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 7,236 others by clicking below, and to the regular readers, thank you. 🙏
Weekly Rant 📣
Crypto's difficult teenage phase
In debates about the future of Crypto, there are memes on both sides. People who are pro-crypto see a world of more efficient, inclusive, and transparent finance. The more crypto skeptic memes suggest that Crypto uses too much energy, is filled with crime, and allows ransomware to happen.
Of course, memes don't tell the whole story. Crypto is rapidly becoming mainstream, but the establishment is pushing back. One way or another, Crypto will become mainstream, but the question is how?
The conversation is reduced to either making Crypto conform or how bad the establishment is. But I think if we step back, there's more going on here.
We have to understand why Crypto is going mainstream, why the establishment is pushing back and what Crypto's fundamental challenges are. Then maybe we can move the conversation from talking points to making a global, digital economy that works better for everyone.
The mainstream opening.
Meanwhile, as Fred Wilson published, NFTs are Crypto's mainstream moment (or, as he called it, The Opening). This past weekend more than 500 people joined a party to bid for (and win) a Cryptopunk.
NFTs themselves may (and probably will) crash from here, but that's not the point. We're witnessing the creation of a new economy, a Crypto native economy, and the mainstream is arriving into NFTs.
NFTs are a growth engine that can spin out countless other use cases and businesses. The Crypto native economy will create Crypto native business models. These new business models will be captured best by the projects, creators, and communities that live in this new world.
So while everyone is waiting for the Pokemon NFT (which needs to happen), it's the new IP and business models that will grow the most.
Think about it this way who benefitted from the internet growth more, internet native Fintech businesses or the big banks? The old world businesses use the new technology to try and improve their existing business model. In the new paradigm, the adopters change their business model. When a technology innovation leads to business model change, Clayton Christensen called that "Disruptive Innovation."
The establishment pushback.
In recent weeks we saw the US Senate debate for the Infrastructure Bill held up primarily by the issue of how the Crypto industry should be taxed. The bill was mainly a $1trn spending package to build roads, rail, and schools, but it had a twist. There needed to be a way to pay for all of this spending. Conveniently the Crypto industry is a growth segment that could be taxed for its activity.
Crypto advocates took issue with the Infrastructure bill, not (as some assumed) because they didn't want to be taxed, but because of how clumsily written the bill was. As initially written, anyone who wrote software that could move value in Crypto could potentially be required to pay tax on the transactions that software performed. That would be like a software engineer working for a bank, being taxed for the trades the bank made.
It feels like we're at an inflection point and that the infrastructure bill debate was just the opening battle. The Crypto industry pushed back with a massive lobbying campaign and PR battle, and to some extent, it was successful.
Governments and regulators are wrangling with what to do about this Crypto thing. It's big, it colors outside the lines, and it could well have negative consequences. It's not just tax policy; every government agency in every major developed nation is trying to figure out how the heck it manages Crypto. This won't be the last battle; it was the first.
And therein lies the rub. While there are valid criticisms of Crypto as it moves from difficult teenager to adulthood, it needs to figure out how to be a successful adult.
The challenges Crypto has to overcome.
Crypto doesn't just need to figure out how to be a good citizen; it needs to figure out who it wants to be when it grows up. It is growing fast, doesn't care about convention, and is full of optimism. That's no bad thing, but to have the impact it dreams about, it may have to face some hard truths.
Most regulations exist for a good reason. The SEC was created after the great recession of 1929 to ensure the Main St didn't end up in such a dire situation again. Legislation and regulation often react to significant events and public outcries that "something must be done." Most people don't want to be their own bank, overthrow their state or become really good at OpSec. Most people want a good outcome for their family, a decent place to live, and as little admin as possible.
Crypto also has to face some other emerging truths.
Crypto primarily benefits early adopters. If you live on Discord, spend all day looking at charts, or, better yet, are paid by a DAO, chances are you know when the latest NFT drop is coming. Even if you know about the newest token or NFT drop, you need a good amount of Eth and live in the right time zone to participate. Yes, it's exciting that communities can emerge around Soccer, Basketball, and even Cryptopunks - meaning that your passion can be tokenized. But if you have a family, career, or just can't afford to dollar cost average every month, Crypto is still a very exclusive club.
Crypto is replicating capitalism's wealth disparity (and possibly making it worse). For every story of the lucky consumer who went big on Dogecoin and is a millionaire, there are thousands more on the sidelines who either lost or stood still. Crypto has done well for the patient who can afford the dollar cost average, but it has done exceptionally well for the founders and big institutions who have succeeded. Don't get me wrong, there should be a prize for success, and I believe in capitalism. But Crypto is still very elitist. You're either in the know, or you're not.
Crypto is irritatingly tribal. Communities evolve around their favorite coin and often shout down anyone who doesn't like their coin or promotes another. This is prominent with Bitcoin maximalists but applies to plenty of other communities too. It just seems so unnecessary. I get rooting for your team to win; I don't get rooting for everyone else to lose.
But Crypto has some incredible things going for it.
Much like the early stages of the internet, the early Crypto advocates project their optimism and hope for a better world onto Crypto. The internet pioneers have been left disappointed by how the internet has become a place where privacy is an afterthought (Tim Berners Lee is even trying to build a solution).
So what makes Crypto any different?
Transparent by default. Crypto networks are public by default. Every transaction is a global, public record that can't be tampered with. This should be a regulator's dream. One of the reasons so many drug and darknet markets got shut down was how trivially easy it is to get a complete picture of transactions on a Crypto network. This is why a former CIA director suggested criminals will move away from Bitcoin. This aligns with conversations I've had with many law enforcement professionals who quietly really like Crypto because it's much easier to spot wrongdoing than in the existing financial system. Be in no doubt, sophisticated criminals absolutely do use Crypto networks, but not nearly as much as the current financial system.
Permissionless by default. To build on Crypto rails, you just pick up open-source code and start. The Crypto rails operate as a public good that operates 24/7.
Global by default. In most parts of the world, Crypto is the same for everyone. Build it once and access global scale. This is slightly different where both China and the US are balkanizing through regulation somewhat. But the primary beneficiary is likely to be the global south. Suddenly there are global, 24/7, transparent and permissionless rails to build with. Now all you need is internet access.
Reinforced by incentives. Every Crypto network and coin has some sort of incentive mechanism baked in. If you look at Bitcoin long enough, you conclude that the core function of the asset is to secure the network. Bitcoin has an economic incentive to keep running and stay consistent. This is why despite some miners having had the capacity to execute a 51% attack, it hasn't happened. Because Bitcoin is a transparent public record, it would be visible to everyone in the world, who could, without permission, choose to fork the network and operate on a version of the truth that no longer included that miner. This is just one example; the incentives go much deeper.
Reinforced by the community. Vitalik (the founder of Ethereum) once gave a thought experiment. If he selfishly forked the Ethereum codebase, would all the miners, wallets, and users follow him? The answer is, of course, no. Vitalik's point was you can fork code easily, but forking community is much harder.
Yes, Crypto can be tribal, but the people are some of the most creative, talented, and downright helpful I've ever experienced. If you have an opportunity to enter some of the discord communities in Crypto, I highly recommend it. The passion and enthusiasm are like nothing I've experienced.
To make Crypto mainstream, we need to lean into its strengths.
The problem with regulation is not intent its execution.
The temptation of any legislator or regulator is to try and make Crypto fit into existing categories or rules. This is a huge missed opportunity. The rules of the global financial system were built when everything existed on paper and often in response to a crisis. Regulation is rarely designed from first principles.
So why can't the industry design its own rules from first principles? This strikes me as a huge opportunity. If we assume most people don't want to be their own bank and want to build a better global, digital economy for everyone, how do we do that?
Instead of using the rules we have as the only starting point, what if we started with the outcomes we wanted to measure? This is how we train AI today. Most models are so complex it's nearly impossible to fully understand how they made a decision, but it is possible to measure their outcomes.
Once we have these outcomes, I think there is an enormous opportunity to create more standards that lean into the strengths of Crypto and outperform the existing financial infrastructure by any measure.
Crypto needs its Section 230 moment.
I think Crypto folks need to show they're thinking about risks more; we need regulation that is more outcomes-based, and more than anything, we must first do no harm to Crypto.
4 Fintech Companies 💸
Bit of an international flavor this week
1. Railz - Accounting Data as a Service (CAN)
Railz provides a single API for accounting platforms. Like UK-based Codat, the API creates several use cases like advanced KYC, credit underwriting, fraud prevention, and auto-reconciliation for SMBs.
Canada really feels like it's about to have its Fintech moment. Every other day there's something exciting popping up. Canada has been dominated by the big 4 banks and slow to the Fintech movement, but that could change through 2022. As infrastructure players like Railz and likely, Banking-as-a-Service players enter, things could get super interesting. Will Canada be a market people expand into from the US, or will we see more homegrown talent? Especially since it's much simpler to get an equivalent to an MTL license in Canada than in the US.
2. Comma - If Melio used Open Banking (UK)
Comma works by connecting accounting platforms (like Quickbooks or Xero) to the UK's open banking rails. Users can create bulk salary runs or supplier payments and then execute with a single click. Comma also allows 3rd parties (such as accountants) to do this on behalf of their small business clients.
Bulk paying salaries or bills in the UK is still a manual process or outsourced to 3rd party providers; there isn't really a Melio or Modern Treasury (yet). I like that they're using Open Banking rails for two reasons. 1) They can help keep data consistent between the bank and accounting platform, and 2) Over time, they can potentially spot opportunities for cash flow financing, or other value add to their small business customers. Open Banking as a payments rail has so much potential when you add in the real-time data element.
3. Rutter - The e-Commerce Aggregator
Rutter allows merchants (or creators) to manage multiple e-commerce providers through a single API. As a mid-sized merchant, you may want to sell your products on Amazon, eBay, or in-person via Square. Creating a custom experience would require a lot of self-built code, so Rutter provides all of that via a single API. Merchants accept payments via all storefronts, and they can also use their marketing and checkout features.
e-Commerce is getting re-bundled. There's a whole ecosystem of vertical SaaS businesses aimed at e-commerce merchants. Take Uncapped, who do revenue-based finance, with Rutter; they can pull the revenue data from multiple platforms for a single merchant.
4. Dune - Free, community-led crypto analytics (Norway / Global)
Dune allows the global Crypto community to create, share and even fork dashboards of Crypto data. Customers include some of the largest DeFi projects like AAVE, Uniswap, and Compound. Dune has an impressive amount of data sources available like decentralized exchange volumes, NFT trading data, and even full balance sheets for DAOs.
Dune's freemium model feels very Crypto. It's open to experimentation, but the power users can begin to pay for the value they receive. Compare the data available on Dune to traditional finance. In TradFi, at the end of each quarter, a PDF gets compiled of all relevant data. With Dune, it's real-time and transparent. Regulators and auditors could build their own dashboards about how the market is performing.
Things to know 👀
Reuters reports that Nubank has hired Goldman, Citi, and Morgan Stanley to lead an IPO valuing the company at more than $40bn. This report follows an investment round in June that valued Nubank at more than $30bn. Nubank has more than 40m customers, mainly in Brazil, but recently expanded into Mexico and Colombia.
🤔 My Analysis: $40Bn is a heck of an IPO valuation for a bank founded in 2012. At its debut, Nubank will be about the same size as UK banks Barclays and Lloyds. It will also be slightly larger than First Republic and a little smaller than CIBC.
🤔 My Analysis: But $40bn could be just the start. Nubank has two avenues of growth, Geo and product line expansion. If it can grow in other Geo's as it did in Brazil, that could drive up their revenue and valuation. Nubank already offers SMB accounts and credit cards, but they'd also drive up users and potential revenue by adding additional products (e.g., Mortgages).
🤔 My Analysis: LATAM is a great market to be a bank, especially with a low-cost operating model. Interest rates are high, and the consumer need is much higher. While we've seen the profitability question plague Neobanks in Europe (like N26 or Monzo), this isn't an issue in LATAM. In the US, it's more common to live on card interchange as a primary source of revenue. Taking deposits and lending isn't as profitable for the US or EU-based challenger banks.As such, we see folks like Revolut going more of the "super-app" route. Which makes me wonder, what happens if Nubank went the super-app way too? Or will they open up a BaaS offering? They don't need to do either yet, but the competition for "who's the financial super app of LATAM" is going to be compelling to watch.
Chime's new round comes from Sequoia's late-stage fund, Softbank and Tiger Global. The new valuation was more than $10bn higher than their reported valuation in October 2020. Chime is, according to their CEO adding 100s of thousands of accounts per month and is profitable on an EBITDA basis. Eight of the 20 most valuable private companies are fintech companies (hella stat!)
🤔 My Analysis: Chime feels like a Fintech blue chip. Chime is continuing to grow, loved by its users, and expanding its product lines. What's not to like? By valuation, Chime is larger than Fifth Third Bank and roughly the same market value as Canada's 6th largest bank.
🤔 My Analysis: But is their valuation based on a tech multiple or being a bank? We know Chime has applied for a charter, and if it does that, it can drive new revenue from lending products. But do you want to be a bank in today's market? Banks are measured on their RoE and balance sheet performance, tech companies are measured on user growth, engagement, and revenue.
🤔 My Analysis: Or will they pivot to the super app strategy? Square and Paypal have both managed the "not quite a bank but slowly starting to lend" pivot well. Maybe if the path to a banking charter is too hard, Chime could pivot in that direction? If I could choose between being a bank (outside of LATAM) or a Fintech company that's not a bank, I'd pick Fintech but not a bank every time.
Quick hits 🥊
Crypto Tax software Taxbit raises $133m at a $1.3bn valuation. Taxbit provides reporting software to the IRS for institutional clients. 🤔 This is a timely raise given the infrastructure bill and the global push to tax the Crypto industry. Keeping up with Crypto tax reporting is hard; this software is selling shovels in a gold rush.
Venmo launches Crypto cashback credit cards. 🤔 Crypto as a cashback mechanic is interesting. Instead of reward points that allow you to get stuff, or a tiny amount of cash (which is really a marketing budget), many users believe the Bitcoin price will increase over the long run, meaning the reward will increase in value over time. Bitcoin has proven its ability to acquire customers (for Square and Robinhood) but fold.app was the first I saw to use Bitcoin rewards for engagement. Crypto as cashback is another onramp for the mainstream.
Lionel Messi to receive $30m of Crypto tokens as he signs for Paris St Germain.Messi has received "fan tokens," which are designed to allow supporters to vote on some minor decisions related to the club and present a new source of revenue for the club. PSG's own Socios.com token grew by 130% since the news of Messi's arrival. 🤔 Tokens as an engagement mechanic and revenue source makes a lot of sense. If you're a fan of a club and it does well, the price increases. I wonder what happens when this meets fantasy sports? Like what happens if Draft Kings had tokens?
The revolution will be tokenized.
Good Reads 📚
People are status-seeking monkeys and seek out the most effective method to gaining social capital. Social capital is a leading indicator of financial capital. When many people analyze NFTs, they make the mistake of not understanding social capital. If it seems irrational that people would spend millions of dollars on a JPEG, exploring social capital may explain it.
But NFTs are more than bling. They have utility (e.g., with the NFT, you can access exclusive content or communities). We're also seeing the beginning of NFTs as entertainment, as Cryptopunks find their way into comics. If Cryptopunks get a Netflix show, they'd potentially start generating revenue. Maybe NFTs are the new social network?
As with anything Packy writes, you should read it; I'll struggle to do it justice in summary form, but here are a few things it made me think...
🤔 My Analysis: NFTs are becoming a culture. It's cool to have a Twitter avatar of an NFT you own; it is not cool to have the avatar of an NFT you don't own. You can imagine a world where it's only possible to have an avatar (or character skin) if you can prove you own it.
🤔 My Analysis: NFTs could have every bit as much entertainment potential (and more) as the marvel universe. Comics, video games, and merchandise but with unique "ownership" perks.
🤔 My Analysis: Packy mentioned it, but it deserves unpacking more; imagine getting an NFT for being somewhere at a specific place or time. It's like the festival t-shirt that never gets old. (Some DAOs already give NFTs for attending a party or being involved during a specific period). Imagine if your OG festival t-shirt got you lifetime backstage pass access. NFTs with utility will be a game-changer.
🤔 My Analysis: Is the future all capitalism and bling? I don't want to sound like rent a boomer here, but all this limited edition collectible stuff feels vacuous. Fashion, beauty, and art are already huge industries, but one person's culture is another person's waste of time. But I'm excited for what NFTs could do to create real-world impact. New business models, new ways to own property and make it in the Great Online Game, regardless of where you were born.
If you're building a Neobank or a brand that wants to embed finance, chances are you need a bank partner. In this Blog, Ayo, who was one of the creators of the Square Cash app, explains the primary type of problem you may encounter with your bank partner.
The problems are 1) Regulatory, the bank is responsible for making sure you follow regulation, if you don't their neck is on the line. 2) Network (e.g., Visa and Mastercard) are very sensitive about how their brand gets used and come with their own complex ruleset. 3) Operational banks have aging technology, and they become your operational team if they need to investigate something that has gone wrong (e.g., fraud or exceptions).
🤔 My Analysis: This is a must-read for operators, especially if you haven't worked with a bank partner before. Banks are weird animals, and so much of your service relies on them. Ayo points out that from experience, all Neobanks that successfully scale have more than one bank partner.
Tweets of the week 🕊
This one from SBF is an absolute classic
That's all, folks. 👋
Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)