Fintech flies to close too the sun, ECB and the WEF come after crypto systemic risks, digital yuan changing China
Fintech flies to close too the sun, ECB and the WEF come after crypto systemic risks, digital yuan changing China
Chips are the new oil and the US wants to cut the flow to China
1. Fintech like Icarus flies too close to the sun
2. The ECB goes after crypto’s “inconvenient truth” systemic risk
3. Digital Yuan changing China’s position in the world?
4. WEF says riskiest path is “wait and see” on crypto regulation
5. Chips are the new oil and the US wants to cut the flow to China
Detail from: Fall of Icarus, Carlo Saraceni1606-07. Museo a Real Bosco di Capodimonte. The story of Icarus is one of the most famous tales from Greek myth. The tale is often interpreted as being fundamentally about the dangers of hubris, with Icarus' flight a metaphor for man's overreaching of his limits (and coming to a sticky end as a result).
1. Fintech like Icarus flies too close to the sun
Like Icarus who flew too close to the sun, fintech is falling from the sky as about half a trillion dollars is wiped out of cumulative market capitalization.
Download the FT Parners Research Report: here
Flying too close to the sun is dangerous, and fintech crashing from unsupportable valuations is a necessary correction for a marketplace that is not just overheated, but addicted to “hopium” in lieu of profits.
Today we’ve got two fantastic reads for those interested in better understanding the state of fintech.
The first is the Financial Time’s analysis of the fintech market decline which was the source of the US$0.5 tn figure above. (here).
This is followed by FT Partners Q2 Quarterly Fintech Insights which provides graphs and charts which summarize the state of decline.
Icarus and the dangers of hubris
The FT’s half-trillion-dollar figure may be a bit exaggerated as their research department measured the industries fall not from its cumulative market peak, but the market peak of each individual stock.
Still, whether you believe the half trillion dollar figure or not the average fall of fintech shares is more than 50% when compared to a Nasdaq drop of 29%. So fintech which flew higher and closer to the sun had further to fall than tech overall. Hubris? I think it fits.
The impact of fintech’s fall makes itself clear in the FT partners PDF whose top line stats in the executive summary on pg 6 are a must-read for all:
“Total dollar volume of global fintech deal activity across private company financings, IPOs, and M&A transactions in Q2 2022 was down 67% from the peak of activity in Q3 2021.”
Ironically the crypto and blockchain sector was the most active in Q2 2022. These activities were predominantly, pre-crypto crash and the party is now officially over.
Jump ahead to pg 46, to see just how amazingly high crypto flew relative to other market sectors before not just crashing, but crashing and burning.
For a global view look to pages 42-44. The dominance in the North American market is clear with 48% of deals by number with the EU in second with 24% and Asia third with 18%. Africa took 4th place but with a mere 4% of total deals. Also, see pg 45 where India gets 3rd!
The obvious reason for fintech’s fall is to blame it all on “higher interest rates, lower valuations, and economic uncertainty” as do FT partners.
The FT, however, is more accurate in noting fintech’s “untested business models."
Takeaway
That so many fintechs rely on burning cash and "hopium" in the midst of a recession should be a major concern.
Klarna’s fall from $46bn to $7bn valuation is likely just the start.
Fintech isn’t dying but it is time to land, refuel and reconsider how high it can fly.
2. The ECB goes after crypto’s “inconvenient truth” systemic risk
The ECB goes for crypto’s “inconvenient truths” and the systemic risks they bring while offering a brief but key explanation of why CBDCs are so critical.
My take on the ECB report is that some of the “truths” contained within are so surreal that only the art of famed surrealist Rene Magritte can save the day! Download all five parts of the ECB report and their “Case for the Digital Euro”: here
Surrealist art seems to best summarize the relationship between crypto and central banks Here Rene Magritte’s “Lovers II” shows a couple locked in an embrace and kissing each other through a veil.
So it is with the ECB who is essentially embracing crypto with a kiss of death through regulation!
The PDF I’ve assembled for you contains all four of the sections in the just released ECB bulletin plus a special section on CBDC that was released this week by ECB heads Lagarde and Panetta.
Frankly, the ECB’s report is a great read as it simply lays out the facts associated with crypto's dark side. The ECB sees an imminent threat to financial stability and anyone disagreeing with this would have to be in a very deep state of denial.
🔹Stablecoins: By now you likely know very well that stablecoins present a real risk to the financial system and ECB does not mince words: Stablecoins fall short of what is required of practical means of payment in the real economy. Frankly, they have great potential, though the ECB doesn’t admit this! That said the ECB calls for URGENT regulation and who can blame them.
🔹Climate Risk: My favorite section! I urge all readers to look at Chart 2 on page 25 which shows emissions due to Bitcoin and Ethereum versus past and future EU greenhouse gas savings. It is shocking!
Any sane person would have to ask why so many are sacrificing to reduce carbon emissions while crypto, which serves so few simply nullifies their efforts. Even worse crypto proponents are unrepentant declaring energy use “a feature not a bug.”
🔹DeFi: “DeFi protocols or platforms claim to have a decentralized governance structure, although in reality governance is often concentrated.” Taking Uniswap as an example the ECB shows how 1% of token holder addresses exercise 97% of the governance and 80% of Uniswap tokens are owned by the managing team! How is that decentralized?
🔹CBDC: The ECB is genuinely concerned that private money will displace the Euro and reduce its international standing if it surrenders to crypto. I don’t think they are wrong in believing this.
The ECB then goes on to address privacy, low cost, and responsiveness to users to ensure it is widely accepted. They even go as far as to say that the digital euro will complement cash, not replace it!
Takeaway
This is one of the most thoughtful and clearly written articles on the risks associated with crypto that I have read.
Kudos to the ECB and I am sure crypto regulation is coming soon.
Will it be a kiss of death?
3. Digital Yuan changing China’s position in the world?
It was fantastic talking with Edward Tse founder of Gao Feng Advisory Company to outline what our digital CBDC future has in store not just for China, but for all of us.
Link to the interview on YouTube: here
Gao Feng graciously provided a full transcript for those who prefer to read: here
Ed is a globally acknowledged China expert and the “Father of Management Consulting in China” as the former head of China operations at both BCG and Booz. Gao Feng Advisory is a pre-eminent strategy and management consulting firm with roots in China.
Frankly, being interviewed by a seasoned China expert like Ed is a joy for me! Thank you, Ed!
Here are a few interview excerpts that should make you want more!
17:00 You're always under surveillance if you use the CBDC, is that right?
Let me make a broad statement to make it easy for people. You should be concerned about this, but you should not be afraid of this. CBDCs are software. You can build good software and you can build bad software. ...is the e-CNY spyware? the answer is really funny. China’s CBDC offers greater privacy and anonymity than all of your credit cards or digital payment forms in the West, including Visa and Mastercard.
30:48 Because of what's going on in Europe with Ukraine, whether CBDC can help evade the sanctions?
When China and India both fully launch their own CBDC, 37% of the world's population will have access to a CBDC. Now, add Russia. …The next two to three years in the future, India, Russia, and China will have CBDCs and it's foolish to believe that they're not going to use them.
34:40 What would be your advice in general? Let's say if you are talking to the CEO of a large American company.
The answer is very clear - this is good for business! …China's digital Yuan is not just a payment system. Most economists are completely missing this. ...What they are missing is that using digital RMB will give you access to a digital customs clearance and digital logistics system.
40:09 Global companies today, by definition, are very concerned about the supply chain security…
What China is doing in supply chain is flying under the radar. ...What they're doing with digital logistics hubs and digital supply chains is mind-blowing. And people are not paying attention.
44:05 What would be your recommendation for Hong Kong business people…
Hong Kong will become the international digital RMB center. The BIS is working with the HKMA to build the first central bank-sponsored CBDC transfer exchange center. It will be a global leader.
Thank you Ed for such a thoughtful interview!
4. WEF says the riskiest path is “wait and see” on crypto regulation
The WEF on crypto and stablecoins is correct, “letting present trends continue in a 'wait and see' approach poses the greatest risk to society.”
Download the WEF white paper: here
I’ve been watching the new documentary called “The Anarchists” and can’t recommend it enough as it highlights some of Bitcoin’s early days. What I enjoyed most was that it presents an intriguing, if not scary, view of crypto’s most ardent maximalists.
All of the maximalists in the documentary would loathe the WEF’s recommendations as an assault on their ability to use BTC to “self-rule.” And to be honest, they’d be right. Crypto’s days of evading taxes and “stick it to the man” days are ending.
Still, I do wonder whether any of the maximalists in the documentary robbed in the infamous “Bitclub” scam ($722mn) might have a change of heart? Even anarchists need to eat.
Crypto’s risk to society
For the rest of us conformists, the WEF unsurprisingly finds that: “allowing cryptocurrency to play a regulated role in the economy will bring the highest macroeconomic net benefit to society.”
The WEF considers macroeconomic societal benefits that include: financial stability, equity, and safety, innovation, and sustainability.
The view that regulations are required is now the norm; I know you're not surprised. It is even prevalent among crypto CEOs including an unlikely convert, Bitcoin evangelist Michael Saylor. Other CEOs see Ripple's protracted legal battle with the SEC and fear for their future without greater clarity.
What the WEF has in mind for regulation will make anarchists shudder:
🔹 Require cryptocurrency exchanges to implement the Travel Rule (collect and share customer data for transactions over a certain threshold)
🔹 Require cryptocurrency exchanges to identify their corporate counterparts
🔹 Conduct transaction monitoring over a certain threshold, on crypto exchanges
🔹 Implement sanctions compliance controls for crypto exchanges in accordance with the US Treasury Office of Foreign Assets Control (OFAC)
For stablecoins the recommendations are in line with what is already expected by most in the industry:
🔹 Regulation that disincentivizes stablecoins taking on riskier investments
🔹 Capital requirements that ensure full capitalization
🔹 Public or private insurance (FDIC)
🔹 Central bank liquidity support
🔹 Limits to banking sector risk exposure
Takeaways
Maximalists will fight these regulations to the death as they represent an end of non-governmental money and will close the gap between crypto and CBDCs.
It's a battle they can't win. While I liked some of the anarchists in the movie, what happens when their desire for "monetary freedom" diminishes financial stability for everyone else? This is the bigger issue at hand.
For perspective, we need to look to the people who lost everything in the Terra or Bitclub scandals or the current crash.
5. Chips are the new oil and the US wants to cut the flow to China
Chips are the new oil, and the US is trying to cut China out of the market with the Chip 4 Alliance, a losing bet against China's manufacturing prowess.
The biggest news of the week, proves how big a losing bet this will be. Bloomberg reported that China, in defiance of US sanctions, leapfrogged two generations of chips to go from producing 14 to 7 nm chips. A development that stunned the marketplace. (here)
When the Trump administration banned and restricted chip sales to China I stated that:
“Betting against China’s ability to manufacture -anything- is a losing bet.”
I stand by that comment and while I acknowledge the US’s lead in high-tech 2nm chips, many products, like cars, only require more mundane versions that China readily produces.
To cut off China’s access to chip-making equipment, and hobble its production beyond what it has already done, the US is promoting the “Chip 4 Alliance.” A partnership envisioned by the US to include South Korea, Japan and Taiwan to starve China of technology.
The US has good reason to worry, thirty years ago 37 per cent of semiconductors in the world were made in the US, while today it’s only 12% with the momentum in Asia’s favor.
The problem for the US is how to get Asian countries to cooperate in a deal that obviously helps the US at their expense?
China is South Korea’s biggest trade partner and of South Korea’s US$69 bn memory chip exports in 2021, exports to China accounted for 48%.
Japan exported $39 bn in chipmaking devices to China in the second half of 2021, exceeding car exports.
Half of Taiwan’s $189 bn in exports to China were chips with a YoY increase of 25%.
Given these nations' dependence on China market its no wonder why some analysts are calling participation in Chip 4 "commercial suicide."
Meanwhile, China is dumping some $150bn into chip production to help wean itself off $430bn in chip imports in 2021.
For its part, the US is fighting back with the “slimmed down” US CHIPS act that will dole out $52bn, about a third of China’s investment, and $24bn in tax credits.
The great irony is that Trump’s tariffs on China chip imports helped create the US chip shortage and its export restrictions are helping China become a global leader! China's chip industry is now growing at 30% and is projected to be the world leader by 2030!
Takeaway
With Chips 4 the US is trying to do with chips what it did with Huawei, cut them out of the market to smother them.
It didn't work with Huawei, still the 5G global leader, and it won't work with chips even in the unlikely event that the US gets cooperation on Chip 4.
The US must bet on its own chip manufacturing prowess, not make a bad bet against China's that others will pay for.
Thank you for reading!
More of my writing, podcasts, and media appearances here on RichTurrin.com
Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer 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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