gary Gensler’s SEC insists there are still beneficiaries from the fees generated on the platform, and the agency issued letters over the summer seeking more information on exchanges like Uniswap that could potentially be hosting tokens that are actually unregistered securities. Now, Uniswap will probably fight back by saying there is no central authority that determines which coins and tokens to list, arguing that all that work is determined by the network of users and the protocol itself, hence the “decentralized” in the term decentralized exchange. In that case, what would the SEC prosecute? The protocol’s code? Uniswap is not like Coinbase, which is a centralized authority that administers its exchange daily and controls which securities are listed. But Uniswap has instead chosen to take a more compliant tone, removing synthetic tokens that tracked public equities’ trade on popular stock exchanges like the Nasdaq and showing a willingness to work on its transparency.
However, another major issue Uniswap will most likely have to deal with is its lending pools, which are probably the next target of the SEC’s investigation. These lending pools, where users will offer up their assets for other users to trade, provide healthy yields, just as banks would pay interest on your deposits. However, as Matt Levine of Bloomberg argues, this kind of crypto lending program may be considered an investment contract according to the Howey Test. The SEC has started to take notice, as evidenced by their most recent spat with Coinbase over its new lending product. According to Nasdaq, the agency sent Coinbase a Wells notice stating its intention to sue the exchange if the product was formally rolled out. Coinbase CEO Brian Armstrong took to Twitter to vocalize his frustrations over the SEC’s seemingly targeted regulation without explaining how the program is a security.
On the note of unregistered securities, Kim Kardashian fielded some criticism from the United Kingdom’s Financial Conduct Authority for her promotion of cryptocurrency token Ethereum Max on Instagram, as reported by CNBC. Ethereum Max was a little-known token developed only a month prior to Kardashian’s ad, which could show signs of a potential scam or pump and dump scheme. Promotions like Kardashian’s Instagram advertisement are also a perfect trigger for the Howey Test. According to the SEC, an investment contract can be “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” In this case, Kardashian’s efforts seem to qualify as the “effort of others,” given that she provided “essential managerial efforts that [affected] the success of the enterprise,” which points to the Howey Test conditions being met.
Payments
A judge recently ruled that Apple can’t restrict applications on its App Store from redirecting payments to users outside of its ecosystem, as the company’s anti-steering provision was declared unlawful, as reported by The Wall Street Journal. The anti-steering rule for developers was implemented to keep users within the ecosystem and drive users through Apple Pay for all in-app purchases, but this was ruled to be an anti-competitive practice. However, the ruling probably didn’t go as far as Epic Games would have wanted it to, as the judge still left Apple’s App Store as the only way to download applications on iOS devices. It’s also not clear yet what “loosening restrictions” means for Apple’s anti-steering provision, as the language in the ruling suggests the practice may still be in place but with some changes. At the very least, Apple will have to let apps offer third-party payments outside of its ecosystem, skirting Apple’s hefty commission on in-app purchases.
According to PYMNTS, Square will be the exclusive provider of point-of-sale (PoS) hardware and software for vendors in the new SoFi Stadium in Los Angeles. It’s a huge win for the payments company, given the traffic that will be coming through the stadium. SoFi Stadium is already the home of the Chargers and Rams of the National Football League, and the 2022 Super Bowl and the 2023 NCAA College Football playoffs will be hosted there. Even weekly regular-season game transaction volume on Square systems could be significant, given that the Chargers sold over 68,000 tickets just for its first 2021 preseason game in SoFi Stadium.
It will be interesting to track if more exclusive deals with stadiums pop up in response to this partnership and how competition heats up for new event venues being built. Back in April, PayPal entered a 10-year deal with the San Jose Earthquakes of Major League Soccer, securing the right to rename the stadium PayPal Park and outfitting vendors with PayPal PoS systems, with a particular focus on implementing its QR code technology to reduce personal contract, according to Forbes. The focus on these exclusive partnerships will only intensify the battle among the biggest payments companies as they jostle for market share and attempt to fortify their presence among the small business vendors within stadiums that have suffered through the pandemic.
E-commerce
Intuit recently agreed to acquire digital marketing and email service company Mailchimp for $12 billion in a cash and stock deal, according to The Wall Street Journal. The deal marks Intuit’s largest acquisition ever. It could generate synergies with the company’s popular QuickBooks software, which has become the go-to accounting platform for small businesses with a reported base of 4.5 million customers, according to Ace Cloud Hosting. Integration with Mailchimp services could make Intuit a one-stop-shop for small businesses to manage services like payroll but also foster business growth through email marketing and web advertisements, transforming QuickBooks from just an accounting program to an end-to-end small business management service.
Digital Lending
The Consumer Financial Protection Bureau (CFPB) has sued digital lender LendUp for misleading borrowers on interest rates and their activity on the platform, according to PYMNTS. The CFPB stated that LendUp contributed to borrower debt cycles by promising users the ability to unlock more favorable interest rates with repeated borrowing. The agency alleges this was a ploy to lock users into more debt, and there weren’t any tangible benefits to taking out more loans through LendUp. This wasn’t the first time the CFPB has come after LendUp, as the consumer protection agency ordered the FinTech lender to pay over $3 million in fines in 2016 for its deceptive marketing.
Global Developments
According to the Financial Times, South Korean financial regulators have begun to crack down on the digital assets space, issuing a mandate for all cryptocurrency exchanges in the country to register with the Financial Services Commission. The problem is that two-thirds of the exchanges are not expected to meet the regulatory requirements, posing potential risks to investors on the various platforms. If these exchanges are unable to meet the regulatory requirements for registration by September 26, assets will be frozen and trading will be halted, limiting liquidity for investors who may not be able to pull their money out in time. Losses of up to US$2.6 billion for cryptocurrency traders are possible in response to the shutdown of about 60 exchanges, leaving the South Korean crypto market in a bit of flux as exchanges move to meet requirements.
In addition to advancing digital asset regulations, South Korea seems to be navigating greater oversight over Big Tech giants like Kakao and Naver. Both companies experienced over 7 percent slips in their share prices after financial regulators indicated FinTechs will no longer be able to direct users to third-party financial products without registering as brokerages, according to The Korea Economic Daily. Regulators say advertisements and recommendations leading users to products offered by financial firms violate the Act on the Protection of Financial Consumers if companies are not registered as official brokerages. This ruling limits a significant source of business for FinTechs that took commissions on financial product recommendations from its wide consumer bases, like Kakao and Naver. The decision will limit projects like Naver’s car insurance review project, which will not be accessible anymore. The decision from regulators also limits access to new customers for financial firms offering loans and insurance, narrowing the number of marketing avenues available to these companies.