Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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Crypto regulation is coming. Even regulators aren’t sure how.

​Regulators have their eyes on cryptocurrencies.

Hello and welcome to Protocol | Fintech! This Friday: Bitcoin baffles bureaucrats, Remitly goes IPO and Berkshire Hathaway breaks the Nasdaq.

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The Big Story

Bitcoin of the realm

Cryptocurrency regulations are definitely coming, two top Biden administration officials strongly suggested this week.

The question is how. Treasury Secretary Janet Yellen and Securities and Exchange Commission Chair Gary Gensler said it's bound to be a major undertaking. There's currently no clear framework to regulate cryptocurrencies and other digital assets.

Crypto is growing rapidly. That's why addressing the regulatory gaps is becoming increasingly urgent.

  • Yellen cited a need to protect consumers and investors and to prevent money laundering and "the use of digital currencies in illicit payments."
  • Some key agencies "arguably have some ability to address this through regulation," she said. The Internal Revenue Service and the Financial Crimes Enforcement Network have some rules already and are trying to develop more.
  • But "I frankly don't think we have a framework in the United States that is quite a task of putting in place the regulatory framework that we need in the future," Yellen said.

Bitcoin buyers are vulnerable. Gensler focused on the need to regulate crypto exchanges where there's "really no protection against fraud or manipulation," he told the House Committee on Financial Services.

  • "If one trades bitcoin in America today, there's not an investor protection regime," Gensler said.
  • Having clear regulations would help the SEC and the Commodity Futures Trading Commission "instill greater confidence" among digital-asset investors, he said.
  • The problem is "a regulatory gap", said Jonah Crane, a partner of Klaros Group (who co-wrote a paper on blockchain with Gensler). A particular problem is the absence of "direct regulation of trading in the cash markets for digital assets that are not securities."

Congress has a role to play. Gensler said lawmakers can help "try to fill some gaps," particularly in connection with regulations for crypto exchanges, where there's a pressing need for "greater investor protection."

"It's only Congress that could really address it," Gensler said.

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From Protocol | Fintech

Startups want your kid's allowance. There's so much competition in digital banking that fintechs are looking beyond Millennials and Gen Z and wooing even younger consumers, including children as young as 8.

The new SEC boss also criticized payment for order flow. Gary Gensler said the system that made Robinhood's stock-trading app wildly successful can conflict with the interests of retail traders.

Bill.com bought Divvy for $2.5 billion. The small business payments company snaps up the spend management and corporate card startup.

Overheard

  • "Streaming apps figured out some time ago that I'm kind of a rom-com guy. You thought I was a thriller guy. But I'm a rom-com guy." —Yet more Gary Gensler, in making a point about gamification in streaming video versus stock-trading apps.
  • "It really does feel like a slot machine. They're thinking, which one is going to make me a fast buck between now and six months' time? It's based on speculation, and not the underlying value of that coin."Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, describing the crypto market.
  • "Mox and ZA have done a good job of engaging with customers and building a brand, whereas some of the other banks' websites or app store ratings are a bit underwhelming."Ben Quinlan, CEO of Quinlan & Associates, on Hong Kong's new virtual banks.

3 Questions With...

Kristo Käärmann, CEO, Wise

What fintech trend are you most excited about?

The growing digital-first mentality. The recent boost in the use of online and contactless payment methods reminds us that consumer behavior is motivated by necessity, efficiency and convenience. As fintech continues to evolve, we will see an uptick in the need for and use of modern APIs as companies look to adjust to a more digital economy as well as new customer needs. I anticipate we will continue to see fintech infiltrate vertical industries such as transportation apps, food-ordering apps and corporate membership accounts.

What trend are you most worried about?

As the global economy is opening back up, once again putting an emphasis on "borderless" forms of money movement, the state of cross-border payments is once again center stage. But with that comes the potential for banks and other payment providers to hide fees on international transactions through exchange rate markups, meaning some consumers might not realize they are paying more than they should. The impact of fees and exchange rate markups on American consumers and businesses is substantial, and increasing every year. Over the past five years, the annual amount Americans lost in fees and exchange rate markups has increased from $13.6 billion to $16.3 billion.

What was your biggest professional blunder and what did you learn from it?

Wise was actually born from a professional blunder. When I received my Christmas bonus as a consultant over a decade ago, I needed to transfer money from my account in London to in Estonia. When over 500 pounds was missing in my Estonian account, I realized it was because they used an inflated exchange rate — and that most providers do the same.

Need to Know

  • Chime to drop "bank" branding. The challenger bank was forced to drop its chimebank.com domain name and other use of the term after a settlement with California regulators.
  • Square smashed its earnings, fueled by bitcoin. The payments company reported $5.1 billion revenue in Q1 2021 driven by $3.51 billion in bitcoin revenue, which was up 11x year over year.
  • PayPal also beat the Street. It reported $6.03 billion in revenue and said it plans to launch an all-in-one "next-generation digital wallet" in the third quarter.

Deal Flow

  • Remitly looks to IPO. The remittance startup is seeking a valuation of about $5 billion, per Reuters.
  • ReCharge Payments raises $277 million. The ecommerce payment processor was valued at $2.1 billion after funding from Summit Partners, Iconiq Growth and Bain Capital Ventures.
  • Boost Payment Solutions grabs $22 million. The B2B payments optimization startup's round was led by Invictus Growth Partners.

Data Point

$429,496.7295

Berkshire Hathaway's share price when it hit Nasdaq's price limit, due to the stock exchange's aging 32-bit architecture.

Thanks for reading — see you Tuesday.

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