17 Apr 2022 - Stablecoins will change the world, FIDEL raises $65m and NEAR Protocol raises $350m

Hey everyone 👋, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 12,836 others by clicking below, and to the regular readers, thank you. 🙏

Hey Fintech Nerds 👋

The recent inflation numbers make ugly reading. The US is running at 8.5% CPI and the UK at 7%. The human cost of high energy prices, high food prices, and rising fuel costs will most hit the low-income consumer. It's also hitting tech company valuations as public markets come back to earth. 

Yet this week, I was listening to the Acquired podcast with Brad Gerstner, the founder of Altimeter. Brad built a career on betting on tech when nobody else wanted to. Building the firm in the financial crisis and betting big where others wouldn't.

Consistently, those that win big, “overpay” relative to the market at the time. They just do it on the right company.

And a thought struck me.

Fintech may have had a moment of hubris in 2021. But the opportunity remains massive. This is the time for contrarian builders, contrarian bets, and saving nothing for the swim back.

I’m convinced if we want our Web 3 future, we have to bridge DeFi and Crypto. And to bridge DeFi and Crypto we need to be able to confidently move between Fiat and Crypto. Those who get fraud and risk will be the best at bringing liquidity into Crypto. Few are thinking two or three steps ahead.

There are lots of funds, with dry powder they need to deploy but are afraid to get burned. If I had to deploy anywhere, I’d be looking at risk, payments and the on / off ramps around Crypto.

PS. I'll be in New York this week (at Empire Fintech); drop me a message if you want to meet up.

PPS. I've always wanted to record the podcast you send to anyone who says, "But isn't Crypto unregulated?" And now, finally, here it is. Joined by Professor Chris Brummer, Patrick South from TRM, and Cuy from Visa, we got to go deep. Check it out.

Weekly Rant 📣

Stablecoins are now the non-bank Eurodollar.

I believe Stablecoins will become the currency used by the global poor, merchants, and internet native nomads. Stablecoins will also become the fastest, most efficient way for institutions to transact across borders and find new investment opportunities. 

Stablecoins will become the rail of the future and how everyone in the world can have instant access, near free payments, and a store of value. 

But not yet. 

The pieces are in place, and this future is being built, but we have work to do to make this a reality. 

Recent news got me thinking we could be reaching an inflection point.

This week Circle announced a $400m funding round led by the world's largest asset manager Blackrock. As part of the funding, Blackrock and Circle will also "explore capital markets applications of USDC." This signals the beginning of Stablecoins becoming the global US Dollar rail. A sort of FedWire or ACH for everyone, everywhere. Except real-time, programmable, and international.

I'm seeing the regulatory sentiment to Stablecoins improve, bringing in the institutional actors and creating new opportunities for Fintech companies, marketplaces, and non-banks. 

Before we get into that, let's level set, who's Circle, what's USDC, and how could Stablecoins make a difference to the world?

Who's Circle? 

Founded by serial entrepreneur Jeremy Allaire (founder of a firm acquired by Macromedia and took video platform Brightcove to IPO). Circle the company had three acts. 

Act 1: Circle started in 2013 as an accessible consumer Bitcoin wallet (competing with, say, Coinbase). During this time, Circle established a strong reputation with regulators and banks. They secured the first Bitlicence, an investment from Goldman Sachs, the first Virtual asset license from UK regulator the FCA, and a bank account from Barclays in the UK (wonder how that happened 👀).

Act 2: While it gained users, it failed to get the traction of some competitors in the 2017 bull run but instead built a successful institutional trading desk. Having built up so much Crypto that increased its back-office value was driving much more revenue than its consumer wallet. So its second act was a market maker. It later sold this business to Voyager Digital.

Act 3: In May 2018, Circle raised a further $110m from additional investors to create USDC (US Dollar Coin) to compete with the then-popular Tether token. USDC and its services now make up most of Circle's business, focus, and revenues.

While USDC wasn’t the first regulated / reputationally solid Stablecoin (that honor goes to Gemini and Paxos). Circle maintained a reputation as the high watermark for compliance and diligence throughout all of its acts. So while the product changed, the reputation hasn't.

That reputation puts them in an interesting spot to bring forth the institutions.

Understanding Stablecoins and USDC

USDC is a pegged Stablecoin, where for each USDC, $1 is held in an account. There are other types of Stablecoin (asset-backed and algorithmically managed, and if you want to go deep there, google is your friend).

Buying USDC (or most Stablecoins) looks like buying any other Cryptoasset. 

1. Head to an exchange (e.g. Coinbase, Kraken, FTX)

2. Click "buy" on the Stablecoin (e.g., USDT, USDC, USDP)

3. Send the regular exchange currency from your bank or card.

4. In return, the exchange sends the Stablecoin to your wallet.

USD pegged Stablecoins are created (or minted) when the USD (fiat) enters the bank account of the organization minting the tokens (so, for example, you'd send USD to Circle, and Circle would send you USDC in return).

Early use cases

Many of these are Crypto trading related, but you'll see some big themes we can come back to.

• Store of Value: Traders wanted a way to store value that wasn't volatile. By selling a volatile Cryptoasset (e.g., BTC) in return for a stable asset (e.g., USDC, USDT), the trader can avoid negative price moves and hold on to profits.

• Trading: Some assets have many willing buyers and sellers (e.g., ETC to BTC), but some don't. If a trader wanted to buy or sell something exotic (e.g., Simon Coin) for something else (Brainfood Coin), then are there enough buyers and sellers for that trade? If not, plenty would likely buy with a Stablecoin or sell for a Stablecoin. 

• Payments: If a trader wanted to move value between exchanges (e.g., buy some other asset or get a better price), Stablecoins became the fastest, cheapest way to do that.

• Unit of account: While many traders in Crypto now denominate in BTC or ETC (i.e., they do their mental math of are they up or down using those assets), many still think in dollars. By cashing out into Stablecoins, the "wins" can be seen clearly (and, in many cases, sent to an off-ramp like a centralized exchange to become regular fiat in your bank account).

• Lending / Borrowing: Finally, traders want to trade and don't always have the cash. Stablecoins became a default asset to borrow because they're unlikely to be volatile while you borrow them. On the other side, holders of Stablecoins could lend those coins to make a steady return from traders who wanted to borrow.

(For those keeping score at home, "money" is often defined as a store of value, means of exchange, and unit of account. Stablecoins are money, unlike Bitcoin in its current volatile state). 

These early use cases first appeared on more centralized exchanges (like Binance), but things got more interesting when the Stablecoins were baked into decentralized exchanges and protocols (DeFi).

Stablecoins are Programmable, Composable, and Permissionless.

USDC was initially created on the Ethereum network as an ERC20 token. (Today Stablecoins are available on many networks and in many forms).

But the genesis story is important.

ERC20 is a standard that allows any developer to create tokens on the Ethereum network that can be held by Ethereum wallets. Competing stablecoins are often built the same way (BUSD, USDT, etc.) Using this standard (and running on a Blockchain) makes the USD tokens programmable and composable.

This makes Stablecoins much more interesting than regular USD.

Programmable means any developer can build new functionality that uses the Stablecoin. Developers can make payments or money that moves on conditions like "if x happens, then do y." (Side note: We’re seeing people do this now in Fintech but as an abstraction, not core to the technology, and importantly, it’s not composable, see the next paragraph.)

Composable means anything that a developer builds in their application can be consumed by another developer or application. A metaphor might help here. Imagine taking two ideas (two wheels and a box) to create a third idea (a carriage). With this carriage, you can create a fourth idea, like milk bottles that sit inside the carriage. Finally, a fifth idea could appear; a milk delivery service. 

If that sounds like APIs, it kind of is. Except, APIs are often built to provide limited functionality to the outside world.

Stablecoins (and other token types) are Permissionless. In Crypto, each service can be remixed by another. This would be like Cash App releasing a feature, and it instantly being available to Venmo users. Or more accurately, if Stipe had a product, that was immediately available to Adyen customers.

(Permissionless sounds scary to some bankers and regulators like “not secure,” but that’s also not the case. It can be very secure, safe, and regulated.)

New Use Cases point to the massive potential of Stablecoins

The combination of programmable, composable, and permissionless tokens has created new use cases.

• "Savings" without a bank: DeFi protocols emerged (e.g., Compound and AAVE) that would help traders, individuals, or institutions to pool their Stablecoins (or other assets) together. But these protocols wanted pairs of tokens (e.g., USDC and ETH). In return for putting in two tokens, users get a 3rd token (called LP tokens). These LP tokens are used to ensure "savings" or rewards are paid to users if someone borrows from the pool. (We’ll see in a moment how programmability and composability starts to kick in here)

• Trading without an exchange: Because this pool has two tokens, other users can now swap one token for another (e.g., USDC for ETH or vice versa). The protocol takes a fee from the user swapping tokens and distributes them to users that "deposited" or locked their tokens in the pool.

• "Borrowing" without a bank: Remember the LP tokens that the "saver" got when they locked their liquidity in a pool? These LP tokens, too, can be entered into another pool (e.g., UNI and USDC). This is our composability at play. Some protocols and services will even accept these tokens as collateral and issue a new token that the user can spend or trade with as if it were cash. You can imagine these use cases get progressively more complex, and there are many approaches!

• Cross-border store of value: A compatible wallet is all a user needs to hold a Stablecoin. The user could be a citizen of any country and keep a stable asset in their wallet.

• Cross-border payments: That user can also send those Stablecoins to any compatible wallet, service, or protocol instantly, 24/7.

• Real-world lending: Companies like Goldfinch and Credix have used liquidity pools to efficiently move USD stablecoins across borders. Investors pool their liquidity; these companies then identify real-world lending businesses in emerging markets. The company (e.g., Goldfinch) lends to the lender, making a profit in return. The company then passes on this return to the investors in the Liquidity pool.

These use cases are great but would have struggled if Crypto was still slow and expensive. We're now seeing many Stablecoins supported by Ethereum L2 solutions (e.g., Polygon) and alternative L1's (like Solana), meaning the "nearly free" promise of instant, global payments could be a reality.

This means people with unstable currencies could hold dollars, merchants could get paid in dollars, and maybe we have this instant, global rail.

But first, we need liquidity.

Sending money cross-border is great, but it's useless if the other person can't exchange that locally and pay their bills. They need someone locally who can swap their USD stablecoins for local currency to pay their bills. 

And to get liquidity, we need institutions.

The best way to always have a buyer or seller is to have organizations with lots of capital who make money from holding that capital and always being the buyer or seller needed. These market makers play a major role in capital markets today. They're not currently operating at scale in Stablecoins or DeFi.

To get institutions, we need compliance. 

Most governments and jurisdictions don't let companies manage massive amounts of capital without a license. These financial institutions (asset managers, hedge funds, etc.) must comply with financial rules locally and in every geography.

This can be as simple as knowing who they're buying from or selling to (Know Your Customer or KYC). And it could be as complicated as enforcing local currency restrictions (e.g., China or South Africa limits how much money an individual can send out of a country).

At this point, some of you are thinking, wait, won't that add back all the friction the technology was supposed to take away. It will undoubtedly add some friction, but it doesn't have to be directly into the Stablecoin. Remember, Stablecoins are programmable and composable. Depending on who's using them and what they're used for, different rules can be enforced, followed, and implemented.

That's why we need many Stablecoins and many approaches.

Fortunately, there's no lack of Web 3 projects right now.

USDC's Competitive position

USDC’s biggest competitor is Tether.

Tether claimed to back every Tether token (USDT) with $1 "real" US Dollar and quickly gained traction as the dominant Stablecoin. But after years of rumors and claims they didn't have those real US Dollars, Tether's reputation was tarnished. Especially with more risk-averse institutional investors.

Fast forward to 2022, and at the time of writing, Tether is still in the lead with nearly $80bn supply of USDT, but USDC is second with just shy of $50bn.

Circle's DNA as the organization that puts in the yards with policy and regulators has allowed USDC to be the first asset that institutions and incumbent payments companies use to dip their toes into the water.

USDC Along with USDP (Paxos), (USDG) Gemini, and increasingly DAI (MakerDAO), the reputation of Stablecoins is improving.

And that's important.

Because compliance will drive institutions into Stablecoins.

And institutions will drive liquidity.

And liquidity will drive mass adoption.

And that's why the Blackrock news is interesting.

It’s beginning, but:

This space is still early and risky.

Regulators are moving at different speeds. The UK Government just set out a plan to be a Stablecoin and Cryptoasset hub, Europe just passed rules about Stablecoins, and the US is still consulting on the topic. Meanwhile, some investors are being sued for lack of diligence to prevent alleged fraud in DeFi platforms.

This lack of certainty will get cleared up in the coming years. But if we want the promise of the technology, we have to be proactive about not just copying + pasting the old rules onto new technology. We need to be thoughtful about the risks and what controls manage those risks without harming innovation and opportunity. 

And I believe those new controls can be much more effective than the old ones.

When you head into the frontier before the law arrives, you can do whatever you like. 

The difference between this frontier and the old West is that Crypto never forgets.

Every transaction we do in Crypto will be recorded forever.

Be careful out there.

What happens now

We're moving from the gold rush to the gold business. If you struck gold or oil at the frontier, at first, you're just so happy you did. Making more money than you ever imagined, these moments are transformational.

But before long, you'd hire people and start a business. Before you know it, the gold mine needs investment to be more efficient and security guards to manage theft. 

This is already happening in Crypto, where companies like Coinbase could charge consumers high fees for trading; there's now increased competition. Where payments companies could use cards for payments, they now want access to ACH and local rails to deal with volume and scale.

Those striking gold are doing well.

Those selling shovels may do better.

And few are thinking three steps ahead to how this space evolves.

ST.

4 Fintech Companies 💸

1. Proper Finance - Ledger and Payment orchestration

• Proper provides a universal ledger and integrated payments reconciliation platform. Users can connect various APIs or low-level payment rails to gain a single source of truth across all payment types. 

• 🤔 Moving money should be simple, but it can be remarkably complex. If you're a company that uses multiple payment rails, there can be countless errors or delays that need to be chased by an operations team. This creates drag, cost, and overhead for anyone in Fintech, marketplaces, or e-commerce. The efficiency gains from a ledger that puts reconciliation on autopilot but is also programmable are dramatic. As a result, there are now countless companies in this category. Which made me wonder, will these companies all scale, find their niche, or get acquired by someone bigger? 

2. Starlight - "Brex of Crypto"

• Starlight customers can setup a Crypto wallet, onboard team members, and track spending in a single platform. Starlight can show Fiat and Crypto balances (claiming to support more than 76,000 Cryptoassets and tokens). In addition, Starlight can integrate with accounting software, manage key recovery and bulk upload of transactions (CSV)

• 🤔 Starlight is initially aimed at DAOs and Crypto native companies but could work for anyone who needs to interact with or use Web 3 / tokens in time. Ramp, Mercury, and Brex (and their international equivalents) have become the default financial operating systems for most businesses born in the past few years. Something like Starlight may be the equivalent for Web 3 entities and especially Web 2.5 companies in the coming year.

3. Soon - Automated saving and investments (+ Crypto)

• Soon is a direct-to-consumer Fintech App that connects consumer bank accounts to automatically buy or spend Crypto. From the website, consumers will be able to set a frequency to pull fiat from their bank account. 

• 🤔 This looks like a mash-up of Acorns and Fold.app. Where Acorns was a strong "don't speculate on the market, we'll take your spare cash and invest for you" proposition, Fold.app created massive engagement through Crypto rewards with a debit card. I really like the idea that there's a balance between Crypto as speculation and Crypto as an everyday asset that helps you hedge inflation. But balancing that with Crypto the tool for engagement, is also smart. We don't need another Fintech app that turns finance into gambling/speculation.

4. Goodfin - Private banking for the next generation

• Goodfin provides "curated investments" in private markets, credit limits related to your employment, and "exclusive benefits." The website and coverage have been thin on details, but Goodfin is aiming at a young professional that traditional wealth managers have left behind.

• 🤔 The segment that used to be "mass affluent" or high earning but not yet rich had traditionally been ignored or not a priority for the wealth banks. But today, this segment may have several Fintech accounts, options in companies they have worked at, and is hyper-aware of inflation. For this segment, who may also have high student debt, saving into the 401k for a 7% return isn't enough. There is a real need for the private bank experience for the high-earning younger segments. Side note, this web design is so Spring / Summer '22. Gradients, italic fonts, wavy background design.

Things to know 👀

1. FIDEL raises $65m led by Bain Capital

• FIDEL provides developers with an API to connect cards to their applications and use the data to trigger event-based experiences. FIDEL claims customers like Google, Royal Bank of Canada, and British Airways. With the FIDEL API, customers have created experiences like expense capture, loyalty, rewards, and PFM. The founder claims FIDEL makes cards become more like "Programmable Money." 

• 🤔 The use cases for programmable money are endless. Initial use cases for merchants include real-time rebates, reimbursements, or purchase linked offers. Doing things because a purchase happened is interesting, but FIDEL is launching a transaction stream API, and that's much more interesting. Developers can build expense management use cases like auto-reconciling an expense on payment by checking the customer's email inbox vs. the merchant name and then adding that invoice. 

• 🤔 Payment authorization is one of the most underused event triggers in payments. You could give customers their own IFTTT for money. Imagine creating your own recipes that remove the admin you do every month that's unique to you? Money Macros. When you get paid, when you make a payment, on a rainy day, etc.

• 🤔 But is this a feature of an issuer processor or a company? Ultra-modern issuer processors like Lithic and Highnote also offer composability in the payment auth stream (and card product). In theory, everything FIDEL can offer can also be built directly on the issuer processor. But what about a customer who has cards with many banks? Most incumbent banks and Neobanks don't use those modern issuer processors today. There are lots of cards out there.

• 🤔 Bain's Meritt Hummer gives an example of an expense management platform tracking transactions on a 3rd party card. Imagine you have an employee who had to put expenses on another card (for whatever reason); you could track that and reconcile it as if it happened on your own corporate card.

• 🤔 What happens when you can see all of a customer's cards? FIDEL relies on opt-in, but imagine the PFM features you could build here. 

2. NEAR protocol raised $350m led by Tiger Global

• NEAR an "Ethereum competitor," an alternative L1 chain, following a $150m raise in January. In April '21 NEAR launched the "rainbow bridge" to transfer Ethereum ERC20 tokens to the NEAR chain, and in October '21 NEAR's Aurora launched to bring the Ethereum EVM to NEAR.

• 🤔 NEAR fashions itself as a developer-friendly chain; it supports things like account names instead of wallet addresses and multiple languages (like Rust or Assemblyscript). NEAR is also faster and "more green" than Ethereum since it uses the less energy-intensive proof-of-stake consensus model (and actively offsets any energy it uses).

• NEAR is the L1 that's done many things Eth is upgrading itself to do to scale. Ethereum will be moving to proof-of-stake and sharding to improve performance in the coming months and years, but NEAR already supports those techniques.

• 🤔 But Ethereum has a strong network effect with developers; it may not be elegant, but it is permissionless and well supported. Ethereum is Java. Often the winner isn't the best tech but the worst at almost everything except for one thing. The classic example is Java, which was open, simple, and widely supported in the early years of the Internet. It also runs anywhere because of the JVM (Java Virtual Machine), which handles the work of making Java do its thing. Ethereum's equivalent is the EVM (Ethereum Virtual Machine). 

• 🤔 Be kind to the EVM, and the EVM will be kind to you. The EVM is where all accounts and smart contracts (programs) live. Ethereum can legitimately claim to be a decentralized world computer because everything happens on the EVM. Developers are now used to writing EVM-compatible code, applications, and products. Perhaps unsurprising then that protocols like NEAR

• 🤔 With so much money sloshing around in these ecosystems, the challenge is becoming attention, mindshare, and adoption. Avalanche, Near, Solana, Polkadot, Cosmos, and even Cardano are not short on cash to spend. But they're short on developer attention and momentum compared to Ethereum (and its L2s). As a founder with the next breakthrough idea, picking an ecosystem is hard; getting funded isn't.

Quick hits 🥊

• Payments tech company Form 3 partners with Goldman to launch FX payments in 124 currencies and 163 markets. 🤔 Form 3 is the payments company almost nobody pays attention to, quietly killing it. Perhaps because the team is former bankers, or the first customers are mostly all UK banks. This is an interesting move. Goldman already had very high-quality transaction banking APIs, but Form 3 potentially broadens that market. 

• Tesla, Block, and Blockstream to Mine Bitcoin from Solar Power in Texas. The build is a proof of concept for a 100% renewable Bitcoin mining facility. Currently, the variable demand for Solar in West Texas has limited investment, but Bitcoin mining can be a buyer with "always-on" demand. 🤔 Combining some demand from Bitcoin and improved battery tech means there is always a buyer and additional supply. What if Bitcoin funds zero-emission infrastructure build?

Good Reads 📚

1. Approaches to decentralization for Web 3

• This piece by Miles Jennings introduces three lenses for decentralization; technical, economic, and legal. Technical decentralization approaches don't rely on any single trusted actor. Economic decentralization creates balanced incentives between developers and users to continue upgrading and running the protocol. Legal decentralization is the most complex, but the idea is to distribute ownership and information about the protocol's future so widely and openly that no "management" or central entity exists. (AKA, sufficiently decentralized)  

• Inevitably, when a project is formed, a smaller group influences its development. But in this piece, Miles outlines several things projects can do to increase decentralization, like enabling transparency of all transactions, allowing users to port their data to any application, and creating inbuilt incentives to share revenue across all stakeholders.

• 🤔 Understanding how these three lenses relate is critical. So often, people have expertise in one of those three subjects and find a flaw in the ideas of Crypto or its projects. Decentralization sounds binary (yes or no), but it is a spectrum with many design choices.

Tweets of the week 🕊

That's all, folks. 👋

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