November 9, 2022

Photo: Ramsey Cardy/Web Summit via Sportsfile
Good morning, and welcome to Protocol Fintech. This Wednesday: how FTX collapsed, the midterms, and Zelle’s real fraud problem.
The midterm elections didn’t deliver any clear wins to the crypto industry, though Rep. Patrick McHenry’s likely ascension to the chair of the House Financial Services Committee could place a blockchain enthusiast in a key role. That committee will also be a thorn in the side of the CFPB’s Rohit Chopra: Expect lots of hearings about the consumer-protection agency’s push to rein in fintechs. The Senate remains a question mark, but FTX’s sudden collapse is producing a bipartisan consensus: Crypto needs better regulation sooner rather than later.
— Owen Thomas (email | twitter)Binance’s shock announcement of a plan to rescue archrival FTX — after days of open feuding by the companies’ CEOs on Twitter — has rattled an industry still reeling from a dramatic crash and growing regulatory scrutiny. The high-profile brawl that turned into a shotgun wedding reinforced the fear that despite the industry’s rapid growth, the crypto realm remains murky and erratic.
Can you explain this, Sam? The brouhaha began with a report that raised serious questions about FTX and Alameda Research, the trading house owned by FTX CEO Sam Bankman-Fried.
The Binance-FTX rivalry has deep roots. CZ hinted that Binance’s beef with its archrival went beyond Alameda’s fuzzy finances.
Did FTX suddenly run out of options? SBF fired back Monday in a now-deleted tweet that claimed “a competitor is trying to go after us with false rumors” and stressed that “FTX is fine. Assets are fine.”
Will the deal stick? The way CZ announced the merger plan struck some as odd.
This is bad news for crypto no matter what. Whether or not the Binance-FTX merger happens, the way the drama unfolded is bound to shake confidence in crypto as a whole.
The FTX crisis unfolded the way crypto meltdowns typically hit — suddenly and opaquely. And the drama is far from over. “It's remarkable, again and again, how crypto personalities like SBF will claim that everything is fine up until the very second they have to admit it isn't,” White said.
— Benjamin Pimentel (email | twitter)Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.
Goldman Sachs is fintech shopping. The investment bank has expressed interest in buying a payments-technology firm to further build out its credit card capabilities, The Wall Street Journal reported. That includes reaching out to Deserve, a company that provides card-issuing technology. (This wouldn’t be Goldman’s first buy in the category.)
Affirm shares plunged after its earnings report. The stock dropped as much as 18% after the “buy now, pay later” company revealed a weak forecast. Executives pointed to struggles at Peloton, a key partner for its installment loans.
U.S. credit card balances surged to a record high in the third quarter. Balances increased 19% to $866 billion, with average credit lines also climbing to an all-time high, according to TransUnion data.
Robinhood gave users access to IPO flops. All 23 IPOs that Robinhood opened up to customers through its IPO Access program have declined by double-digit percentages since the stocks debuted, Bloomberg found.
German regulators called on Coinbase to clean up its act. BaFin, the country's financial watchdog, ordered Coinbase's local unit to ensure it has effective risk management and internal controls in place after uncovering "organizational deficiencies."
Crypto venture investors are still pumping the brakes. October data showed the pace of crypto VC investment fell under $1 billion per month, according to a J.P. Morgan research report, less than a third of last year's pace.
Disgraced pharma executive turned crypto token promoter Martin Shkreli had some advice for Terraform Labs’ Do Kwon on the “UpOnly” podcast: “Jail is not that bad."
Say now, regret later? “We're just good at managing,” Affirm CEO Max Levchin told analysts on a call to discuss the “buy now, pay later” company’s earnings. Investors didn’t seem to agree
Before Sardine, Loganathan was the chief data officer of Early Warning, the fintech company behind Zelle that’s owned by the country’s seven largest banks. Now, at Sardine, he helps protect financial institutions against payment fraud.
Elizabeth Warren has been very outspoken about fraud on Zelle recently. How bad is the problem?
As we move to real-time payments and instant settlement, the fraud vectors you're seeing on the Zelle network will manifest themselves in all of these other rails and any other emerging rail that comes our way. The reason for that is, if you take a look at Zelle, or if you take a look at [The Clearing House] or what FedNow is going to be, these network operators are only transmitting messages back and forth between the sending bank and the receiver. But the majority of the fraud controls, and all of the liability, are with the sending bank.
To go a little bit deeper, think: How do you send a transaction on the Zelle network? You go to your bank's mobile banking app, you click on Zelle on the login page, and the bank is doing the fraud detection from that point onward.
The fraud vector that Zelle is fraught with is social engineering fraud. That is a fraudster, for example, using a third-party application like TeamViewer and socially engineering a relationship with the bank customer so that bank customer gives them access, or the fraudster hacking into their accounts. Then they’re now logging in to that bank account and initiating a transaction. In that instance, what failed was the fraud and risk capability on the bank’s online and mobile banking application, not the Zelle network.
Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.
Thanks for reading — see you tomorrow!
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