In this issue
Digital Assets
Payments
Small Business
Global Developments
I sat down with former United States Treasury Department official Michael Greenwald, who currently serves as a director of multi-family asset manager Tiedemann Advisors, last week to discuss the latest news in the digital assets space. Our conversation covered The Fed and Central Bank Digital Currencies (CBDCs), China’s recent crypto ban, and the role of international alliances in the digital assets space. Watch the interview below:
Digital Assets
Non-fungible tokens (NFTs) have taken off and created hot markets for a wide range of assets, including highlight clips from NBA games, digital cats, and more traditional physical assets like art. However, several questions remain about the accessibility of NFTs and who can buy and sell these tokenized assets. Alex Wilhelm of TechCrunch set out to conduct his own experiment by both attempting to purchase a low-priced NFT and creating his own NFT for sale on OpenSea, an NFT marketplace. For his first experiment, he ran into the commonly criticized issue of gas fees for crypto transactions; after purchasing and transferring ether from a Coinbase wallet to OpenSea, Wilhelm lost $7.69 of the original $50 worth of ether he started with. Then, Willhelm realized the funds left over were barely enough to cover even the transaction fee associated with an NFT, much less buy a somewhat valuable asset. To make matters worse, the NFT of a Twitter thread he created has captured a bidding price of .002 ether, which comes to about…$5.77. So maybe not all NFTs sell for millions of dollars?
There are a few lessons from this. First, quality NFTs are not as accessible as we thought they were; gas fees on smaller transactions are still high and represent a pretty significant burden in proportion to the value of the asset being bought. Second, not just anyone can sell a million-dollar NFT, as the record-breaking transactions we see from Christie’s auctions and other art galleries are usually reserved for existing artists with credibility and authority in the wider art community. NFTs are valuable because they are ownership shares of a valuable, genuine asset backed by an authority . As such, it is a prerequisite for a seller to have some authority prior to selling a high-valued NFT, as noted by the co-founder of Nifty Gateway, another online marketplace for NFTs that was acquired by the digital assets exchange platform Gemini.
Quant trading firms like Jane Street and Jump Trading are beginning to allocate more resources to focus on crypto trading, according to the Financial Times. Unlike other institutional investors, these companies use a quick, high-frequency approach that seeks to maximize gains from arbitrage. This makes volatile cryptocurrencies that can rise by 10 percent on any given day the ideal candidates for the quantitative approach of these companies. They focus on differences in the spot and derivatives markets, meaning they can capitalize on volatility, which is usually a negative factor for most large trading firms employing other strategies. However, there is a significant risk here given that a firm like Jane Street trades trillions of dollars worth of assets every year: These institutions' decisions could significantly influence the market. As such, this is another important test for the digital assets space. While initially born as a method to circumvent traditional finance and help build a decentralized P2P transfer system, cryptocurrencies are being used as facilitators for quick profits. The effects of institutional high-frequency trading remain to be seen. Still, we have already witnessed how Tesla’s announcement that it would hold $1.5 billion in Bitcoin launched the price of Bitcoin over 20 percent in less than 24 hours.
Gavin Wood, founder of the cross-chain platform Polkadot, which enables blockchain interoperability, told Bloomberg’s Emily Chang that regulation for decentralized finance (DeFi) could be positive for the industry since there are many projects out there that are only decentralized in name rather than practice. Wood stated that while Polkadot has maintained a presence in conversations around DeFi regulation in Congress, he believes regulation could eliminate confusion in the market and help separate pseudo-decentralized projects from truly decentralized projects that accurately portray their products. This unique view on the space represents Wood’s confidence in truthfully advertised decentralized projects like Polkadot. Still, this perspective also relies on the belief that Gary Gensler and the Securities and Exchange Commission (SEC) are only interested in regulating pseudo-decentralized projects. Wood’s claim rests on the idea that the SEC’s main issue with DeFi is the lack of transparency and safeguards built into certain DeFi projects; however, Gensler has indicated in the past that he believes that there is always some level of centralized involvement in DeFi that makes projects subject to securities regulations.
Payments
As reported by CNBC, JPMorgan has acquired a 70 percent stake in Volkswagen’s payments unit in an effort to bolster its wholesale payments division. While the financial terms of the deal haven’t been shared publicly, this move marks JPMorgan’s first foray into the automotive industry in its string of acquisitions over the past year. The details of the new consolidated venture may change as the deal is finalized over the next six months, but signs point to an attempt by JPMorgan to become the go-to payments platform to "buy and lease cars and pay for parking tickets and electric vehicle charging, among other things" according to CNBC. Electric vehicle charging stations are relatively new and untapped by other payment platforms, so there is a significant first-mover advantage that JPMorgan can capitalize on with this strategic acquisition. JPMorgan could help build the future where the ISO 15118 interface, which establishes digital communication between an electric vehicle and the charging station, could enable contactless payments without a smartphone or credit card. In other words, an electric vehicle owner would essentially be able to pay with their credit or debit card through their vehicle. However, JPMorgan already faces competition from Blackberry, which recently partnered with driving payments company CarIQ to develop autonomous, connected car payments, according to PYMNTS. The applications of intelligent vehicle platforms go beyond EV charging and can range from paying with your car in drive-throughs to paying tolls instantaneously. This is potentially the next wave of frictionless payments, eliminating some of the inefficiencies left in our transactions.
FinTech is breeding the next batch of social media influencers, aptly dubbed “finfluencers.” According to Bloomberg, young finfluencers who post personal financial advice for their audience on platforms like TikTok make up to $8,000 per advertisement post. However, it’s truly a mutually beneficial relationship, as finfluencer Austin Hankowitz has stated that he has driven $268,000 of crypto transactions on BlockFi after advertising a unique sign-up code on his platform. TikTok has become an especially popular platform for people like Hankowitz, given its powerful algorithm that launches users onto “fintok” after liking several related videos, leaving creators with a wider audience to show to potential partners. However, for every Austin Hankowitz, there is a pseudo-influencer offering harmful financial advice that poses a great risk to young adults who don’t have much training in the subject matter. Cryptocurrency can run rampant, and risky investment advice from TikTok amateurs is often amplified through the algorithm, leaving a huge potential for finfluencers to mislead their wide range of viewers that often come from different financial situations and backgrounds.
Small Business
Flippa, an online platform for mergers and acquisitions between small and medium-sized enterprises, recently raised $11 million to advance its goal of bringing a wide range of financial services to a wider range of businesses, according to TechCrunch. The platform essentially digitizes some of the advisory services investment banks provide on strategic transactions by using a proprietary algorithm that allows buyers to access performance data through integration with software like Intuit’s QuickBooks accounting platform and Shopify. While this funding round was light compared to some of the other capital raises happening in FinTech, Flippa has immense potential to aid the growth of small businesses that want to expand either horizontally or vertically.
After acquiring Mailchimp earlier in the month to bolster its relationship with small businesses, Intuit has established a Venture Capital arm that will invest in the Series B and Series C stages of companies’ growth, according to TechCrunch. Intuit will look to invest in companies specializing in blockchain innovations, personal finance, and capabilities that unlock small business growth, as evidenced by Intuit’s investment into business-to-business payments platform Melio. Melio simplifies the accounts receivable and accounts payable processes for small to medium-sized enterprises by enabling the use of a credit card in business transactions, contributing to its 5,000 percent increase in monthly processing volumes over the past 18 months, according to PYMNTS.
Global Developments
A US citizen has pled guilty to assisting North Korea with its efforts to evade sanctions via cryptocurrencies and blockchain technologies, according to The Diplomat. A former Ethereum developer, Virgil Griffith, was found to have provided technical assistance to the North Korean regime during his unsanctioned travel to Pyongyang, adding to a history of North Korea utilizing foreign sympathizers to aid their economic programs. In 2020, two Chinese nationals were charged with hacking a cryptocurrency exchange and stealing over $100 million worth of coins and tokens on behalf of the North Korean government. Griffith’s case is a worrying example of how a foreign individual or collection of individuals could help connect North Korea back to the global economy in legal and illegal markets.
China has banned all crypto-related transactions and foreign exchange platforms in a recent decree, as reported by TechCrunch. The move comes at a time when China has already advanced the crackdown on its domestic technology companies, striving to limit their influence by limiting their data collection abilities. China has cited national security and consumer protection as justification for the move, stating that rampant cryptocurrency speculation has disrupted the typical economic order and facilitated criminal activity. However, another reason China is targeting cryptocurrencies is the incoming rollout of its own central bank digital currency (CBDC), which has been designed to permeate the banking system and be used frequently in all domestic retail transactions. Limiting the number of cryptocurrencies being bought and sold domestically will drive more demand toward accepting and using China’s CBDC, leaving more control of the economy in the government’s hands.