In this issue
- COMP token’s sudden surge
- Jerome Powell distances Fed from Digital Dollar Project
- Ripple elbows in on international banking standard SWIFT
- In China: new cross-border blockchain platform, and 5G soon to blanket Shenzhen
- VC highlights in India
From the Editor’s Desk
Dear Reader,
The pressure is on. Federal Reserve Chair Jerome Powell this week had to address initiatives in the digital currency space, and he said the government must understand it “first and best” if anything is to be developed. It is not the role, he said, of the private sector to do so (as he addressed a direct question from Rep. Tom Emmer of Minnesota about the Digital Dollar Project). This addresses work from the Digital Dollar Foundation and its recent white paper on how a U.S. digital dollar might function. Powell likely did not even read the white paper or know its details if you consider his response, saying that the public might not be receptive to private employees being responsible for the money supply. In fact, the Digital Dollar white paper thinks through directly the role of the Federal Reserve and the function that the government must play. What this exchange does underscore is that the government bandwidth may be stretched too thin (Covid-19 response, BLM protests, U.S.-China tensions) to think through it thoroughly. If the Federal Reserve wants to understand it “first and best,” it will have to employ a lot of these private citizens who are at the forefront of this technology space to help them do it.
If there’s one thing that everyone can likely agree on, it is that the Federal Reserve should be “working hard on this.” And at least Mr. Powell has outlined what’s at stake: “It’s our obligation to understand it well and not wake up one day and realize that the dollar is no longer the world reserve currency because we just missed a technological change.”
From our vantage point in Asia, China is already implementing this innovation within their own system. High-level and confidential real-world tests are being conducted in cities in China by selected citizens who’ll report back. A soft-launch if you will, with an official launch likely coming later this year. Compare that to the comments from Mr. Powell whose answer boils down to the need to “understand” it first. There’s some catching up to do.
Until the next time,
Angie Lau,
Founder and Editor-in-Chief
1. $COMP surges on new “yield farming” trend
By the numbers: COMP token — 5,000% increase in Google search volume.
Compound dethrones MakerDAO as the top decentralized finance (DeFi) protocol in total value locked with its newly launched COMP token exploding to become the biggest DeFi token by market cap. The algorithmic credit protocol on Ethereum that lets users earn interest or borrow assets against crypto collateral now has over $600 million locked in — surpassing MakerDAO’s $449 million (as of June 22).
- Each COMP token represents a basket of underlying assets that serve as collateral; users can in turn borrow 50-75% of the value of the underlying assets — more if the underlying assets are in-demand and widely-held tokens or stablecoins. This in turn has fueled demand for stablecoins like Tether (USDT).
- “Yield farming,” a perpetual arbitrage play fueled by credit, has become a hot topic of debate on social media among notable Ethereum developers, including Vitalik Buterin.
- @VitalikButerin: “Decentralized finance should not be about optimizing yield. Rather, we should be solidifying and improving a few important core building blocks: synthetic tokens for fiat and a few other major assets (aka stablecoins), oracles (for prediction markets etc), DEXes, privacy….”
- Ethereum developer @econoar: “Yield farming will allow open source projects with a working, in demand product to monetize via token incentives. So while I agree this shouldn’t be the end goal, I see it as an important funding experiment.”
Forkast.Insights | What does it mean?
“Old MacDonald had a yield farm….”
Compound’s structure is a fascinating one. On one hand, it’s the equivalent of being able to spend any money you deposit in a bank while earning interest. On the other, it is almost analogous to a credit card provider slowly vesting equity to the borrower proportional to the amount that they spend on their card. All the while that borrower can use said equity as collateral to take out more credit, which is in turn secured by their other savings and assets.
The inherent risk of all of this is that it’s one big “long” on the market; a bet that crypto assets will perpetually rise and become more and more liquid. After all, the last part of a successful “yield farming” play is to use the gains from yield in credit-fueled crypto arbitrage to buy more Compound tokens.
Crypto is known for its wild double-digit market gyrations, and one serious disruption to the bull market could bring the whole thing crashing down. We’re already seeing the first signs of that as the price of COMP is beginning to hit the red, ending its mini-bull run and signalling the possibility that the credit market it fueled is about to seize up.
In the traditional financial world, banks have strict capital reserve ratios put in place for reasons such as this. While deploying credit to the commodity market builds liquidity in the market and creates new opportunities and price discovery, there’s also the strong understanding that what goes up must come down, and building layers upon layers of investment fueled by credit isn’t a sustainable play in the long run.
To be sure, Compound and the crypto credit market are doing a lot to build liquidity in the market by ensuring that demand exists for crypto. However, this credit opportunity and repackaging of loans on an asset that’s known to gyrate is a risky move. Before the whole thing collapses, let’s hope that there’s some governance rules put into the tokens to ensure proper capital buffer ratios.
2. Jerome Powell, public option advocate
By the numbers: Jerome Powell — 5,000% increase in Google search volume.
Virtually speaking before the House Committee on Financial Services, Federal Reserve Chairman Jerome Powell dismisses the notion of private sector involvement in the development of a future digital dollar for the United States. With China’s Digital Currency Electronic Payment (DCEP) already in pilot testing stage and other CBDCs around the world also in various stages of development, Powell assures U.S. lawmakers that the Fed must “understand it first and best.”
- “The private sector is not involved in creating the money supply. That’s something that the central bank does,” Powell said.
- The Digital Dollar Project, which has been researching and advocating a CBDC for the United States, is a partnership between the Digital Dollar Foundation and the tech consulting firm Accenture — both non-governmental bodies.
Forkast.Insights | What does it mean?
Although some might believe that Powell has dashed hopes for a U.S. central bank digital currency (CBDC) for the near future, that’s not entirely the case. Though Powell dismisses a role for the private sector to lead the effort, he also emphasizes that the U.S. needs to make progress on a CBDC or else the U.S. dollar risks becoming a less liquid and competitive currency.
Right now the Fed is in study mode. A CBDC is something that can’t be rushed; it needs to be done right. This is also a view shared by the People’s Bank of China; their DCEP may already be in pilot tests, but they are in no rush to roll out their digital currency nationally.
What this could be a loss for, however, is the Accenture-led Digital Dollar Project. Powell’s comments immediately relegated Accenture’s expected role to that of merely a consultant or advisor and not as a project leader. Which is fine, as that’s a role that Accenture specializes in anyway. The U.S. may still go for a CBDC, Accenture might still be involved, but the Fed has asserted that its employees would be the ones leading the project.
3. Ripple rolls out PayID
By the numbers: PayID — 5,000% increase in Google search volume.
Ripple is all over the headlines with the Open Payments Coalition for announcing its launch of PayID in hopes of ousting SWIFT codes for overseas transfers. As reported by Forkast.News, established companies confirmed to be joining Ripple in this coalition include BitPay, Blockchain.com and Huobi.
- Ripple’s heavy mainstream coverage over the week also saw the payment protocol land on CNBC’s list of 50 most disruptive startups in the year 2020.
- Despite trending news and mainstream achievements, it also received some criticisms from former Commodity Futures Trading Commission chair “Crypto Dad” Christopher Giancarlo, who declared XRP “not a security.” Crypto Dad is currently employed by law firm Willkie Farr & Gallagher. Ripple is a client of the law firm.
Forkast.Insights | What does it mean?
Ripple has enormous potential to disrupt the remittance industry by providing low-cost international wire transfers. With a number of Ripple-powered payment corridors already in existence, and traditional banks, like Indonesia’s RBI, eager to integrate Ripple into its software stack, Ripple seems poised to disrupt incumbents like SWIFT.
Logically, the next step would be to build out an ID system to replace SWIFT’s unwieldy codes and routing numbers. Ripple seems to have this with PayID, a consortium that it is backing. To send cash to someone, all you need is an address that looks very similar to an email address.
The problem, however, is that Ripple doesn’t yet have legacy financial partners on board. Although you would still likely be able to send funds to an account holder at these institutions, the lack of buy-in from banks adds a layer of inefficiency to the process. PayID works quite well for the partner firms it has onboard, but those are only crypto companies. For it to really take off, it needs to position itself in a way where it can beat PayPal: sending money to anyone with a bank account.
4. In China: new blockchain cross-border payment platform, and 5G for Shenzhen
The first cross-border blockchain-based financial system has been launched in China’s Greater Bay Area.
- The Greater Bay Area — which includes mainland China, Hong Kong and Macau — has three vastly different legal and regulatory systems that have for long posed obstacles to cross-border transactions.
- China Guangfa Bank, one of the biggest commercial banks in mainland China, recently launched a cross-border blockchain-based financial platform that allows seamless payment settlements between the three jurisdictions.
- The platform provides a number of different services, including customs declaration information and cross-border credit authorization verification.
Forkast.Insights | What does it mean?
Beijing views enhancing trade corridors between Shenzhen, Hong Kong and Macau to be critical to China’s overall coming growth in the coming decades, but trade within this region isn’t exactly seamless.
In theory, all these regions have something important to add to a unified trading area: Shenzhen is a manufacturing hub, specializing in electronics; Hong Kong is one of the world’s largest ports as well as finance hubs, and its (current) autonomous status from China gives it preferential access to the U.S. market; Macau’s asset is hospitality, and its location makes it the go-to place for large conferences and exhibitions.
Because of the lack of commonality between different jurisdictions, it’s tough to build up trust. Small and medium sized enterprises (SMEs) have it the worst, as they lack the resources to dedicate to the required administrative requirements for building up cross-border credit and ensuring compliance with rarely-overlapping customs regulations. Without the scale of a big corporation that has substantial administrative resources, an SME would have challenges getting a credit line across the three borders to be used in different parts of the supply chain. Suppliers might not trust the integrity of the credit note being presented. A firm in Shenzhen would have a tough time getting credit from a bank in Hong Kong, secured by its recent purchase order, to be used for a deposit for an event in Macau.
Though the region’s fragmentation presents challenges, it is also an excellent reference use case for blockchain technology. A digital ledger could guarantee to stakeholders the authenticity of credit. Tokenized access controls could restrict the ability to see sensitive data so that prying eyes are unable to glimpse where they shouldn’t.
This will be an excellent reference customer for blockchain technology, should it gain momentum.
As new 5G bases are being installed in Shenzhen, Shenzhen will likely become the first city in China to have a high-quality, full-coverage 5G network.
- According to Shenzhen’s local newspaper, 17,000 new 5G bases will be laid in Shenzhen by the end of August this year, bringing the total to 45,000 new 5G bases.
- Shenzhen’s municipal government has been investing heavily in China’s so-called “new infrastructure,” especially 5G and blockchain. Aside from blanketing the city in 5G, Shenzhen’s government has also been cooperating with tech giants such as Huawei to jointly build IT centers and pilot zones to develop the emerging technologies in the city.
Forkast.Insights | What does it mean?
5G will be an incredibly disruptive force for telecoms and the broader technology sector as it means there will no longer be a trade-off between mobility and bandwidth. Only a decade ago, telecom companies spent billions installing the capacity for high-bandwidth connections like VDSL and Fiber to the home. Now that bandwidth is available from your cell phone.
The massive gains in available bandwidth are going to fuel a surge in things in the data available from “the edge.” IoT sensors will be able to send back richer data, from 4K video to granular motion-tracking that allows urban planners to get an in-depth look at how their city functions. Manufacturers of smart vehicles will have much more data about their cars and will be able to understand their life cycle in greater detail, which can lead to improvements in the manufacturing process.
Of course, Shenzhen isn’t the only place in the world with a massive build-out of 5G. It’s happening worldwide. But China’s model of public-private partnerships means that capital costs are less of a barrier than in the West, so the technology is rolled out faster. Building out 5G at this rate will turn Shenzhen into a technology incubator, potentially furthering China’s lead in this field.
5. Funding highlights: fintech in India
GoldenPi — India, seed, US$460,000
GoldenPi, a Bangalore-based fintech startup, announced it had closed a $460,000 round of seed funding last week. The fintech firm provides Indian consumers access to fixed-income instruments, such as corporate bonds, via an in-house aggregation platform. Rainmatter Capital, a VC subsidiary of Indian stock broker Zerodha, supplied the funding. The firm states that it hopes to make bond market investments “easy and affordable” for Indian investors.
Jai Kisan — India, Pre-Series A, US$4 million
Indian agritech firm Jai Kisan, which offers credit for the agricultural sector, announced it had closed a $4 million round of seed funding. Eight investors contributed to the round, including Bangalorean investment firm Arkam Ventures. In a public statement, the company stated that it has received funding from three bulge-bracket banks and five non-financial banking institutions. The startup seeks to expand their financial products to include insurance and saving accounts for India’s growing middle class.
Forkast.Insights | What does it mean?
Upward income mobility is stronger than ever in India, with a Bain & Company report for the World Economic Forum stating that rising wages and specialized economic zones will add “about 140 million middle-income […] households by 2030.” This comes along as rural consumption is set to more than quadruple in the next decade. But expansion of the economy and upward growth is based upon a healthy and mature credit market. This exists in some regards within India, but still excludes too many people.
India’s startup firms, including GoldenPi and Jai Kisan, are seeking to take advantage of this vacuum and step in. Yet, the coronavirus pandemic has made India’s financial future uncertain, even as India battles crypto adoption. And, even as conflict between India and China increases, could industries reliant on Chinese imports continue to grow?