Stablecoins, Innovation, and FinTech Funding

Our Week in FinTech columns for July covered three of the more pressing themes in finance, technology, and money and show just how far innovation in finance is shaking up our traditional infrastructure. Would you have thought that Federal Reserve Chair Jerome Powell would be talking about stablecoins? Or that investment in financial technology would break records in the first half of the year?

And we are not even talking about Robinhood’s IPO this week. It was covered as “soured” by the Wall Street Journal and the “worst debut ever for an IPO its size” by Bloomberg. Yet a lot of retail investors made money using a mobile trading app wrapped in a fantasy about democratizing financing and used to stick it to the man. And the app’s developers and their investors got very rich.

Speaking of people who have gotten very rich, my favorite article of the week is from the New York Times: “Crypto Nomads: Surfing the World for Risk and Profit.” It’s a fascinating profile of the founders of FTX, a crypto derivatives trading platform, Binance, the largest crypto exchange, and a platform designed for professional traders, BitMEX. All three are seeking legitimacy in the U.S. markets, but are based outside the country to avoid the regulatory restrictions.

I have added some updates to our articles to round out the discussions and show how quickly the FinTech market is developing.

Who Will Regulate Stablecoins in the U.S.?

This roundup article covered the players in Washington D.C. who will split regulation of stablecoins and cryptocurrencies in the United States. This week, American Banker noted a definite split in Congress as well. It’s the typical story, pitting Wyoming Republican Cynthia Lummis against Sen. Elizabeth Warren, D-Mass.

Of more interest is the publication’s contextual statement: “The divide comes as an expanding universe of cryptocurrency providers and their partners become a more permanent staple of the financial mainstream, exciting investors and consumers while making policymakers nervous.

Our article also covered the lack of transparency of the leading stablecoin, Tether. It’s the kind of thing that makes policymakers and mainstream financiers nervous. A pair of academic researchers explore the history and potential solutions to the problem, leading their paper “Taming Wildcat Stablecoins” with this:

“Cryptocurrencies are all the rage, but there is nothing new about privately produced money. The goal of private money is to be accepted at par with no questions asked.” That’s pretty much Tether’s argument. In a fascinating history of money in the U.S., the authors show that we have been down this road before, and the policy routes have not led to the desired destination. Their preferred option is to have Congress require the Federal Reserve to issue a central bank digital currency, just as it required the issuance of a single paper currency.

FinTech Innovators Take the Lead Across Financial Services

One argument for the hands-off approach to regulation and policymaking is that policymakers and regulators stifle innovation. The U.S. needs to maintain a global edge, and our financial technology is lagging. Investors and technologists are best suited to the task of creating new approaches and technologies and should be left alone to build and fail or succeed as they will. It gets all too black-and-white for me.

Innovation is about communication and understanding as much as it is about technology. Conversations tend to flow when all parties are open and honest and responsible. The same goes for emerging technologies.

I like hearing that government regulators are willing to listen. I hope that initiatives like the U.S. Securities and Exchange Commission’s newly announced FinTech innovation office really does “promote financial inclusion and protect investors and other financial consumers, as GMA News reports while fostering innovation by “championing the business sector, the capital market, and the investing public,” as SEC chairperson Emilio Aquino says it would.

And I wonder whether consumers really need the kind of warning that the Consumer Finance Protection Bureau issues this month to consumers using buy-now, pay-later (BNPL) services, which we covered in Buy Now Pay Later – A More Level Playing Field for Lending?. It’s about the most consumer-friendly credit product offered today, argues the law firm Ballard Spahr, writing in the JDSupra blog.  “Instead of focusing on these so-called “risks,” the CFPB’s efforts might be better spent exploring and encouraging the ways that BNPL companies and other FinTech lenders can continue to innovate with lower-cost, consumer-friendly products,” the firm concludes.

2021 FinTech Funding So Far Beats 2020

Reports on the robust amounts of funding going into FinTech continue. The industry’s leading investment bank, Financial Technology Partners also puts Q2 2021 at the “largest quarterly financing dollar volume ever, establishing 2021 as the most active year for private FinTech company financings ever.” If you like dense slides of logos and analysis of financings by sector, geography, market type (public and private), this is the report to read.

– Collin Canright