July 1, 2022
Photo: Jordan Vonderhaar/Bloomberg via Getty Images
Good morning, and welcome to Protocol Fintech. This Friday: crypto mining’s debt problem, the House vs. fintech bros and Paris Hilton HODLs.
We’ve known Paris Hilton has been into Web3 for a while now, after she compared Bored Apes with Jimmy Fallon. Fallon has since gotten rid of his Bored Ape NFT profile picture, but Hilton is holding on to her NFT profile picture on Twitter, where the viral clip was roundly mocked. Not that that’s stopping her: She revealed on “Jimmy Kimmel Live” that she named her two new Pomeranians “Crypto” and “Ether.” Isn’t that a bit like calling your dogs “Fruit” and “Banana”?
— Lindsey Choo (email | twitter)
As bitcoin boomed, crypto mining seemed almost like printing money. But in reality, miners have always had to juggle the cost of hardware, electricity and operations against the tokens their work yielded. Often miners held on to their crypto, betting it would appreciate, or borrowed against it to buy more mining rigs. Now all those bills are coming due: The industry has accumulated as much as $4 billion in debt, according to some estimates.
The crypto boom encouraged excess. “The approach was get rich quick, build it big, build it fast, use leverage. Do it now,” said Andrew Webber, founder and CEO at crypto mining service provider Digital Power Optimization.
Bitcoin miners are HODLers by nature. Many preferred to hold most of the bitcoin they generated, selling just what they needed to pay employees or other suppliers, because they believed it would go up in value.
Everything in this crypto market comes back to leverage. While miners are typically borrowing to operate, not speculate, debt is still a key part of the business.
Are defaults coming? As the price of bitcoin and other cryptocurrencies has fallen, so has the value of mining hardware. This could be forcing some to decide whether it’s worth making payments, Webber said. “I expect there's gonna be some meaningful distress and likely some liquidation or consolidation across the space.” It wouldn’t be the first time a rush for money turned to bust.
A version of this story first appeared on Protocol.com. Read it here.
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On Protocol: The CFPB ended a sandbox arrangement for earned-wage-access provider Payactiv, underlining the CFPB’s increasingly critical view of fintech-friendly agreements that the agency itself said “proved to be ineffective.”
The CFTC charged Mirror Trading International with a $1.7 billion fraud. The agency alleges that the bitcoin pool operator misappropriated bitcoin it accepted, calling it “the largest fraudulent scheme involving bitcoin” in CFTC history. The subtext here: The CFTC wants to remind you it’s no softie on crypto.
Also on Protocol: The SEC denied Grayscale’s spot bitcoin ETF application, and Grayscale is following through with its promises to sue. While the SEC said Grayscale failed to meet investor protection standards, Grayscale said that the agency was “acting arbitrarily.”
FTX is reportedly close to buying BlockFi for $25 million. FTX already has an option to buy a 50% stake in BlockFi in exchange for a revolving credit line, according to The Block, and is reportedly close to buying up the remaining shares. But BlockFi CEO Zac Prince denied the $25 million figure, chalking it up to “market rumors.”
The FBI added Ruja Ignatova to its “Ten Most Wanted Fugitives” list. One of the few people on the list related to non-violent crimes, Ignatova was added for allegedly defrauding investors globally through her company OneCoin. She’s the first person accused of a cryptocurrency-related crime to be added to the list, the FBI told Protocol.Facebook is experimenting with NFTs. After introducing NFTs on Instagram in May, Meta is testing NFT support on Facebook for select creators, with plans to allow for cross-posting on Instagram and Facebook.
Are tech bros the problem? The U.S. House Financial Services Committee convened for an unusually themed hearing Thursday to hear from several witnesses on the obstacles to VC investments in diverse-owned fintechs.
Financial Technology Task Force Chair Stephen Lynch of Massachusetts led the “Combatting Tech Bro Culture” hearing, highlighting that while companies with diverse founders earn 30% higher multiples on invested capital when acquired or going public, only about 2% of VC funds go to women-owned companies, 1% to Black founders and less than 2% to Latinx founders.
One issue that came up was the SEC’s barrier to entry for investing in startups: Only about 14% of U.S. households can reach the income or asset requirements to become accredited investors.
But much of the problem can be attributed to the lack of diversity in the VC landscape. A lack of diversity in professional and social circles contributes to lack of diverse portfolios, as VCs are more likely to invest in founders that are the same gender, race and ethnicity as them.
“Venture capital firms continue to gamble on poor investments such as cryptocurrency companies like Celsius,” Lynch said, while “women and founders of color with well-thought-out, substantive business plans remain in the waiting room.”
— Lindsey Choo
Not everyone’s cutting back in the face of the crypto crash. Several companies are adding hundreds of new crypto-related jobs. The most surprising employer may be Deloitte, the big consultancy, which is looking for everything from crypto tax analysts to blockchain engineers.
The competitive edge of digital solutions: When companies invest in maintaining their “green ledger” with the same commitment they have to their financial ledgers, they will be able to connect their environmental, social, and financial data holistically so they can steer their business towards sustainability. At the end of the day, what gets measured, gets managed.
Thanks for reading — enjoy the Fourth of July and we’ll see you Tuesday!