It is no secret that Andreessen Horowitz is bullish about crypto: Not only does the firm boast that it started to invest in the space a decade ago, but it also debuted a $4.5 billion web3 fund last week.
To understand a16z’s bullishness despite what others have described as a “crypto winter,” its 2022 State of Crypto Report is a good start. Per its disclaimers, the document is not directed to any investors or potential investors — yada, yada, yada. But it does read like an argument for crypto, DeFi, NFTs and all things web3.
The problem, in my view, is that the report’s authors, all of whom are part of a16z’s team, are overstating the current opportunity for crypto. By doing so, they are making it sound bigger than it is — and it may take years to get to that point.
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That the report takes an optimistic view of crypto is understandable. After all, if you are about to deploy billions in funding into a market, and you are not even alone, the TAM needs to be up to par. But the report is also meant to be an overview of trends, which is why it seems questionable to allude to opportunities that aren’t real yet.
The point that bothered me the most has to do with remittances — money sent cross-border by individuals, typically from a richer country to a poorer one. The World Bank expects that such annual inflows will reach $630 billion in 2022. And yes, there are inefficiencies and fees along the way. For the authors of the a16z report, that’s more than enough to list remittances as an argument for DeFi.
But are remittance payments and money transfers really ripe for crypto disruption? And is DeFi really the right solution to help what the report describes as the “huge part of the world [ … ] underserved by existing financial institutions”? That’s definitely not what I am hearing from the ground — as also confirmed by two founders I reached out to Tomás Bercovich from Global66 and Ryan Newton from Paisa.
Thanks, but no thanks
Just earlier this month, I sat in the audience of the Tech.eu Summit as Wise CEO Kristo Käärmann was interviewed on stage. “Currently, Wise doesn’t accept cryptocurrencies. Do you think,” Bloomberg’s Ivan Levingston asked him, “that this might change at some point?”
This is a recurring question for the fintech company, so Käärmann made sure not to sound dismissive. “I am very excited about the technology,” he said, while also adding that “there are interesting experiments going on all around the world.” But the gist of his answer was still a nail in the crypto coffin. “We are just looking for a use case,” he said. “We’re looking for the problem that we can solve with it.”
Käärmann’s comment was still very much on my mind when I read a16z’s report, but I was also aware that Wise is not a remittances company. While it started out with a focus on money transfers when it was called Transferwise, it has since rebranded to emphasize its broader fintech ambitions.
Global66 hopes to be a neobank one day. But at the moment, the three-year-old Latin American company is focused on money transfers, and Bercovich, its Chilean founder, is well placed to comment on whether crypto would add value to his company’s focus. The answer is no, he said.
“If you already have the crypto,” Bercovich explained, “sending bitcoin to bitcoin is pretty fast and the cost is low. The problem for remittances is the cost of conversion from crypto to fiat and fiat to crypto.” If you add the spread on both sides, in emerging markets, that’s “much more expensive than peer-to-peer transfers,” he said. It’s also not faster: Global66 already offers instant peer-to-peer payments from one currency to another.
Projection, meet reality
Paisa founder Ryan Newton is skeptical that crypto could help her customers just yet. Her Mexico-based startup serves remittance recipients, most of them women who are often unbanked or underbanked. But what they need is financial inclusion, not cryptocurrencies.
Visualizing Paisa’s model is helpful to understand what its users do and don’t need. The overwhelming majority of its target users receive their remittances in cash, at a physical point of contact — the kind of place where they might also be able to top up their phone and more. It’s there that independent agents reach them to offer them Paisa’s remittance-backed loans. The loans can be used for personal emergencies or for a small business and are managed via WhatsApp to avoid requiring a dedicated app.
When offering loans takes such a human, low-tech approach, crypto just sounds a world apart. Paisa meets users where they are, both physically and metaphorically. “We are already working on understanding access barriers,” Newton said. “For crypto, the customer just isn’t there.”
It’s worth noting that Newton isn’t skeptical of crypto in general. For instance, she thinks that as a B2B play in the back end, or for B2B transactions, it could make things more efficient and transparent. As for Bercovich, he describes himself as a “crypto believer.”
Bercovich also acknowledges that things might change when it comes to crypto and money transfers. “In a few years, if there’s less volatility, and more liquidity — in all markets, but mostly in emerging markets — [then] it might be useful.”
For now, though, Newton said, bitcoin applied to remittances “would be a solution looking for a problem.”
That’s why I take issue with a16z’s report crowing about crypto offering a shot at financial inclusion, only to note a few slides later that “49% of crypto wallet activity comes from games.”
It’s supposedly still early days for web3, and it makes sense for a16z to talk about future use cases. It’s also laudable for the firm to put its money where its mouth is. But perhaps not vice-versa. There’s something disingenuous about insisting that crypto can help a population that has much more immediate and glaring needs.
(Disclosure: The Tech.eu Summit paid for my flight and accommodation to attend the event as a panel moderator. I chose to refer to the event here on my own given the information value.)
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