Crypto Crackdown: Regulators turning up the heat; Worldpay FIS divorce: deja vu all over again
The regulatory wagons are circling in on the crypto sector in the US, an almost inevitability after the embarrassing high-profile collapses’ of once high-flying companies like FTX, Celsius, BlockFi, Three Arrows Capital (3AC), et al. After years of relative inaction, it appears regulators feel emboldened to act now. This approach of “regulation by enforcement” does not help those who’ve already been harmed. It feels similar to the U.S. Healthcare system; focused on the cure and not prevention. While it may not be bringing clarity to the sector, it is making an impact, and regulators seem intent on applying choke points to the very lifeblood of a few very high-profile and lucrative crypto products: staking, stablecoins and custody. Just a few weeks ago, TFL covered US crypto regulation in depth as it was clear something was about to give.
“It certainly feels, from an industry perspective, like there’s a crypto carpet bombing going on right now.”
Kristin Smith, CEO of Blockchain Association, speaking to the WSJ
Paxos’ bad week
On Monday, the New York Department of Financial Services (NYDFS) told Paxos to stop creating any new BUSD stablecoins and end its partnership with Binance. Paxos is the issuer and owner of Binance USD (Binance licenses BUSD). A spokesman told Reuters that Paxos was not administering BUSD in a “safe and sound” manner, and had thus “violated its obligation to conduct tailored, periodic risk assessments and due diligence refreshes of Binance and Paxos-issued BUSD customers to prevent bad actors from using the platform.”
Paxos for their part appeared to be cooperating.
Unfortunately, that’s not all.
On Sunday, the Wall Street Journal (WSJ) reported Paxos received a Wells Notice from the SEC and has plans to sue over the issuance of BUSD, which they view as an unregistered security. While Paxos doesn’t necessarily agree with that opinion, they appear to be capitulating to the SEC’s request to stop minting BUSD and ending its relationship with Binance.
Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD.… We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.
Paxos’ official statement regarding the SEC Wells Notice
As if that weren’t bad enough, there are also rumors the OCC, a federal bank regulator, may request Paxos withdraw its application for a full banking charter after having been granted a provisional charter in 2021. Paxos has denied these rumors.
It appears stablecoins are not the only focus of the SEC.
SEC Head Gary Gensler this week proposed amending federal custody requirements, expanding the rules to include assets like crypto. If implemented, crypto exchanges would need to seek further regulatory approval. Under the new proposal, institutions will have to have charters or qualify as broker-dealers to custody of client assets, in addition to meeting enhanced record-keeping and examination requirements.
The SEC has certainly been busy, just not clarifying for the industry what they consider a security.
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Binance: A Hubristic ‘Capitulation’
Binance, the world's largest cryptocurrency exchange appears to be doing a full pivot from its original public denial they were under investigation. Having no global headquarters makes it difficult for regulators but the firm is definitely on many global regulators’ shortlists. This week, their Chief Strategy Officer, Patrick Hillmann, told the Wall Street Journal (WSJ) they were ‘unfamiliar with laws and rules surrounding bribery, corruption, and money laundering’ - but that they have been working to fill in compliance gaps and expect to be fined by regulators.
The statement is laughable but he seemed to suggest they are willing to take their medicine, in an “if only you’ll now please go away” sort of way.
The company is “working with regulators to figure out what are the remediations we have to go through now to make amends,” adding, “the outcome will be likely a fine, could be more.…We just don’t know. That is for regulators to decide.”
Binance Chief Strategy Officer, Patrick Hillmann
In other action, the SEC charged Terraform Labs and CEO Do Hyeong Kwon for “offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions,” related to the collapsed algorithmic stablecoin Terra USD. The Singapore-based firm that raised billions from investors, is now square in the SEC’s crosshairs.
“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
SEC Chair Gary Gensler
This all comes on the heels of last week’s announcement that the SEC and crypto exchange Kraken came to a $30M settlement for offering unregistered securities. In a Kraken blog post, it said it will immediately end its crypto staking-as-a-service platform for U.S. customers.
It’s getting a little hot in here, no?
Worldpay to get spun off (again)
Worldpay is looking a lot like the Elizabeth Tailor of fintech these days. The 25-year-old processor and acquirer has bounced around over the years - changing hands a number of times.
How does it feel, how does it feel?
To be without a home
Like a complete unknown, like a rolling stone….
From Like a Rolling Stone by Bob Dylan
Started in 1997 by entrepreneur Nick Ogden who was looking to solve a problem he faced in his online wine store: how could he sell to people all over the world in their native currency, not in his (pound sterling). For him, this was a revelation. If the then-nascent world of online commerce was to take off, people would need to be able to buy goods in their local currency. He set up shop and started working with Natwest to enable this multi-currency payments solution. An IPO in 2000 was scrapped, and he ultimately sold the company to NatWest for £26 million. Shortly thereafter, NatWest was acquired by the Royal Bank of Scotland (RBS).
The card payments world exists on the four-party model. A critical cornerstone of this model is the merchant acquirer, which Worldpay fulfilled. In this model, Worldpay sells payment processing and supporting services - routing transactions to the applicable network for authorization, clearing, and ultimately settlement to the merchant’s bank account.
RBS grew during this period, at one point becoming the largest band in the world. It wasn’t to last. RBS collapsed during the financial crisis, and the UK government required they sell the Worldpay unit as a bailout condition. In 2010, private equity firms Advent International and Bain Capital acquired an 80% majority stake, valuing the company at £2.025 billion.
During this time, Advent and Bain invested more than £1 billion into the company. They used the money to beef up hiring (disclosure: I worked at Worldpay during this period), create new technology, remove legacy technology and shared RBS architecture, expand internationally, and make acquisitions. Nine of them in fact. One of those acquisitions, Envoy Systems, gave them the ability to provide access to over 300 localized payment methods in 146 countries. It was a time of hypergrowth, taking advantage of the tailwinds in global e-commerce.
IPO
In October 2015, they sold 58% of the company at a valuation of £4.8 billion, in the largest float on the London Stock Exchange of that year. But they had bigger plans. Just three months after the IPO, Worlpay management started merger discussions with Vantiv, the number three U.S. player. Eighteen months later, in July 2017, the deal was finalized. Worldpay shareholders ended up getting 41% of the combined company; Vantiv shareholders the remainder.
A happy marriage it was not. Both companies were built on multiple acquisitions. Worldpay acquired nine companies alone during the Advent and Bain years. Vantiv, too, had acquired a few companies, including e-commerce payment processor Litle & Co ($360 million) and POS software company Mercury ($1.7 billion). The combined company was frankly a bit of a …Frankenstein.
In 2019, as they are wont to do, Worldpay started talking to FIS about a sale of some assets. Those conversations quickly escalated into an agreement for a complete merger of the two organizations. FIS would acquire Worldpay for $43 billion.
There’s no sugarcoating it; the merger was a disaster. FIS, as part of the spin-off, took a $17.6 billion write-down on its merchant business.
If recent comments by the FIS CEO about the planned divestiture are any indication, Worldpay is looking to get back to its old ways. On the break up:
“…it will enable FIS to pursue a strong investment-grade credit rating while enabling Worldpay to invest more aggressively in growth.”
FIS CEO Stephanie Farris
“Invest in growth”. When that is not organic, you grow by acquiring. Once you are firmly aboard the M&A train, it’s tough to get off.
Deep dive: Banking-as-a-Service (BaaS)
Banking as a Service (BaaS) and the synonymous “embedded fintech,” has exploded in recent years. Effectively a middleware layer that also handles much of the compliance, risk, and other functions necessary to launch financial services products, BaaS players partner with banks on one side (for program sponsorship via their regulatory licenses) and consumer or business-facing technology platforms on the other side - to offer capabilities like holding deposits, card issuing, lending, and payments. While not necessarily novel, a new crop of companies has emerged in recent years that allows for quick integration via APIs and the ability to launch new products in a relatively short amount of time. This has powered the neobank phenomenon.
Banks, especially smaller regional players, are struggling to keep up with the technological advances that today’s consumers are demanding. Many look to this Partner Bank model as the next stage of growth. A new piece of research (premium content) by the always insightful Jason Mikula of Fintech Business Weekly (a TFL-recommended publication), points out that this is not necessarily a silver bullet.
The analysis shows that while many banks do generate outsize returns as measured by ROE and ROA - new entrants sometimes stumble - and can incur steep losses.
You’ve probably heard the now famous line - in fintech circles anyway - “Every Company Will Be a Fintech Company.” A16z fintech partner Angela Strange effectively argues that just as Amazon Web Services dramatically lowered the cost and complexity of launching a software business, we are entering an era of “AWS for fintech.” She is talking about “embedded fintech.”
If you are interested in learning more about the sector, its origins, the players, use cases, and more, this report is not to be missed.
You can access it here! (premium content)
Tweet Thread of the week 🧵
This was a good thread considering all of the crypto-related news this week.
Surely You Cant Be Serious
In a new series called “Surely You Can’t Be Serious,” the WSJ pulled out a doozy.
Fintech & Crypto Update 📊
Stripe expects to reach $1 trillion in payments volume in 2023. Story here.
FTC orders MoneyGram to return $115 million to scam victims. Story here.
Fintech Pinwheel is pushing for payroll data to be included in the CFPBs upcoming rules around consumers’ rights to access and share their financial information. Story here.
Former Wirecard CEO denies fraud charges at trial. Story here.
San Francisco - as in the city - is inching closer to creating a public municipal bank. How could they screw this up?
The SEC has finalized rule changes to cut the settlement cycle to one business day. Story here.
Two Stanford University academics, co-signed Sam Bankman-Fried’s bond with his parents, according to new court filings. Larry Kramer and Andreas Paepcke were previously redacted from court documents. Story here.
US prosecutors confirmed that Sam Bankman-Fried (SBF), founder of collapsed crypto exchange platform FTX, has been accessing the internet with a VPN, which he claims was to watch the Superbowl from his Bahamas subscription. Story here.
Podcasts I’m digging 🎧
In an increasingly global world, opportunities abound for ambitious startups looking to build internal software systems for companies that look to expand operations quickly. This was a great conversation.
Deeper Reads: Down the Rabbit Hole 🐰🕳
The Fintech Formula: A Data-Driven Blueprint for Creating Enduring Value
Healthtech x Fintech’s Biggest Prize: The Financial Operating System for Healthcare
Demystifying the Banking Regulators’ Recent Crypto Actions: Key Takeaways for Fintech Companies
Jobs & Co-Founder Matching 💼🤼🛠🔊
Fintech is incredibly competitive. It is also a remarkable community. Let’s help our peers who are looking for the next thing and help connect incredible talent with amazing companies where they can build great things!
Looking for a co-founder? Cambrian's bi-annual fintech co-founder matching tool is now live! (including 75+ technical co-founders).
Looking for a job? For those not ready for the entrepreneur’s journey, here is a link to thousands of VC portfolio company jobs. H/T to Michaela Keady
That’s a Wrap 🎬
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Until next week, hasta lluego amigos.