Authors
Arnav Kumar
In this Newsletter
Buy Now, Pay Later
Decentralized Identification
Remittances
Stablecoins
NFTs
Buy Now, Pay Later
Buy now, pay later (BNPL) company Affirm was set to announce quarterly results after market close on February 10, but its highly anticipated earnings call was undercut by an early tweet from its corporate account. The tweet highlighted 77 percent revenue growth and a 218 percent increase in transaction volume, sending share prices higher than expected during midday trading. But the company’s actual earnings data seemed to paint a different story than what was initially presented by the now-deleted tweet. As reported by The Wall Street Journal, top line revenue growth beat analyst expectations by almost 14 percent, but net loss expanded by $130 million year-over-year, leading to the stock tumbling over 20 percent in just a few hours after the tweet was deleted.
The significant decrease in net income poses wider questions about profitability for BNPL companies, as recently acquired competitor Afterpay also reported a $112 million loss for its most recent fiscal year. According to Bloomberg, the Australia Securities and Investment Commission noted that 15 percent of BNPL users in Australia had to take out additional loans to make payments, adding to concerns of BNPL luring customers into debt traps. Despite Affirm’s commitment to blocking users who have missed multiple payments, borrowers could jump between platforms and rack up even more debt across the numerous BNPL services. As such, if the BNPL industry wants to remain in the good graces of the Consumer Financial Protection Bureau, firms must cooperate to ensure consumers cannot build exorbitant debts across various platforms.
Decentralized Identification
The Centre Consortium recently announced a new project to create an open and decentralized identification protocol for the new Web 3.0 economy. Verite, as the consortium dubs the project, will allow users to hold a portable identity that can be used across different blockchains and decentralized applications without having to fork over sensitive data to centralized entities continuously. The project aims to simplify anti-money laundering and know-your-customers checks by issuing identity tokens that users can store in their wallets. The current process is extremely burdensome; whenever someone wants to register for a new service on the Web 2.0 model, they must go through the lengthy process of revealing sensitive data points such as date of birth, social security number, address, and other pieces of information.
Remittances
Coinbase rolled out a new remittance program in Mexico that will allow users to cash out cryptocurrency transfers at participating banks without any fees, according to Decrypt. Cryptocurrencies have long been viewed as meaningful mechanisms for circumventing high remittance fees charged by money transfer services like Western Union, and this partnership with over 37,000 stores in Mexico is intended to undercut the legacy international money transfer service industry. Coinbase will allow cryptocurrency transfer recipients to exchange their virtual currency for pesos without the 6 percent fee that Western Union usually charges. While the free service only lasts until March 31, Coinbase has stated it will offer transfer rates 25-30 percent lower than the current average rate while maintaining instant transfers between wallets.
Stablecoins
Circle restructured its merger with blank check company Concord Acquisition Corp, with the new deal valuing the company at between $7.65 billion and $9 billion, according to the Financial Times. The merger deal could garner up to $750 billion in private funding, over $300 million more than what was expected to be raised, as Circle’s USD Coin (USDC) continues to find mainstream success. Since the previous agreement was announced in July, USDC has doubled in circulation and become one of the key stablecoin facilitators of decentralized finance adoption on various lending and staking protocols.
According to Decrypt, Circle’s competitor Tether released new figures showing a 21 percent decrease in commercial paper holdings from the last quarter. As mentioned in a previous FinTech in Focus, Tether has come under fire recently for its lack of cash holdings to corroborate its claim that its stablecoin is backed one-to-one with dollar reserves. Its mix of non-cash assets like commercial paper and treasury bills called Tether’s liquidity into question and posed risks for its purported claim of a one-to-one peg to the US dollar. After being fined $41 million by the Commodity Futures Trading Commission for misleading investors about its reserve, Tether seems to be rolling back some of its riskier asset holdings in favor of stronger cash balances. As the regulatory landscape becomes stricter and new bills like the Stablecoin Innovation and Protection Act seek to formalize reserve requirements, Tether will most likely continue to reduce its exposure to the riskier digital assets and corporate bond investments it has made in the past.
NFTs
Over President’s Day weekend, 254 non-fungible tokens (NFTs) were stolen from users on OpenSea, the leading NFT marketplace that has grappled with ongoing security issues. As noted by The Verge, initial reactions to the hack centered the blame on OpenSea’s new smart contract system, but CEO Devin Finzer argued that the aggrieved parties were victims of a phishing attack unrelated to any of OpenSea’s vulnerabilities. In a Twitter thread, Finzer described the attack as “tricking users into maliciously signing messages” and clarified that the total value of tokens stolen was $1.7 million, much less than the $200 million figure initially reported. Despite Finzer’s claims that OpenSea was not responsible for the phishing attacks, a Bored Ape Yacht Club owner who lost his NFT in the scheme has filed a federal complaint against OpenSea. Plaintiff Timothy McKimmy argues that OpenSea failed to take proper security measures and protect against the stolen asset being resold on its marketplace.
This recent phishing scam represents a larger security issue in Web 3.0. As we wrote in a previous edition of FinTech in Focus, OpenSea has found itself deeply embedded in the centralization vs. decentralization debate. NFT enthusiasts and blockchain aficionados want OpenSea to be decentralized, but this model comes with costs: OpenSea wouldn’t be able to recover users’ tokens purchased on its platform, placing the burden of security on customers. This situation is another reminder of the importance of wallet security and attention to detail in the Web 3.0 world; while decentralization has placed ownership back into the hands of users, it has also dissolved the ability of a centralized entity to recover stolen assets. When OpenSea blocked transactions and froze accounts during the last hack, there was an uproar about how OpenSea shouldn’t be able to control the marketplace. But now, people like McKimmy are suing OpenSea for failing to freeze trades on stolen assets. Either way, it seems like the NFT community hasn’t decided what it wants from OpenSea.