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Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
September 28, 2021
Hello and welcome to Protocol | Fintech! This Tuesday: China tries to control crypto, Revolut wants its own token, and a digital wallet size contest.
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The Big Story
China is run by a central committee, so it shouldn't be surprising that bitcoin and other decentralized digital currencies don't have many fans among the Politburo. The question is whether China's crypto crackdown risks going so far that it ends up popularizing crypto technologies that even the Great Firewall can't contain.
On Friday, China outlawed virtually any activities involving digital currencies, marking a crescendo in its fight against crypto. First there was the shutdown of crypto mining, then a ban on financial firms engaging in crypto transactions.
The crypto measures come as China moves to rein in Big Tech generally. And to the extent that crypto companies have a presence in the country, the crackdown is having an impact.
- Exchanges Huobi and Binance as well as wallet provider TokenPocket are shutting off access to their services to new or existing users, according to Reuters.
- Individuals who want to trade crypto in China will have to try to access overseas exchanges or use other methods such as peer-to-peer trading.
A smarter strategy for the government could be to co-opt crypto. Benefiting from blockchain innovations doesn't necessarily require engaging with the open internet.
- Take NFTs: As Zeyi Yang reported for Protocol | China, NFT transactions are happening through private blockchains managed by companies and ultimately overseen by the government, or on public blockchains but filtered through a company's control.
- China's digital yuan takes some inspiration from bitcoin, but it doesn't actually use a blockchain — instead, transactions will be kept on private databases more amenable to central government control.
But the risk to China is that innovation and capital will go elsewhere. That will mean a brain drain just as crypto-related industries like asset management are taking off elsewhere.
- Crypto asset management firm Cobo just moved its headquarters from Beijing to Singapore.
- Previous crackdowns in China resulted in outflows of capital from exchanges originating in China including Binance, Huobi and OKEx of $28.3 billion in the first half of 2021, a 62% increase, per Reuters.
- "It's possible that the Chinese crypto market will be cut off from global innovation as companies avoid the market entirely," said Matthew Gould, founder and CEO at Unstoppable Domains.
If China loses, who benefits? Businesses that avoided China could look smart as they pick up more business. And ultimately, technologies that route around central government control could get more powerful.
- Exchanges are a volume game. Binance, Huobi and OKEx still dominate the crypto industry, but a loss of Chinese customers could have some impact on their businesses.
- Other countries are throwing down a welcome mat for crypto — see El Salvador's embrace of bitcoin as legal tender.
- Then there's DeFi — self-running software programs for financial transactions that operate on blockchains and don't depend on a central intermediary. The crackdown only increases the attraction of protocols and apps that can't be abruptly shut down, said Ed DeLeon, founder and CEO of crypto company Anatha: "More than anything, this increases the utility and traffic of the entire DeFi ecosystem."
That's why China's crackdown may backfire on Beijing. When the music industry shut down Napster, file sharing didn't go away: It fractured into hundreds of programs and networks. China risks driving its crypto enthusiasts deeper into the DeFi camp, and unleashing their creativity on an ever-more decentralized financial infrastructure. In a speech proclaiming the People's Republic of China in 1949, Mao Zedong described the state system as a "weapon we must firmly grasp." But what if there's nothing to squeeze?
— Tomio Geron
A MESSAGE FROM FOURSQUARE
As of February 2021, roughly one year into the pandemic, the urgency around obtaining location intelligence had skyrocketed, with one survey conducted by Boston Consulting Group finding that 95% of executives view geospatial data/mapping as important to getting business results.
From Protocol | Fintech
Coinbase wants its customers' paychecks: The crypto marketplace is accepting direct deposit, and converting the money straight into cryptocurrency. It's also helping some employers pay workers in crypto.
- "China's ban only delays the inevitable. The DeFi movement and cryptocurrencies demonstrate how and why individuals will conduct business outside of central banks." —Ray Wang, Constellation Research founder, on China's crypto crackdown.
- "What keeps me up at night is our eviction crisis in America. When renters fall behind on rent we can pair them with zero interest capital to keep landlords cash-flow happy but at the same time keep renters in their home." —Samir Goel, co-founder of Esusu, speaking during a Goals House @UNGA forum.
- "A lot of folks don't realize that crypto is really the third generation of the internet, re-decentralizing it. It is Web3." —Coinbase CEO Brian Armstrong on Twitter.
3 Questions With …
Brian Barnes, CEO, M1 Finance
What fintech trend are you most excited about?
I love seeing financial disintermediation leading to lower fees and costs. Broadly speaking, I think incumbent financial services firms make too much money based on the value they give to clients. They have been walled off from innovation due to high regulatory hurdles and as a result can collect fat margins simply by inserting themselves between transactions. Finance in the purest form is the allocation of resources. Financial services are roughly around 20% of the world economy, meaning we spend $1 in figuring out how to allocate the other $4, and I think that's too expensive. Fintech firms should drive efficiency in financial services to reduce costs, and therefore unlock money to be put to more productive use.
What fintech trend is most troubling for you?
Too many fintech platforms aimed at the everyday consumer are overly focused on the short term. Your personal finances stretch over your entire lifetime and your financial health is a result of beneficial habits practiced over long periods of time. Much like physical health, you don't get fit by going to the gym once. You get fit by going consistently over years and decades. Many fintech apps don't take this perspective and are solely focused on short-term financial entertainment: "Trade stocks, crypto, options now! Price changed — change your strategy! Want something? Buy it now and you can figure out how to pay for it later." These are not instilling tried-and-true financial habits to improve people's financial well-being.
What's your favorite pastime that doesn't involve a screen?
I like two-wheeled vehicles, both human-powered road bikes and engine-powered motorcycles. On both, there's a special feeling of being connected to the road and moving fast. Cycling is a great workout, and motorcycles, well, they're just fun.
Need to Know
- A top Ethereum developer could go to jail for speaking in North Korea. Virgil Griffith pleaded guilty to a charge of conspiracy to violate a U.S. sanctions law after he gave a crypto presentation in North Korea.
- Revolut is planning to roll out its own token. The mobile banking company is reportedly considering introducing its own crypto token for its customers.
- Barbaros Uygun is Mox's new CEO. The former CEO of ING Bank Australia will replace Deniz Güven as chief executive of the Hong Kong-based digital bank.
- Zane Wong has joined Binance. The crypto marketplace has hired the former Goldman Sachs associate as a director of KYC compliance.
- Harit Talwar is retiring from Marcus. The Goldman Sachs executive who helped build the Wall Street giant's consumer banking business is retiring in October.
- Jinal Shah has joined Zip. The global payments company, previously known as Quadpay, has named the veteran executive as its chief marketing officer.
- Shruti Joshi has joined Facet Wealth. The veteran executive is the new chief operating officer of the financial planning services company.
- Wells Fargo's CISO is out after less than six months. Kurt Lieber declined to say why he was leaving.
- OY Indonesia raised $30 million. The Indonesian digital payments company's series A round was led by SoftBank Ventures Asia.
- Yellow Card raised $15 million. The Johannesburg-based cryptocurrency exchange's series A round was led by Valar Ventures, Third Prime and Castle Island Ventures.
- Coinrule raised $2.2 million. The automated crypto trading software company's seed investors included Fitbit founder James Park and Twitch founder Kevin Lin.
That's the total amount of money customers kept in PayPal's mobile wallet as of June, nearly tripling from five years ago, according to Payments Dive. Square's total soared to $2.85 billion from $44 million.
Thanks for reading — see you Friday!