A short reminder of the powerfulness of US Government 🇺🇸🌪; As Klarna's losses quadruple, 2023 will make or break once BNPL’s top star 😵; Most active crypto VCs you must know if you want to win 🚀

You're missing out big time... Weekly Recap 🔁

Sep 04, 2022

👋 Hey, Linas here! Welcome back to a 🔓 weekly free edition 🔓 of my daily newsletter. Each day I focus on 3 stories that are making a difference in the financial technology space. Coupled with things worth watching & most important money movements, it’s the only newsletter you need for all things when Finance meets Tech.

If you’re not a subscriber, here’s what you missed this week:

As for today, here are the 3 FinTech stories that were making a difference this week. It was one of the most interesting weeks this year! (definitely check all the above stories!)

A short reminder of the powerfulness of the US Government 🇺🇸🌪

A refresh ♻️ Earlier this month, something unprecedented happened - the Office of Foreign Asset Control, a sanctions watchdog operating under the auspices of the U.S. Treasury Department, sanctioned a decentralized protocol Tornado Cash.

Since the story is still developing and lots of things are happening as we speak, I purposefully stayed away from it. Yet, it now appears too important to be ignored, so let’s take a brief look at it and why it matters.

The USP 🥊 Tornado Cash is a decentralized non-custodial privacy solution built on the Ethereum blockchain-based zero-knowledge proofs. It enables users to break links in on-chain transactions and enhance transaction privacy between deposit and withdrawal addresses. In other words, it’s a coin mixer that makes it difficult to track a user’s identity.

But why sanctions, bro? 🤔 In its press release announcing the sanctions, the Treasury Department said Tornado “has been used to launder … over $455M stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date.” Also, it is estimated North Korea🇰🇵 used some $50M in stolen crypto to fund its nuclear weapons program. This is serious.

In other words, the accusation is not only about North Korea stealing crypto, but more importantly that North Korea has been stealing crypto for its weapons program, and Tornado Cash has played a key role in helping it transmit these funds in a way that could evade scrutiny. In TradFi that would be massive but…

The fury 😤 The reason this got so much anger from both traditional and crypto finance folks is that Tornado Cash is just a protocol. It has always been an open source to boot and built on a decentralized framework. More importantly, Tornado doesn’t exactly have a business to shut down.

But let’s leave this for now with Simon who summed it up elegantly:

Simon Taylor @sytaylor

Arresting cryptographers for writing software is the end of credibility for the west. Bad move. Worse timing. Naive

The impact 📉 The chart below from blockchain analytics firm Nansen illustrates the impact of Tornado Cash sanctions brilliantly:

And it’s all about the power of the US Government (or the fragility of tech protocols?). Here’s the takeaway:

✈️ THE TAKEAWAY

🇺🇸💪 As you can see from the above graph, about a month ago, more than 1,000 transactions were processed through Tornado Cash. Now, just 2 weeks after the OFAC took the unprecedented step of putting the software on its special list of sanctioned individuals and entities, Tornado Cash’s volume has plunged, with the number getting as low as 128. The fact that volumes have dropped by nearly 10X is a brilliant reminder of how powerful the US government (still) is. Alternatively, it also shows that in the current state of affairs, technology protocols - whether decentralized or not - are still very fragile and prone to censorship (for good reasons or not). Zooming out, the story about Tornado Cash is more about the freedom of speech than anything else. As Fight for the Future has put it, sanctioning Tornado Cash is the equivalent of sanctioning the email protocol in the early days of the internet, justifying that email is often used to facilitate phishing attacks or scams. Tornado Cash is code, and rather than identify those who were aiding and abetting criminals the Treasury simply sanctioned that code. Code is speech, and it seems it’s not free…

As Klarna's losses quadruple, 2023 will make or break once BNPL’s top star 😵

Reporting the numbers 🤲 Swedish Buy Now, Pay Later heavyweight Klarna just reported a dramatic jump in losses in the first half of 2022. This is yet another deluge of negative news for the BNPL pioneer once the industry’s brightest gem.

More on this 👉 Here are the key numbers from Klarna’s latest report:

The Swedish payments firm generated revenues of SEK 9.1B ($950M) in the period spanning January to the end of June 2022. That was up 24% from a year ago.
Klarna’s pre-tax loss soared more than threefold year-on-year to nearly SEK 6.2B. In the first half of 2021, Klarna lost around SEK 1.8B.
Operating expenses before credit losses came in at SEK 10.8B, up from SEK 6.3B YoY, driven by administrative costs related to its rapid international expansion in countries like the US.
Credit losses, meanwhile, rose more than 50% to SEK 2.9B.

What does this mean? 🤔 If you have been following Klarnageddon for at least a bit and have some basic financial understanding, you can sense that 2023 will make or break Klarna, once BNPL’s top star. Here’s the takeaway:

✈️ THE TAKEAWAY

What happens when a growth stock stops growing? 🤔 First, we must note that Klarna’s TPV grew by +21% while the overall e-commerce market was negative, which could be seen as somewhat impressive. But when you look closer, it’s clear their cost base is really high, and 20% of layoffs haven’t helped (more might come this year and next). More importantly, spending SEK 4.5B to generate SEK 1.1B in net revenues doesn't sound like a great and sustainable strategy. On top of that, Klarna’s 1Q2022 growth was 19%, hence, 18% as of H1 2022 implies further deceleration. And when the growth stock stops growing… Well, you know the answer. This brings us to the key point here that 2023 will be a critical year for Klarna - it will either break or make the BNPL giant. Unless it hits profitability (or at least has a very clear path to it), I’m not sure we will see the Swedish unicorn in the FinTech scene in the years to come.

How & can Klarna do it at all, in some earlier takes:

Klarnageddon begins as Klarna will lose 85% of its valuation with the fresh funding 🤯

Will becoming a Super App save Klarna? 🤔

Most active crypto VCs you must know if you want to win 🚀

Following the money💰 Speaking about the startup ecosystem in general, I’ve earlier talked about the fact that most active venture capitalists continue investing and they are doing that almost on par with 2021 levels. Also, if you’re reading my newsletter consistently, you know that despite the crypto winter and Bitcoin suffering, crypto funding in H1 2022 has already surpassed all of 2021.

Hence, let’s have a quick look at the most active VCs in crypto you must know.

More on this 📊 It’s important to note that not only the investment amount in the industry has hit records. Also, the number of deals is up to - so far 1,139 deals have been struck this year, just shy of the 1,348 recorded in 2021. And these are the ones making the difference:

Animoca Brands: concluding 107 deals this year, the company has invested heavily in NFT and Web3 projects.
Coinbase Ventures: the investment arm of crypto exchange, CBV aims to invest in early-stage crypto and blockchain firms. So far this year, the company has racked up 82 individual deals with web3 and DeFi the main focus of their activities.
Shima Capital: the VC firm did 63 individual deals in the first two quarters of 2022. Focusing their efforts on early stage and seed funding, Shima Capital has been most active in DeFi and web3.
GSR: it specializes in providing liquidity, risk management strategies, and structured products to crypto investors. In 2022, GSR has completed 49 deals with DeFi their major area of focus.
Jump Capital: the VC firm specialized in Series A and B expansion stage investments, with a focus on technology and software companies. Throughout 2022, Jump Capital concluded 45 individual investment deals with DeFi projects attracting the most attention.

✈️ THE TAKEAWAY

Build, build, build 🚀 I won’t be original here and must only repeat what I’ve said earlier - it’s pretty clear that the most active investors are still out there and actively hunting for their next big opportunity. This yet again proves the fact that it’s a brilliant time to build right now. Especially if you are in crypto & Web3. And to make your fundraising efforts easier, leverage this list of 20+ most prominent Crypto & Web3 investors (with their focus, portfolio & key people) and use the cheat sheet to increase our chances of raising capital:

Bonus: Web3 & Crypto VCs: a list of most prominent venture capitalists to fund your next startup 🚀

Bonus: Triple your chances of getting funded with this cheat sheet 💸

🔎 What else I’m watching

Customer milestone🇬🇧 British neobank Revolut just launched a new UK advertising campaign called ‘Your Way In’ across TV, podcasts, billboards, and more across the country. The launch coincides with Revolut passing its 5 millionth UK customer milestone, a figure reached 7 years after the FinTech launched. Last month Revolut revealed it had reached 20M customers globally, with the UK as its largest single market.
Proper payments coming to the US🇺🇸 The Federal Reserve has narrowed the timing of the launch of its real-time payments service, FedNow, to the middle of next year. The Fed is targeting a production rollout of the service between May and July, finally bringing to conclusion a multi-year journey inching the US along a journey toward a payments system fit for the 21st century. More than 120 organizations are currently participating in a pilot programme for the service, with technical testing set to start at the beginning of September. When it launches, FedNow will be accessible to financial institutions of any size, enabling them to provide businesses and consumers with the ability to send and receive instant payments efficiently and securely. When you think about it, it’s crazy the US still doesn’t have a real-time payments system…

💸 Following the Money

Capital on Tap, has secured a £200M funding facility from JP Morgan and Triple Point. The London-based SME lender offers a business credit card and spend management platform to business customers.
Lightnet Group, the creator of Velo, a blockchain-based cross-border payment infrastructure, received a $50M commitment from investment group LDA Capital. Lightnet raised $31.2 M in a Series A funding round in 2020.
Nigeria-based FinTech Grey has raised $2M in seed funding, toward its goal of simplifying the sending and receiving of foreign payments for Africans. The company’s services allow for the free creation of a bank account, to send money to the U.K. and Europe, and receive payments from dozens of countries.

👋 That’s it for today! Thank you for reading and have a relaxing Sunday! And if you enjoyed this newsletter, invite your friends and colleagues to sign up:

Linas's Newsletter

Discussion about this post