Blueprint: US Senate bill against Twitter becoming a fintech; Binance audit firm quits; PE/VC portfolios in your pocket
Maybe we don't need a financial Twitter after all
Hi Fintech Futurists —
You are the best, today’s agenda below.
BANKING: Senate Banking Chairman Brown to introduce bill closing 'shadow' banking loophole after Elon Musk says Twitter will process payments (link here)
CRYPTO: BNB Plummets as Binance Auditor Mazars Halts Work With All Crypto Firms (link here)
INVESTING: Poolit raises millions to turn accredited investors into LPs in VC, private equity funds (link here)
LONG TAKE: Should Plaid launch a payments network on Arbitrum? (link here)
PODCAST CONVERSATION: Scaling a core ledger for neobanks, processors, brokerages, and payment providers, with Twisp CEO Jarred Ward (link here)
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Short Takes
BANKING: Senate Banking Chairman Brown to introduce bill closing 'shadow' banking loophole after Elon Musk says Twitter will process payments (link here)
A new bill was introduced by Senator Sherrod Brown last Tuesday, in response to Musk’s potential plan of turning Twitter into a digital wallet provider and payment processor.
The bill, which builds upon a House bill from June, seeks to prevent industrial loan companies (ILCs) from offering banking services without the regulatory oversight of the Federal Reserve, which typically applies to federally insured banks. Since becoming Twitter’s CEO, Musk has floated the idea that he could use Twitter’s direct messaging stack for payments, enabling instant transfers across the world in real-time, going so far as to register with the Treasury Department.
The banking lobby would say that large tech companies don’t behave the same way as banks, obviously. Unlike regional and community banks, they don’t have local financial ties with their users. Regulatory oversight for most embedded finance-powered offerings sits with the underlying banking provider, which means that the consumer-facing companies are less inclined to assess customer risk well, instead prioritising monetisation. Further, the financial consumer data collected can be misused, with data privacy compromised to power the sale of additional financial products. We don’t fully agree with the banking lobby — given that more competition is good for users — but we do agree with putting the underwriting activity next to the risk exposure.
Twitter isn’t alone in looking into using the the ILC structure — Rakuten, Ford Motor Company, and Edward Jones have all applied for ILC Charters. Twitter’s founder Jack Dorsey even managed to secure one for Square in 2020. That said, even if Twitter did end up with the licenses, we aren’t sure they would end up a meaningful Venmo / Cash App competitor. Take for example the lack of adoption for Meta Pay, showing how tough it is for tech firms to actually build out financial services monetization.
Also, Musk may soon be on his way out as leader of Twitter following his most recent poll.
👑 See related coverage 👑
CRYPTO: BNB Plummets as Binance Auditor Mazars Halts Work With All Crypto Firms (link here)
Cryptocurrency exchanges have scrambled to provide proof-of-reserve reports to create the impression of financial stability after the collapse of FTX. Proof-of-reserves are meant to ensure that a company’s assets outweigh its liabilities, and that customer assets are backed by … the assets of the customers. That means in the case of a bank run, customers would be able to pull out their funds, and would not be subject to the same fate as FTX accounts, which had been “loaned out” to Alameda. Binance, given its systemic role in the ecosystem, has been in the spotlight. If FTX was Bear Stearns, who is Lehman?
Auditing firm Mazars (42,000 employees) was working on the Binance proof of reserves, whose report purported a collateralisation ratio of 101% for the exchange’s Bitcoin deposits. However, Mazars has now announced that they are stopping work with all cryptocurrency firms as clients, as well as their audit of Binance, due to concerns of how these reports are interpreted by the public and their legitimacy. There is huge reputational risk of getting things wrong.
And as of writing, the link at which the Binance report used to be is down. It had also been under fire as it did not address financial controls and nor provide a full assurance conclusion, only detailing the statement of assets without associated liabilities.
As a result, there has been large outflow from Binance, with the platform even pausing USDC withdrawals — not a great signal. Outflows totalled $3.6B in seven days, with a single day accounting for almost $2B. There is also speculation that Binance is using its $40B BNB token to collateralise its loans, similar to what occurred with FTX’s FTT token — BNB token price has dropped 15%+ over the past week.
We would be surprised if Binance executed the same playbook as as FTX, given its CEO’s very explicit assurances to the contrary. But who knows! Better disclosure is necessary regardless to understand the real financial situation — look to Coinbase as a positive example. We also highlight the benefits of decentralised exchanges and their onchain transparency, which is the whole point of Web3 and crypto anyway, rather than re-creating the same opaque financial crises under new names.
👑 See related coverage 👑
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INVESTING: Poolit raises millions to turn accredited investors into LPs in VC, private equity funds (link here)
Poolit, a digital wealth platform selling private equity and venture capital fund access, has launched after raising $5.3MM earlier this year. Since going live on December 9th, the company already has $140MM in reservations. Poolit allows accredited investors to invest in two funds as an LP — (1) the “Imagine” fund for venture capital and (2) the “Horizon” fund for private equity. The underlying investments in these funds are names like Bain Capital Ventures, Coatue, CD&R, and Apax, which are managers with a great reputation.
Investors have to be accredited, which the SEC defines as someone with a net worth of over $1MM (excluding their primary residence) and annual income of greater than $200K individually over the past two years. Poolit reduces the minimum amount to as little as $1, and charges a 100 bps management fee. There is also a limited quarterly share repurchase program to provide investors with some liquidity.
We find Poolit notable given the rise of alternatives distribution fintech in digital wealth, and the growing narrative that alternatives are a required part of a well-diversified portfolio *even* for retail investors. We are also surprised by the desire of high-end PE/VC investors to get access to retail capital — perhaps as the institutional market slows down, accredited individuals are still willing to fund risk-seeking adventures.
👑 See related coverage 👑
Long Take: Should Plaid launch a payments network on Arbitrum? (link here)
We start by discussing the challenges that the leaders in embedded finance, Stripe and Plaid, have faced this year.
Both companies drove layoffs of 14-20% of their workforce. The decline in fintech company usage has impacted the underlying providers of infrastructure as well. However, one of the main value drivers for Plaid was the probability of launching a payments network given it holds most of the US financial identities. We look at the rise and transaction counts of Ethereum roll-up scalability solutions, and consider whether it would be possible for Plaid to launch its payments network today in Web3.
Podcast Conversation: Scaling a core ledger for neobanks, processors, brokerages, and payment providers, with Twisp CEO Jarred Ward (link here)
In this conversation, we chat with Jarred Ward, CEO and co-founder of Twisp. Ward has been tasked with building nearly every part of the modern financial ecosystem, from a greenfield core banking stack, direct integrations with Visa and the card networks for card issuing, and later, building a banking-as-a-service API on top of BBVA’s global core. The transition to BBVA was as a result of being principal engineer at Simple, the first neobank, which was acquired by BBVA.
Twisp is purpose-built to help neobanks, issuer/processors, brokerage firms, wallet applications, and payment providers to help design and launch their core ledger and accounting systems. We explore the technical and industry challenges to do this well.
Rest of the Best
Here are the rest of the updates hitting radar.
PAYTECH: Mastercard partners DFC to boost digitisation and financial inclusion in Africa
NEOBANK: With Bling, the fintech startup revolution spreads even to pocket money
NEOBANK: In major Russian fintech deal TCS banking group eyes Tochka
INSTITUTIONAL: This startup just landed $8.5M led by Bessemer to help companies automate their financial operations
DIGITAL WEALTH: First Fidelity Bank launches digital wealth management services with Unifimoney - enabling customers to bank and invest
LENDING: MUFG in Talks to Invest $200 Million in Ant-Backed Indonesia Fintech Akulaku, Sources Say
CONSUMER: Blue to debut a fintech super app for Iraq and the Middle East
INCUBATOR: EY opens fintech incubator in London
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