Fintech 🧠 Food - 28th March 2021 - Crowdfunding creators, UniSwap V3, Fidelity Bitcoin ETF and why Fintech needs its Section 230 moment

Hey everyone 👋, thanks so much for coming back for more Brainfood. A space to learn in public and hopefully process everything happening in fintech.

Earlier this week I got to have a chat all about banking and finance tech architecture with some of the finest minds in Fintech. Hear from people who’ve built core banking systems like former Monzo Lead Engineer Simon Vans Colina, Peter Hurst from Synctera (who’s built several), Christin Brown from Google FSI and 11:FS own, Ewan Silver. This is one you cannot miss. Check it out now, here.

Look out for a YCombinator demo day special bonus food coming later this week, with my take on all the latest batch of fintech companies. If you don’t want to miss a thing make sure to subscribe right here 👇

Weekly Rant 📣

The gap between it will never happen, and it was inevitable.

There's this weird point in technology adoption, where something goes from unacceptable to part of the furniture. The iPhone touch screen was silly before it was the future. Wikipedia was messy before it was the default.  

But it's cleaner in pure tech.

In finance, it feels like there's a storm brewing.

A few things happened in recent weeks' week that feel like actors on the battlefield positioning themselves for a coming war. The war is between born-digital and things that were born analog trying to survive in a digital-first world.

The born analog world has had enough.  Banks are complaining to the regulators about needing "a level playing field" with fintech. India is looking to ban Bitcoin. China is proposing global rules for central bank digital currencies. The global Financial Action Task Force (FATF) has suggested that full Know Your Customer (KYC) should apply to non-custodial crypto wallets decentralized services.

The born-digital world is entering its difficult teenage phase.  Robinhood continues to expand despite regulatory scuffles, BNPL is a phenomenon despite some consumer advocacy groups' worries, and Coinbase looks like it will IPO. BlockFi is valued at $3bn, Blockchain.com at $5.2bn, and Mr. Beast is launching equity financing for creators. Gen Y and Gen Z have built their world.

Then there's this interesting middle group.  Folks like Fidelity, or even PayPal, are just that bit older, a bit more risk-averse, but still able to hang. As I wrote a few weeks ago, these folks entering new areas (like BNPL and crypto) signals that these trends are here to stay.

The big question for me now is can the regulators manage risk without increasing the regulatory capture. I'd argue without the position of "banking licenses," many banks would be in much more trouble than they are today. Fintech has undoubtedly improved outcomes for consumers globally, but we have to be thoughtful in how we regulate.  Simply applying existing rules is lazy and assumes practices built for an analog world will be effective in the new digital reality.

There is no more prominent example of this than KYC rules.  The idea that I must see your legal identity document to prevent financial crime risk is an in-elegant hangover from the analog age.

Finance wants to be global, but counties wish to own local rules.

Finance wants to be digital, but analog companies want to maintain their moats.

The future of financial regulation needs its "Section 230" moment.

Regulators and policymakers are caught in the middle of a shift more significant than the industrial revolution. Regulators look at the captains of Industry like Musk, Bezos, and Zuckerberg and worry about what happens if that level of power comes to finance.  Society will need checks and balances against centralized power. But existing regulations may not be the right starting point.

The early days of the internet had optimism, ICANN and W3C bodies that set standards and unleashed a wave of innovation.

The future of finance needs digital innovators to build infrastructure together.

The future of finance is global and digital. That's inevitable. How we get, there isn't.

4 Fintech Companies 💸

1. Juice - Equity crowdfunding for creators

• Juice is building a financial platform and equity-crowdfunding for creators. It will validate and invest in youtube channels initially and support creators with mentorship. In an interview with The Information, it also appears Juice may be doing revenue-based financing and, in time, offering a complete back office for creators (a bit like Stir).

• X For creators is super hot, but what makes this interesting is it's backed by Mr. Beast Jimmy Donaldson and some other well-known creators, as well as Index and Slow ventures. No doubt their popularity will help Juice get some initial, Juice 👀. But I wonder how open the equity crowdfunding will be. Could you or I buy shares in upcoming creators as a way to support them? That would be cool.

2. Middesk - Identity Verification for Businesses (KYB)

• Middesk handles the complexity of identifying a business for banking or lending onboarding.  Including looking into their legal entity names, company officers, business addresses, and even screening on global watch lists, verifying that a business legally exists and its tax status is for most commercial banks slow and complex. Middesk will search for the documents and reports associated with the business and flag any risks.

• The past five years have seen "digital onboarding" become table stakes making companies like Persona and Socure defaults for anyone building fintech applications for consumers.  Having the same for businesses is hugely valuable; KYB is complicated and expensive.

3. Zaver - BNPL on Open Banking

• Swedish startup Zaver has built BNPL for durables (things you don't often buy, e.g., cars) and is processing "hundreds of millions of dollars."  Using open banking, Zaver can customize pricing and user experience.  

• Zaver doesn't talk up the benefits, but I imagine for merchants, they get instant settlement (and Zaver doesn't have to cover any risk to deliver that), as well as lower cost transaction fees. They're using the same app for the consumer, whether it's pay now or pay later.  Zaver almost looks like it is using BNPL as a wedge product into a "shopping via open banking" solution.  Given Europe is seeing lots of "pay by bank app" players emerge, the one-click checkout without card space is just getting more competitive. Sweden has some good BNPL heritage too...

4. Flux - The crypto remittance wallet for Nigeria

• Flux is a remittance app for businesses that makes collecting US dollar payments simple. The app also allows international and local cash transfers.  By building on crypto rails, Flux says they're able to keep the cost of every transaction much lower than most merchant platforms (e.g., a flat $0.50 regardless of the transaction amount).

• The sheer scale of investment in African fintech is astonishing. It's consistently local founders who build and fill the gaps left by global businesses who cannot enter those markets. Global companies see fraud risk and a lack of compliance while local entrepreneurs are building their solutions.  As companies like Flux scale (to the size of Flutterwave, for example), it will be interesting to see how they approach risk, especially given their crypto use as their core rail.

Things to know 👀

1. Uniswap v3 to launch in May

• Uniswap is arguably the most prominent decentralized exchange (DEX) that allows anyone with a crypto wallet (e.g., Metamask) to quickly swap coins by connecting their wallet to the Uniswap exchange.  Where Uniswap differs from Coinbase is, it never takes custody (holds) coins on your behalf. You can "pool" coins together in wallets held on the ethereum network, or you can swap coins with other users on the ethereum network all via software.  

• Uniswap has opened up a wave of innovation, like decentralized lending, where wallet holders (you) can pool their coins (by sending them to an address at Uniswap), which traders can then borrow against for their trading activity. In return, the wallet holder (you) get an interest fee. This is all handled by code.

• V3 is the latest iteration due to launch in May, bringing more powerful tools to liquidity providers (e.g., you, when you pool your coins at Uniswap) and massive increases in capital efficiency (stemming from the Eth network itself).  The massive capital efficiency comes from working with optimism, a layer two protocol aiming to lower Gas fees to zero.  

• 🤔 My Analysis: For anyone new to using services built on the Ethereum network, you very quickly get used to "gas fees." Gas is essentially the fuel that pays for the use of the ethereum network.  Today a basic transaction can cost $10, and more complex ones can quickly run towards $100.  By working with a layer two scaling solution (essentially, kicking lots of transactions to another network, then being settled back against Ethereum later), Uniswap has reduced the gas fees to near zero. This would be a massive boost for the entire ethereum ecosystem, essentially proving layer two scaling can work at one of its most prominent projects.

• 🤔 My Analysis: Uniswap has a treasury of $2bn for development (in today's prices). That is an incredible R&D budget, and Uniswap almost zero cost of running its business day-to-day. That model is very different from incumbents, who have to spend most of their time keeping the company running. The massive focus on R&D will compound.

2. Fidelity to launch Bitcoin ETF

• ETFs (Exchange Traded Funds) are simple ways for consumers and the market to get exposure to an asset without buying the underlying asset.  With an ETF for Bitcoin, 401ks, pension funds, and any stockbroker service could sell Bitcoin exposure without buying Bitcoin themselves.  

• Bitcoin ETFs have so far been rejected multiple times by the SEC. Still, Fidelity entering the fray is significant given its position as one of the world's largest asset managers and ETF providers globally (with more than $4.9trn assets under management).  

• 🤔 My Analysis: Do we need this if every app has crypto now?

• 🤔 My Analysis: Fidelity is the most interesting "incumbent" asset manager for a few reasons.  The Johnson family privately owns them, and the current CEO Abagail Johnson, has consistently provided thoughtful perspectives on crypto.  It's interesting to me that banks and asset managers who don't have this type of ownership all say "what you're supposed to say" about crypto, which is vaguely bearish PR nonsense. Fidelity doesn't have to and yet is subject to all of the same client and regulator demands.

• 🤔 My Analysis: Possibly the only other large incumbent that has kept this culture is Capital One, which despite being having an IPO in 1994, has retained much of the ethos of its founders Richard Fairbank and Nigel Morris. Capital One is arguably one of the most tech-focussed incumbent banks, and while not perfect, that proximity of founder influence seems to make such a difference to culture. It makes you wonder if, when looking at a bank stock, their ability to make decisions is becoming a crucial factor to see if they stand a chance with Fintech and Crypto's rise in the next decade.

Good reads 📚

1. The Paradoxes of Coinbase

FYI: The Generalist S-1 Club breakdown of Coinbase is exceptional. This essay brought together the Avengers of fintech and crypto to study Coinbase. This whole article is also an experiment in decentralization. The article was published on Mirror, a decentralized publishing platform, sold as an NFT, with embedded art and using ethereum to distribute funds to the contributors automatically.  

• Coinbase is a profitable hyper-growth company, with $1.2bn revenue in 2020 and a profit of $332m. Coinbase has other paradoxes; it is a centralized system for the decentralized future. It requires trust for a trustless future. As a company building the future, they don't engage with social issues.

• Coinbase has positioned itself as the regulated default for retail and institutional investors, and their primary value proposition is trust. Crypto is scary; lots can go wrong; Coinbase will make sure it doesn't.  Coinbase makes money from transaction fees in trading and subscription revenue from custody and staking services. 85% of Coinbase revenue is from consumers and depends heavily on the price of Bitcoin/performance of the crypto market.

• 🤔 My Analysis: This essay covers so many aspects, but I want to double click on regulation. The regulatory mood music is starting to get a little uncomfortable towards crypto. When you look at India considering banning Bitcoin, China is pushing for global CBDC standards. With the recent FATF guidance, which requires full KYC by any non-custodial, Defi wallet, the market is changing.  If all of those things happen, it plays in Coinbase's favor. If they don't, it plays much more towards non-custodial wallets and DEXs.  My gut says we will land somewhere in the middle.

• 🤔 My Analysis: The essay also talked about Binance, which is on the opposite end of the compliance spectrum, maybe not quite as far as Ripple, but they're in the same area code.  The worst thing regulators can do here is try to control crypto through bans; its nature is anti-fragile and will just come back stronger. Crypto community solutions for crypto problems are more likely to succeed. Paper-based "AML" won't cut it. (If you're interested, the new FATF guidance on VASPs is out, and at GDF, we're responding to it)  

2. The Dao of Daos

While we're talking about great essays. Holy shit Packy.

• Decentralized Autonomous Organisations (or DAOs) are a shift in economic organization, with complete transparency, shareholder control, and new types of voting and governance.

• To unpack DAOs, consider Uniswap vs. Coinbase. Uniswap can't decide what is traded and doesn't have a bank account. Uniswap was just a protocol until it got forked by another team who created SushiSwap. SushiSwap introduced economic participation by creating its token. Any Sushi token holders received a tiny % of the fees earned by the SushiSwap DEX in fees. In return, Uniswap announced UNI to give token holders governance rights (e.g., vote on allocating grants, partnerships, and more).  

• How can you design great products by committee? The reality is that, like open source development, there's always a tiny core of super-interested nerds who drive the majority of the development.  However, unlike companies that build in open source, tokens can incentivize contributions to the open-source project. 

• 🤔 My Analysis: The idea of decentralized governance sounds scary, but if you think about it as an incentive/flywheel mechanism for open source contributions, it makes sense. In essence, Web 3 is the evolution of open source where open source meets community and an economic model that drives a flywheel.

• 🤔 My Analysis: Packy touched on regulation; tokens can sometimes be considered "securities," but honestly, this stuff is moving so much faster than regulators can regulate. There is room to talk through the new governance models and benefits of DAOs.  They're ways to govern and fund the development of internet infrastructure. Where the government used to fund rail, road, and networks, now open source communities can.

Tweets of the week 🕊

That's all, folks. 👋