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Come on in, sit back, relax and enjoy episode 111 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, the founder and CEO of Ezra Group Consulting. Over the past 16 years, we’ve worked with hundreds of FinTech vendors and enterprise wealth management firms to guide them towards making better business and technology decisions.
The WealthTech Today podcast features interviews news and analysis on the trends and best practices in technology for wealth management, asset management, and other areas of financial services.
This is our September News Roundup, and we are covering four stories. In the past we had covered more than that, but we’re going to go more in-depth on fewer stories. We are coordinating with our partners at Kitces.com, so please check out The Latest In Financial #AdvisorTech (September 2021) and their Advisor Tech Map, which we work with Michael Kitces to produce.
Click here and schedule a Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.
September News Stories
- Redtail, Snappy Kraken Announce Text Messaging Apps
- Vanilla Raises $11.6 Million With Venrock, Announces High-Profile Partners, Welcomes Former Vanguard Group Chairman McNabb to Board
- Mobile Assistant Launches Template Manager, Voice to Text Recording for Advisors
- DPL and SS&C Start Exchange for Commission-Free Insurance Products
- SEC Inquiry into Online Brokers Could Redefine Recommendations
- AdvicePeriod [09:09]
- Addepar [13:26]
- Altruist [12:38]
- Apprise Labs [15:09]
- BlockFi [40:41]
- Carson Group [16:27]
- Coinbase [30:30]
- Copytalk [18:09]
- DPL Financial Partners [23:26]
- eMoney [14:44]
- Envestnet [15:20]
- FIDx [29:29]
- Hearsay Systems [06:50]
- InvestmentNews [23:52]
- Luma Financial Technologies [29:53]
- Mariner Wealth [16:27]
- Orion Advisor Technology [13:26]
- Pulse360 [18:10]
- Redtail Technologies [02:19]
- RetireOne [29:23]
- Robinhood [31:43]
- SIMON Markets [29:53]
- Snappy Kraken [02:21]
- SS&C Black Diamond [23:25]
- Vanguard Group [12:41]
- Venrock [12:00]
Complete Episode Transcript
Craig: All right, come on in and sit back, relax and enjoy episode 111 of the WealthTech Today podcast. I’m your host Craig Iskowitz, the founder and CEO of Ezra Group Consulting. For the past 16 years, we’ve worked with hundreds of FinTech vendors and enterprise wealth management firms to guide them towards making better business and technology decisions.
This is our September News Roundup, where I cover the latest news in wealth management, asset management and crypto technologies. We’ve got five great stories for you and what are they? Here’s my list. The list of stories is going to be Snappy Kraken and Redtail launch text messaging products. Number two, serial entrepreneur, Steve Lockshin’s new tech startup Vanilla gets Rockefeller VC funding. Story number three, scroll, scroll, scroll, Mobile Assistant launches their template manager for voice to text recording for advisors. Number four, DPL Financial launches their insurance marketplace with SS&C Advent. Story number five and last but not least is our crypto story, we love the crypto stories here at the WealthTech Today podcas, that’s the SEC threatens to sue Coinbase over their crypto lending product.
So before we get going with this, a couple of housekeeping tasks, a quick shout out to our sponsor, the Invest in Others Foundation, please go to their website, InvestInOthers.org, and be sure to subscribe to this show wherever you listen to podcasts so you don’t miss future episodes. All right, let’s get things started.
Redtail, Snappy Kraken Announce Text Messaging Apps
Our September news Roundup, Redtail Technologies and Snappy Kraken both announced text messaging applications. While they are both announcing them, they’re very different usages of text messaging. Snappy Krakens’ is brand new and Redtail’s is an upgrade to a version of text messaging they already had. Marketing technology firm Snappy Kraken is launching their own compliant, text messaging, marketing feature called Convos, which includes a content library with prebuilt text messages, including graphics and other things. And that’s mainly, I would imagine, purely a marketing service ways to outreach to your clients and prospects, pre-generated content to start conversations and build communication with clients. So very different than you would see from the Redtail product.
All content in the library is FINRA approved. So Snappy Kraken is debuting a feature called Leads Never Get Cold. A library of pre-generated content to start conversations with clients and includes a specific finance related information. So all this can be pushed out through text messaging, which as we have seen is a way that most people prefer to get their information. According to a survey, just 14% of companies are texting consumers despite 55% of consumers preferring to get information via text messages, versus 35% preferring email. So this Convos application pushing out text messages to clients and prospects sounds like a great marketing tool, great way to keep the communications going. We really like what Snappy Kraken has done, especially around their campaigns. So we’re expecting Convos to be well-designed, pre-packaged with lots of themes that make it easy for advisors to pick out the content that they want depending on the type of client they are. I know they’ve got different packages for, for example, physicians or new business owners or other types of niche target markets that an advisor might target for prospective clients.
I would imagine that the Convos library, these pre-packaged content libraries will be broken up by different categories, maybe different times of the year or different events in someone’s life, if you have a new kid or your child’s going to college, or someone getting married or divorced, they might have different types of content that you can push out to those kinds of leads or prospects or customers. So looking forward to seeing what Convos has to offer around marketing. Now integrates with MyRepChat, which is third-party compliance application, because everything we send out as an advisor needs to be compliant, needs to be archived and stored, so MyRepChat will be doing that. And I think Redtail is also using MyRepChat for their compliance. So good news from MyRepChat.
Convo’s service starts at $19 a month with each outbound text message costing 10 cents. Now that’s weird. We’ve gotten used to text messages being free for a long time, now costing 10 cents to go out. I’m not sure how that’s going to go over.
Speak, Redtail’s existing product, so they launched in 2017, their text messaging feature, which I thought was cool. And they’re upgrading it, new version, Speak 2.0, Which will be available in early 2022, according to the company. Speak is a great product, allows a compliant communication between advisors and clients and prospects all captured in of course Redtail CRM, which I think is really the best way to do it. You want everything in one place, all your data about your clients in one place. You don’t want to have to go to one data store for compliant text messaging, and then go to your CRM and see something else, and have to copy paste data back and forth. So CRM is where all this communication should be stored. This new version of speak is currently in beta test. As I said, the launching in 2022, and they’re also integrated with MyRepChat.
Now compliant text messaging is not new for advisors since it’s been out since 2017 from Redtail, but also another company called Hearsay Systems, which used to be Hearsay Social, but now Hearsay Systems launched their own compliant text messaging in 2018. So lots of choices for advisors around text messaging. And one thing that they didn’t mention any of the articles is that Redtail and the CEO, Brian McLaughlin who I’ve talked to extensively about this, have been working sort of under the covers on a lot of AI related work because of all the data they have as a CRM provider with tens of thousands of advisor and RIA clients, they’re getting a lot of data, emails, notes, now text messages since 2017, all that data is perfect to feed a machine learning algorithm, perfect for building out these AI big data systems that can provide advice, recommendations to advisors. Like, Hey, we’ve noticed based on a certain patterns that when clients mentioned these keywords, that means you need to give them a call. Or when we see these other keywords, that means they’re really happy and they’re satisfied, they would probably give you a referral. Or these other keywords might mean that they have some of the life event coming up that you should call them about. And that I think is going to be a huge benefit for Redtail once they release it, they’re still working on it. It’s not something you just crank out in a couple of months. So I’m looking forward to their AI-based systems, next best actions or other advice that they can give to advisors based on all the data they’re collecting, so looking forward to seeing that.
Vanilla Raises $11.6 Million With Venrock, Announces High-Profile Partners, Welcomes Former Vanguard Group Chairman McNabb to Board
Craig: Next up in our News Roundup, successful serial entrepreneur, Steve Lockshin’s new tech startup Vanilla gets Rockefeller VC funding to the tune of $11.6 million in a Series A round. According to a survey by caring.com 42% of American adults have essential estate planning documents such as a living will or trust. Steve Lockshin who founded and as a principal of RIA firm AdvicePeriod, is rolling out an automated estate planning platform through his company called Vanilla. Launched in mid 2020 though they founded the company in 2019, the latest ventures and attempt to modernize the antiquated and expensive business, particularly when it comes to generating and managing core documents.
So what is Vanilla? It’s really a document generation and attorney connection tool. If I could put it pretty quickly, sort of like a match.com for estate planners and estate lawyers, it’s like going to match.com and having them do the marriage license for you, right? Something like that, although there’s a lot more documents when it comes to trusts and estates. As part of their initial offering, they offer a guided experience for advisors and their clients to the process of creating a core documents for an estate plan. So I walked through the process and it looks pretty nice, it’s really step-by-step and it puts all the emphasis on the client. So the advisor just has to send the link and get them to use it. Then the system walks the client through all the questions. So the advisor sort of hands off on that part and then connects them with a lawyer, again, the advisor’s hands off, so no legal issues, and that all gets taken care of. And then Vanilla will generate all the documents necessary and also monitor the documents as things go along to show you when there’s data missing, information that might be wrong, including estates trust structures, gifts, healthcare wishes.
Lockshin started this tech business or this tech tool really because he needed it for AdvicePeriod, as most of their clients are high net worth individuals and families. And after working on estate plans and talking with attorneys for 30 years, he’s learned that, according to his words, “most of the problems with estate plans are tracking down forms, filling in data and checking for screw-ups”.
One thing I really like about some startups, the founders of scratching their own itch. So it’s not, they’re building something and hope people will use it, they’ve got a problem that they’re trying to solve with this software. That usually is a good first step to defining a solution that is going to work, or a team that’s going to get across the threshold because they’ve got the problem and they’re solving it themselves.
Another thing I like about the way Steve described Vanilla, he described the contemporary financial advisor’s role as being a general contractor, and I feel the same way. Too many advisors think they have to be experts at everything rather than just being the coordinator, being the quarterback. And Steve says, “Like being a good contractor, you need to be hiring the right plumber, the right builder, the right roofer to build a house. The general contractor is not an expert at everything, they’re a good generalist.”
“Estate planning is the last undigitized frontier of wealth advisory,” says Venrock’s Nick Beim, Venrock being the Rockefeller VC fund. “Vanilla’s breakthrough service integrates the financial and legal sides of estate planning and automates complex estate planning logic.” That’s a big deal for a lot of fintechs, it makes them successful. Find in the area of our business, or any business that is just still manual, still fragmented, still requires a lot of steps, a lot of paper and estate planning is that way.
So what is this about their Series A? B in the Series A Venrock, as well as Jason Wenk, founder and CEO of Altruist and William McNabb, the former CEO and chairman of Vanguard Group, who is also joining Vanilla’s board of directors. Interesting connection, Venrock is also an investor in Altruist, just invested in their recent $50 million funding round. And Bill McNabb is on the Altruist board. So lots of overlap between Venrock, Bill McNabb and Altruist and Vanilla. And according to a tweet, I tweeted out to Jason Wenk, “will there be any integrations planned between Vanilla and Altruist?” And he said, yes, in his verbose style. Yes. So we’re expecting to see some integrations with Altruist and Vanilla and other firms that have announced integrations with Vanilla. If I could scroll down the part of my notes, Orion and Addepar, both announced partnerships with Vanilla to integrate. Eric Clarke from Orion really likes the way Vanilla works and sees some of the mutual clients think that the process works well. So they’re going to integrate it into the rest of their system for higher net worth clients, and Addepar already is in the high net worth space, makes perfect sense for them to connect. They have a lot of clients in the high net worth family offices as well as high net worth RIAs.
So some of the interesting features I like about Vanilla, obviously the document generation, the connection to advisors or the attorneys, but also the monitoring. That’s something that really takes the power of technology to the next level. Anyone can generate a document, but to monitor it over time, to monitor the client’s estate and provide maybe a dashboard for the advisor to highlight areas that need to be addressed really powerful, gives them more of a longterm play rather than just generate a document and go away, here it gives them the ability to charge ongoing fees forever basically for these clients. A great business model.
So again, I don’t know of any competitors doing exactly this, but it’s got to integrate with a technology like eMoney, considering most of the clients that they mentioned they have all use eMoney for estate planning. Now it’s a bit different they’re gathering all the data and doing what if scenarios, and eMoney doesn’t generate the estate planning documents, but you’ve got to integrate. It makes it only makes sense to integrate with eMoney and NaviPlan, which are the number one and two when it comes to estate planning, applying software, and then maybe Apprise Labs at some point as well. I also compare the Vanilla network and connection to attorneys, which is similar to something that Envestnet is doing, which they call the Trust Exchange, which is a network of attorneys and estate planners that Envestnet is hooking up their advisors with. So something similar though that doesn’t generate any documents, but still connecting to trusted sources in the business, through the Envestnet network. Very similar in some respects.
Now let’s see, Vanilla is gathering feedback, they’re going to launch a Vanilla 2.0 soon. Let’s see new features, all new advisor dashboard, I already mentioned that, a new client onboarding flow very important for any tool onboarding has got to be a great process. It’s the first part of the experience for our client is onboarding. If onboarding doesn’t work well, the client’s not gonna be happy. They may abandon, or they may just be unsatisfied and eventually bail out. So good thing they’re doing a new client onboarding flow, proactive estate planning opportunities and reminders and ongoing monitoring of the client’s estate.
We talked about Orion and Addepar, they claim 400 RIAs as well as Mariner Wealth and Carson Group, two of the biggest RIA networks in the country. So it’s great having them on board. And also Marty Bicknell from Mariner was an investor in the seed round of Vanilla. So it makes sense. And also Mariner Wealth bought AdvicePeriod, Steve Lockshin’s firm. So they were using Vanilla, now Marin is using vanilla as well. And then of course, Carson Group is using it and Carson Group is a big eMoney user. So I’m expecting some integrations there. And it’s really a combination of a well-connected founder with Vanilla, Steve Lockshin, strong financial backing, I know he put a lot of his own money into it, and a vision of how to digitize complex manual paper-based processes with software, the best way to do this. More power to them. I see a lot of runway for this product and let’s see what they’re doing with the series A and where they wind up in a couple of years.
Mobile Assistant Launches Template Manager, Voice to Text Recording for Advisors
Craig: Mobile Assistant launches their template manager. Most busy professionals don’t always take the best notes when they’re meeting with clients, since they’re usually focused on listening and responding to the client and don’t want to interrupt the flow of meetings to take notes, Mobile Assistant comes in handy. It allows advisors to basically make a phone call and speak their notes, it’s recorded and a human reviews it and types it up and sends it back to them very quickly. Now these types of tools, there’s not many available. If you look at the Kitces advice tech map, which I help Michael on every month, you can find that at Kitces.com, there’s only three products in the client note-taking category, that’s Mobile Assistant, Copytalk, and Pulse360, which is actually more of a document creation organizational tool, it’s not a voice to text tool like Copytalk and Mobile Assistant.
What are these templates and why are they important? When you’re using the Mobile Assistant, especially on the mobile app, it gives you a series of questions and you can customize the questions that way that reminds you or prompts you, what you need to respond to for that particular note. So if it’s a client review meeting, the list of questions might say, okay, tell me the client name and meeting date, the financial status, any change in the financial status, risk tolerance updates, investment objectives, time horizons, etc, etc. So it prompts you step-by-step through the process of speaking your notes for the meeting and also reminds you of the things you need to talk about in case you forgot.
So it’s a great little tool these templates, easy to create, but in the past, it was difficult to manage your templates. If you had multiples, you had a client review meeting, maybe a new onboarding client meeting, maybe a meeting with a client that you had for a specific type of issue, maybe they just got married, or they want to talk about estate planning. Like we were just talking about Vanilla earlier, might be different types of questions you would ask or notes you want to take for those meetings, difficult to manage all your templates. So the template manager makes it easy to manage your templates with big buttons, different colors. You can name each template, move them around, click on the one you want really simple from the mobile app, which note do you want to record, then it walks you through it, whether it’s a Reg BI, discovery meeting a phone call, things like that. And you can create your own of course, or use some of the pre-built ones.
So it’s a cool app. very useful. I mean, I know I’m not a financial advisor, but I use automated voice transcription services all the time. I wish I had something like Mobile Assistant, but for consultants, I wound up using a bunch of other online services that are generic, they’re not specific for my industry. But having a tool like Mobile Assistant is very helpful, and it’s not just an automated system. I’ve used the automated ones and they’re just not right. There’s still something missing. I still need a human to go through the transcript and clean it up because it’s just never done right, because machines aren’t there yet.
And especially with customized or industry jargon, the systems can’t possibly know it all. So the fact that Mobile Assistant uses humans to do it means you’re going to get pretty close to a 100% accuracy every time. And it’s also secure, your notes aren’t going out on the internet, not being fed into some system somewhere and then used for some other purpose. Even though it might be anonymized, they’re still taking your notes and using it to train their other systems, not giving you any benefit, Mobile Assistant doesn’t do that. You can get more information about Mobile Assistant at their website, MobileAssistant.us.
DPL and SS&C Start Exchange for Commission-Free Insurance Products
Craig: The next story is DPL Financial Partners launches an insurance exchange and online insurance marketplace with SS&C Black Diamond. The platform called SS&C Advent Insurance Marketplace allows advisors to access a range of fee-only products through Black Diamond’s wealth platform, and DPL’s proprietary product discovery tools. So this is from our good friends at InvestmentNews, also email@example.com. And I’m not sure why the story is coming out now because I thought they announced this earlier. I know even on my podcast, and I don’t break news in my podcast, it’s more analysis and so on and industry trends. But I spoke to David Lau, the founder and CEO of DPL Financial Partners back in May, that’s episode 87, for those of you keeping track at home, and David founded DPL Financial Partners, and he was formerly COO of Jefferson National Insurance.
One of the reasons why he founded this company was he really wanted to change the way annuities and insurance products are distributed. He felt that that was the most expensive part of the product and that they needed to move away from the commission-based model. Every other product in the world has moved away from commissions except for insurance. So he saw that the fee-based insurance model needed a delivery mechanism, and he wanted to build a platform to do that, technology based platform, which is what DPL is. It helps RIAs become more holistic by adding insurance to their repertoire, and also helps insurance agents who are getting into wealth do the same thing. He believes that annuities have a bad rap and that the marketplace will help that by providing more transparency, making it easier for price shopping and comparison shopping of annuities.
They’ve got some good traction at DPL, in just the past two and a half, three years. They have over a thousand RIAs on their platform. Some statistics that David shared with me insurance is approximately 20% of most people’s investible assets between permanent life, which is $18 trillion market and annuities, which has only about a $4 trillion market versus all RIA assets, which are $3 trillion. So there is quite a lot of assets there, and if you can turn them into fee-based assets, which is what DPL does. There’s no commissions on these products, they’re all fee-based, and I believe DPL builds in a 1% platform fee, which is a lot cheaper than what you’d pay commissions previously.
I believe he was talking about 300 basis points or more 360 basis points for a $500,000 or $600,000 annuity. So at 1% is quite a bit cheaper. And 30% of most RIA clients own an annuity or two and most RIAs historically, ignore it. So by leveraging the DPL platform, even advisors who aren’t licensed to sell insurance can do so on a fee-based basis.
DPL recently raised, well, not recently anymore, it’s already September, last December DPL raised during a capital raise, they got $26 million. A couple of the people who were investing Todd Boehly, who owns the LA Dodgers and Bob Diamond, current CEO of Barclays Bank, which gives them some dry powder for more development building out their platform, or even M&A, maybe they’re going to buy somebody.
So this no load commission-free marketplace, the Advent insurance marketplace, which you can get through Black diamond. Now the DPL really wants to be the intel inside. At least that’s what David tells me. And they offer their platform through APIs and other technologies where you can plug into it. So you don’t have to use their interface, you can plug into something else. And they’re also trying to offer or position annuities as being a more efficient investment than fixed income bonds and other investments. And David shared a scenario where $50,000 in income over a 30 year period would require $1.2 million in bonds versus a $750,000 annuity. So he’s showing it as being cheaper or less capital intensive to generate the same amount of income, which may be true. The only difference is after those 30 years are up, assuming the owner of the annuity is still alive, the annuity is gone, right? The annuity is at zero. Whereas the bonds, you still own the $1.2 million in bonds. If they’re throwing off 4% interest on average, that’s $48,000. So there is a bit of a difference there between those two, but still there are some definite advantages to annuities over bonds in some cases.
Let’s see what else with this, Black Diamond integration they’re able to plug it in to the Black Diamond wealth platform. So they can combine wealth and insurance and show some data and able to show RIAs and advisors and their clients, how annuities can play and become a complimentary asset to their investments. Also, the DPL marketplace does a lot of modeling. That’s some of their benefits with transparency comparisons. They are modeling over 3,500 annuity products with 40,000 riders and over 400,000 price points to compare fixed income versus annuities, and annuities versus annuities, and that’s what their tools will do. There’s no charge for advisors to use the product.
Overall, It seems like a great idea. They’re getting a lot of traction. Some of their competitors would be RetireOne, which has an outsourced insurance desk, similar to DPL. Also FIDx, which is partner with Envestnet on the Envestnet Insurance Exchange, which is also a competitor. So lots of ways for advisors to access insurance, more choice is always good. More integration is always good. We’re seeing a lot more of these marketplaces launching, not just DPL RetireOne and FIDx and Envestnet. We’re seeing annuity marketplaces being launched by firms like Luma, Simon and other online marketplaces. We’ve done a lot of research on that. If you go to our website EzraGroupLLC.com and fill out a discovery form or a contact us form, we can share some of that with you and tell you some things we’re working on and some of the research we have on online marketplaces.
SEC Inquiry into Online Brokers Could Redefine Recommendations
Craig: Here we go, story number five, this is our crypto story. We’re going to have a crypto story in every month’s News Roundup. This crypto story is probably the biggest news in the crypto space going on right now, the SEC threatens to sue Coinbase over their crypto lending product. Coinbase, for those of you who live under a rock is the largest digital asset trading platform in the US and they’re also a public company now, their NASDAQ symbol is COIN. They received Wells Notice from the SEC. A Wells Notice is a legal document that indicates the SEC is investigating the company, indicating it may pursue an enforcement action while giving the company an opportunity to respond as to why it should not sue them. So Coinbase of course, is a crypto company, they have a mobile app where people can buy and sell crypto, and it is the most popular, when they went public, they announced over a billion dollars in revenue. So they were really doing quite well. Their market cap, when they launched was over $100 billion, then it dropped down a bit. It’s probably down to $80 billion now, but still quite a big company their revenues really accelerated last year as many trading companies like Robinhood and other firms. I’m sorry, they’re up to $2 billion in revenue as of August 10th, 2021. So big company, decent size company for the space.
So what is the deal here? Coinbase planned to launch a program called Lend, and that’s what got the sec upset, the yield on interest where you would basically lock up cryptocurrency with Coinbase and they’d pay you interest on it depending on the type of cryptocurrency. Now, Lend was going to offer a 4%, which is huge compared to what a bank would offer, which is, 0.06%, 4%, 400 basis points for anyone who wants to lock up USDC, which is a dollar based stable coin.
So stable coin is a cryptocurrency, but it’s always valued at a dollar. Different than Bitcoin or Ethereum or other cryptos that trade at different prices on exchanges where stable coins are always a dollar. So locking up stable coin for a certain amount of time, either 60, 90 days or even longer would generate this interest payment. The SEC decided that this is a security. What caused all the ruckus in the news and on Twitter was Brian Armstrong announced that the SEC had sent him his notice in basically a long Twitter thread, which most people probably wouldn’t do, but Brian felt that that was the best way to announce that can be transparent.
Funny tweet from Doug Bonaparte who runs a Bonafide Wealth, he’s an advisor, it says, “Coinbase CEO: I should tweet about the SEC. Coinbase counsel: That’s a bad idea. Coinbase CEO: Time for a thread!” And then it all goes downhill from there. I’m not sure that’s really the reason, but maybe it wasn’t such a good idea to tweet about the SEC. A Couple other good tweets about this one from Mark Cuban, the billionaire owner of the Dallas Mavericks which is why it’s important for Coinbase to be aggressive in their engagement with the SEC because he believes that if Coinbase isn’t aggressive, the SEC will go through a small decentralized entity, get a quick judgment, and that’ll become law of the land, they’ll use that as precedent. That’s why he thinks Coinbase needs to push back on this.
Some other tweets, the SEC wants to impose their legal definition of a financial instrument conceived in the 1930s specifically of the Securities Act of 1933 onto a 21st century monetary technology. That needs to be some pushback. Again, Mark Cuban tweeting on September 8th, “This is a regular, this is regulation via litigation. They aren’t capable of working through this themselves and are afraid of making mistakes and doing so. That’s why they just leave it to the lawyers.” Now, I’m not sure about that as well, but there is a really good article written by Matt Levine, you can look it up on on bloomberg.com is it’s called “Lending Bitcoins is Tricky” from Matt Levine on September 8th, really good article, a lot of people have quoted this kind of referred to it.
So the issue here is that Coinbase doesn’t think their lending platform is a security, that it shouldn’t be regulated by the SEC. But as Matt Levine points out lending Bitcoin or other crypto is a security. I’m going to read from this article “Lending Bitcoins is Tricky”, “Oh, sure. Yes, absolutely. The rule in the US is that an investment contract, meaning the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others is a security”, as Matt Levine points out, “and generally can’t be sold to the public without registering it with the securities and exchange commission, delivering a prospectus with audited financial statements, etc. A crypto lending program in which one bunch of people pool their crypto. So manager or smart contract lends those crypto to borrowers who pay interest and some, or all of the interest is paid back to the people in the pool is pretty straightforwardly, an investment contract and thus a security.”
So that kind of cuts the legs out. Now, Matt is not a lawyer, but that argument cuts the legs out from under Brian Armstrong and Coinbase and Mark Cuban that their lending program is a security, but some other crypto people such as Jerry Brito, executive director of Coin Center, doesn’t agree. He says it’s pretty easy. What his recommendation is, again, he’s also not a lawyer, but he recommends Coinbase just goes ahead and launches the product and let the SEC sue and go to court. Then let the SEC make a case, let a judge decide what the law is. That’s one way to do it. And again, he uses the same argument Mark Cuban does that, you want to fight the SEC now, rather than having them go through a small provider without the deep pockets of Coinbase, that you have your best chance of fighting them then rather than going after someone without any money who’s going to roll over.
And so in this case, it’s a security as Matt Levine said. Another comment, this is also from Matt Levine’s article, “Still I feel like both sides are wrong and there’s an obviously better analogy. I think this thing is not a stock or a bond or a note or an investment contract or a personal IOU or syndicated loan. Obviously this thing where you have an account at Coinbase, Coinbase lends your Bitcoins to people it chooses and you get interest from Coinbase as a bank account. This is what banks do. They hold your money for you and they use it to fund loans. They pay you interest and promise to pay you back even if the loans default, the whole thing is seamless to you. It’s just a bank account.” Well, that may be one way to look at it, but Coinbase, I don’t think wants it to look that way because then they’d have to become a bank and get a bank charter and then and then be regulated by the officer, the office of the comptroller of currency, like other banks, and they really want to find the middle ground where basically they’re not regulated, right?
I think they want it both ways. They want to be this cool crypto company. They want to offer lending and other services, but they don’t want the same regulations that banks or money transferers or money changing accounts or other, other financial services firms, broker-dealers or advisors, even have. They want some sort of a separate legal entity or legal regulatory, ruling for them, which probably is not going to happen.
So there have been other regulatory issues with lending products offered on crypto and just full disclosure before I go on, I should’ve said this earlier I do some of these lending products, myself. I use an app called Crypto.com to buy and sell crypto. And I also lock some crypto up in what Crypto.com has a product called Earn where you can give them crypto, basically almost any crypto you want and then you lock it up and for, you know, for 30, 60, 90 days, or even a flexible week by week program and they pay you interest in that crypto. So for example, I’ve got some Bitcoin locked up in three month earning accounts that pays me 4.5%. I have some USDC, which is the dollar stable coin locked up paying 10%, which is fantastic. I’m very happy about it, but maybe that also should be regulated by the SEC. I don’t know. But that’s something I’m working on now.
There has been other regulatory issues with other firms trying to offer lending in crypto, for example, just a couple months ago, it’s September, back in July, New Jersey ordered a company called BlockFi to stop offering interest bearing accounts. New Jersey ordered the cryptocurrency platform BlockFi to stop offering interest bank accounts that have raised $15 billion from investors. It was a cease and desist order from the New Jersey bureau of securities said, BlockFi’s accounts were not registered with the office or exempt from registration and their sale violated New Jersey securities law. According to the order, investors can buy BlockFi interest accounts by depositing cryptocurrencies, such as Bitcoin and Ethereum with the company, which uses them to fund lending operations and proprietary trading like a bank an investment bank, broker dealer, or the firms, but they’re not regulated like that. BlockFi was offering yields up to 7.5percent, depending on how much in which assets were deposited. And this was all stopped by the state of New Jersey. So firms cracking down on crypto lending happening a lot.
Now the one interesting thing about this whole fiasco going on is something the SEC is doing, which is raising a lot of eyebrows, raised my eyebrows as well, I was concerned about it. It’s one thing for the SEC to say, Hey, we don’t like this product. We want you to stop it, or we want more information about it. But the SEC also asked, this came out on the Coinbase blog, they asked for formal documents for investigation, but responses, blah, blah, blah. But they also asked for the name and contact information of every single person on their waiting list. So not even people using the product, but people just on the waiting list. Why, why would you need that? People who aren’t actually doing it? Why would they need that? In order to determine if Coinbase has lend program is a security, the SEC wants the name and contact information of every single customer on the waiting list. Makes absolutely no sense why they would need that. I don’t get it. And personally, if I was Coinbase, I wouldn’t do it. That’s that you should be protecting your customers’ privacy and not giving it to the government.
So that’s a quick rundown on the crypto news. So we’re not talking about the price of cryptos here. We’re just, we’re talking about other issues. My opinion is products like this, once they get the regulation nailed down, are really going to be the main ways that people work with crypto and the main ways that people interact with crypto, it’s not going to be the buying and selling necessarily or using it as an asset class. It’s going to use these other decentralized finance products like lending like trading and other types of decentralized finance products that are going to be cheaper, they’re going to be cutting out the middlemen and are going to be allowing a lot of people to be taking advantage of financial products that they may not have been able to because of cost or price or minimums and things.
So look for these to increase and look for more regulation, but then more regulation makes things safer and should also create more products, more compliance products will be coming out to support the regulations that provide reporting and such. So it’s all going to be good for the industry in the end, in my opinion.
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