Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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The Senate is getting serious about crypto

The U.S. Capitol building, seen at night.

Hello and welcome to Protocol | Fintech! This Tuesday: The Senate zeroes in on crypto, Monzo faces a money-laundering probe and Square buys Afterpay.

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The Big Story

Homing in on crypto rules

The Senate held a hearing on cryptocurrencies last week called "Cryptocurrencies: What are they good for?" But the room wasn't as hostile as the title sounded.

Members of the Senate Committee on Banking, Housing and Urban Affairs, while critiquing the industry, delved into some of the nuts and bolts of the crypto world, from miners to software security. Some expressed skepticism about cryptocurrencies: Sen. Elizabeth Warren, who last week asked Treasury Secretary Janet Yellen to take the lead on regulating crypto, called digital currencies "the yellow brick road."

The debate over crypto comes as broader crypto tax enforcement has become part of the big debate over the infrastructure bill dominating Washington's attention. As of Monday, in a concession to the crypto industry, the latest version of the bill clarified that miners or node operators wouldn't be responsible for reporting transactions to the IRS.

Who's in control here? Some panelists and senators raised concerns that cryptocurrencies are not quite as decentralized as advertised.

  • This has been a longstanding critique of the crypto industry, which has lofty egalitarian aims but in reality often relies on a relatively small group of individuals to build and maintain the networks digital currencies rely on.
  • There are "concentrated pockets of power," said Angela Walch, professor of law at St. Mary's University and research associate at the UCL Centre for Blockchain Technologies. These include core software developers who make decisions that affect currency holders, as well as miners who wield considerable control over transactions.
  • "This sounds to me like something we see in this committee on a number of different issues. Sort of a phony populist marketing brought to us by people that have immense power in the marketplace," said Ohio Democrat Sen. Sherrod Brown.
  • If crypto evangelists' dreams are realized, power shifts away from big banks and "puts the system at the whims of some shadowy, faceless group of super coders and miners, which doesn't sound better to me," Sen. Warren said.

Miners are in the spotlight. Crypto miners, typically a shadowy part of the crypto world, were a focus for their role in the industry — particularly as more of the work critical to operating blockchains shifts to the U.S. amid a crackdown in China.

  • In response to a question from Rhode Island Democrat Sen. Jack Reed, Prof. Walch said miners can choose which transactions to take and which ones to delay — and nothing's stopping them from taking money to make those decisions. "I think these players need more scrutiny," she said.
  • Jerry Brito, executive director of industry group Coin Center, argued that miners are intermediaries — but not financial intermediaries. He compared miners to internet service providers who relay financial transactions.

Is crypto too big to fail? Some panelists and senators raised questions about the systemic risk of the crypto industry overwhelming the traditional financial markets, as more and more ties between the two markets develop.

  • This concern has already been raised about stablecoins such as tether. Stablecoins often use commercial paper as reserves to back the digital currencies. Fitch Ratings noted that the reserves backing tether may be larger than most money market funds.
  • "With every link that is built and the larger the crypto financial system grows, that risk increases," Walch said.
  • Coin Center's Brito said that you can have guardrails for crypto like any other commodity. "I don't think it's an impossibility," he said of system risk. "The same could be said for any commodity — cryptocurrencies ultimately are commodities, you can imagine an investment in orange juice, and you can imagine a literal bug that wipes out the orange crop could have a (systemic) effect."

The best news out of the hearing was an increasing sophistication from Congress on crypto — arguably a sign of crypto's increasing importance in mainstream finance. Take it as a sign that more regulation and legislation is coming.

Indeed, Virginia Democrat Rep. Don Beyer just introduced a detailed 58-page bill that would impose a slew of new changes on the crypto industry, including defining which tokens are securities as well authorizing the Federal Reserve to create a central bank digital currency.

A MESSAGE FROM SINGAPORE EDB

Singapore is fast becoming a global hotbed of tech innovation. It's easy to see why. Nearly 80 of the world's top 100 tech firms have set up outposts there, including Google, Facebook, Stripe, Salesforce and homegrown unicorns like the super-app Grab.

Learn more

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Join Protocol's Biz Carson for a conversation with Atomic's Swathy Prithivi, Accel's Rich Wong and Asana's Oliver Jay during our upcoming event: Going Global: How Tech Companies Can Expand Internationally August 10 at 9 a.m. PT / 12 p.m. ET Learn More

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From Protocol | Fintech

Square bought Afterpay. Square's deal to purchase the buy now pay later company instantly adds a large merchant network, while much more tightly connecting Square's Seller unit to its consumer-focused Cash App.

Stock exchanges are facing questions, too. Robinhood has been scrutinized for taking payment for order flow, but some critics say exchanges take a similar approach — and create similar conflicts of interest — with exchange rebates.

Overheard

  • "Crypto regulation is not consumer protection. It is bank protection, it is incumbent protection." —Investor and former Coinbase CTO Balaji Shrinivasan.
  • "Inflation is a cancer that has been killing civilizations throughout history. Bitcoin is the cure. —Software CEO-turned-crypto evangelist Michael Saylor on inflation.
  • "Responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person." —The revised definition of "broker" in the infrastructure bill which had earlier targeted "any decentralized exchange or peer-to-peer marketplace."
  • "No person may issue, use, or permit to be used a digital asset fiat-based stablecoin that is not approved by the Secretary of the Treasury." —Language in a House bill regulating digital assets proposed by Rep. Don Beyer.

Need to Know

  • Monzo said it faces a U.K. probe. The digital bank said it is under investigation by the Financial Conduct Authority for potential civil and criminal money laundering violations.
  • NCR is acquiring LibertX. The enterprise software company said it is buying the cryptocurrency software provider to respond to growing demand for crypto capabilities.
  • Voyager Digital acquired Coinify ApS. The crypto investing service is buying a crypto payments firm which operates in more than 150 countries.

Making Moves

  • Orazio Tarda is joining Credit Suisse as co-head of fintech. Tarda is an HSBC veteran and served as the bank's global head of fintech.
  • Former California official Manuel Alvarez has joined Binance. Alvarez, who served as commissioner of the state's Department of Financial Protection and Innovation is now chief administrative officer of the digital-assets marketplace.

Deal Flow

Data Point

104 million

That's the projected number of consumers with digital payment cards — even though a PYMNTS.com study found many consumers still aren't interested in giving up plastic.

3 Questions With...

Shameek Kundu, Chief Strategy Officer, Truera

What fintech trend are you most excited about?

I am excited about the potential role that fintechs can play in enabling meaningful action on climate change. Without reliable data on the environmental footprint of a financial transaction, banks are often flying blind today when it comes to allocating financial resources efficiently to support climate action objectives. Firms like Doconomy are aiming to fill that gap.

What was your first tech or fintech job?

I was part of the team that built out India's first online retail brokerage (Sharekhan) more than two decades ago.

How do you see AI changing fintech in the next three to five years?

AI can dramatically improve the way in which fintechs manage risk. Many fintechs face a significant credibility challenge today: Can they scale up without putting customer welfare and financial system stability at risk? AI can help them overcome this challenge in a lean, agile way.

A MESSAGE FROM SINGAPORE EDB

Business leaders say they choose Singapore for its modern tech infrastructure, strong government support, robust pipeline of talent and pro-business regulations (the World Bank ranks it No. 2 in the world for ease of doing business). Plus, its location in the heart of Southeast Asia serves as a launchpad into the bustling Asian-Pacific market.

Learn More

Thanks for reading — see you Friday.

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