Kinly, Facing Trademark Suit, Pulls App From Apple, Google Stores

Eco CEO Promises (but doesn't deliver) Response, 8 Takeaways from SVB, Cash App World

Mar 19, 2023

Hey all, Jason here.

Wow, what a week to (try to) go on vacation. At least I had plenty of reading and listening material for my various flights!

Speaking of — this should be hitting your inbox around the time I’m taking off for Las Vegas. If you’re attending the Fintech Meetup event, I hope to see you there. I’ll be moderating a panel on “Blending DeFi and TradFi” Monday with speakers Simon Taylor, Lex Sokolin, and Oivind Lorentzen.

Tuesday, I’ll be joining Alex Johnson, Cristina Ciaravalli, and Marcel van Oost on stage for an “ask us anything” session — if you have banking/fintech questions, tag them on this tweet, and we’ll do our best to answer them!

Finally, I’m excited to be collaborating with Unit21 for their webinar later this month, Fraud in the Fast Lane, which will focus on the latest trends and risks in real-time payment fraud and fraud-prevention strategies — register to attend here (for free!)

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Neobank Kinly, Facing Trademark Challenge, Removes App From Apple, Google Stores

Kinly, a neobank previously known as First Boulevard, has pulled its app out of the Apple app store and Google Play store amid a legal challenge to its use of the name “Kinly.”

Netherlands-based Kinly Holding B.V., a global provider of A/V systems and virtual conferencing, filed a notice of opposition to the neobank’s trademark application, arguing permitting the neobank to register and use the “Kinly” mark would be “confusingly and deceptively similar.”

The result of permitting the neobank Kinly to register and use the mark is such that the “purchasing public likely will be confused and deceived by, for example, believing that Applicant’s services originate with or are otherwise authorized, sponsored, licensed or associated with Opposer, or vice versa.”

Further, A/V company Kinly has used the mark globally and in the United States since early 2018, it argues, and filed for the trademark in the US in June 2018 — far before neobank Kinly ever used the mark.

Neobank Kinly last updated its iOS app on January 19th; the trademark opposition was filed on on January 27th; and, sometime between January 19th and the present, Kinly’s app became unavailable to download on Apple or Android devices.

A Kinly customer support agent confirmed the app is not currently available in response to questions on the matter.

It’s unclear if this is as a result the trademark case or what impact, if any, it may be having on users’ ability to access and manage funds in their Kinly accounts.

Welcome to “Cash App World”

Block (formerly known as Square), which currently operates its p2p payment and bank-like service Cash App in the United States, UK, and Ireland, has secured a digital asset business license in crypto-friendly Bermuda.

Awarded to a new, Bermuda-based legal entity called Cash App World Ltd., the “Class F” license, issued on February 17th, 2023, enables the company to engage in:

(a) issuing, selling, redeeming virtual coins, tokens or any other form of digital assets
(b) operating as a payment service provider business utilising digital assets which includes the provision of services for the transfer of funds;
(c) operating as a digital asset exchange (d) providing custodial wallet services

The digital asset license appears to form the foundation for a crypto-powered global expansion in the form of “Cash App World.”

According to the new offering’s terms of service, Cash App World will be available in an unspecified list of countries that explicitly excludes the United States, Canada, Japan, Australia, the UK, and the European Economic Area (EEA).

A review of the terms of service indicates that, like Cash App, Cash App World’s primary feature will be peer-to-peer money transfer, as well as enabling user to buy “virtual currency” using fiat money. Fundamentally, Cash App World is a barebones crypto exchange and wallet, but it is likely to be positioned and marketed as an international peer-to-peer payments app.

Notably, the terms define “virtual currency” as [emphasis added] “bitcoin and other virtual currency that may be purchased, sold, saved and transferred using Cash App.”

Taken in combination with the activities permitted by its digital asset business license, one could imagine a scenario where Cash App World issues its own digital currency for use in the app.

What might Block be up to here? Designing a peer-to-peer payment app that is actually a crypto wallet may allow it to scale more quickly, by leveraging some countries’ less cumbersome (or absent) crypto regulation vs. that which would be necessary to operate a similar service with local “fiat” currency.

Simultaneously, by operating in virtual currency instead of local currency, Cash App World has the potential to offer residents of countries with inflation-prone currencies a safe haven in which to store their money — imagine the potential in, say, Argentina or Turkey.

Virtual currencies could also serve as a common layer between “Cash App World” and Cash App users (or other crypto wallets), enabling peer-to-peer payments to flow outside of typical, high-friction, high-cost remittance channels.

SVB’s Collapse: 8 Takeaways

Generally, I avoid writing about topics that have already been covered extensively elsewhere (especially if Matt Levine has already weighed in — unlike Matt, I take vacations 😅)… unless it’s a topic in which I have a particular depth of knowledge or competitive advantage (eg Goldman, BaaS, BNPL, etc.)

But, as an analyst covering the banking and fintech space, it seems I’m legally required to weigh in on the meltdown of Silicon Valley Bank and its knock-on impacts, given it is arguably the biggest story in banking since ‘08.

I’ll refrain from explaining the mechanics that led to SVB’s failure in favor of highlighting my biggest takeaways from the events of the last couple weeks and thoughts on their potential impacts.

1. Rapid Growth As Red Flag

Anyone who’s part of the startup or VC ecosystem knows just how unusual 2020 and 2021 were from a fundraising perspective. It seemed like anyone with a half-baked idea and half-decent pitch deck could raise a round.

Much of that cash ended up at… SVB. Multiple reports indicate that a whopping 50% of startups banked with SVB.

The result was a rapidly ballooning base of deposits, which SVB deployed by buying “safe” (low default risk) securities like mortgage-backed bonds and Treasuries:

That extremely rapid growth — 42% compounded annually — should have been a red flag, if not to risk professionals at the bank itself, then at least to regulators.

In any type of business experiencing extremely rapid growth, risk infrastructure and controls often fail to keep pace. As is now clear, SVB was no exception here.

2. Inadequacy of Asset Size as Measure of Risk

Regulators use asset size as a rough heuristic to evaluate the relative riskiness of banks and determine the level of supervision an institution should be subject to.

As a high-level grouping, that makes enough sense — the size of any potential problem (and bailout) is likely to scale with an institution’s assets and liabilities.

But, as we’ve seen in other recent regulatory actions, like Blue Ridge, a bank’s asset size alone may belie the level of complexity and risk that lurk under the surface.

In SVB’s case, the speed with which it was growing assets and liabilities should have suggested a level of risk higher than the absolute size of its assets — and encouraged regulators to take a closer look under the hood.

Additional indicators that, in hindsight, should have indicated higher risk than its assets alone include its share of uninsured deposits and its sectoral concentration. SVB was in the top 1% of banks in terms of reliance on uninsured deposits, which substantially escalated the risk of deposit flight in a bank run.

3. Possible Conflicts & Related-Party Dealings

Plenty has been written about SVB’s habit of tying products — for instance, by requiring startups that took venture debt from the bank to keep their deposits there as well.

There’s been less discussion of how interaction within the tight-knit ecosystem of venture capital funds and fund employees, startup companies, founders, SVB, and SVB officers and employees may have driven increased risk taking.

While, in theory, funds, companies, and SVB should have robust controls in place to manage potential conflicts of interest, in practice, this isn’t always the case.

Both the Department of Justice and the SEC have opened investigations into SVB’s collapse, which may shed additional light on practices at the bank and if they contributed to its collapse.

4. Legislative and Regulatory Responses

In trying to identify regulatory gaps that allowed SVB to fail, many analysts have zeroed in on 2018’s EGRRCPA, also known as the Crapo Bill.

The Trump-era measure, supported by Republicans and some Democrats, rolled back some provisions of Dodd-Frank, including raising the threshold for banks to be subject to the strictest level of oversight from $50 billion in assets to $250 billion in assets.

This regulatory “tailoring” — which SVB lobbied for — meant that the bank was subject to a less-stringent level of oversight from bank regulators than otherwise would have been the case.

But given many Republicans response to SVB’s failure — blaming “woke” management distracted by diversity — new legislation adjusting these requirements seems unlikely, at least as a stand-alone bill.

Still, bank regulators have tools at their disposal. The Fed has broad authority to impose requirements on banks with more than $100 billion in assets in order to protect financial stability.

Updated requirements in response to the crisis sparked by SVB could include annual stress tests, limits on counter-party credit risk, and requiring banks to maintain resolution plans.

5. The Challenge of Managing Risk in An Always On, Faster Payments World

SVB has been described as the first bank run of the Twitter era.

The velocity of everything has increased substantially since the last major banking crisis in 2007/2008 — information (and misinformation), fear, and money move more quickly now than ever before. Bank management and regulators are struggling to keep up.

When Washington Mutual failed in 2008, $16.7 billion in deposits left the bank over the course of 10 days.

With SVB, $42 billion in deposits fled the bank in a single day.

This trend, absent the intentional addition of some kind of circuit breakers or guardrails, will only accelerate with the implementation of faster payment schemes in the US, like FedNow and TCH RTP.

The rapid advances in AI and the ability to generate “deep fake” audio and video add further risk of bad actors intentionally spreading misinformation in hopes of causing panic — whether for geo-political purposes or personal financial gain.

Current systems, bank risk managers, and regulators are ill-prepared to deal with the velocity of risks that come with these developments.

6. Are Other Banks At Risk?

While SVB’s extreme reliance on uninsured deposits was an outlier, its exposure to declining asset prices because of rising interest rates was not.

Beleaguered First Republic, facing significant deposit outflows, was rescued by a consortium of 11 banks that deposited a combined $30 billion at the regional bank.

But, according to a recently released academic analysis, nearly 190 banks would face losses to insured deposits if half of their uninsured deposits left the bank (spacing adjusted and emphasis added):

“10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB.
On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run.
We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”

While SVB is an extreme outlier as far as its uninsured deposits as a percent of assets…

…the authors’ analysis finds numerous other examples of banks with a “negative insured deposit ratio,” which they define as the market value of assets not being able to cover all insured deposits after paying out “runnable” uninsured deposits.

7. Flight to Quality May Drive Greater Concentration

As the SVB crisis unfolded on Twitter and across private Slack channels and WhatsApp groups, the default advice to those with uninsured deposits at SVB seems to have been to move those funds to a “G-SIB,” or globally systemically important bank, like JPMorgan Chase or Bank of America.

Bank of America saw an inflow of some $15 billion in deposits as panic gripped customers of SVB and other regional banks.

The upshot may be that, absent changes to FDIC insurance limits, larger depositors gravitate towards already-huge banks — driving greater concentration and less competition in the banking sector.

Newfound attention to the risks of uninsured deposits also provides an opportunity for fintech infrastructure startups like IntraFi, which enables large depositors to achieve greater FDIC coverage by spreading their deposits across numerous institutions.

8. Slower Rate Hikes/Impaired Ability to Fight Inflation

Finally, there are very real potential macro impacts from SVB’s meltdown and the associated chaos that is continuing to unfold.

With rising interest rates as a key ingredient in SVB’s failure, the Fed is now caught between a rock and a hard place. Continue raising rates to fight stubborn inflation, but risk additional chaos in the banking sector as a result — or, ease up on rate hikes, but risk inflation expectations becoming unanchored.

Neither option is particularly appealing.

With the Fed’s next rate setting meeting taking place this week, we should get a better idea of how it hopes to thread the needle here.

Eco CEO Promises — But Hasn’t Delivered — A “Complete Response”

Although it might feel like it’s been months, given recent events, it’s actually been two weeks since Fintech Business Weekly covered a16z- and Founders Fund-backed Eco’s pattern of deceptive behavior.

And while Eco CEO Andy Bromberg was quick to tweet that the piece was “filled with inaccuracies” and promised a “more complete response,” the company has yet to deliver one.

Many of the rebuttals in Bromberg’s tweet attempt to draw a distinction between what “Eco” did vs. third-party service providers, specifically crypto custodian Wyre.

While it is accurate that there was a separate agreement between the end user and Wyre, substantial evidence indicates this relationship was hardly “direct.”

The interest rate users received was determined by Eco — not by Wyre.

Eco earned a yield based on Wyre lending customer funds, retained a portion for itself, and passed along 2.5-5% to end users.

Eco — not Wyre — issued 1099-MISC tax forms to users who earned more than $600 in APY “rewards,” further demonstrating Eco’s role as intermediator between Wyre and end users.

Bromberg’s claim that Eco “did not say explicitly it was lending to Goldman or Fidelity” is demonstrably false, based on a review of multiple versions of internal “playbooks” and transcripts of actual user onboardings, in which Eco employees repeatedly told users that “we lend USDC on a short-term basis to regulated top tier financial institutions like Fidelity, Goldman.”

If Bromberg’s logic is that the word “like” was intended to convey institutions that were somehow similar to Goldman/Fidelity, but not actually include them, I’m intensely skeptical any regulator would buy the argument.

Even if you accept that ludicrous use of “like,” numerous internal chats demonstrate Eco execs were aware Wyre was directing user funds to DeFi protocols and now-bankrupt Genesis — which hardly constitute “institutions like” Fidelity and Goldman Sachs.

Representatives for Eco didn’t respond to an inquiry about when the company’s “more complete response” would be available.

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