Fintech Update, 6/5 - 6/11
Hi! It’s Monday, June 12th, 2023.
The Rundown
Crypto’s woes continue as regulators come for two of the world’s most well known exchanges: The Securities and Exchange Commission (SEC) sued Binance and Coinbase for violating US securities laws.
The first came against Binance, with charges including artificially inflating trading volumes, misleading investors about trade surveillance controls, and commingling customer funds [full text]. The agency also charged Binance CEO Changpeng Zhao (“CZ”) of spinning a “web of deception” as he structured his holdings and the various Binance entities to obfuscate funds flows and avoid the compliance processes and controls the company had nominally put in place. Although we expect the point to be debated by Binance, the SEC has evidence to suggest that the company’s employees were aware of the deceit – in one particularly damning quote in the SEC’s complaint, Binance’s former Chief Compliance Officer “admitted to another Binance compliance officer in December 2018 [that] ‘we are operating as a fking unlicensed securities exchange in the USA bro.’” (Complaint, p. 29).
A day later, the SEC filed its second lawsuit of the week against Coinbase, alleging that the exchange operated as an unregistered securities exchange, broker, and clearing agency.
Though the two lawsuits differ in content and severity of charges, they both point to the highly skeptical attitude of the SEC towards crypto. SEC chairman Gary Gensler gave his opinion bluntly in an interview with CNBC earlier this week: “We don’t need more digital currency. We already have digital currency. It’s called the U.S. dollar, it’s called the euro, it’s called the yen. They’re all digital right now […] so what’s the real underlying value of these tokens?”
Meanwhile, US regulators have yet to put forward proactive guidelines on how US crypto exchanges should proceed. What guidance has been put forward is highly reactive – and sometimes outright contradictory. As the TFU team wrote several weeks ago, this regulatory ambiguity is resulting in a flight of crypto innovation from the US. In response to this week’s lawsuits, Robinhood pulled its support for Cardano (ADA), Polygon (MATIC), and Solana (SOL), three cryptocurrencies named in the Binance and Coinbase suits. On Thursday, Binance announced the suspension of US dollar deposits and warned that it could “pause fiat (USD) withdrawal channels as early as June 13, 2023” due to severed ties with its US banking partners.
The Consumer Financial Protection Bureau (CFPB) released a report on chatbots in consumer finance, and issued a press release reminding companies that customer service from a chatbot or from a real, live person must 1) provide accurate information, 2) ensure that customers can access money and make payments, and 3) protect customers’ data. As the use of these chatbots become more common at fintechs and banks alike, the CFPB has received increasing numbers of consumer complaints about chatbots, which it uses to prioritize exams and enforcement matters. Consumers may not recognize when they are talking to a bot versus a real person, and while there is currently no federal law requiring disclosure that customer service is being provided by a bot, California has been requiring disclosure of bots since 2019. Our take: As the cost and sophistication of AI technology accelerates the value proposition for customer service chatbots, companies should ensure they have proper monitoring in place to escalate to real people when necessary, and should closely monitor any consumer complaints to stay ahead of what regulators are hearing.
On June 6, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) (the “prudential regulators” that oversee the safety and soundness of the banking system) issued final guidance on managing risks associated with third-parties (vendors, fintech partners, and others). In addition to reiterating that a bank’s reliance on third parties does not diminish its own responsibility to comply with applicable laws and regulations, the guidancealso highlighted that relationships with fintech companies may introduce new risks to banks and reminded such banks on regulatory expectations for how banks evaluate third parties, including the company’s depth of resources (funding, staffing, a more), level of experience performing the contracted activities, and history of litigation or customer complaints. Our take: Nothing earth-shattering here, but this guidance is a helpful checklist for fintech firms to consider when pitching themselves to potential bank partners. Chances are good they’ll be asked sooner or later, and more than ever banks will be looking for thoughtful responses.
The U.S. Department of Justice charged two Russian nationals, Alexey Bilyuchenko and Aleksandr Verner, with the 2014 hacking – and subsequent collapse – of Mt. Gox, at the time one of the world’s most popular crypto exchanges. The DOJ’s indictment [full text] accused Bilyuchenko and Verner of “hacking the exchange and conspiring to launder about 647,000 bitcoins, worth about $17.2 billion today” – an theft that then “[contributed] to the exchange’s ultimate insolvency,” according to a Justice Department statement.
Affirm and Amazon deepened their partnership, announcing that Affirm’s BNPL offering will now be available to merchants who offer Amazon Pay as a payment option at checkout. The announcement comes just about two years after the two partnered up to allow Amazon customers to choose to pay for purchases in installments at the point of checkout.
Another tough week for Better.com, as the digital mortgage lender “exit[ed] the real estate business [and] laid off its real estate team.” The company had, in recent years, been working to improve the customer experience for all aspects of home purchasing – “hence changing its name from Better Mortgage to just Better” – but the new business unit was expected to require a significant financial investment from the company, which has been struggling with funding and layoffs over the past year.
Updating on a developing story we referenced last week, banking technology provider FIS acquired BaaS platform Bond for an undisclosed price. Bond had raised $42 million in funding since 2019, reaching a $182 million valuation in 2020.
Australia says farewell to checks – the country plans to “phase out cheques by the end of the decade,” noting that checks account for only 0.2% of its non-cash payments. In parallel, Australia will invest in growing its digital payments platform and electronic clearing system.
American Express signed a data access agreement with Envestnet Yodlee to allow AmEx customers to connect to other third party financial services tools through Yodlee’s platform.
Origin, the company working to elevate financial literacy in the workplace, acquired financial education startup Finly for an undisclosed price. Origin founder Matthew Watson said that with the acquisition Origin “will be able to broaden the educational element it can provide to users, while also boosting ongoing engagement on its platform.
Public launched a new product Alpha, which uses OpenAI’s GPT-4 to enhance users’ investing experiences by reducing “the time retail investors spend researching and tracking their investments by allowing investors to ask market-specific questions to OpenAI's GPT-4.”
Selected fundings
Payroll and HR API provider Finch raised a new funding round led by Intuit Ventures.
Financial strategy and planning platform Mosaic raised $26 million in a Series C funding round led by OMERS Ventures with participation from Founders Fund and General Catalyst.
Payment operating system Payrails raised $14.4 million in a seed extension funding round led by EQT Ventures with participation from General Catalyst and a16z.
Amsterdam-based insurtech Insify raised $10.7 million in a Series A extension funding round led by Munich Re Ventures.
Spanish life insurance startup Life5 raised $10.7 million in a Series A funding round.
Bonsai, a growth financing provider for brick-and-mortar businesses, raised $4.35 million in a new funding round.