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FinTech in Focus — July 26, 2021
In this Newsletter
Industry Developments
Cryptocurrency
Visa is preparing for the next wave of payments innovation by partnering with popular exchanges like FTX and Coinbase to enable the use of cryptocurrencies as a medium of exchange, according to Fortune. The payments company facilitated over $1 billion of cryptocurrency-linked card transactions in the first half of 2021, demonstrating a unique demand to utilize cryptocurrencies like Bitcoin to purchase everyday goods and services. Customers using one of the twenty-five digital currency wallets that Visa has partnered with will be able to use their cryptocurrencies as payment tools. Still, volatility remains a risk to their sustainability as a steady means of exchange. While Visa is offering a card-linked ramp for cryptocurrencies to be exchanged like fiat currency, it is still up to wallet owners to consider the risks of relying on these digital assets as their main payment mechanism, as Visa CFO Vasant Prabhu noted in an interview with Bloomberg.
The debate about digital asset regulation continues as cryptocurrency exchange platform Binance faces harsh criticism over its handling of the cryptocurrency crash in May. According to The Wall Street Journal, users were locked out of their accounts during the Bitcoin crash, leaving those with leveraged bets unable to close their positions and lock in any profit. As Bitcoin continued to fall on May 19, Binance began liquidating these users’ positions as margin requirements could not be met, leaving investors without their initial capital investment and potentially incurring an additional liquidation fee. This fee is meant to encourage investors to monitor the target liquidation price closely and manually exit positions before forced liquidation, but Binance users were unable to do this because of technical bottlenecks on Binance’s platform. While still the largest cryptocurrency exchange in the world, Binance demonstrated the dangers and limitations of unregulated marketplaces without a centralized means for dispute resolution.
As a result, Senator Elizabeth Warren (D-MA) has called upon the Consumer Financial Protection Bureau (CFPB) to target financial scams and improve its cryptocurrency regulation standards, as reported by Bollyinside. Others in Congress have also taken notice, with the House’s Financial Technology Task Force sponsoring a bill to establish a digital asset workforce between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), according to Roll Call. As Bloomberg reports, the simple solution may be to remove complexity from cryptocurrency exchanges and avoid offering derivatives and financial instruments alike. However, this challenges exchanges desiring to compete by offering specialized products and a better user experience. Without the ability to offer such financial instruments, competition could come down to simply lowering transaction fees, which would hurt underlying business models.
Apple Pay Later
According to Bloomberg, Apple has announced its intentions to enter the burgeoning “buy now, pay later” (BNPL) movement in FinTech, adding more competition to an already crowded market and increasing the appeal of Apple Pay. Apple will offer features allowing customers to pay in four installments over the span of eight weeks or monthly installments, with the former option being interest-free. This move reflects Apple’s further expansion into FinTech, which is in line with competitors like Amazon, Facebook, and Google. Bigtech investment in FinTech totaled $2.2 billion in 2020, according to a report from CBInsights. This report suggests that “Apple Pay Later” is part of the company’s shifting focus from hardware to software, demonstrated by Apple Services’s $16.9 billion in revenue in Q2 of 2021, a 25 percent increase year-over-year. A PYMNTS survey revealed that just 13 percent of the population uses Apple Pay at least once a week at physical locations. Still, the company’s new BNPL feature could encourage more iPhone users to take advantage of Apple Pay. BNPL is yet another addition to Apple’s diverse ecosystem, posing challenges to companies like Afterpay, Affirm, and Klarna that cannot compete with the tech giant’s network integration and existing customer base.
Global Developments
Central Bank Digital Currencies
China recently released an update on its proposed digital currency, sharing more information about e-CNY’s design, usage, and purpose. One of the main themes that emerged from the white paper is the focus on CBDC usage in domestic retail payments rather than wholesale settlements or cross-border transactions. While mobile payments in China already account for 60 percent of total transaction value, the Chinese government has made it clear that e-CNY’s primary goal is to facilitate further mobile payment penetration through faster settlement times and greater domestic financial inclusion.
However, e-CNY won’t completely replace the physical renminbi, given that there are still clusters of the population without access to the needed internet connections and technical hardware. The government has recognized that an overzealous move to eradicate the use of physical currency could significantly harm certain communities, which is also why CBDC interoperability with legacy banking systems remains a major focus. Nonetheless, the core of e-CNY design remains immediate settlement, offline transactions, and independence from banks. Smart contract capabilities will also be included in the design; e-CNY will be real-time programmable, setting up potential self-executing payments and transactions. It is important to note that the introduction of e-CNY doesn’t entail complete bank disintermediation, as select commercial banks will be provided with e-CNY and counted upon for circulation. Questions remain over just how much independence and flexibility commercial banks will have under the People’s Bank of China’s centralized management. However, the proposed plan is a two-tier model that counts on cooperation among financial institutions and the government. Importantly, the report quickly establishes that e-CNY is not regarded as a cryptocurrency, using phrases like “acute price fluctuations” and “lack of intrinsic value” to diminish Bitcoin’s potential for daily usage in China.
The Bank of International Settlements (BIS) released a report highlighting the role of CBDCs in cross-border payments, and many of its findings seem to correlate with several of the themes from the People’s Bank of China’s CBDC white paper. BIS notes that most CBDC research projects only focus on domestic initiatives rather than cross-border transactions, which is reflected in China’s strategy. However, how countries choose to cooperate on CBDCs and international payments will directly affect their economic development, financial inclusion, and access to capital. There are several options for cooperation among countries on the topic of CBDC design: mere compatibility with similar cryptographic techniques and user interfaces, interlinked common clearing mechanisms with shared message standards like ISO 20022, or a single system across different countries with one digital infrastructure and one ledger. The design options chosen by central banks across the world will determine how the enhanced efficiencies CBDCs can provide will counter the complex compliance challenges and long transaction changes that currently weaken cross-border payments.
Terraform Labs
The Terra blockchain has proven to be one of the crypto world’s most valuable assets for applying the benefits of distributed ledger technologies to real-world practices. Developed by South Korean company Terraform Labs, the Terra blockchain hosts native mining token LUNA in conjunction with its stablecoin TerraUSD (UST). When there is an increase in demand for TerraUSD, new coins need to be minted to increase supply to maintain the stable peg, so LUNA tokens representing mining power are burned and absorb the volatility in transaction volume. In exchange for taking on the short-term volatility, miners receive a 1 percent cut of the transaction at most. In this way, Terra hopes to achieve a price-stable and growth-driven cryptocurrency that maintains its purchasing power and can be effectively used by both merchants and customers. As a result, Terra blockchain-enabled payment platform Chai charges less than 1 percent on merchant transaction fees in South Korea compared to around 3 percent for legacy competitors like Visa. In a podcast with ARK Invest, Terraform Labs co-founder Do Kwon also notes that Chai’s instant transaction settlement frees up working capital for South Korean businesses, giving them more flexibility to invest in their enterprises and pay employees. The same podcast also discusses how the Mirror Protocol built on Terra is democratizing retail investing and allowing citizens from developing countries to artificially participate in American stock exchanges. The Mirror Protocol is a decentralized finance (DeFi) marketplace that offers synthetic, tokenized versions of publicly traded companies like Tesla and Apple but has already drawn criticism due to its lack of regulation, as reported by Bloomberg. The tokens on the exchange track prices of the actual equities trade on official exchanges like the New York Stock Exchange (NYSE) but aren’t actually offering investors the ability to be recognized as official shareholders.
Mastercard in India
According to Quartz, India has banned Mastercard from issuing new debit and credit cards in the country, citing failures to comply with data storage requirements and guidelines. While this move wasn’t completely unexpected after the government banned American Express, it is still a significant change in the economy; Mastercard accounts for about a third of all card payments in India. Existing Mastercard users won’t be affected, but only Visa, Maestro, and RuPay will be able to issue cards going forward. RuPay is the Indian government-owned payments platform. Recent moves to block American Express and Mastercard suggest a greater initiative to limit dependence on foreign card companies and payment processors. While Prime Minister Narendra Modi was a passionate advocate for foreign direct investment and multinational corporation involvement in India earlier in his time in office, his economic policies have since skewed toward protectionism. According to The Diplomat, banks like Morgan Stanley and Goldman Sachs have predicted over 5 percent growth for the Indian economy in 2022 after an initial recovery in 2021, but regulatory and political tailwinds in India could prevent this from happening. Anti-trust lawsuits against Amazon and Walmart represent an increasingly difficult e-commerce environment for foreign companies, and social media companies have been accused of facilitating the spread of misinformation and defamatory comments, as reported by NPR. This is all to say that foreign companies are experiencing a more difficult regulatory environment in India, and aggressive intervention on the part of the Indian government could potentially restrict the robust economic advancement that was once expected of the world’s largest democracy.
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