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Robinhood’s crypto wallet is smart, risky — and inevitable

Protocol Fintech

Hello and welcome to Protocol | Fintech! This Friday: Why Robinhood's rolling out a crypto wallet, JPMorgan's new core banking system, and decoding cryptospeak.

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The Big Story

The why of Robinhood's wallet

Robinhood CEO Vlad Tenev has had fun teasing his brokerage's crypto customers who have been clamoring for a crypto wallet for months. Now comes the serious part.

After months of dropping "coming soon" hints, and occasional flashes of impatience in Tenev's tweets, Robinhood said it would begin testing a wallet starting next month, and has asked customers to sign up.The wallet — a "hot" wallet storing customers' private crypto keys online, with easy access for trading — is expected to be fully available to all users next year.

At last, we know when Robinhood's wallet is coming. But a more important question might be why.

  • One way to read the move is a simple attempt to score geek points among its users dabbling in crypto. Robinhood customers have been asking for a wallet as a seamless way to manage crypto.
  • Another way to see it, though, is a strategic way to solidify Robinhood's position among young investors, who increasingly see crypto as yet another trading asset.
  • Robinhood already lets users buy and sell crypto, a growing part of its business. Crypto transaction revenue rose sharply to $233 million in the second quarter, up from $5 million in the year-ago period. Over 60% of Robinhood's "net cumulative funded accounts" traded in crypto in that quarter.
  • The company described a benefit of wallets as letting customers easily consolidate their crypto holdings with Robinhood. A deeper exposure to crypto could possibly hedge the company against the growing regulatory threats to its equities business.

Of course, "growing regulatory risks" describes the crypto business, too. Anywhere Robinhood looks for growth, it faces increasingly skeptical politicians and bureaucrats.

  • Robinhood faces uncertainty after SEC Chairman Gary Gensler said the agency might look closely at payment for order flow, the rebates that make up a big chunk of the company's revenue which he has said could be banned.
  • Expanding its crypto footprint with a wallet could mean more complications for Robinhood "with the SEC exploring crypto investor protections" for crypto, too, said Melody Brue, an analyst with Moor Insights & Strategy.
  • The SEC is somewhat hamstrung, though, by the unclear regulatory status of cryptocurrencies, with several agencies jostling for jurisdiction over the digital assets. Formal authority will almost certainly require action by Congress. Regardless, "the company is taking another significant risk with this move," Brue said.

Meet Robinhood's "chief wallet officer." That's what Tenev called Christine Brown, Robinhood Crypto's chief operating officer, in May. She's a company insider who has oversight of its crypto business after being promoted from VP of product operations in April.

  • Brown described the crypto wallet to Protocol as "a gateway to a broader crypto ecosystem."
  • Currently, a customer who wants to move crypto to another exchange "would have to sell crypto on our platform, withdraw the cash, deposit the cash on the other exchange, and purchase crypto there," she told Protocol.
  • A crypto wallet would make that dramatically simpler, she said. Take a customer who wants to buy an NFT, Brown said. That user could simply buy ether on the Robinhood app to make that purchase, then send it to an NFT marketplace like OpenSea.
  • Analyst Brue said a crypto wallet "can drive volume with friction-reducing features." And it could lead to more growth for Robinhood "as investors become more crypto-savvy."

Robinhood is transforming into a crypto company before our eyes. And just as it's been a gateway app for many first-time stock-market investors, it needs to be the place to start with crypto, too.

  • The typical "first purchase" of a Robinhood user, Brue said, is now "more often in crypto than equities."
  • This positions Robinhood to go head-to-head with crypto powerhouse Coinbase. Coinbase, which has long offered a wallet, has the crypto cred. Robinhood has the app-design chops — and no commissions.
  • It's even ported the payment for order flow business model over to the crypto world. The lower per-transaction fees that allows could be a lure for crypto newbies.

"There's so much more of a market out there," Brown said of the crypto world. Gaining more exposure to crypto poses risks. But in light of the demand from customers, not jumping down the crypto rabbit hole could be the bigger risk..

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From Protocol | Fintech

An SEC commissioner is now Robinhood's legal shield.Dan Gallagher, the online brokerage's chief legal officer, is the one who will have to deal with those crypto headaches.

For example, Gary Gensler saying that stablecoins are like "poker chips." The SEC chair has sent another strong signal that crypto will face intense scrutiny.

Cheer up, Vlad: At least you're not running Binance. The largest crypto marketplace is under fire everywhere from the U.K. to Thailand.


  • "How are the returns generated? It is hard to get straight answers that don't quickly devolve into cryptospeak. If one follows the money, what lies at the end?" Michael Hsu, acting comptroller of the currency, at a blockchain event.
  • "By packaging up a selection of crypto assets in a DeFi CopyPortfolio, we're doing the heavy lifting and enabling our customers to gain exposure and spread the risk across a variety of cryptos."Dani Brinker, head of portfolio investments at eToro, describing the firm's new decentralized finance crypto portfolio product in what Hsu would probably deem "cryptospeak."
  • "All these things are ripe for error. There can be five deals a day, and you need to get the amount right, get the commission right, and it's all chicken scratch on a piece of paper on my desk. It's incredibly challenging."Ben Batory, head of Franklin Equity Group Trading at Franklin Templeton, describing the problem that a new IPO system called Capital Markets Gateway is tackling.

3 Questions With …

Catherine Brown, partner, Klaros Group

What fintech trend is most troubling for you?

Fintechs are typically focused on innovation, which is great, but many don't have the regulatory background, expertise and mindset to anticipate the changes we're going to see with the new administration. Democratic administrations typically take a more assertive approach to regulation and consumer protection. Now on top of that we are seeing an orientation toward racial justice and diversity. We're going to see intelligent and sophisticated takes on disparate impact, not just from federal regulators but from state regulators and attorneys general as well. Banks have been doing this for decades, and they still screw up.

What's been your biggest professional blunder and how did it help you?

It didn't end up being a blunder but at the time I know some thought it was! I'm an attorney and I was in private practice for a corporate firm very briefly out of law school. I didn't care for private practice at all. It was very competitive and male-dominated and there was a lot of backbiting — behaviors that I don't really like. So culturally, it wasn't a great fit for me.

One of my girlfriends from college was working in the same building for a subsidiary of a bank. She introduced me to her boss and he invited me to come work with them. It was very much accidental. I started in banking law basically doing transactional acquisitions of blocks of assets and then ended up having an opportunity to be groomed for the chief compliance officer position at a large national bank when I was very young. I was only 30 years old. It was just "right place, right time," and I had a great mentor, the general counsel of the bank who really wanted to get a young person in that role. So that was really kind of the start of my foray into the regulatory world, where I've been ever since.

What fintech sector or company is most underrated and overrated right now?

Underrated? Straight retail banks — regional banks like KeyBank, Fifth Third, Huntington here in Ohio — that used to be one thing, but have been trying hard to evolve.

Overrated? Retail trading. Most people should not be day-trading stocks, period.

Need to Know

  • JPMorgan is replacing its core banking system with software from Thought Machine. The startup, headed by former Googler Paul Taylor, has a cloud banking system.
  • Twitter is letting users tip each other in bitcoin. It's adding bitcoin to its Tip Jar feature using Strike, and also exploring authentication of NFTs on Twitter.
  • At last, eBay's in-house payments system is live globally. After moving off PayPal, the ecommerce company's new payments system is live worldwide and a majority of sellers are using it.

Making Moves

  • Sheila Jambekar joined Plaid as chief privacy officer. The former Twilio and Zynga executive jumps in as Plaid navigates a changing financial data landscape.
  • Rohit Chopra could be approved to head the CFPB soon. Biden's nominee cleared the Senate Banking Committee, which opens the way for a floor vote.
  • Saule Omarova is expected to be nominated to head the OCC. The former Cornell law professor has criticized Wall Street banks.

Deal Flow

  • Ocrolus is now worth a cool half-billion. The document-workflow startup has clients including PayPal, Plaid, SoFi and LendingClub.
  • Barclays and Anthemis launched a $30 million fintech fund for female founders. The expansion of the Female Innovators Lab will enable it to invest in the U.S., U.K., Canada and Europe.
  • Vyne raised $15.5 million. The U.K.-based open banking startup focuses on enabling faster payments.

Data Point

$870 million

That's the amount raised by restaurant fintech company Toast in its IPO. Shares popped on the first day of trading Wednesday but dropped on Thursday.

Thanks for reading — see you Tuesday!

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