I’ve been looking at it for hours now. No, not that queue. But, it is a picture and it too illustrates a passing of the old to the new. I’m thinking of digital finance, or as they say in jargon town “embedded finance”. In particular, I’m looking at the progress of various industries in the online commercial world and how they have introduced financial services as a feature of their goods and services. Think of Amazon, and how it introduced delivery as a feature of purchasing on the internet. Now think of payments, subscriptions, buy-now-pay-later (BNPL), funding and foreign exchange as a feature of many online offerings today. Note, I have not mentioned cryptocurrencies but I do believe embedded finance gives us an interesting insight into where crypto assets and Web3 platforms built on blockchains can go. First, let’s look at the picture from consultants, Bain & Co., and apologies in advance for the absence of a Huw Edwards voice-over…
Bain & Co were using this graphic to make a point that embedded finance accounts for $2.6 trillion which is just 5% of total US financial transactions. The mega-adopters are not particularly surprising coming from the high-frequency retail/e-commerce and food delivery sectors but the laggards look very interesting. The health, travel and real estate sectors as reluctant adopters are possibly not a surprise given they are, for individuals, the highest value items for a household. Clearly, higher value transactions bring with them associated risks and processes which add complexity as security, regulatory obligations, privacy and verification present challenges. If only there was a technology to meet these digital challenges…..but, but dare we mention something even more brand-challenged than Centre Parcs this week?
Cryptocurrencies, are being hammered. Not even the hugely hyped “Merge” event on Ethereum has halted the crypto carnage. Bitcoin is almost back to 2020 pricing levels and the wider crypto universe has lost more than $70 billion in just the last 24 hours, dragging the crypto market value under $1 trillion. That’s a long way off peak $3 trillion levels achieved in 2021. However, let’s not lose our heads and weep for bigger empires. There’s a danger we focus on cryptocurrencies and miss the more significant moves on the technologies underpinning those digital assets. Specifically, a blockchain code/database with embedded smart contract programmes is potentially a transformational solution to the big-finance challenges listed above. In simple terms, blockchain technology removes intermediaries, reduces the risk of disruption and can solve many of the security, privacy and verification challenges presented by embedded finance.
If you think crypto and blockchain solutions are dead, think again. Then join the queue to get involved because there is lots going on as the following developments illustrate:
- Starbucks has announced the launch of a loyalty programme using digital collectibles(NFTs) and the blockchain technology of Polygon. If you thought this was just another high-frequency small item brand dipping its toe into Web3 you’d be wrong.
- Famed private equity ‘barbarian’ KKR manages just the $450 billion of financial assets. Its investors are huge and they take their money very seriously. So, check out KKR’s decision to put a portion of its “Healthcare Strategic Growth Fund” on a blockchain developed by Avalanche. This tokenisation of an exclusive fund gives smaller investors the opportunity to follow big institutions into alternative markets and suggests crypto is pushing embedded finance further down the Bain & Co graphic.
- Investment funds are a classic beneficiary of technologies designed to remove intermediaries so expect more news flow in this space. Interestingly, in the depths of a crypto ‘nuclear winter’ it was striking to see crypto-focused investment firm, Valkyrie, ring the bell at the Nasdaq stock exchange HQ in New York last week. The Nasdaq technology index is also providing a helpful crypto insight.
- We need to start thinking of crypto, blockchain and Web3 as technology, and not currency. Sure, currency is a feature but there are so many other financial features possible and that’s the future. So, it is not a surprise to me or macro analytics experts like Quant Insight(Qi) that crypto/blockchain assets trade like technology stocks because so much of their value is in the future, and therefore hugely impacted by interest rates and confidence. Technology stocks are hurting too – 45% of the member companies of the big tech index, Nasdaq 100, are at new 8 week pricing lows. By any measure, and in comparison to other periods of market volatility, this is a severe tech drawdown. In fact, the Financial Times is reporting that this week marks the longest tech IPO drought in history; 238 days without a tech IPO over $50 million is a longer freeze than the 2008 credit crisis or even the dot-com TMT bust in the early 2000s.
- However, weakness presents opportunity. The crypto trading platform/investment bank, FTX, is the gorilla in the crypto playground and has been ramping up its acquisition and investment activity in the likes of BlockFi and Doodles. Apparently, FTX’s founder Sam Bankman-Fried is looking to raise more dry powder/funds which is hardly a surprise. However, his valuation of FTX might be more surprising – a $32 billion expected valuation would be similar to that struck at its last fund raising ie not the 60-90% valuation collapse seen by many of its competitors. Might be worth keeping an eye on that as a sentiment changer for the entire sector but there’s possibly more…
- Abra Bank is seeking full depositary institution status in the US for the custody and trading of digital/crypto assets. They are not alone – Wall Street giants like Citadel, Charles Schwab are building a crypto exchange platform. One can’t help sensing a TMT funeral-watch vibe which 20 years ago fooled many into thinking Web2 was dead. Go and Google Amazon’s history and watch the doc on Netflix….they were all there back then, and busy building.
Things are busy closer to home too. Look at that Bain & Co graphic again and then wonder why eShopWorld founder, Tommy Kelly, has bought local real estate player, Sherry Fitzgerald, for €50 million? The investment will be managed by Kelly’s family office investment team which in turn, will be managed, by a well-known senior financial figure – what embedded finance strategy might ex-Goodbody Stockbrokers CEO, Roy Barrett, have in mind for Sherry Fitz? E-commerce, finance… real estate. Hmmm. Place your bets but join the queue if you’re looking at ASX Sports’ current crowdfunding campaign…
Again, check the graphic above and note that the sports, betting and gaming (SBG) sector has been identified as a natural adopter of blockchain technologies like currencies and tokens/NFTs. ASX Sports has teamed up with Aventus to integrate blockchain into its platform to track transaction activity and offer NFT collectibles. The race to innovate and engage customers is understandable given the US sports betting market alone is set to grow to $10 billion a year. Of course, it is early days yet for crypto and blockchain solutions but watch the early movers and imagine if Web3 could this time enable the digital laggards in Health, Travel and Real Estate to play financial catch up. Game still on me thinks…..