February 16, 2023

The search landscape is shifting

Search platforms are in fierce competition to integrate large language model-based generative AI in an effort to better understand users’ natural language queries, provide more informative search results, and differentiate in other regards (e.g., accuracy, privacy). Most attention has focused on Microsoft and OpenAI’s big splash to integrate the Sydney chatbot with Bing search and Google’s “code red” response to better promote its established AI efforts and launch new products like Bard, but there are several notable search upstarts like Perplexity.ai, You.com, and Neeva. While Perplexity and You have not clearly identified their business model or revenue streams, Neeva, which was co-founded by an ex-Googler deeply familiar with its adtech business, is betting that users are willing to pay for an ad-free or ad-lite, and more private, search experience. Neeva has now launched globally; arguably the market leaders are more vulnerable outside of North America. 800-lb gorilla Google has been losing share slowly in some regions. The idea of paid search is not new, think of exclusive data oriented services like Lexis-Nexus, etc., which provide answers based on factual, verified, or peer-reviewed information. But it is an open question whether or not some share of Google and Microsoft’s users, accustomed to getting something for nothing, would switch or perhaps just multihome depending on the task. There are beneficial indirect network effects using the big platforms’ multiple services. And established platforms may be able to absorb the additional costs of operating LLM-enhanced search long enough to outlast upstart competitors.    

European Digital Identity (EUDI) Wallet Project Is Taking Shape  

Last week the EC issued the European Digital Identity (EUDI) Wallet Architecture and Reference Framework. The document lays down all the specifications needed to build an interoperable ‘EUDI Wallet Solution’ based on common standards and practices. The wallet and the EUDI framework is part of the EU’s broader digital strategy focused on building technical systems to improve trust in digital transactions. In 2014, the EU had recommended member states adopt consistent standards for electronic authentication through the Regulation on Electronic Identification and Trust Services (eIDAS). The regulation had little impact, however. In 2020 the EC announced a revamped eIDAS 2.0 which integrates digital identity, wallets and electronic storage of documents. In June 2021 the European Commission (EC) adopted a recommendation to create a digital identity based on “unique identifiers” and wallets to enable consumers across the EU to transact digitally and control access to their data from their mobile phones. In December 2022, the EC awarded pilot projects of the Digital Identity Wallet to four public-private consortia across Europe. The EU Digital Identity Wallet Consortium (EWC) which includes 60 organizations like VISA, Digidentity, Amadeus and Finnair, was granted large-scale pilots by the Commission for travel, payments and organizational digital identity. The 148-member Potential Consortium includes participants from 19 EU member states and Ukraine. The Nordic-Baltic eID Project (NOBID) is led by a consortium of six countries, including Denmark, Germany, Iceland, Italy, Latvia and Norway. The consortia are implementing the pilots and developing standards even as the legislation is still in the works. The scope of the project and its implementation bear striking resemblance to the India Stack project which integrates the digital identity solution Aadhaar and payments interface like the Unified Payments Interface of India (UPI) for digital transactions. The centralization of digital identity and online payments has led to policy problems like exclusion, fraud and compromise of digital security. The EC should avoid these pitfalls by scrutinizing the development of India Stack and its platforms. Another risk for the EC is to ensure that the project does not lead to fragmentation of digital identities along sectors or countries. 

SEC’s crackdown on crypto continues

The Securities and Exchange Commission (SEC) continues its adversarial crackdown on crypto. In early February, the SEC settled with crypto-exchange Kraken for $30 million to roll back its “staking” practice of crypto holdings. This process allowed users to generate returns on crypto holdings. Where do these returns come from, you ask? A long and complicated process of holding, exchanging, arbitraging on hype-based price volatility, and creating artificial reserves, sometimes backed by an infinite money glitch. If that sounds like a Ponzi scheme, that’s because, in most cases, “yield” on crypto probably is. It may be good for the ecosystem to dial back on offering a 6% yield on ATOM coin holdings as large-scale use cases are yet to materialize. We are still in the hype cycle of private currency.

The SEC is also suing the crypto broker and fintech company Paxos for failing to register Binance’s BUSD coin as a security. Expectedly, Paxos responded stating that BUSD is a stablecoin and doesn’t generate yield, therefore, it should not be categorized as a security under the law. Paxos also declared its willingness to “vigorously litigate if necessary.” At any rate, this action served as another test of Binance’s stability under run conditions. But it also raised interesting questions about the differentiating factor between stablecoin and reserve backed crypto. BUSD lost close to $1 billion in net outflows on February 13 but is currently stable.

SEC’s regulatory muscle-flex can be understood as riding the wave of public outrage after FTX’s collapse and bolstering its track record before launching an expedition against its white whale, Ethereum. Without a clear law-backed institutional landscape, the SEC regulates by enforcement to deter bad actors, benefiting from the lack of clarity regarding their mandate to apply broad powers, as we saw with Ripple and BlockFi. CNN has called the recent SEC action a possible “Dodd-Frank era of crypto.” Yes, but the Dodd-Frank Wall Street Reform and Consumer Protection Act passed three years after the crash and still had policy design flaws. It will take rigorous study to understand the impact of a regulatory regime for stablecoins and other digital tokens, and in many cases, second-order effects cannot be factored in.  

Regulators are going to regulate lest we call them asleep on the job. It’s Congress’s job to fix this mess. The problem with coming up with the proper regulatory framework that affords investor protection is that digital assets overlap the mandate of government agencies who are positioning for control in this space. But that’s a story for another day.  

Meanwhile, with the 118th Congress, crypto is back in session and holding hearings. Senator Warren has signaled her intent to re-introduce the Digital Asset Anti-Money Laundering Act (DAAMLA). DAAMLA is packaged under a national security sales pitch, a politically expedient rhetorical strategy, likely to rally Republicans to her cause. The bill treats developers and users of crypto as gatekeeping financial institutions and would create a registration regime that burdens most crypto stakeholders, such as wallet providers and miners, with compliance requirements reserved for banks. See Coindesk for a more detailed account of its provisions. If Senator Warren succeeds in creating a political equilibrium, we can expect to be sold on a US Central Bank Digital Currency as a panacea soon. Unless Republicans remembered stablecoins’ potential in dollarizing the entire global digital economy.