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, since 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 that 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?
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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 that 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 that 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.
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