Fintech Update, 5/15 - 5/21
Hi! It’s Monday, May 22nd, 2023.
We’ll be off next week for Memorial Day, so we’re sending you off with a mega-post to tide you over. 🙂 We wish you all a happy and hot dog-filled holiday weekend, and we’ll see you back here in June! Best, The Fintech Update team
The Rundown
The race is on to set global crypto rules. The European Union announced that its 27 member states approved “the world’s first comprehensive set of rules to regulate crypto assets,” responding to recent shocks in the global crypto ecosystem like the collapse of FTX and the onset of “crypto winter.” The EU’s new rules require firms that want to issue, trade, or hold “crypto assets, tokenized assets and stablecoins” in the EU to obtain a license from European regulators. “Recent events have confirmed the urgent need for . . . rules which will better protect Europeans . . . and prevent the misuse of crypto industry for the purposes of money laundering and financing of terrorism,” said Sweden’s finance minister, Elisabeth Svantesson (Sweden currently holds the EU presidency).
The EU’s new rules represent the first multinational effort to bring enforceable, clear rules to the global crypto space. Meanwhile, they highlight other countries’ lack of clear regulatory frameworks or consistency in approach to crypto assets: while the UK currently is evaluating a proposed framework that would allow crypto firms to operate in the UK with a license from the government, British lawmakers last week published a report [full text] commenting that cryptocurrencies have “no intrinsic value, huge price volatility and no discernible social good,” and that crypto trading “more closely resembles gambling than a financial service, and should be regulated as such trading as such.”
Meanwhile, in the U.S., the alphabet soup of regulators and multiple regulatory approaches to crypto does not seem to be nearing a conclusion: the SEC, FTC, CFTC, and others continue to investigate how existing rules could be modified or applied to the crypto space, while the Fed and Treasury also explore their own regulatory and CBDC initiatives. That’s not to mention the industry groups and other advocates – most recently the American Bankers Association, which issued a statement on stablecoin regulation to the House Financial Services Committee. US regulators are even struggling with internal consistency: SEC Chairman Gary Gensler recently claimed that all digital assets besides Bitcoin should be regulated as securities, in direct contradiction to previous SEC statements. As CFTC commissioner Hester Peirce noted recently, “we are wandering in the desert a bit.”
What does this all mean? As with anything, a multiplicity of approaches means uncertainty and the increased risk of regulatory arbitrage – all of which can combine to chill innovation or encourage flight to jurisdictions that offer more clarity. Ripple CEO Brad Garlinghouse has been beating this drum for months, and last week told CNBC that his company and others are increasingly making investments and hiring talent outside the United States as other countries take the lead in defining clear rules for crypto. “[Regulatory confusion is] why you’re seeing entrepreneurship and investment flowing into other jurisdictions,” said Garlinghouse “—certainly Europe has been a significant beneficiary of the confusion . . . in the U.S.”
The bad news keeps coming for Revolut. The British challenger bank, which has a banking license from Lithuania to operate in the EU, reportedly will have its application for a British banking license rejected by the UK government. Per The Telegraph, which broke the story, the UK’s Prudential Regulation Authority informed the Treasury that it would “issue a statutory warning to [Revolut] over concerns about the company's balance sheet,” the latest hit in the fallout from a troublesome audit of Revolut’s 2021 annual report, in which auditor BDO was unable to verify “three-quarters” of the company’s revenue. The rejection should not impact Revolut’s current operations – it may continue to operate as a licensed bank in the EU and will continue to operate through its banking partners in the UK. However, it would be another blow to the company’s image and ambitions: Revolut continues to face allegations of poor company culture (and recently a number of key executives left the company), and failing to secure a British license will prevent the company from offering loans and mortgages in the UK. Ongoing reminders that having an excellent product means little if the company fails to build excellence into its day-to-day culture and operations as well. We hope this latest test will help motivate Revolut to turn things around. (Maybe this is a bad time to mention that Revolut also launched business accounts in Australia and is also seeking a full banking license there?)
Sharing a story from two weeks ago… the Consumer Financial Protection Bureau (CFPB) issued guidance clarifying that a bank or nonbank’s decision to unilaterally reopen a closed deposit account (e.g., to process a deposit, pay out interest, or charge a fee) is potentially an illegal practice in violation of federal rules against unfair, deceptive, or abusive acts or practices (UDAAP). The guidance harkens back to Wells Fargo’s now-infamous practice of opening fake accounts to juice fees and also recalls the CFPB’s $15 million order against USAA Federal Savings Bank for reopening consumer deposit accounts without authorization or adequate notice. Why do we care? Because the UDAAP guidance applies equally to banks and nonbanks, fintech firms and their bank partners must ensure they have controls in place to avoid running afoul of the CFPB’s guidance or risk getting hit by similar actions to the one the Bureau took against USAA.
And another one! In remarks to the Innovative Payments Conference in DC, CFPB General Counsel Seth Frotman discussed how the monetization of consumer payments data by digital wallet companies and payment processors could violate federal rules, including UDAAP and the Fair Credit Reporting Act. Why is this so important? The CFPB has focused much of its enforcement activity on large banks, but Frotman’s remarks were aimed squarely at fintech firms. Monetizing payments data has become commonplace among many fintechs (e.g., Stripe, Earnest) – it’s even created a speciality in advisory services (e.g., McKinsey, Ernst & Young) – and the remarks demonstrate that the CFPB is taking a more critical eye to these businesses. Payments-focused fintechs must plan carefully or risk running afoul of federal law and an increasingly active CFPB.
Blockchain firm Ripple launched “an end-to-end CBDC [Central Bank Digital Currency] platform” designed to help “central banks, governments, and financial institutions . . . issue their own digital currencies and stablecoins.” The platform combines “ledger technology, issuer capabilities for minting, distribution, redemption and destruction of tokens, inter-institutional settlement and distribution functions, and end-user wallets” as an all-in-one solution. It also acquired Swiss cryptocurrency custody company Metaco for $250 million in cash and equity. CEO Brad Garlinghouse said that the acquisition is “monumental for our growing product suite.” Big week for Ripple.
Securities and Exchange Commission (SEC) filings revealed that trading firm Jump Trading entered into a secret agreement with TerraUSD to prop up the cryptocurrency a year before its collapse in May 2022. Jump, which reportedly made a $1.28 billion profit from the arrangement, hasn’t been accused of any legal wrongdoing.
Remember when Tether adamantly (and fraudulently) claimed that its stablecoin was fully backed by USD? It’s a new day. Tether is investing heavily in bitcoin to “diversify” its reserves and is now the sole decider of which assets comprise its stablecoin reserves. Seems legit.
International remittance and money transfer firm Zepz, which owns fintech brands WorldRemit and Sendwave, laid off 420 employees (roughly 26% of its workforce) as the wave of fintech layoffs continues.
FTX reportedly is seeking to recover more than $240 million from its acquisition of white-label brokerage service Embed, after claims that FTX “did no investigation” before buying what the embattled firm now terms an “essentially worthless bug-ridden software platform.”
Crypto wallet provider Ledger launched its Ledger Recover subscription service, which allows users to recover their seed phrase (a series of random words that grants access to a crypto wallet) if they lose their device.
Robinhood is launching 24-hour trading during weekdays for select stocks. A subset of users can now trade 43 high-volume ETFs and stocks like Tesla, Apple, and Amazon at any time between Sunday 8am and Friday 8pm (the feature will be rolled out to all users in June).
The Reading Nook
Among several articles in The Economist’s new special report on digital payments, we were particularly interested in the ones highlighting how emerging economies like India and Brazil are building modern alternatives to the developed world’s traditional payments systems (banks and cards) and why the vaunted crypto and CBDC wave hasn’t lived up to the hype.
The Economist also explores whether the expansion of deposit insurance and the government’s increasing presence in the traditionally private banking sector means the banking system is slipping into state control.
Selected fundings
Nigerian B2B e-commerce startup Sabi raised $38M in Series B funding at a $300M valuation.
Procurement software provider Zip raised $100M in a Series C funding round led by Y Combinator with participation from CRV and Tiger.
Percent, a platform for sourcing, structuring, syndicating, monitoring, and servicing private credit transactions, raised $30M in Series B funding.
Obie, which offers insurance and risk management for real estate investors, raised $25.5M in new funding led by Battery Ventures.