SEC is infected with Grayscale
Big weeks for BNPL firms Klarna and Affirm BNPL, Mastercard increase merchant fees while distancing themselves from Binance, and Astra and Plaid look to resolve fraud in real time payments.
Welcome back, to Fintech Weekly.
Happy September! Apologies for this week’s headline, I couldn’t resist, but more on that in the main story of this week’s newsletter. This week, BNPL firms Klarna and Affirm are both celebrating positive earnings and have their eyes set on continued growth in the years ahead. Mastercard is distancing itself from Binance, while together with Visa, they are expected to increase merchant fees. Also, an extended partnership between Astra and Plaid may present a solution to fraud concerns for real-time payments.
What is the impact of Grayscale's victory in the spot bitcoin ETF case?
The crypto story of the week was undoubtedly the news that a federal appeals court ruled on Tuesday that the Securities and Exchange Commission were wrong to reject an application from crypto asset manager Grayscale (not to be confused with the fictional yet deadly disease featured in Game of Thrones) to list an exchange-traded fund that tracks the price of bitcoin. The announcement resulted in a rally in the crypto markets with Coinbase Global shares increasing 15% and Bitcoin futures jumping by 7%.
So what is actually happening here? The SEC has already approved bitcoin futures ETFs, which track agreements to buy or sell bitcoin at a pre-agreed price. Asset Managers have been trying for years to persuade them to approve a spot bitcoin ETF. As far as Grayscale and others are concerned, this would allow investors to gain exposure to Bitcoin without actually having to go through the complexities of owning and holding (or Hodling) the cryptocurrency. On the other hand, the SEC claims that spot bitcoin ETFs will be vulnerable to manipulation. However, the court ruling this week was that Grayscale showed that its proposed bitcoin ETF is "materially similar" to the approved bitcoin futures ETFs and that the SEC was "arbitrary and capricious" to reject the filing because it "never explained why Grayscale owning bitcoins rather than bitcoin futures affects the CME’s ability to detect fraud."
From here, the SEC has 45 days to appeal the ruling, which could send the case to the US Supreme Court, but it is unclear what their plans are to date. The broader ramifications of this ruling are more interesting. First, from a cryptocurrency perspective, ironically, a Bitcoin spot ETF would likely lead to widespread investment in Bitcoin, but not in the antiestablishment manner that Satoshi envisioned over a decade ago. In fact, the purpose of an ETF would be to allow everyday investors to profit from Bitcoin through traditional financial markets, without ever needing to own or manage public and private cryptographic keys. The second implication of this ruling is that it adds to the growing sentiment that there is doubt in the overall analysis conducted by the SEC, led by Gary Gensler. This ruling follows the SEC losing a lawsuit brought by Ripple, and the pressure is set to intensify on the SEC in upcoming cases against both Binance and Coinbase.
Sources:
Read more on this story from Reuters, Wall Street Journal and Axios
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In Other News:
How can you verify identity to support real-time payments?
The payments industry is pushing for faster payments and reduced instances of fraud, however, those two requests are rarely complimentary, and the less time between payment initiation and settlement naturally reduces the time for fraud teams to assess the risk of that payment. With a view to addressing this problem, Astra, a leading infrastructure provider for faster payments is extending their partnership with data network Plaid. Currently, Astra taps into Plaid’s payment authorisation APIs (Auth, Balance, Identity) to facilitate bank-based payments. The extended partnership aims to combine the technology of the Plaid Identity Verification tool with Astra’s safe and efficient APIs for real-time payments, to create a complete solution for identity verification, payment authorisation, and payment processing, as well as to give developers an easy way to improve the user experience and their overall privacy.
Sources:
Read more on the story in The Paypers and BusinessWire
Where did Affirms 25% YoY increase come from?
Buy Now Pay Later provider, Affirm saw its share price soar after a positive earnings report showed gross merchandise volume (GMV) of $5.5 billion, marking a 25% YoY increase. The Wall Street Journal attributed the increased volume to travel spending, payments coming through partner platforms such as Stripe, and the new Affirm Card that lets people split up debit card purchases into several payments. Global BNPL payments are projected to grow by 21.7% this year, to $527,942.3 million. The industry is expected to continue this growth as retailers including Walmart begin to work on solutions, and BNPL providers look to develop strategic partnerships in sectors including travel to diversify their income.
Sources:
Read more on Wall Street Journal and Yahoo Finance
When was the last time Klarna were profitable?
In further BNPL news, Klarna, the Swedish provider that once held the title of Europe’s most valuable private first, has announced its first month of profitability in three years. Sebastian Siemiatkowski, CEO, announced that the company had made a small net profit in May, and while they still made an operating loss of 865m Swedish kronor (£62m) for the second quarter, between April and June, the company is expecting profitability to continue. The Fintech was consistently profitable from its founding in 2005 until 2018, then it was heavily impacted by factors including soaring inflation and the war in Ukraine hit consumer confidence. This came at a time when Klarna were looking to fuel its US expansion and the drop in valuation forced them to make redundancies. However, Siemiatkowski told the Financial Times that he is now eyeing up an IPO. Klarna is clearly confident in its future despite growing calls for regulation of the BNPL sector in the UK, Australia, and the US in particular.
Sources:
Read more on Financial Times and The Guardian
Why is Mastercard distancing from Binance?
The mounting legal battles that Binance are facing in the US appear to be the motivation behind Mastercard distancing itself from the globe’s largest crypto exchange by trading volume. Binance is currently accused of operating as an unregistered business and misleading investors by the SEC, in addition to accusations of the “wilful evasion” of US law by the CFTC. The DOJ is also looking to weigh in with an accusation of fraud against the company. This week these cases resulted in Mastercard announcing they will end their crypto card programs in Argentina, Brazil, Colombia and Bahrain as of September 22. Meanwhile, Mastercard’s partnership with crypto exchange Gemini will not be impacted. The news is thought to be linked to Mastercard increasing their efforts in the blockchain industry, including the CBDC Partner Program which we discussed in last week’s newsletter. Mastercard does not wish for its efforts in the space to be hampered by any relationships with potentially bad actors.
Sources:
Read more on the story on Coindesk and Reuters
Who will pay the brunt of increased fees from Mastercard and Visa?
Visa and Mastercard are set to increase fees that are charged to merchants when accepting payments via credit cards. These hikes are expected to result in merchants paying an additional $502 million annually in fees. For context, card networks like Visa and Mastercard determine the fees that merchants are charged, Visa and Mastercard pocket the network fees, while the banks that issued the card to a consumer pay earn the interchange fee. Needless to say, these fees are regularly passed on by the merchant to their customers in the form of higher prices, meaning that customers and small businesses feel the impact of these changes most of all.
Sources:
Read more on the story in Wall Street Journal
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