Asia's explosive metaverse, Embedded finance a win-win for banks, Riding the Bitcoin wave to a wipeout, A wholesale digital dollar CBDC to counter China's digital yuan!
FTX why no CFO and how the books were cooked by counting liabilities as assets.
1. Asia's explosive metaverse growth!
2. Embedded Finance as a win-win strategy for banks
3. Riding the Bitcoin wave leads to a wipeout
4. A wholesale digital dollar to counter the digital yuan
5. The FTX downfall why no CFO?
The Outcry, Wolfgang Lettl, 1989. I chose this image due to the FTX collapse and the shocking report on Bitcoin from the BIS. Both are worthy of outcry! Note the crumbling of this figure perhaps indicative of the crumbling faith of hodlers?
1. Asia's explosive metaverse growth!
Asia's metaverse growth will be explosive, far above and beyond all other regions.
Download the superb Deloitte Metaverse Report: here
This report goes the extra mile with a country-by-country analysis that shows WHY the metaverse will be transformational.
Deloitte’s Metaverse report claims the potential impact of the metaverse on GDP in Asia is about $0.8T-1.4T per year by 2035, roughly 1.3 – 2.4% of overall GDP.
While we’ve seen big claims for metaverse growth before in other reports Deloitte does better than the others and focuses on WHY Asia is going to be ground zero.
Asia’s tech dominance
For my regular readers, you’ve recently seen me write about why Asia is leading in the following areas: mobile wallets and payments, CBDC, 5G, Chip manufacturing, ecommerce, digital banking, and of course superapps.
Do you spot the trend? Asia is adopting digital faster and with more conviction than the West and the Metaverse is no different!
Asia is simply unparalleled with Metaverse growth potential:
🔹Over 60% of the world’s youth, aged between 15 and 24, live in Asia and Oceania.
🔹South Korea and China are leading the world in 5G deployment.
🔹The 12 Asian economies in our study exported 81% of the total value of cell phones and 75% of integrated circuits globally in 2021.
🔹India, the Philippines, and Pakistan are top destinations for IT outsourcing.
🔹1.3 billion mobile gamers across Asia, the biggest mobile player base worldwide.
Asia’s digital tech is aspirational
Now that is all well and good but there is one more key area that I will return to once again and that is that Asian economies are NOT afraid of tech. They see it as “aspirational” in that it brings services that would not be available without digital tech.
For proof, Asian economies have an overwhelmingly positive view of the potential impact of Augmented and Virtual Reality on their daily lives (China 78%, India 75%, South Korea 63%, Singapore 58%).
The same survey showed 42% of Americans and roughly 32% of EU citizens have positive views of AR and VR. Meanwhile, in the US only 16% of Americans can correctly define the term metaverse!
Now to supplement this I want you to look at this article on China’s singles day sales that shows how Alibaba Group’s Metaverse sales platform “Alimama” (great name) was put to work. (Article: here) Alimama used virtual idols Ayayi and ambassador “Noah” in the sales process.
Big brands joined in Alimama and while we don’t have sales figures it’s clear this is a trend that isn’t going away.
Takeaways:
Asia is primed for metaverse growth, more so than any other region.
The metaverse is one of many areas where Asia is “in the lead” a trend that readers would do well to follow.
Digital is seen as “aspirational” by many in Asia, people want it because it makes their lives better.
China and US metaverses will splinter as has the internet.
EU and US metaverse uptake will be tepid.
2. Embedded Finance as a win-win strategy for banks
Can Banks see Embedded Finance as a win-win diversification strategy or will it be a “living hell?”
Download the KPMG report here
KPMG does a great job laying out Embedded Finance or “EmFi” as a win for banks and an enhancement to their diversification strategy. Authors note: Do we really need EmFi along with DeFi, TradFi, CenFi? I will use the term here but I confess I’m “Fi’ed” out.
I still claim, as I have here in a past edition, that EmFi will be a “living hell” for many traditional bankers who see these changes as a step down in banking’s social hierarchy.
Let’s start with the obligatory big numbers. “APAC's EmFi industry is expected to reach US$110B in 2022. From here, EmFi revenue in the region is estimated to increase to US$360B by 2029, an annual growth rate of 24.4%.” Big enough?
The report is EXCELLENT and these three sections impressed me:
🔹 Trade finance:
Noteworthy in the EmFi use cases is KPMG’s focus on B2B trade finance and cross-border transactions. KPMG is very smart in thinking of far more complex use cases beyond the mundane B2C use case of BNPL.
The report nicely ties EmFi to “the integration of physical activities and financial supply chain activities into a single platform. Logistics will be linked to the flow of funds on the platform. This exists in China today!
KPMG is on target for Asia’s SMEs who desperately want “cross-border trade made easy!”
🔹 DeFi’s and EmFi “amalgamating two concepts:”
KPMG does a great job of tying DeFi into PSD2 regs in Europe which “open the door to the democratization of financial services by facilitating open banking.” KPMG is prescient in viewing DeFi as inseparable from EmFi!
Too often, we separate DeFi into its own niche. In reality, it will be just another EmFi product. Note that it might be better to talk about “permissioned DeFi” products that are not necessarily crypto.
🔹 Asian Markets:
KPMG nails it by saying that “surging ecommerce sales, high rates of smartphone and internet penetration, a significant un/underbanked, and a tech-savvy population will facilitate EmFi adoption. Regulators in ASEAN nations are also actively supporting EmFi to expand financial inclusion.
That said KPMG makes a stunning error: “While the EU and NA markets are more developed when it comes to embedded payments and lending, the Asian market is catching up quite rapidly.”
Really? As though China’s superapps didn’t invent embedding payment and lending long before EmFi was a buzzword in the West? Nothing personal KPMG but with superapps throughout Asia copying China’s model it would be polite to acknowledge this!
Takeaways:
EmFi is now, not tomorrow. It already swept through China, Asia is next!
EmFi is far more complex than BNPL and KPMG shows vision by focusing on cross-border trade.
KPMG will likely bill many hours convincing traditional bankers of EmFi's necessity! For many, it will still be a “living hell.”
3. Riding the Bitcoin wave leads to a wipeout
Riding the Bitcoin wave led to a wipeout for many and what if the greater fool theory was true?
I couldn’t use the BIS’s normal boring covers when the report is just so dramatic so I worked with DALL-E AI to come up with this one! I hope you like it! Download the BIS report here
Riding the crypto wave isn’t easy and leave it to the BIS however to hammer crypto with a paper with stunning results. The greater fool theory often put forward by anti-crypto pundits may have just been proven true!
Two disclaimers that I believe are important.
Disclaimer 1: The BIS is no friend of crypto so if you like crypto and disbelieve the BIS I’m ok with that. But maybe the BIS is trying to tell us the bad news that crypto influencers on Twitter won’t.
Disclaimer 2: I don’t hate crypto but I do hate the culture of greed, lies, theft, and callous indifference to others and will never back down!
The BIS is harsh so fasten your safety belts:
🔹 Buyers are chasing a rising market not ideology:
New users are attracted by rising prices. The price of Bitcoin remains the most important factor when we control for global uncertainty or volatility, contradicting explanations based on Bitcoin as a safe haven. On average, a 1% increase in the Bitcoin price is associated with an increase in the monthly average number of daily active users by 1.1%.
🔹 Buy high sell low:
We find that 73% of the users downloaded their app when the price of Bitcoin was above $20,000 – above the price of Bitcoin in October 2022. If these users invested in Bitcoin on the same day they downloaded a crypto exchange app, they would have incurred a loss on this initial investment.
🔹 Most retail investors are underwater:
Assuming that each new user bought $100 of Bitcoin in the month of the first app download and in each subsequent month, 81% of users would have lost money. The median investor would have lost $431, corresponding to 48% of their total $900 in funds invested.
🔹 Crypto bros:
The largest group of users by far – nearly 40% – were men under the age of 35. Men between 35 and 54 made up a further 25% on average. Less than 35% of all users globally are female (Graph 4), and the majority of female crypto app users are under 35.
🔹 New users are causing the price increases:
The entry of new users could also lead to price increases, raising concerns about reverse causality. Our findings raise concerns that individual decisions are backward-looking and that many retail investors are not fully informed of the risk or volatility of the crypto sector.
🔹Greater fool theory proven?
🔥Blockchain data analysis shows that during price increases, small Bitcoin holdings tend to increase, while especially the largest Bitcoin holders – the humpback whales – tend to sell. This, again, is consistent with a market sustained by new entrants, allowing early investors and insiders to cash out at their expense.🔥
Takeaways:
The BIS suggests that the greater fool theory in Bitcoin is true. I believe analysis from a less biased source is required, but if true the result is shocking.
Bitcoin pundits need to refute the results not complain about the BIS's obvious bias.
Change is coming for crypto and I expect the new regulations to be severe and require global AML and KYC that will bring crypto in line with fiat currency.
4. A wholesale digital dollar to counter the digital yuan
"The e-CNY sounds like the basis of a promising medium of exchange” stunning revelation from a former Fed Governor who says that the US needs a wholesale CBDC to counter the digital yuan! I agree!
Download the report “Money Matters: The US Dollar, Cryptocurrency, and the National Interest” here
This a great paper that supports a US wholesale CBDC from of all places the ultra-conservative “American Enterprise Institute.” While I never talk politics many of the staunchest critics of retail CBDCs are from conservative policy groups. This author is no exception but his case for a wholesale US CBDC is compelling. Most importantly he warns US policymakers to "avoid complacency" over the digital yuan!
A currency reigns supreme until it doesn’t.
The author Kevin Warsh, a former Fed Governor, wants the US to build a wholesale CBDC and I completely agree!
That said, there are sections of this paper that I disagree with rather strongly, two examples:
🔺 “The world is better off managing its affairs around a single currency [USD].”
Hungry masses in emerging markets who are victims of a soaring dollar right now would beg to differ. I see competition in currencies as beneficial and this is a key question that many emerging markets are asking right now.
🔺 A retail-oriented, customer-facing CBDC is at odds with the American ethos of privacy from government intrusion…it is not the American way.
The author knows full well that a private CBDC is possible but supports the conservative hard line.
Still, there is a lot that is good in the paper that is worthy of reflection.
🔹 The author understands why the e-CNY is important:
China is challenging the predominant of the American dollar by adopting digital currencies, which significantly reduce transaction costs and allow for a smoother exchange in the marketplace... The implications for the great-power rivalry should not be underestimated.
🔹 On the Fed’s strategy as a CBDC “laggard” he chastises Powell:
The status quo, in my view, is neither sufficient nor sustainable. US authorities should not take false comfort from recent dollar strength. The risk of squandering the privilege of the world’s reserve currency is elevated. The Fed and Treasury should cease to play the slow game while China, among others, actively seeks to carve out a new monetary and financial architecture.
🔹 A strong proponent of a wholesale CBDC:
The US should take the lead in pronouncing the essential design features of a wholesale-only, dollar-based CBDC... The existing wholesale payment system is slow, cumbersome, opaque, and expensive. The growth in the digital economy demands a fast, efficient, safe, and sound payments system.
🔹 Stablecoins:
Would demand by the foremost foreign governments and other sophisticated, institutional investors be as strong if the US chose to operate the world’s reserve currency on a private company’s IOUs?
🔹 Innovation:
[With a wholesale CBDC] economic rents imposed by legacy systems would be competed away. So the cost of money transfers and remittances to the end user would be expected to fall significantly.
Takeaways:
This is a political document, please bear this in mind when reading, but some excellent points are made.
I want a wholesale digital dollar not because of support for dollar hegemony, but because it will bring “economic rents” down globally.
A wholesale CBDC will also be a much easier sell than its retail counterpart to a divided America that is fundamentally distrustful of big tech and government.
Finally, someone gets that the e-CNY is disruptive technology!
5. The FTX downfall why no CFO?
The FTX downfall, appears rooted in fraudulent books where liabilities were booked as assets which should make us all wonder, “why was there no CFO?”
This article was written on holiday before the full extent of the FTX melt-down was fully appreciated! It references two solid articles from Ledger Insights, one of my favorite daily reads! The first covers the lack of a CFO, here and the second why FTX’s balance sheets were frauds, here.
So a billionaire with a stratospheric rise, deep ties to Washington, newly named stadiums, a black box trading account, and a penchant for cooking the books fails. Why is everyone so surprised?
I am fond of the Mark Twain quote that “History never repeats itself, but it does often rhyme.” In this case, it rhymes with Enron.
Tonight I’m not going to speculate or get very philosophical about the FTX collapse, I’m on holiday for 24 more hours!
Instead, I will feature two excellent articles by Nicky Morris of Ledger Insights that don’t deal with speculation but do hit at the roots of FTX’s problems. If you don’t read Ledger Insights you should!
🔹 Why FTX’s balance sheet was not just in error but a complete fantasy!
Ledger Insights lays out how booking FTT tokens on your books is not just a thoroughly bad idea but confuses assets with liabilities! Link: Here
From the article:
“The weird thing here is that FTX accounts for FTT as an asset because it’s a tradable token and hence has ‘value’. It’s not alone in the crypto community. But outside of the crypto world, the token would not be on the balance sheet. If it were, it might be considered a liability because FTX owes its customers future discounts on trading fees.”
🔹 Why was there no CFO? See article here
Managing billions in client funds would seem to make hiring a CFO prudent don’t you think?
After an exhaustive search Ledger Insights can’t find one and then goes for the kill shot:
“And didn’t any of the venture capital backers, or even BlackRock funds, wonder about the need for a CFO? You know, when the company looks after $16 billion of client funds. The Information reported that SBF and his companies invested in some of the venture capital firms that backed FTX.”
One thing that does make me wax philosophical is how all of the “smart money” could be so oblivious to basics. But what if they were bought off? Did they really accept the “black box” sight unseen or were they so enamored with the money they happily didn’t look?
🔹Author’s follow up, 6 days later:
It turns out that FTX lacked far more than a CFO! This list is from an excellent article in “Naked Capitalism” here The article does a great review of the FTX bankruptcy filing!
Things that FTX did NOT have:
Balance sheets that showed crypto customer funds as liabilities. The only customer holding on the consolidated balance sheets are fiat currencies!
Digital asset controls: “The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets.”
An accounting department
Audited financials for all businesses. Only one “silo” used a recognized audit firm. The biggest customer-facing silo had its books prepared by a no-name flake (office in the Metaverse, you cannot make this up), two had no audited statements.
Record of bank accounts and signers on those accounts.
Centralized cash management.
Record of employees and their employment terms.
Meaningful disbursement controls.
Board meetings and/or “audited by flaky auditor” financials for many FTX entities.
Records of most decisions.
My conclusion from the beginning of the week that “A lot more about FTX will come to light this week,” was accurate! A lot more did come out and it got even worse! Still, these three high quality articles are very much worth your time.
Take aways:
Does FTX rhyme with Enron?
I think it does, it’s just the latest in a long line of scams where even the “smartest guys in the room” are so overcome with greed they simply lose objectivity.
That SBF was so adroit at hoodwinking the rich and powerful is amusing and shows systemic problems not just those within FTX.
The damage SBF brought upon so many people should be met with jail time as it was for Enron’s Skilling and Lay.
See how deep the “cashless” rabbit hole goes!
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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