An interesting op-ed by Leah Callon-Butler in CoinDesk this week got me to change my mind about something pretty fundamental. She asked: “Is crypto fintech?”
My
instinctive answer was “no!” For me, fintech is technology applied to
finance, while cryptocurrency is a technology unto itself. That
technology is giving rise to a new type of finance.
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But
something about that rationale felt a bit glib, so I wrestled with it
some more. And then some more. And after way too long staring at the
screen and wrinkling my forehead, I may be taking tentative steps into
the “yes” camp, but with some heavy caveats.
What is 'fintech'?
To start, let’s look closer at what we mean by “fintech.”
The
term is the portmanteau of “financial” and “technology,” and most
definitions stress the latter’s influence on finance. “Finance” is usually defined as “the management of money.”
Does
crypto help with the management of money? Although they may have
money-like qualities, cryptocurrencies are not yet generally recognized
as such* as they are not widely accepted as a medium of exchange. Yet,
they can help move money around, allow it to express opinions in new
forms and generate returns in creative ways.
Of all the definitions of fintech from official organizations that I’ve read, the Financial Stability Board’s choice of words
is perhaps the most inclusive: “Technologically enabled financial
innovation that could result in new business models, applications,
processes or products with an associated material effect on financial
markets and institutions and the provision of financial services.”
New
business models. Check. New applications and processes. Check.
Associated material effect on financial markets and institutions. Double
check.
The
“technologically enabled financial innovation” part is perhaps
problematic, as crypto is about so much more than “financial
innovation,” but it’s not wrong.
What is 'crypto'?
We
should probably define “crypto” as well. The term originates with
cryptography, which has to do with the security of information, and is
widely used in its abbreviated form to refer to all things blockchain,
including cryptocurrencies, tokens, smart contracts, etc.
Most of these concepts are being adopted by the financial world to try to re-imagine how securities move, how companies can raise funds, and even how currencies function.
This
past week Standard Chartered, about as “traditional finance” as you can
get (its origins go back to 1853), announced the pending launch of a
crypto custody service. More details are emerging on the plans of
PayPal, long a darling of the fintech sector, to offer crypto services.
MUFG, Japan’s largest banking firm, is developing its own crypto token
for use in a smartphone payment app.
In his timely report for crypto API provider Zabo called “Fintech
Adoption of Cryptocurrency,” Alex Treece highlights how the rolling out
of crypto-asset services boosted valuations of fintech firms Robinhood,
Revolut and Square. Visa issued a statement
this week in which it bragged that it was “reshaping how money moves
across the globe,” and in the very next sentence talked about the
“exciting avenue” of digital currencies.
So,
fintech seems to be increasingly embracing crypto. But is crypto
fintech? It does seem to be becoming part of the fintech set. It is a
technology impacting how finance is handled. So, in some ways it is –
but it’s also more than that.
Time for a refresh?
We
should note that the term “fintech” is trying to put an edgy spin on an
age-old concept. Financial innovation is not new, as material changes
to how money is managed were triggered by the telegraph, telephone,
centralized ticker service, complex derivatives and more.
Even
in its modern application, it is becoming outdated because there are
few traditional finance firms that don’t already heavily rely on new
technologies to reach and grow client bases.
Given
the impact of crypto-based innovation on our understanding and
application of financial concepts, surely we can come up with something
better. Using a tired catch-all for something so significant is like
trying to put a formidable force into a tidy bucket.
So
far, the technologies making the biggest waves in fintech are the
internet and AI – they are game changing, for sure, but their innovation
stems from the creation and treatment of radically new types of data.
Crypto
is also a data innovation, but it goes much further – it’s an
innovation of authority. And since the power of finance stems from the
authority conferred to it and by it, the potential impact of crypto goes
beyond what previous technologies have managed to achieve.
The
technologies we apply to finance matter, as technology shapes what we
do and how we do it. The internet, for instance, changed how we carry
out age-old activities such as writing letters or grocery shopping. It
also gave rise to entirely new activities such as video conferencing and
fighting zombies (at least I think that’s new).
Fintech
has been a transformative force; changing financial habits and
attracting new audiences is no small feat. Crypto should be thrilled
that it is being thought of as a tool that could join mainstream
financial innovation. Yet it is not going to settle for just that.
The
impact of new technologies on how we handle money should not be
underestimated. But no technology until now has attempted to change our
understanding of money.
(*As I’m writing this, it has just been revealed that bitcoin is now considered money in the context of money transmission licensing, only in Washington D.C.)
Anyone know what's going on yet?
This week in markets had both good news and bad.
On
the good news, they say times of crisis bring people closer together.
The European rescue package was seen as a step toward greater fiscal
unity, and has boosted investor sentiment in European markets and in the
euro.
And,
at time of writing, S&P 500 year-to-date returns are now in
positive territory, which is astonishing. Easy money is obviously a more
powerful market driver than high unemployment, geopolitical tensions
and uncertain growth.
The dollar, on the other hand, is trending weaker
against most major currencies, and looks headed toward its worst month
since early 2018. The COVID-19 case tally continues to go from bad to
worse, China-U.S. relations have hit a new low and the likelihood that
the global economy might not bounce back after all seems to finally be
sinking in.
Bitcoin seems to finally be moving out of its doldrums, rising over the weekend to reach a gain of almost 10% on the week. Could this be the reawakening of crypto animal spirits?
CHAIN LINKS
This news is potentially a very big deal: The Office of the Comptroller of the Currency (OCC) said in a public letter that any national bank can now custody digital assets for its clients.
- Until now,
custody has been the province of specialist firms, which typically
needed a state license, such as a trust charter, to offer the service to
institutional investors. Now, large, regulated financial companies that
already provide similar safekeeping services for stock certificates and
the like could broaden their service. - Many institutional
investors are probably more likely to use a custodian they are already
familiar with and who has a line to federal dollars, a
better-capitalized balance sheet and bankruptcy rules that protect
customer assets. - Caitlin Long points out
there is still legal uncertainty for banks transacting with crypto
assets in the U.S., because commercial law treatment of many crypto
assets is still unclear. - She also explains why
a bank license totally trumps a trust charter and New York’s BitLicense
when it comes to crypto custody, and that existing custodians are going
to have to merge with banks to stay competitive. - Also, it is probably more efficient for banks to buy the technology and expertise than try to build it from scratch.
- It
is not clear whether banks will be allowed to extend their custody
services to cover the rapidly growing demand for staking, in which
digital assets are locked up in specific wallets for governance
purposes, in exchange for a yield. - A significant component of
banks’ custody services for traditional assets includes securities
lending – will they also enter the crypto lending business? - Alex Mascioli, head of institutional services for digital asset prime broker Bequant, reminded us we should not expect a stampede of traditional banks into the crypto asset space – most don’t care.
- My colleagues Nik De and Ian Allison spoke to Washington insiders
who agree that banks are unlikely to move quickly here, and that larger
financial institutions are likely to want more reassurance before they
enter the space. - The OCC is currently headed up by Brian Brooks, a former executive at crypto exchange Coinbase. We expected him to attempt to push forward
crypto-friendly reform, but to be honest I didn’t think he’d be able to
get something this significant through so quickly. This leaves me
optimistic that there may be more positive surprises in store.
Standard Chartered has revealed that its venture and innovation arm has been working on a crypto custody offering for the institutional market and the first pilot could launch later this year. TAKEAWAY:
This is the most significant step from a large incumbent into the
crypto markets so far – Standard Chartered is present in 70 countries,
and is one of the 100 largest companies in terms of market cap listed on
the London Stock Exchange. Apparently it was considering setting up a
crypto marketplace, but realized that a significant barrier for its
clients was the lack of big-balance-sheet custody services. So far,
about 20 institutions have expressed interest, according to the company,
which is not insignificant but nor is it a huge amount. It remains to
be seen how this strategy fits in with its recent investment in Switzerland-based institutional crypto custodian Metaco.
Avanti,
a crypto-focused financial company known as a Special Purpose
Depositary Institution (SPDI) based in Wyoming and founded by long-time
crypto advocate Caitlin Long, will launch in October. TAKEAWAY: Avanti
aims to compete with traditional banks for crypto business, and has a
head start, not just in terms of its crypto credibility (Caitlin Long
has been instrumental in pushing forward blockchain-friendly legislation
in Wyoming, which other states are starting to emulate). It also has
the flexibility to innovate on how banking works, and has started with a
token called the Avit. Details are still thin, but it seems like it will be a digital token for settlement purposes, not pegged to the U.S. dollar but issued by a bank under existing U.S. commercial laws, which confer transaction finality. I’m looking forward to learning more about this.
The price of ether, ethereum’s native token, has more than doubled so far this year, dwarfing bitcoin’s +34% rise. But its fees have risen by much more,
signalling growing congestion on the network. ETH fees are now
averaging well over $1 per transaction, up from just $0.04 at the
beginning of the year. TAKEAWAY: Proposals are in the
works to reform the fee structure, and the whole network is heading
toward a profound technology change that should solve the scaling
problem (we dive into the upcoming change in detail in our latest report
“Ethereum 2.0: How It Works and Why It Matters”).
These changes will take time, however, and escalating fees tend to
eventually choke activity on a network. For now, though, the transaction
count is showing no signs of abating. Worth watching.
The universe of listed crypto companies is still small (my colleague Matt Yamamoto has written reports on two of them: Ebang and Hut 8), but that could well change in the very near future. TAKEAWAY: With Ant Financial listing
on the Hong Kong and Shanghai exchanges, and a rumored Coinbase listing
in the offing, there could soon be high-market-cap opportunities for
all types of investors. An argument can be made that this would be even
better for the sector than a bitcoin ETF, as funds flowing into listed
crypto companies would spread mainstream investment across a range of
crypto assets and blockchain applications, rather than just bitcoin.
To
get an idea of the potential impact of even a teensy portion of U.S.
equity investment reaching the crypto sector, my colleague Shuai Hao
prepared this scorching graphic:
And for any current or future token enthusiasts out there who have kids (or were once one themselves), you can now get a Dr. Seuss collectible non-fungible token (NFT) of your very own. TAKEAWAY: NFTs may sound like a quirky niche application now, but they could end up playing a significant role in markets through the creation of investment opportunities in art,
for instance. Or, and here it could get even more interesting, in
identity applications. An NFT basically enjoys all the same advantages
of blockchain-based tokens (ease of transfer, traceability, sovereign
control, etc.) – but there is a verifiably limited number. It could be
one, it could be 10 or 100, but the scarcity and lack of fungibility are
part of the value proposition.
Podcast episodes worth listening to:
- The Origins of the World’s Oldest Bitcoin Metric, Explained – CoinDesk Research
- A Simple Explanation of DeFi and Yield Farming Using Actual Human Words – The Breakdown, Nathaniel Whittemore
- Nate Maddrey (Coin Metrics) on the rise of stablecoins – On the Brink, Nic Carter
- Coinbase CEO Brian Armstrong on Bitcoin – Unconfirmed, Laura Shin
