Celsius insolvent from stETH illiquidity and leverage; Apple using own cash for BNPL; Engagement banktech Backbase valued @$2.6B
Lex Sokolin
Managing Partner @Generative Ventures | ex Consensys Chief Economist & CMO | Fintech, AI, Web3
Hi Fintech Architects —?
You are the best. The markets are awful, hold on to your hats. Today’s agenda below.
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Short Takes
BNPL: Apple to fund pay-later loans off its own balance sheet and?Apple Announces Plans to Launch a Buy Now, Pay Later Service Within Apple Pay?(link?here)
BNPL, called “Apple Pay Later”, will launch as part of the iOS 16 update in September 2022. It will let users make purchases and pay for them in four installments over a six week period, with the initial payment on purchase and the remaining three payments every two weeks thereafter. This works for online and in-app purchases, but not point-of-sale transactions.
Several unicorns emerged around the BNPL feature in recent years, and in 2021 BNPL users grew 100%+ year over year, but momentum is starting to slow. The fast rate of growth correlated with the pandemic, which?led to a 43% increase in e-commerce in 2020.?Despite popularity, BNPL sparked regulatory concerns around the financial burden on some users and that insufficient checks are made to ensure that loans are made to individuals who can afford it. We still think this a good user experience for Apple customers; adding financing adjacent to Apple Pay infrastructure makes it easy users to use BNPL within the commerice flow, without requiring third-party underwrirting. We expect Apple to be growing out the market as a result, while pure play firms spin fast to stay in place (i.e., see?Klarna’s layoff of 10% of their workforce).
The last bit of news is about Apple using its own balance sheet to underwrite the BNPL loans — that’s easy enough to do with $50B+ of cash. That means that Goldman Sachs, Wells, Green Dot, or any other embedded fintech provider isn’t embedded. Given the tight economics within Apply Pay costs for financial partners, it’s probably not a big monetary loss, just a market share, psychological one. We also?like this take from Simon Taylor, pointing to Pay Later as a way to penetrate deeper into merchant adoption and compete with Square and PayPal, as well as strengthening its stranglehold over user identity.
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DeFi:?Celsius (CEL) Insolvency Could Create Wave of Liquidations?(link?here)
ETH price is down sharp for two reasons: (1) negative macro surprise of a 75 bps hike on a continued inflation, and (2) the very vivid deleveraging now hitting Celsius, potentially Microstrategy, and lots of DeFi. Here’s a light overview.
Celsius collected deposit from customers in the form of crypto, and promised to distribute interest to them against those deposits. Note that this description mimics a bank account with an interest rate, but was actually run much more like a levered fixed income fund, where client assets were not guaranteed and could suffer principal loss. At one point, the company was worth $3B and had reportedly $30B or so in AUM. But now there is run on the bank situation, and Celsius has closed all withdrawals, because they cannot pay back depositors. Why?
A track record of mistakes: (1) a series of?hacks?losing $50MM+, (2) declining crypto market sentiment with users looking for cash, and (3) $500MM+ of client?deposits?being held by Celsius in LUNA/UST, which crashed to zero. 50K ETH was being redeemed weekly, such that it was?estimated?they have 5 weeks until running out of liquid ETH. Of course you can’t run out of ETH if you?pause withdrawals. Lol.
Part of the issue is that most of their ETH is either staked in the beacon chain, or was traded for stETH, a LIDO derivative exchangeable for ETH on the beacon chain — but that redemption is unlikely to be liquid for a while. Further, their current 450k stETH position is so large in the market that it is practically illiquid as well. As?covered last week, the imbalance of Curve’s stETH-ETH liquidity pool — the Curve pool only has?120k ETH?remaining — means a large sell off of stETH for ETH would imply even less value to give to depositors. Celsius needs to sell other assets to cover the shortfall, with $400MM Wrapped BTC and $7MM $LINK being their other large holdings. The company also now has yet another huge target on its head from a regulatory perspective.
That said, all of this can just be summarized by the word “deleveraging” and “risk management”. Levered prices fall as fast as they rose.
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BANK TECH: Backbase raises its first funding, $128M at a $2.6B valuation, for tools that help banks with engagement (link?here)
Amsterdam-based Backbase was founded 10 years ago, and just raised its first funding round — a €120MM ($128MM) investment at a €2.5B ($2.6B) valuation. Motive Partners was the sole investor in this round, and they usually take a private equity view rather than a YOLO fintech VC view. The firm provides a middleware platform across retail banking, business banking, and wealth management that connects both to the core and B2C apps.
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Backbase has 150 large banking clients, revenue of €200MM, and has become profitable,?all while bootstrapping. The company wants to ...
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Quarter in Review: Top 3 key Fintech developments in Q2 2022?(link?here)
We look into three overarching thematics over the last several months: (1) Digital banks, lenders, wealth, and brokerages stop defying gravity, (2) Big Tech continues awkward flirtation with Finance, with strength in payments and infrastructure and (3) crypto splinters into Web3 DAOs culture and scalability architecture, destroying most app valuations.
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Podcast conversation: Were we wrong about neobanks and B2C fintech? With 2x digital bank founder Will Beeson (link?here)
In this conversation, we chat with?Will Beeson, co-founder & Chief Product Officer at digital bank BELLA, and co-founder of Allica Bank.
More specifically, we touch on frameworks for navigating down markets, valuations, multiples, why some fintechs have to disclose themselves as tech companies than banks, covid-19 implications, buy now pay later developments, and so so much more!
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Rest of the Best
Here are the rest of the updates hitting radar.
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Research Advisor in AI/Robotics & Sustainability (Hydrogen and CCUS) - AI Legal Enthusiast
2 年Celsius was highly leveraged, and the challenge is the lack of proper risk management to take into account such steep losses. Cryptocurrencies move up and down significantly and have to be treated this way.
Helping you make sense of going Cashless | Best-selling author of "Cashless" and "Innovation Lab Excellence" | Consultant | Speaker | Top media source on China's CBDC, the digital yuan | China AI and tech
2 年Love it Lex great read as always. On Celsius I agree that "this can just be summarized by the word “deleveraging” and “risk management”. True, but that doesn't seem to sum up the "irrational exuberance" investors felt for lenders like Celsius paying out up to 18% as though they had developed a new system for making money. The problem remains that poorly managed CeFi/DeFi (nominally DeFi) companies like Celsius and Terra are the norm, not the exception. It would seem that all of the lessons on leverage and risk learned in 2008 are bound to repeated again in the crypto space and are directly aimed at the little guy. Each failure it just goading regulators to come in and hammer the space.
C-Suite | Driving Fintech & Web3 Innovation | Board Member
2 年One of the most clearly written descriptions of what has happened that I have read so far, thanks Lex Sokolin
American Banker Top 20 Most Influential Women in Fintech | Book Author - Beyond Good (2021), Metaverse Economy (2023) | Founder - Unconventional Ventures | Podcast - One Vision | Advisor | Public Speaker | Top Voice |
2 年Great Summary, Lex. And OY.
General Manager: Experience | Crypto Products | Retail & Institutional
2 年Great summary Lex Sokolin