NY Fintech Week: Crypto Regulation, Fraud, and Venture Capital
Speakers at the Empire Fintech Conference discussed regulation and cryptocurrency, protecting against fraud, and where VCs invest in fintech.
Kelly Fryer, FinTech Sandbox; Jordan Nof, Tusk Venture Partners; Jennifer Lee, Edison Partners; Christa Williams-Collett, Citi Impact Fund; and Peggy Mangot, PayPal Ventures at the Empire Fintech ConferenceJoao-Pierre S. Ruth
Empire Fintech Conference, hosted by Empire Startups as part of New York Fintech Week, included a few hot takes on the regulation of cryptocurrency, the relevance of Web 3.0, and where venture capital wants to invest in this space.
The mix of one-on-one discussions and panels showed that as fintech has seen some fast-moving growth and deals, there is still plenty of reason to remain pragmatic about what may come next.
During a discussion of venture capital trends in fintech, moderator Kelly Fryer asked the panel if they were leaning more towards fintechs with B2B or SMB-focused models as potential gets for their portfolios. Fryer is executive director with FinTech Sandbox, a nonprofit advocate for and supporter of fintech startups. The panel included Jennifer Lee, partner with Edison Partners; Jordan Nof, co-founder and managing partner with Tusk Venture Partners; Christa Williams-Collett, senior vice president and investing principal with Citi Impact Fund; and Peggy Mangot, operating partner with PayPal Ventures. See the rest of the slideshow for their responses.
In a fireside chat with Donna Parisi, partner and global head of finance for law firm Shearman & Sterling, Flori Marquez, co-founder and senior vice president of operations with BlockFi, discussed the hypergrowth her company has seen as well as major policy matters the company had to contend with.
BlockFi is a blockchain crypto investment wealth management platform founded in 2017. Marquez said BlockFi’s first product was loans backed by crypto. “Since then, really what led to exponential growth was when we started offering interest on crypto assets,” she said. With that growth has come a pronounced need in crypto, Marquez said, for infrastructure and services that exist outside of crypto. “We’re still at the beginning of the growth stages for this entire ecosystem.”
BlockFi has grown from some 10,000 clients in 2019 to more than 600,000 in 2022, she said. “There’s this huge demand from people who’ve already invested in crypto and also from the mainstream.”
Regulators also have their eyes on this space. BlockFi agreed in February to pay $100 million in fines to settle charges brought by the Securities and Exchange Commission for “failing to register the offers and sales of its retail crypto lending product” as well as other violations. In discussing the issue with Parisi, Marquez framed the situation as something of a lesson learned.
“Crypto, in order to truly continue to mature and grow, needs regulatory clarity,” Marquez said. She explained that many organizations such as BlockFi did not know how these types of products should be regulated. The settlement with the SEC was in regard to the BlockFi interest account, she said, which allows interest to be earned on crypto. “From the moment that we launched that product, we knew there was regulatory uncertainty,” Marquez said.
BlockFi has worked with the SEC, she said, to create a construct for US citizens to earn interest on crypto in a regulated way. “We’ve figured out a way to register the product -- it will be called BlockFi Yield,” Marquez said. “What this marks is a new turning point in the maturity of the crypto space.”
More of Marquez’s comments and a selection of other speakers from the conference follow in the slideshow.
Challenges to the hypergrowth model, Marquez said, include making the right decisions in terms of where to invest given a macroeconomic environment. For example, Marquez said, in early 2021 BlockFi saw 50% month over month growth for two months in a row followed by 30% month over month growth. “From a client base perspective that is almost crippling.” The company almost did not have enough people to staff the team to respond to the influx of clients, she said, yet there was a need for restraint to not over-hire or overspend. “You have to decide, ‘How do I solve for this immediate problem?’ while at the same time understanding that this growth isn’t going to last forever.”
When asked if there were plans to bring BlockFi to Web 3.0 and the Metaverse. “Web 3.0 is just crypto rebranded and feel free to prove me wrong on this,” she said. “BlockFi already is Web 3.0 because we’re already building in crypto.”
A talk about “Fraud, Identity, and Fintech” brought together panelists Julia Nalven, head of risk with Lean Financial; Justin Howell, co-founder and CEO of Rize; Jane Barratt, chief advocacy officer for MX; and moderator Gary Barnabo, director for cybersecurity and privacy with CrossCountry Consulting.
Barnabo asked where customer savviness and expectations in relation to fintech currently stands, whether they were more focused on being delighted by apps and ease of use versus making decisions on where they put their money and who they share their identity with based on some deeper understanding of risks and the landscape.
Barratt said some fintech companies may miss the importance of the customer’s perspective as they try to innovate on data usage. “At the core of all of this is your identity and your money,” she said. MX is a SaaS fintech that offers an open finance portal, data aggregation, and other services to companies.
Barratt said when companies start off architecting a platform, they often think about how to get the most out of data acquisition, collection, and storage but may lose sight of the fact that the customer’s identity and money are the two most important things in a client’s life from a data perspective. “If people really knew what they were giving up whenever they give their data over to some companies, there would be rioting in the streets,” she said. There is massive trust, Barratt said, that has been engendered from the customer perspective without really understanding what platform they are giving two of their most valuable assets to.
Howell said his organization adopted a mindset about compliance and fraud that is tied to knowing customers, starting with their access. Rize, a fintech as a service that enables financial institutions and brands to build across multiple account types. “Who are you letting in the door?” Howell asked. “And once they’re in, what are you allowing them to do? That’s really controls. What visibility do you have into your black box to see the behavior that’s happening?” This can include monitoring and anti-money laundering (AML), with data security and other resources woven in.
There certain existential threats faced in fintech that evolve as companies and platforms mature and grow, he said. “In the early stages . . . fraud is probably going to kill you faster than a data breach,” Howell said. “As you get bigger and bigger, you can handle fraud much more effectively . . . but a big data breach can wipeout your customers’ trust.”
Nalven said a big part of her day involves dispute fraud that can include disputes about excess charges from vendors on debit cards or cards getting skimmed by thieves who secretly installed such devices in ATMs. Lean is a developer of financial products for the flexible workforce that includes independent and gig workers.
Security and compliance are often connected, Nalven said, with regulatory procedures that must be followed when dispute claims come in. “Data security, data privacy certainly are things your customers and your organization have to think about,” she said. “As you scale especially . . . you want to start thinking about best practices when it comes to security and privacy from the get-go, so it doesn’t become this huge thing that comes back to bite you.”
During the venture capital panel, Lee said that after last year’s boom in funding activity, some considerations need to be made about what comes next. “Regardless of the business model, especially nowadays after the pandemic, the really big run up and boom within fintech -- I firmly believe there is so much more to do and there’s so much more to achieve,” she said. “Now we are figuring out what is sustainable in this current macroenvironment.”
This includes taking into account inflation, debt levels, and other factors, Lee said. “What fundamentally all of us are saying, regardless of your business model, what problem are you solving but also do your fundamental, economics, and financials make sense?”
Nof said SMBs of late have not gotten attention they have seen in the past. “A lot of them are working on problems that don’t make sense for big companies to tackle.” He was a bit reluctant to make predictions on the economy in relation to portfolios and the future of fintech, but a sense of pragmatism seemed to be spreading.
“A lot of people are scratching their heads trying to figure out what makes sense towards the economy,” Nof said. “As credit does tighten, we’ll see, hopefully this shake out in a way that is palatable.”
Williams-Collett said she is spending more time looking at the retirement segment of fintech, which has some overlap with SMBs in the sense that such companies often cannot afford to offer the same types of retirement plans made available through large corporations. Those smaller companies may need alternatives that fintech might bring to the table.
The country is also transitioning to a period, she said, time where much of the workforce needs retirement options beyond relying on real estate. “A lot of people don’t know that it’s not necessarily your house, at the end of your life, that will be the largest percentage of your net worth,” Williams-Collett said. “It’s actually your retirement plan.”
Mangot said there is some weariness in venture capital when it comes to direct-to-consumer (DTC) in fintech. “It’s so hard to make it work,” she said. “Investing, commerce, and coupon savings apps -- it’s really hard to make that a new business. The revenue models are difficult.”
There is always a private-public comparison of such offerings, she said, and DTC fintechs in the public markets are having some trouble scaling and making money, which can be a result of limited revenue streams with consumers. Areas Mangot said she is interested in include identity, fraud, and regulatory compliance. “Regardless of the market, where we are in the cycle, those are incredibly strong businesses.” Identity includes know-your-customer and know-your-business; fraud risk management, and AML compliance, which may see growth on the international stage. “Look at all the successful companies in those spaces in the US, then project that to world,” she said. “Who’s the next identity verifier for Pan Africa?”
Mangot said there is some weariness in venture capital when it comes to direct-to-consumer (DTC) in fintech. “It’s so hard to make it work,” she said. “Investing, commerce, and coupon savings apps -- it’s really hard to make that a new business. The revenue models are difficult.”
There is always a private-public comparison of such offerings, she said, and DTC fintechs in the public markets are having some trouble scaling and making money, which can be a result of limited revenue streams with consumers. Areas Mangot said she is interested in include identity, fraud, and regulatory compliance. “Regardless of the market, where we are in the cycle, those are incredibly strong businesses.” Identity includes know-your-customer and know-your-business; fraud risk management, and AML compliance, which may see growth on the international stage. “Look at all the successful companies in those spaces in the US, then project that to world,” she said. “Who’s the next identity verifier for Pan Africa?”
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