Authors
FinTech in Focus — June 14, 2021
In this FinTech in Focus
Industry Developments
Cryptocurrency
The Milken Institute recently hosted a panel discussion on stablecoins, which are cryptocurrencies pegged to commodities, fiat currencies, or a basket of other coins. Center for Financial Markets Executive Director Michael Piwowar joined industry experts to discuss how stablecoins have become attractive, real-time programmable digital assets favorable in cross-border transactions. Digital assets like USD Coin (USDC) are bridges between fiat currencies and digital assets, with increasing adoption during the pandemic as expansionary monetary policies have encouraged a shift toward decentralized cryptocurrencies. Listen to the virtual forum to hear the panelists discuss the future of regulation and financial institutions’ involvement in stablecoins as innovators begin to think about what decentralized finance could look like in the coming years.
Payments services company Circle, which was represented by Chief Strategy Officer Dante Disparte at the stablecoins panel, has continued to attract investor interest for its role in developing USDC. The company recently raised $440 million in new capital from large institutional investors like Fidelity and FTX, according to The Block. Rumors of the company’s $4 billion target for a potential merger with a special purpose acquisition company (SPAC) to take the company public also seem to suggest significant market interest in payments facilitated by USDC. As investors begin to worry about volatility in crypto assets like Bitcoin, stablecoins could become more attractive options for risk-averse investors.
Former Massachusetts Institute of Technology cryptocurrency lecturer and current Securities and Exchange Commission (SEC) Chairman Gary Gensler recently expressed concern over Bitcoin Exchange Traded Funds (ETFs), Markets Insider reports. Applications to establish these ETFs from several institutional investment managers are currently under review, but Gensler suggested the process may take longer than anticipated. The SEC’s concerns still revolve around the risks cryptocurrencies pose for consumer protection; volatility in crypto markets has been well documented over the last few months, and Gensler is apprehensive about how this volatility could affect ETFs and mutual funds.
Square CEO Jack Dorsey recently floated the idea of developing a hardware wallet to manage crypto assets securely, according to Bloomberg. Square’s Cash App currently offers users the ability to buy and sell cryptocurrency with small transaction fees, and about 1 million users bought Bitcoin on its platform in January of this year, CNBC reports. A hardware wallet product rollout would further immerse Square in the crypto asset ecosystem by allowing users to store the private key to their digital assets safely offline. According to Medium, hardware wallets are also useful because they can work on multiple blockchains and conduct peer-to-peer trading with other users.
In other company news, Square announced a new $5 million environmental partnership with Blockstream to build a Bitcoin solar mining facility. With increasing pressure mounting over Bitcoin mining’s energy requirement, this move is an attempt to create an infrastructure that is 100 percent powered by renewable energy.
To wrap up crypto news for this week, Venmo rolled out a trading platform that enables users to buy and sell Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. The platform is similar to the Cash App’s capabilities but with one important difference: Assets bought in Venmo cannot be transferred to another wallet, as is possible on the Cash App, reports CNBC.
IPOs, SPACs, and Capital Raising
Card issuing and payment service platform Marqeta went public on June 9. Ahead of its initial public offering (IPO), the reference price was expected to be between $20 and $24, with about 45 million shares being issued, according to Barron’s. On its first trading day, Marqeta saw its share price close at $30.52, valuing the company at $16.18 billion, according to MarketWatch. The lofty valuation reflects Marqeta’s over 100 percent revenue growth from 2019 to 2020 and its relationships with large clients like Square, Uber, and DoorDash. Square, its largest client, has found Marqeta’s just-in-time funding capabilities extremely helpful for merchants. Marqeta’s application programming interface (API), for example, has allowed Square merchants to issue real-time programmable business expense cards that can immediately connect to their Square balance. There is no delay in transferring revenues to a bank, which prevents capital tie-up and gives merchants greater control over their finances and liquidity. As a result, merchants have greater flexibility for short-term and immediate expenses.
TechCrunch reports that expense management platform Jeeves recently raised $131 million in debt and equity to finance its growing business across North America and South America. The company has built a unique infrastructure that eliminates the hassles that arise with different financial structures in cross-country transactions. As startups continue to become more global, the demand for services that facilitate cross-border sales, expenses, and payments will continue to grow. Jeeves is a reminder of FinTech’s importance in reconciling different financial systems and currencies.
Online investing platform eToro will merge with blank check company FinTech Acquisition Corporation, V, to go public after submitting confidential registration with the SEC. This merger is significant because of eToro’s status as a new-age investment management platform that has yielded significant growth in the last several years due to rising interest in retail investing. eToro reported a more than 200 percent increase in user registration from Q1 2020 to Q1 2021, and the number of trades executed on the platform also increased by 233 percent in the same time period. Retail investor sentiment is reflected in company valuations, and crypto asset demand is a huge reason for eToro’s year-over-year growth.
The investment management innovator Acorns also plans on going public via a merger with Pioneer Merger Corp. Acorns’ core business revolves around helping users save and invest by automatically rounding purchases to the nearest dollar and placing the difference into an Acorn account. From here, Acorns will invest on behalf of the user in diversified ETF portfolios in exchange for a monthly commission. According to The Wall Street Journal, this isn’t necessarily a revolutionary business model, but CEO Noah Kerner says the company differentiates itself by avoiding punitive and overdraft fees for users.
Digital Wealth Management
Swiss investment bank UBS has ambitious plans to advance its wealth management solutions for both billionaires and clients with at least $278,000 held with the firm. The current system of wealth management relies on discussions with human advisors to develop investment strategies, but UBS is trying to automate this process by delivering digitized and personal investment recommendations remotely. Using 60 different factors, UBS’s “MyWay” modular system will help build a customized portfolio for each investor, depending on their financial situations and risk appetites. Talking about how Spotify and Netflix deliver personalized music and media recommendations, UBS CEO Ralph Hamers said, “If we can make our content available in that way, we can differentiate ourselves.” These ambitions reflect the democratization of finance that has been underway for several years now, as simplicity, transparency, and accessibility become primary drivers of innovation.
International Developments
Bitcoin in El Salvador
In 2020, the Bitcoin Beach Initiative created a Bitcoin economy in El Zonte, El Salvador, as a means for building a sustainable commercial and social environment for the underbanked, Forbes reports. Direct transfers to families were fully transacted in Bitcoin, and educational programs were essential to teaching the community how to manage their new digital wallets to pay for things like transportation and groceries.
El Salvador is now seeking to apply the success of this project to the whole country, with President Nayib Bukele announcing a legislative proposal to make Bitcoin legal tender in the country, according to Bitcoin Magazine. There is currently no precedent for such a sweeping move from a central government, which is why the cryptocurrency world is watching carefully. However, El Salvador could uniquely benefit from this move due to the nature of its economy. Remittances from working family members abroad made up over 20 percent of the country’s gross domestic product (GDP) in 2019, the World Bank reports, but these money transfers often go through a long process with intermediaries and exchanges before they reach the intended party. As a result, fees and various charges can add up along the way in these critical cross-border transactions that fuel the Salvadoran economy. Bitcoin could eliminate these wait times and fees by facilitating the process. The Lightning Network, used in El Zonte, is currently being deployed in discussions about conducting everyday transactions with Bitcoin. The network opens new possibilities for micropayments, which can circumvent the need for Blockchain block confirmation at the point of sale. The hope is that this technology will help make small transactions in Bitcoin more cost-effective. As reported in Forbes, Bukele has predicted that “the amount received by more than a million low-income families will increase in the equivalent of a billion dollars every year,” and the Lightning Network technology is an important factor in this lofty goal. There is also the argument that this move would decouple El Salvador from the harmful effects of the United States’ monetary policy during COVID-19, considering that it is a dollarized country. While an increase in the money supply provides more liquidity to US financial institutions and citizens, the same cannot be said for Salvadorans. Instead, they have suffered a decrease in purchasing power without receiving the same benefits of the stimulus. Bitcoin’s limited supply, about 21 million units, is therefore an attractive alternative for El Salvador; in theory, there can’t be the same creation of money with a supply cap.
However, some analysts worry about price stability under a Bitcoin regime, as volatility usually significantly undermines a state’s currency. Bitcoin has shown that it is sensitive to very small reactions, like tweets, which can cause massive intraday changes. Beyond potential issues with market dynamics, El Salvador’s internet penetration rate would also need to improve for digital assets to become ingrained in the economy. The penetration was at 50.5 percent of the population as of January 2021, meaning about half the population could still have trouble building their digital wallets, according to DataReportal.
Digital Banking in Pakistan
Bloomberg reports that Pakistani FinTech company TAG Innovations announced its intention to become the first digital bank in the country, after years of incremental changes in Electronic Money Institutions (EMI) regulations. In Pakistan, 70 percent of citizens are currently unbanked, leaving the financial sector in the South Asian country relatively underdeveloped. TAG Innovations hopes to change this by simplifying the documentation process to register for a bank account, claiming registration can occur in under three minutes. This development is significant considering that digital lending by commercial banks has been extremely limited, given that Pakistan remains a cash-based society with much of the money in circulation outside of traditional banking institutions, according to Dawn. A robust financial sector is important for economic growth, but banks and financial services companies will falter without capital. As such, reducing barriers for Pakistanis to deposit money and open formal bank accounts is a critical first step to bolstering Pakistan’s economic outlook for the next decade. Digital banks will need to offer lending and financial management products to sustain themselves and turn a profit. Companies like TAG Innovations and citizens across Pakistan need each other to develop a formidable financial sector, but government regulation is also an important factor; the State Bank of Pakistan has stringent capital requirements that limit microfinance, creating extra barriers to FinTech adoption. We can see this reflected in the fact that as of October 2019, the average Indian was expected to carry out five times as many digital transactions as the average citizen of Pakistan, according to TheNews International. However, if Pakistani stakeholders can come together to ease restrictions on microfinance and digital banking, the nation may be able to achieve the potential for a $36 billion digital finance market and 7 percent GDP growth, according to the World Bank.