We Need Cryptofax, not Equifax

Here are some rhetorical questions about the current state of financial data storage. How is it possible that Bitcoin gets Jamie Dimon's misplaced finger-wagging, while Equifax can lose 140 million citizen identities? Did any of the individual consumers, whose information was hacked, knowingly consent to allow Equifax (or its oligopoly cousins) to indefinitely scrape and store financial and identity data? Did they choose to participate in this particular network, the way that millions of people have chosen to participate in public blockchains? What's even more spectacular is that the but-for causation of the hacking, in addition to the criminal activity of the hackers, was Equifax's negligence in failing to download a server upgrade for more than 5 months

There is no amount of improvement you can add to a horse and buggy for it to keep up with a Tesla. The core competency of this credit reporting agency is meant to be data security and identity. And yet one of its administrative portals used the credentials "admin/admin". Why does Equifax even manage servers when cloud providers like Amazon literally provide modern infrastructure for this use case? There is regulatory promise in Europe to create incentives to modernize such businesses, with the coming implementation of the General Data Protection Regulation that would result in up to a 4% revenue fine for a data breach. That's nearly $150 million on $3 billion + of revenue.

But there is a much better solution called blockchain, which has literally been built to be an incorruptible source of truth for digital information. Fintech companies like Token have built GDPR-ready APIs for open banking. Countries like Estonia are already running a blockchain-based national identity systems. Enterprise tech providers like IBM have an out of the box solution for the banking industry. And dozens of crypto-companies are tackling the challenge using public blockchains. It is time to get into the Tesla and put the horse carriage in the shed.

Apple Creeps Your Face For Identity

Source: Techcrunch

Source: Techcrunch

Speaking of digital identity, forget the old world of pins and passwords. You are the best measure of your identity -- and you carry it with you just by being who you are. No technology or lookup is needed to map your genetic information to your fingerprint to your voice, these things are just you! And increasingly, financial, social and media graphs are an extension of ourselves in the real world. So shouldn't these things be tied to us like biology? That would be the real-world version of a cyborg, where information streams, from biological to technological, are merged into one.

Apple has been setting the bar in biometrics, whether financial services incumbents are ready or not. The thumb is as good for a credit card payment as a physical credit card; 60% of surveyed consumers are indifferent between them. The next step is facial recognition, which users will rely on to log into their phones in the next version of iOS. To do this, the phone projects 30,000 invisible dots onto your face, scans that information with an infrared camera to build a 3D mesh, and finally uses a locally-run neural network to identify you. No cloud, no upload, no blockchain -- all of this happens on the device.

This approach is part of a broader melding between the real and digital worlds. Scanning objects, knowing what they are, placing them in a rendered augmented reality -- these are things that in 5 years time will be the new normal. Are bankers ready to flush out decade-old password systems for artificial intelligence-driven authentication? Or is it another case of "wait and see"?

SoFi and Uber Are a Symptom We Must Fix

A deeply disappointing and embarrassing account of SoFi corporate culture was exposed last week. Starting with CEO Mike Cagney and through multiple levels of management, there are serious allegations of sexual harassment, discrimination and disrespect towards women over whom SoFi executives held power. Cagney resigned abruptly to give the company a chance to move past the accusations. The story would be more shocking, were it not a blow-by-blow repeat of Uber. And the fall of Zenefits, driven by aggressive expansion skirting regulations and a frat sales culture, comes to mind.

In defense of its core business, SoFi has published strong statistics around performance in the last quarter -- $134 million in revenue, 60% YoY growth, $3.1 billion in loans. The dangerous implication is that high quality financial performance is what matters, and personality scandals are acceptable (or perhaps do not reflect on the corporate entity). Do we really have to accept cowboy entrepreneurs as a requirement to build high-growth innovative companies? Is a toxic startup ecosystem an acceptable byproduct of chasing growth and hitting revenue numbers?

Change starts from calling things like this out, and understanding that companies operate in a society, not in a vacuum. They are collections of people, and their mission and culture reflects the example set by leadership. Therefore -- leadership matters. Further, when attention is scarce and product choice is infinite, creating a disrespectful culture is terrible business. Consumers can and should vote with their wallets -- Commonbond will be glad to have them. And last, as Fintech companies build increasingly more human judgment into software (think blockchain and artificial intelligence), these biases will become massively amplified. Powerful tools should be built by teams with diverse backgrounds, genders, ethnicities, and wealth levels, or risk perpetuating the mistakes of the old world.

Devil's Advocate on ICOs

Source: Hut34

Source: Hut34

Let's take a bearish view on cryptotokens, just as a hypothetical. At their core, what ICOs have done is move the exit, i.e., monetary reward for investors, from (a) the moment of company maturity to (b) the moment of idea formation. That creates a breakdown in what is commonly cited as venture capital mantra -- ideas are worthless, execution is everything. As a byproduct of early stage illiquidity, venture capital forces founders to go on a journey that moves a project from idea into a functional economic artifact. But when venture funds can make a 6X paper return by participating in an ICO pre-sale (e.g., Filecoin $0.75 presale vs $4.69 end of first ICO hour), venture capital becomes not about gathering your party to venture forth, but about day trading speculation and access arbitrage in a new financial instrument. And further, the cool-factor of tokens and the meteoric rise in BTC is blinding all types of investors to what they are actually purchasing -- a number in a (decentralized) database with no equity rights. And if there are equity rights, that's even worse once the law is clear.

So what assumptions did we make that could undermine the above argument if they were not true? The first, and most obvious is the existence of mature capital markets. In many of the jurisdictions where ICO money is being raised and implemented, the needed packaging of legal and financial instruments is missing. It's not Silicon Valley breaking down, but Russia and China rising. And perhaps Western "maturity" is akin to old infrastructure that keeps it tethered, while the developing world leapfrogs into the next stage (think mobile in Africa). The second, and more difficult assumption, is that the existing early stage markets do not allow entrepreneurs tothink big and solve global problems. Instead, early stage venture incentivizes incremental polish on incremental features. As an example, see Fintech as a thesis or the latest B2B fintech rounds.

Shouldn't we dream big and reward those who do? How about an automated renewable-energy trading and clearing system that decentralizes a green electric grid (see Power Ledger$17 million in ICO presale). Or using virtual reality models of scientific problems and a blockchain-based rewards platform to incentivize scientific collaboration on research (see Matryx)? Or creating a global superintelligence, not controlled by Google, Facebook or Apple, but in a shared distributed interbot network monetized by humans (see Hut34)? We don't know if these ideas will be utopian or truly valuable, but we are excited to see them attempted.

Building Attention Viruses

Source: USPTO, CB Insights  

Source: USPTO, CB Insights

In the post-scarcity world, user attention is the scarce good; so goes the saying. One of our themes is tracking the intersection between artificial intelligence, software, human understanding and thought, resulting demand generation for products and media, and the asymmetric returns that result. Meaning, if a company controls a massive software system that determines what people think and buy by the billions, then you will experience monopolistic winner-take-all economics. Or if you are a video-gaming streamer with 52 million subscribers, you can make over $1.4 million a month despite the quality of your ethics.

This post from CB Insights highlights a worrying amplifying trend -- Google is working on a patent to identify human influencers within networks, and Microsoft is doing the same to automatically assess a person's level of expertise. This means, first, that a network can be scored and activated for viral content through influencer marketing at scale. Forget Klout and Twitter. If Google's virtual assistant is always connected to humans via their phone, it can deploy software-determined peer pressure in real life to change behavior and create engineered viral outcomes. All you would have to do is pay for advertising. If an election can be swung by creating an army of fake persons and throwing around Likes, what chance does human judgment stand in the long run?

And second, in the Microsoft world, software gets to decide who is an expert based on what they say -- on the web, on a social network, or perhaps to Cortana. This short-circuits the signaling we currently rely on to understand who is trustworthy, such as university and company brands. Already, people are paying thousands of USD to purchase Instagram influencer followers and badges. Do we really think that software-led attention curation engines won't be massively gamed? 

Square Wants ILC Banking Licence, Small Banks Fight

Source: FDIC

Source: FDIC

It's hard to be a little bank. Large banks have massive technology budgets and branch footprints. Fintech companies are building tech products that consumers actually want (see RobinhoodN26). Community banks and credit unions are stuck renting technology from Fiserv and Jack Henry, and focusing on local markets. And even that long tail of distribution is eroding, as people spend more time on their phone than the local branch. 

So it stands to reason that when the Fintech unicorns like SoFi and Square want to access FDIC insurance through an industrial loan company application, and not a full-fledged banking license, the small bank community gets pretty defensive. If regulation is your main barrier to entry, then regulation must be protected and emphasized. In fact, the main protection banks have been citing over the years of Fintech growth is that tech companies "don't want to be regulated", and therefore won't get into banking product manufacturing. Well. Square has lent out $1.8 billion to over 140,000 business. Seems like manufacturing banking product to us.

It's easier to be an ILC than a bank -- the parent firm does not have to be a Bank Holding Company, and therefore is not regulated by a federal banking agency. And federal regulator OCC had previously expressed a desire to create some carve-out for Fintech banks, however flawed the attempt, which led to State lawsuits against the agency for overreach. State regulators are working on modernizing their own framework to better deal with technology developments, but we are not optimistic that so many non-entrepreneurial parties can be coordinated to be competitive on a global scale.

They Huffed and They Puffed and They Blew the Crypto House Down

Source: Autonomous NEXT

Source: Autonomous NEXT

Cryptocurrencies most threaten those jursidictions where residents want to pull currencies out of the economy into international havens. Think Russia and China. And so we see the Eastern sovereigns trying to wrangle control of the crypto-economy, like the media companies that had tried to fight digital piracy. Except countries have the power to jail people for promoting Initial Coin Offerings. Just over the weekend in China, the ICO market hasbeen put on ice by China's Central Bank, which has sent Bitcoin tumbling from nearly $5,000 to below $4,400. But the community believes this to be a temporary measure for controlling the market and protecting the population from fraud, rather than a permanent moratorium.

Russia, on the other hand, has been sending out mixed signals. First it was reported that the Moscow Stock Exchange was introducing crypto for qualified investors. Then this news was denied by the exchange, claiming that many options are on the table but none have been implemented. Further, Ethereum is likely to be behind a Russian crypto-ruble, either to be controlled by the nation or perhaps via a proxy bank or a foundation. You can see a great run down of these events at Token Economy. And while in the West, blockchain companies are primarily outsourced Fintech R&D for incumbents, in the East the cryptoeconomy is a way for people to have a free banking system and movement of money. Maybe not for much longer.

We'd be remiss not to mention the governance attempts from inside the community itself. Countries and regulators may try to shut down unlawful activity, but the best hope in our view is from the community itself. To that end see these independent efforts to beef up ICO launches with a diligence framework: (1) Cryptoassets: A crowd sourced evaluation & due diligence framework, (2)  Independent SRO, The Financial Commission, Extends Fintech Certification to ICOs, and (3) The ICO Governance Foundation: Cleaning up the ICO market. A lot of folks in this decentralized world trying to own stuff.

Who is the Worst Performing Roboadvisor?

Source: BackenDBenchmarking, WealthManagement.com

Source: BackenDBenchmarking, WealthManagement.com

Back to a simpler time -- roboadvisors. Research firm BackenDBenchmarking opened up portfolios across the usual digital wealth suspects in the United States to see how their investment performance stacks up over the last 12 months. The portfolios were intended to seek a moderate asset allocation of roughly 60% stocks and 40% bonds, and the results can be seen in their chart below. The average return was 10.6% for the year, with Schwab's service reaching 11.94% and Acorns coming in last at 7.4% per year. Betterment outperformed Wealthfront, and Vanguard beat Personal Capital.

More telling are the efficiency ratios -- how much did holders pay for their units of Return with units of Risk? Nothing too fancy, just a Sharpe Ratio. Here, Acorns does noticeably horribly, coming in at nearly half of best performer E*Trade. FutureAdvisor also had a meager performance, which is surprising given their BlackRock affiliation. 


So are these numbers at all useful? Not really -- they are the wrong way to look at digital wealth management. In the world where brokers sell investment product, this type of horse-race about which portfolio has the best return may make sense. But that world is a decade gone. Humans using roboadvisors care about fulfilling their financial goals and having a non-stressful user experience, not just raw returns. To that end, the useful metrics for these services should be around customer satisfaction, net asset flows, engagement and education, asset retention during crises, and the avoidance of behavioral biases. Selling digital wealth as net investment performance only hurts industry participants, as it optimizes them around metrics that are not the primary motivator for consumers of the service.

Tokenizing the AI Messenger

Source: Activate Media

Let's connect two data points and make a trend. First, Canada-based chat platform Kik is working on a $125 million token sale, which will embed a cryptocurrency into the messaging network itself. No need for Paypal, ApplePay or other shenanigans. The network itself becomes the payments mechanism by giving literal value back to its participants. Can this happen to WhatsApp, Facebook Messenger, Telegram and create a Western version of WeChat? What is payments but a derivative of communication?

Second data point. Tech giants are partnering -- in retail, it's Amazon vs Google and Walmart. And in voice interfaces and AI, Amazon Alexa is now working with Microsoft Cortana to take on Google and Apple. In a spectacular Quora post, Brian Roemelle walks through how the audience resulting from this partnership is immediately 200 million (if not bigger). So what we have is a multi-purpose artificially intelligent agent that mass-personalizes products and software across ecosystems. This thing that will live in our smart speakers, autonomous cars, VR headsets and neural implants (thanks, Elon!).

So let's connect the data points. A messenger with 300 million users is creating financial liquidity for its community through tokens. The attention economy is evolving its own economic power, outside of financial services. But remember, messaging and conversation will be not only between (1) humans, but between (2) humans and machines, and (3) machines and machines. There are only a few billion people, and far more software and hardware agents, which thanks to Amazon/Google can now talk to us directly. Voice-first is not just a front-end upgrade, it's an economic vector. It is human intent with machine money attached. 

How Many Crypto-Hedge Funds Can You Count?

Source: Autonomous NEXT

Source: Autonomous NEXT

As the cryptocurrency asset class becomes more mainstream, a financial services ecosystem is sprouting around tokens. Like wild mushrooms, crypto hedge funds have been taking root in the volatile and unregulated soil of the crypto economy. So we went digging, and digging and digging. With the help of our friends at Token Economy (also with shout-outs to Forbes and Daily Fintech), we have put together the list of currently-known crypto investors as of end of August 2017. 

There are generally three types of funds. The first comes in a traditional regulated hedge fund structure which happens to be buying up cryptocurrencies. Think macro or technical Wall Street traders. Second, there are early-stage funds that look like liquid venture capital. They target pre-ICO investments through community access, and can then quickly make a return once the token is trading. And last, we see a number of funds using the ICO structure itself to create decentralized investment management products (i.e., indexes, baskets, ICOs of ICOs). Good luck claiming that's not an investment contract to the SEC! There's a fourth kind of fund as well, but we'll leave that to next issue. 

Here are the 55 entities we found, with links to their websites, and below is a fun infographic we've put together on the space. Spread the word, and tell us if we've got it wrong, or are missing any names.

(1) 1confirmation, (2) Alpha Bit, (3) Alphabet Coin Fund, (4) Auryn Capital, (5) BKCM Digital Asset Fund, (6) Blackmoon Crypto, (7) Bletchley Park Asset Management, (8) Block View Capital, (9) Blockchain Capital, (10) BlockStack, (11) BlockTower Capital, (12) Blueyard, (13) CoinFund LLC, (14) Coinshares 1 LP / Global Advisors, (15) Crypto Asset Fund, (16) Crypto Assets Fund, (17) Crypto Fund AG, (18) Crypto Lotus, (19) Cryptochain Capital, (20) Cryptocurrency Fund LLP, (21) Cryptor Trust, (22) Cyber Capital, (23) Digital Developers Fund, (24) Ether Capital, (25) Exagon Fund, (26) FBG Capital, (27) Fenbushi, (28) Firstchain Capital, (29) General Crypto, (30) Grasshopper Capital, (31) Hyperchain Capital, (32) ICONOMI, (33) Iterative Instinct, (34) Kenetic Capital, (35) Logos Fund, (36) Medici Crypto, (37) Metastable, (38) Monkey Capital, (39) Multicoin Capital, (40) Pantera, (41) Placeholder Capital, (42) Pollinate Capital, (43) Polychain, (44) Rich Fund, (45) Satoshi Fund, (46) Science Inc., (47) Solidus Capital, (48) Soros Fund Management, (49) SuperBloom, (50) TAAS Fund, (51) Tezos, (52) The Token Fund, (53) Token Factory, (54) Unit Fund, (55) Venture One

*** Update for new funds that have reached out to us to be included :

(56) Base58, (57) Bitfin Capital, (58) Blackchain , (59) Blockweather , (60) CryptoLifeCapital, (61) Iterative Capital, (62) Kryptonite1 PLC, (63) MTDigital Assets, (64) NextBlock Global, (65) Protos Cryptocurrency Asset Management, (66) Shuttle Fund, (67) The Crypto Fund, (68) Vergio

Will Augmented Reality Be Our Economic Future

Source: VentureBeat, Game Insight

Source: VentureBeat, Game Insight

As we highlight in the thematic links below, there were two meaningful ICOs in the gaming / virtual reality space recently. The first was called Decentraland ($24mm) and looks like an open source, decentralized Second Life, rebuilt for modern sensibilities. Recall that Second Life had a GDP of nearly $600 million from a population of over 1 million back in 2015. The second data point is DMarket ($10mm), a blockchain that connects the value of virtual goods between different worlds. Get used to slogans like "live in the blockchain" and "turn every virtual item into a real commodity". These things do not sound weird to Generation Z.

Since virtual goods will exponentially grow and proliferate in functional and economic complexity, accelerated further by artificial intelligence, we think that understanding how this platform shift looks and feels is fundamental for financial services that want to remain relevant in an alien world. So take a look at this recent development of a video-game world being rendered in Augmented Reality on a shared physical table. There are participants who are both inside and outside the virtual world. Recall that Amazon bought video-game streaming site Twitch for $970 million a few years back. The distinction between real and digital will collapse once (if?) Amazon deploys Augmented Reality shopping across all of Whole Foods.

And perhaps there is a point where digital worlds mesh with real worlds. Perhaps EstoniaVietnam and South Korea's warm embrace of the cryptoeconomy will put them into a position not just of pioneering digital currencies, but pioneering blockchain-based digital sovereignty in the virtual worlds to come. Can the SEC keep up with the implications of the technology, or is it doomed to enforce last century's paradigms?

Neobank Contrast: Revolut or Simple?

Source: Revolut

Source: Revolut

Which banking team do you think young developers out of university will be more excited to join? Is it neobank Revolut, which is publicly committing to include cryptocurrencies like Bitcoin, Litecoin and Ethereum into its mobile app based on community feedback? This development would turn Revolut into both a crypto-wallet and an app-based exchange in the long term.

Or is it Simple, the famous neobank that BBVA Compass acquired in 2014 for $117 million, wrote down $60 million last year, and that continues to apologize to its customers for forgetting how to innovate? And why is Simple mired in integration while Revolut captures the imagination of its users? Because it has been re-writing a core processing system from scratch, and is talking about budgeting and planning when the world is talking about conversational interfaces and virtual assistants.

Vision and mission are the differentiating factor in our economy. Without vision, there can be no purpose. Without purpose, how can organizations attract a world-class team? What is your vision?

Crypto is for Machines

Source: 21 Inc

Source: 21 Inc

Just because the ICO market is red hot, doesn't mean every component of it makes sense. Depending on time horizon and risk tolerance, capital allocators should think about whether they are investing in a short-term financial sentiment play, or a long term infrastructure play. And as more and more traditional money moves into the ecosystem, parsing out things that are transformative from those that are fashionable is important. We are working on separating out these issues. Perhaps the value is just decentralization and privacy from sovereigns. But that is like saying the Internet is for websites. 

So one clear short-term trend is traditional institutional investors looking for exposure to the cryptoeconomy. Symptoms include asset managers like Van Eck filing with the SEC to create Bitcoin ETFs, venture capital funds partnering with Blockstack to create a$25 million fund, the creation of Coinlist by Protocol Labs and Angellist, North Capital's Proof Ethereum Reg D offering, and a variety of others. Wealth managers, family offices, broker/dealers, traders are all looking for crypto-exposure as a response to the ICO boom. And that's just public knowledge. There's likely much more demand privately -- so much so that an insider like Ryan Selkis of Coindesk / Digital Currency Group thinks that the rush into crypto-hedge funds is a disaster waiting to happen.

Our initial intuition is that much of the cryptoeconomy is not for people, but for machines. In a world where most work is done by automation, human interactions with blockchained ecosystems isn't particularly important. However, machine-to-machine interactions on the Internet of Things is a massive problem at scale. We haven't even seen the start of it. To that end, projects like District0x (which we don't hold or endorse) are interesting at a conceptual level. Perhaps this is just crypto marketing mumbo-jumpo, but the idea of a platform for spinning up decentralized autonomous organizations that use Ethereum, Aragon and IPFS fits our Accelerando thesis. Or see this talk on the "Machine Payable Web" by 21 Inc, a place where financial hive-minds and Amazon borganisms can evolve to compete with Uber Eats.

Amazon Lex for Wealth Management & Banking

Source: Amazon Lex

Source: Amazon Lex

We believe that bank-as-a-platform is inevitable for any meaningful financial institutions, and that it is more likely to be a narrow, utility-like platform than the dominant iPhone app store. A strong enterprise tech platform like Amazon is the main vector that would compress financial institutions from large manufacturers and distributors to regulator-facing APIs.

In wealth management, roboadvisor Betterment uses 20 different applications on AWS. In this excellent article, Financial Planning discusses how Amazon's conversational interfaces can become prevalent across the industry. What starts as a conversation about payments can turn into a conversation about financial products, planning, investing, trading and retirement. And talking, or even chatting, is far more natural than thumbing through buttons on the glass screen of your phone. But perhaps advisors can use the technology to their advantage, or build skills and applications to live in the Amazon ecosystem.

In banking, take a look at ING, and its vision of voice-activated digital assistants. The combination of open banking mandated by European regulation PSD2 (i.e., all banks have open APIs) and natural language processing means that data is free. Building the first voice-based financial data aggregator can create a lead generation engine for deposits and lending. Or it can commoditize all financial product manufacturing.

How Creative Artificial Intelligence Can Lie

Source: Google, NYTimes

Source: Google, NYTimes

Once in a while, we can't help coming back to this rhetorical question -- Can AI ever be creative?  This week saw a return of interest to the field of deep dream and deep style, which is the use of neural networks to hallucinate art, music, and poetry. The New York Times walks through the basics of how computers can do this, sharing Google's project MagentaNSynthSketch-RNN and others. Another example is a viral art app called Prisma, which lets users apply artist filters on top of their own photos, now planning to provide its image recognition software as a private label service to businesses.

So two things to think about as it becomes more obvious that computer vision works, and that it can be creative. The first is that we can no longer trust what we see. Neural networks can be used to manufacture not just weird artifacts and copy Picasso's style. They can also be used to manufacture voices and videos. See this article for multiple examples of synthesized videos of world leaders (e.g., Obama) delivering a variety of real and manufactured messages. To doctor a video and spread misinformation, using perhaps a Twitter bot army,  will become trivially easy in the next 3 years. How does this impact finance? Think of all the things robot Warren Buffet could be made to say.

Second, this can be used to break the machine vision claims processing software that are being built by Insurtech companies. We've talked before about how photos of damage can be read by machines, and save operating costs of sending out claims assessment professionals. See here for a clear example how this technology works and "sees" damages. How hard would it be to hallucinate damages where there are none? Creative AI is merely the reciprocal of machine vision. Companies like Nationwide and Ping An, spending millions on insurtech solutions, should beware of such exposure.

OnDeck and Kabbage Show $1 Billion Difference Between Public and Private Markets

Source: Kabbage, Supermoney

Source: Kabbage, Supermoney

 A bit over a week ago, SME digital lender Kabbage raised $250 million from Softbank, the Japanese tech and telecom behemoth, with a valuation somewhere between $1.25B and $2B. That's a real digital lending unicorn. The firm has lent out over $3 billion with a maximum of $150k per business. A loan can be underwritten in 10 minutes, and this technology has been increasingly useful as a private label platform to incumbents like Santander

Let's compare that to OnDeck, also a digital lending startup, which has lent out $6 billion with a maximum of $500k per business. Underwriting can also happen algorithmically in minutes, and the platform has been private labeled to incumbents like JP Morgan. However OnDeck is public, and instead of getting additional runway from private funding, it has been cutting costs by $45 million and managing its $350 million marketcap on a quarterly timeframe. It's hard to know whether there is meaningful difference in proprietary algorithms between those two firms, and perhaps that explains the $1 billion in valuation. Or perhaps the gap between private and public markets is not kind to Fintech.

One last thing to note. The black swan threat to digital lenders isn't banks. It's high tech companies that have better and deeper data, and therefore are better able to underwrite loans. That means more issuance with fewer defaults. Paypal Capital, having just acquired Swift Financial, and Square Capital own the flow of merchant payments data, something OnDeck and Kabbage get after-the-fact with data aggregation. And Amazon owns not just payments and shopping cart data, but the traffic to merchant pages on the Amazon platform, customer reviews, and the underlying merchandise. Better stay private!

Neobank Tandem eats Old Bank Harrods

Source: Harrods Bank

Source: Harrods Bank

Building a consumer-facing fintech company, in particular one competing on user experience when most clients just want some deposit interest, is really hard. It is "$1 billion to be spent on marketing" hard. To add insult to injury, getting a license to do the very basic function that you are trying to improve can be prohibitively difficult for banks.

Tandem, a challenger that competes with Atom, Monzo, Revolut and other neon-colored websites, had two strokes of bad luck this year. First, its pre-announced capital raise of £29 million fell through. And second, its license to offer banking services in the UK was never granted. But Tandem has something that traditional banks lack -- 11,000 vocal champions that have crowdfunded it on Seedrs. It's not the money that mattered, but the conviction of future customers and the love of a brand (prior to the launch of any financial products). This, you could say, provided Tandem a mandate to satisfy a demonstrated demand.

And it has done so through a reverse acquisition of a traditional bank. Aren't all fintechs just looking for an exit? Harrods is a bank aimed at the high end of the market, the same segment as theaffiliated luxury store Harrods. It does not have a distributed retail footprint, but it does have a banking license. And there's something satisfying about this high-end brick and mortar organization going all-in to Millennial mobile banking. Tandem is getting the infrastructure and £80 million of capital to fulfill its mission. Since the terms of the deal were not disclosed, we wonder if they were heavily tilted to equity, and who retains majority share. Probably not the 11,000 vocal champions.

Is the Cryptoeconomy Spilling into the Real World?

Source: Overstock, Forbes

Source: Overstock, Forbes

At a high level, we think that the most interesting things happening in the economy are around platform shifts -- mobile apps to voice skills, human intelligence to machine intelligence, and traditional economy to crypto economy. From that perspective, all you have to believe in order to see the potential of the crypto economy is that superior technology infrastructure matters in business competition. Any business not using the advantages of decentralized crowd storage, global users, consensus and trust mechanisms, smart contracts and embedded exchanges, and user-controlled attention economy is at a severe disadvantage in the world of the future. So how to take advantage of this shift?

Overstock, the oddball cousin of Amazon, announced that in addition to Bitcoin, it will accept Ethereum, Litecoin, Dash, Monero, and the new Bitcoin Cash, using digital exchange ShapeShift. Can you ask for a more clear rebuttal to "I can't use crypto-currencies anywhere"? The edges between these two worlds are starting to blend, and some portion of the $100B+ in tokens will certainly be used to purchase "real goods". 

And a large portion of the real economy will spill back into the decentralized world. The bridges are being built. Coinbase, one of the largest digital currency exchanges, has just raised $100 million at a $1.6 billion valuation. That's instant fintech unicorn status, as well as a fair valuation for a company with 10 million users and 30 million wallets. Or alternately, see the CBOE planning to launch a Bitcoin trading product for institutional access. Or the $1B+ market cap of the Bitcoin Investment Trust, publicly traded. Or the $252 million that Filecoin has just raised in just 60 minutes from accredited investors in the United States, SEC commentary notwithstanding. This cannot be ignored.

Independent Broker/Dealer LPL robo-future

Source: Financial Planning, LPL

Source: Financial Planning, LPL

Roboadvisors are not the future of financial advice, they are the present of financial advice across the world. From the $70B+ in Vanguard to $10B+ in Betterment and now £260mm in European fintech Moneyfarm, roboadvisors are a well worn path for building B2C digital wealth channels. Same for B2B. A few years back, after BlackRock bought FutureAdvisor and began selling it to financial institutions, like banks and broker/dealers, there was a series of announcements of firms adopting FutureAdvisor as private-label software. We are now seeing signs of production deployment of such institutional contracts.

LPL, an independent US broker/dealer with 14,000 financial advisors, is rolling out Guided Wealth Portfolios. We don't need to guess how it will look as we've seen FutureAdvisor, the launches from Schwab, Vanguard, Fidelity, as well as planned launches from JP Morgan, UBS, Bank of America Merrill Lynch and others. In addition to this channel, the firm will launch a mobile app, which is a strategy for digitizing existing client relationships through reporting.

Perhaps more interesting are the following data points. LPL won't let advisors change more than 100 bps for the offering. LPL has had to spend $77 million on technology in 2016, more than double the $38 million in 2011, due to the requirements of the DOL fiduciary rule. And what LPL is really excited about isn't roboadvisors, but micro-investing services like Acorns and chatbots like Trim.

Filecoin Gets $52 Million Prior to ICO

Source: Filecoin

Source: Filecoin

First, none of the below is an endorsement of any kind, but only macro commentary on the strategic landscape. A lot of interesting developments around the upcoming Filecoin token launch. To recap, unlike nearly every single ICO to date, Filecoin is explicitly trying to launch within the framework of US Securities Law, and is doing so leveraging traditional institutional venture capital and angel investors. The sale is being run through CoinList, an offshoot from angel-investing / venture syndicate platform AngelList. It uses a newly created legal form called the Simple Agreement for Future Tokens (SAFT) and targets only accredited investors with an investment minimum of $500. 

But what is particularly interesting in this example are the implications of allocation and pricing. Filecoin is a decentralized file storage and computing platform built on blockchain, not unlike Storj or MaidSAFE. In principle, the token launch mechanism is a democratic crowdfunding in which users of the future project can participate the protocol level and benefit from their own efforts. And yet, the project has already raised $52 million in a token pre-sale ahead of the ICO from investors like Union Square Ventures, Sequoia, Winklevoss Capital, Digital Currency Group, among others. That investment happened at a discount to what the ICO price is set to be, in certain cases by an order of magnitude. Designing a price increase into the ICO merely one week after an original sale feels a bit like that time Steve Jobs got millions of backdated options. Not all crypto-economy participants are happy about this.

To go even further, read this excellent analysis by Preston Byrneon why the SAFT helps issue tokens, but does nothing from a regulatory perspective to help trade them. Resale is different from offering. It is a conservative view, assuming that regulators will not want to encourage token launches through friendlier treatment. But nonetheless something to think about if your token looks like an investment contract, rather than internal software money supply -- an issue we covered in our ICO report