$2.2. Billion for iZettle by Paypal


If you're PayPal, maybe it's frustrating to see people talking about the future of money and not mean you. But it would be a mistake to count them out of the game. The company has been expanding expertly across the Fintech ecosystem, with the latest data point being a $2.2 billion acquisition of iZettle. iZettle is a European version of point-of-sale dongle manufacturer Square, processes $6 billion in payment volume and accepts Google/Apple pay. The success of this model is a consequence of the adoption of mobile phones and tablets -- meaning that smart devices are cheap, everywhere, and can accept payments. Thus the (slow) power shift from dedicated hardware, to payments as a feature within tech ecosystems.

Two directions to think about. First, payments is a great entry into a broader fintech business model. When looking at Chinese messaging company WeChat, we see the world's largest messenger user base, tech payments app, and money market fund. Associated with such a messenger is a large data set of conversation and commerce -- which powers lending and investing. The same playbook could happen in the West. For PayPal, such logic would drive the partnership with micro-investing app Acorns and the acquisition of social payments app Venmo (and developer focused Braintree). Lending is the next logical step -- for analogy, look at Square's merchant lending business or Goldman's success with Marcus and its expansion into Europe. 

The second direction is augmented commerce. As AR/VR penetrate the world with devices and change how people shop, we think it will be important to own a hardware asset that can adapt to the opportunity. iZettle gives PayPal an option for success in the next wave of tech transformation. Of course, it will be complicated to rationalize capability, especially in relation to Google and Apple pay. Looking at the Venmo acquisition, PayPal is now stripping out its web functionality and limiting Venmo to the mobile app -- there is no sense in having two separate web standards. And on retail commerce, there is still the question of crypto. Companies like Basepay (support Ethereum as currency at 11 million retail location) and Revolut (prepaid card that can index to crypto and be swiped at point of sale) are building a bridge that PayPal is yet to cross.


Source: Reuters (iZettle), Crowdfund Insider (Goldman Marcus), Reddit (Venmo), NewsBTC (Basepay).

Catch 22 of Insurtech Transformations


When we looked at Insurance in our artificial intelligence deep dive, nearly $400 billion of cost was up for grabs as a result of the platform shift. But there's a catch. Getting to the other side can look pretty much impossible for an incumbent. Ripping out legacy systems, which support billions of dollars of revenue, and sailing into an unproven direction is not a popular choice for a public company CEO. So instead of jumping onto entirely modern architecture, companies like John Hancock partner with transformation consultants / software providers like Infosys for multi-year $10 to $100 million projects. Further, according to the innovation officer of MetLife, only 30% of execs really "get it", and even then you only have 18-24 months of runway before the company starts to ask for operating results. Compare that with the 5-7 years that are afforded a new startup to get off the ground. And we know that startups are much faster at execution.

On the other hand, we see the symptoms of fundamental change all across the space. For example, Allstate had to send 3,000 employees to assess the damage from hurricanes Harvey and Irma last year. But it also deployed drones (trained on 5,000 hours of prior flight time), which provided needed image data before the humans even got to the location. How soon will drone pilots and video Facetime agents replace the traveling adjusters? Similarly, companies like Roost are deploying telematics in homes, retrofitting old smoke alarms to detect water damage, weather issues, and other dangers, with connected data streams into smart phones and monitoring systems. If this data is real time and builds out the IoT/AI corpus, what need is there for human assessment in the majority of cases?

The idea that terabytes of daily data from smart systems can interact with legacy insurance infrastructure seems untenable. But in 18-24 months of execution, the best outcome is that these products can become mere bolt-ons. Compare that to Lemonade's approach, which is open sourcing its insurance policies on GitHub and practicing radical transparency on its metrics and approach. And further, entirely new cyber risks are emerging, around which traditional insurers have no systems at all. Crypto projects like Coinsurance (pay out in case an Initial Coin Offering fails to list on an exchange) and Coin Governance System (pay out in case of ICO scam) are rethinking the bundling of financial products which are becoming top of mind to many Millennials, 5-10% of which own crypto currencies. Such new entrants will need to get enough scale for the old guard to believe that the world is changing -- see you in 5 years.

Source: DigIn (30% ExecsDrones), Coverager (John HancockRoost), LemonadeCoin Governance System

What could Facebook Coin do?

  Source: Facebook

Source: Facebook

Let's get the facts out fast: Facebook's David Marcus used to runFacebook Messenger. He also used to run PayPal, after selling to it one of his startups. And now he is going to run the Facebook blockchain team. Did we mention he is on the Board of Directors at Coinbase? And did we mention that Facebook has a PayPal integration that lives inside Facebook Messenger? So let's test out some ideas.

Idea 1: Bitcoin as a native payments coin inside of Facebook. The social media network doesn't like ICO advertising because that implies promotion of financial products, Bitcoin is very much not a security and has financial industry maturity (see Goldman, CME, CBOE) like no other asset. If you're making an argument for payments or store of value for a Facebook wallet, why not start with Bitcoin and put it into Messenger as a form of payment. This would the PayPal line of reasoning. Our verdict: unlikely, commercially unnecessary and regulatory nightmare.

Idea 2: Empower users with their data in response to Cambridge Analytica and GDPR. Create Facebook wallets and tokens, where the tokens hold all user data on a distributed ledger, and users can control granular permissions about how their data is used and monetized. Perhaps this merges with the Brave browser, such that attention tokens are backed by deep user data. Our verdict: unlikely, undermines core model.

Idea 3: Create unique digital collectibles that are somehow tied to user profiles and interactions that can be purchased, shared or stored. Unlike selling digital goods from a central data base (which can be wiped anytime), a Facebook version of CryptoKitties could work. Casual gaming like Farmville was practically born on the Facebook graph, and the customer segment is correct. The question is, will customers understand that blockchain-based tokens have real scarcity? Our verdict: possible, easy experiment.

Idea 4: Take the enterprise blockchain approach by finding an industry oligopoly and build common infrastructure. For example, create a common platform for advertisers, that uses smart contracts to execute workflows and is transferable between providers. Replace cookies on people's computers with tokens they are paid to hold, which will allow advertisers in the consortium to target audiences better. Our verdict: possible, though coordination problems.

Idea 5: Launch Facebook Coin, like Telegram did. Just copy/paste Ethereum and its top 10 apps into a white paper description, tell a story about how many users you have, and raise $10 billion from venture investors. Out verdict: never going to happen, we hope

Email us anytime David!

Can Robinhood and Acorns grow into their Valuations?

  Source: Learnvest

Source: Learnvest

Microinvesting apps got a massive boost last week in credibility and funding. We've written before about the difference in model between web-born roboadvisors and mobile-born microinvesting apps, with the key being a focus on attention versus a focus on assets. How do you monetize $500 accounts? You get millions and millions of them. How do you do that? Give out free candy.

Take Robinhood, the free trading app just reached a $5.6 billion valuation, based on a $363mm round. Autonomous partner Vincent Hung looked at the stats: Robinhood has 4mm users, which is higher than E*Trade’s customer number of 3.7mm. But so far, the company's focus on Millennials, and potential for these accounts to eventually become lucrative, does not seem to have impacted any of the large e-brokers in terms of growth metrics or industry economics. This implies that Robinhood is comprised of low asset value / high turnover accounts. We also wonder whether the 4mm user figure is also the active account number.

The investment was led by DST Global, Sequoia and Kleiner Perkins. These are smart venture capital names, but we are starting to have doubts. Robinhood has been raising money like it's their only business, burning through that cash to fund growth, and raising again. This is the social network  growth strategy -- burn until you become a monopoly, and then control the market. But is that worth $1,400 per user, nearly all of which pay nothing to consume services that have positive costs to manufacture? If premium subscriptions costs $10 per month, then it will take more than 10 years for a user to justify the acquisition cost. Or perhaps this investment is just a probability-weighted bet on finding the next Coinbase, which runs at a $1B+ in revenue

Another example in Acorns, with 3.3 million users, which just received a $50 million investment from BlackRock. BlackRock has been explicit about building out a digital wealth platform of the future. They are owners of FutureAdvisor and part owners of European roboadvisor Scalable Capital. So it's not a surprise they continue to invest in digital wealth solutions that could distribute their products. Today, much of that distribution is done through advisors and financial planners, but this investment suggests they want to get closer to the consumer, directly through an app. It's a hedge in case Millennials change behavior and rely on apps and chatbots, instead of advisors. 

  Source: Acorns

Source: Acorns

We like Acorns and the behavioral hack of how it helps people save intelligently, but such an investment has to be analyzed in context. And this context is the shut-down of Learnvest inside Northwestern Mutual -- several years after Northwestern bought Learnvest for $250 million. Attempts at changing investor behavior are difficult and expensive, as are attempts to integrate innovations into large financial institutions. So while the Acorns deal is not as absurdly priced as Robinhood, it still highlights the need for Fintechs to grow up and build out their own business models. Because raising money isn't it.

Goldman's Bogus Journey to Retail Fintech

Brands are funny things. They are hard to create, and expensive to boot. You need about $100 million to create a financial services brand with the consumer, not to mention the maintenance cost. And then when it's built, the reputation can get away from you. Only so much can be done to manage how people respond to what you put out into the world. Brands also have to adjust to the shifting sand of cultural change underneath them.

Which brings us to Goldman Sachs, infamously dubbed (by an angry populist Rolling Stone article post the 2008 financial crisis) as a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.  Of course, Goldman is also one of the most competitive investment banks in the history of finance. When it gets into a market, it tends to win. In the past, most of its markets were institutional -- for asset managers, family offices, hedge funds and endowments. From derivatives to capital markets to wealth management, the Goldman brand stood for prestige and exclusivity. But that's not cool any more.

Today, Goldman runs the digital lender Marcus which has issued $3 billion of loans, just bought Adam Dell's personal finance app Clarity Money, is partnering with Apple on a retail credit card, and is jumping head first into crypto trading. Let's trace the trends. Apple has democratized the miniaturized personal computer, empowering the masses to leverage technology. Fintechs like Lending Club and Mint popped open the gates of Wall Street to help regular people get credit, information, financial literacy and planning. Crypto assets intend to decentralize the very manufacture of money and financial products, from the intermediary to the end user. Populism, anarchism, chaos.

So while many are dissecting whether Apple+Goldman is better than Apple+Barclays, or whether Jamie Dimon will walk back his Bitcoin words now that his biggest competitor is in the game -- we sit back in wonder. This is Goldman Sachs. And they are in at the ground retail level, following the generational shift to Millennials whose values reflect a different world -- not wealth of assets, but experiences, convenience, connectivity and globalization. Instead of prestige, it's technology, Fintech and crypto. 

$5 Billion Week in Private Equity for Fintech

  Source: Financial Engines

Source: Financial Engines

Where are we in the Fintech cycle? Two massive private equity transactions over the last week reveal the maturity of the space. It's not just startups promising a new world order, but cashflow investors making purchasing decisions to own tech-enabled financial services businesses. If even conservative firms like TPG, Carlyle, and Hellman & Friendman think that roboadvice and digital wallets are the wave of the future, good luck to the old guard banks still in the mode of disbelief.

Our first data point is the purchase of Financial Engines by Hellman & Friendman for $3 billion. Financial Engines had an early lead in digitally-delivered financial advice services, carving out a strong presence in the 401(k) market in the 2000s. After acquiring the Mutual Fund Store, they developed a large physical footprint across the country to target mass affluent investors. The acquirer will combine the firm with Edelman Financial, one of the largest independent Registered Investment Advisors in the US. Digitally enabled wealth management, driven by purpose and mission, supplemented by a physical presence across the diverse geography of the country is the right answer for the future of financial advice. Whether this particular mix of assets achieves that goal remains to be seen, but the rationale makes sense.

One could fault Financial Engines for missing out on the roboadvisor wave, while Vanguard, Schwab and others amassed over $150 billion of assets in low cost managed accounts. But a $3 billion price is a positive data point for startups like Betterment and Wealthfront, which have unicorn valuations with narrow exit opportunities. The largest roboadvisor exits to date were $250 million (Learnvest, a bust) and $150 million (FutureAdvisor), with much quiet since.

The second data point is the $1.9 billion sale of a majority stake in Baidu's financial services arm to to TPG and Carlyle. Western capital has long wanted access to Chinese tech companies, and Fintech especially. Unlike in the Western World, Asian tech combines personal data across social media, shopping, search, and finances to hone artificial intelligence on its users. Imagine if Goldman had all the data of Google, and offered payment wallets, money market funds, and wealth management inside the chat app with 100 million users. This is what regulation as a sword, rather than a shield, looks like. Of course, part of this are fundamental ethical questions about what kind of society we would like to live in, and whether a never-forgetting chrysalis of AI software controlled by a government aligns with our aspirations. 

  Source: Baidu

Source: Baidu

Growth Hacking with Airdrops and Forks


As we gear up for the next edition of Token Mania, one of the key issues to quantify are token airdrops and forks. While ICOs are still good for fund-raising, they are becoming less democratic as investment moves from crowdfunding towards large private pre-sales. So instead of a community-backed token, companies end up essentially raising a token version of early stage financing from venture capital. Airdrops, however, are a way of driving project growth and adoption without asking users to pay for access, or to prefund development. The model is reversed – the project may already be funded, and the team is distributing value to the community to incentivize adoption.

While there's nothing new about sign-up bonuses (e.g., $100 to open a bank account), this particular version of internet growth-hacking is quite different. First, some ICOs are reserving 5-10% of their raise to distribute back out to the community, compared to 0.50% per ICO advisor, or 1% for ICO law firms. Markets see this as a legitimate incentive because many investors value protocols on a ratio of Market Value to Transactions. This means that the more transactions within a network, the higher the relative price of the token. For example, EOS surged 45% in anticipation of a planned drop. And second, the application of a growth hacking to airdrops can tie "free" tokens to bounty tasks, like following a Twitter account, joining a Telegram group, or downloading a crypto wallet. An example of this is that people who signed up for the Ontology newsletter (project on the NEO blockchain) had received tokens which are now worth nearly $10,000. The biggest enabler of this growth hacking is Earn.com, a recent $120mm+ acquisition by Coinbase and driver of much crypto community theater.

  Source: Earn.com

Source: Earn.com

It's hard to find good data, but we were able to parse yourfreecrypto.com (so take this with a grain of salt). You can see in the chart past and planned airdrops by month. The rising tide signals that projects are in the mode of buying community, now that they've raised assets to fund development. Oddly enough, the projects want community before their software is finished -- perhaps to put pressure on exchanges to list the token, or to financially engineer positive sentiment and demand.

Two adjacent issues are worth mentioning – (1) taxation and (2) forks. Airdrops could be interpreted to be income, and taxed as such. You are receiving some value with a cost basis of $0, so watch out. And from a structural perspective, airdrops and forks both resemble dividends in some form. We had predicted 50 Bitcoin forks in 2018, which probably won't be far from the truth. Regulation, or at least economic normalization, of such financial engineering to remove scammy behavior is still desperately needed in our view. Too many opportunists are giving away free magic beans, persuading people those beans will grow, and then walking away with capital gains and no positive impact on the world.

Instagram Payments = Tip of AR/VR Iceberg

  Source: Instagram

Source: Instagram

Social media and tech companies have been adding native payments into their apps for years, and nothing in the West has yet come to resemble WeChat's payments success. Venmo has the "texting money" behavior on lock, despite competing with a native feature of iOS. Banks are still in the growth mode for Zelle, a bank-pipe for messaging money. Facebook payments, and Amazon Pay, and the credit card networks' Buy Now button are all competing for our payments share of wallet (!) on the web.

So why do we think Instagram adding payments to its app is interesting? For the same reason that we think Snapchat adding a store can be compelling. Instagram is a way for many Millennials to consume brands and lifestyle. It is a platform of creators and influencers that broker fashion and retail. Platforms (like Amazon) are unlike individual products in that they can flex to include many different products and services once the use-case is proven. And influencer marketing, powered by propaganda bots, AI, and other growth hacking, is only becoming more important as a trend for generations that grew up on YouTube and eSports. This will become true in time for financial services companies.

  Source: Instagram

Source: Instagram

The other side of this coin is Augmented Reality and AI. Using machine vision, Facebook / Instagram can extract products from images posted on its network. Through integrated native payments, Instagram can become the platform where commerce happens, rather than linking out to third party sites. On top of this, Facebook's Oculus Go is an upcoming $200 virtual-reality head set meant to bring VR to the masses. Building Instagram into VR and AR, similar to how Snapchat is experimenting with both the medium and its associated hardware, would allow the company to open up a new commerce category. If this category catches on, Facebook / Instagram will have a meaningful moat that even Google and Amazon cannot match, because it will have (1) the social graph that can drive commerce, (2) the AI talent to build real-time image and product recognition, and (3) the customer's device to interact with this platform. 

  Source: Oculus

Source: Oculus

Don't Call it a Comeback - Binance vs Deutsche, Revolut vs TSB

  Source: CEO of Binance in Bermuda shorts, CEO of TSB having a moment

Source: CEO of Binance in Bermuda shorts, CEO of TSB having a moment

Fintechs are supposed to be dying out, desperately needing large financial incumbents for their money and customers. Right? Or so goes the story of fintech partnerships over the last 3 years. So goes the story of every seed-stage Fintech incubator, corporate venture arm, and encouraging regulatory initiative (UKUS). Maybe the story is about to change.

Example one. In the week that neobank Revolut raised $250 million to grow its vision of a multi-currency pan-European mobile bank, Sabadell's TSB kept nearly 2 million customers locked out of their banking account as a result of a core banking system migration failure. TSB's prior system was from Lloyds, the bank's original owner, and accounts were being moved to Sabadell's modern Proteo system. This raises an existential question -- can an incumbent bank develop good software and swap it in for legacy infrastructure? Maybe that begs the question. Our view is that endless capital is not nearly enough to build fintech solutions. You need the right vision and talent, which are scarce and not fungible. You need customers that have an affinity for your brand. For contrast, let's look at Revolut. In 3 years, it managed to get 2 million users, a $1.7 billion valuation, and is positioned to offer consumers more products than regular banks through partnerships. Like adding Ripple and Bitcoin Cash to their already existing crypto functionality.

Example two. This one is contrived, but cute. Binance, the world's largest crypto currency exchange (by some measures) is less than a year old. In the first quarter of 2018, it has turned a $200 million USD-equivalent profit. This places it as a more profitable endeavor than Deutsche Bank's $146 million quarter. You don't need to be a century old to sell financial products to millions of people -- you just need to sell what people want, and fast. Maybe you also need to understand growth hacking, social influence and emerging technology. There is even talk of Nasdaq evaluating the option of running a crypto exchange. But we think this ship has already sailed -- unless you are willing to pay $1B+ valuations, or are buying distressed assets. 

  Source: CEO of Binance in Bermuda shorts, CEO of TSB having a moment

Source: CEO of Binance in Bermuda shorts, CEO of TSB having a moment

So is Crypto making Fintech come back? At least for retail products, yes. Incumbents have massive moats around institutional business, reinforced through regulation and lobbying. But isn't that just capital?

Changing Digital Face of Commerce

  Source:  Business Today

One of our key early trends for 2018 is the shifting nature of retail commerce. The themes of augmented reality, mobile device adoption, and artificial intelligence are all nipping away at how people make purchasing decisions, and how they implement those decisions in the real world. Further, as tech retailers like Amazon.com get into banking, money and life get meshed together at the expense of niche financial product manufacturers (like regional banks or financial advisors).
Back in 2012, British grocery store giant Tesco used South Korea as a test bed for a virtual grocery store in subway stations and bus stops in downtown Seoul. Images of grocery-stocked shelves were printed onto walls allowing for consumers to use their mobile devices to scan the QR-code attached to each item, checkout via the mobile app, pay, and have their items delivered to their doors all while waiting for transportation. The product/market fit is between consumer lifestyle (busy commuter), payment mechanism (QR code enabled digital wallet), and available technology (mobile device).

Missing a platform shift matters. For example, our colleague Craig Maurer at Autonomous highlighted the importance of a new initiative from Visa and Mastercard to create a single online shipping "Buy Button", supported by standards built into the web browser. Had such a technology existed in, say 1998, we may not have seen PayPal grab the branding, technology and business opportunity to become the default payment mechanism for the web. Today, this "Buy Now" space is threatened not only by tech firms and payments companies, but also by coins like Bitcoin and Ripple. Whichever provides the easiest tokenization and comes standard with the browsing experience is likely to win in the long run. So who is doing this best for Augmented Reality? Seriously, write to us and tell us!
What if consumers look at shopping completely differently in ten years? Think of the Starbucks example -- it's not a coffee shop, but a third place. Today, many consumers are using brick-and-mortar locations to browse options, and then later buy those options cheaper online. One interesting solution to this is B8ta: a brick-and-mortar retail presence for new brands that don’t have an offline presence of their own. Consumers go to the store, play around with early products, and provide feedback, which then is sent to the manufacturer who pays for the data. All of a sudden, the physical world is not about product delivery, but about browsing-driven engagement with digital fulfillment. Who owns the "Buy Now" button then?

  Source:  Business Today ,  B8ta

Source: Business TodayB8ta

Enterprise Blockchain Inching to Production


We give incumbents a hard time on innovation to motivate higher risk taking on technology and more investment in early stage software. But financial institutions already know that enterprise blockchain infrastructure is key to saving $20 billion across capital markets and nearly $200 billion in international payments (if you don't, ask us). While 2016 was full of constortia announcements and pilots, 2017 remained largely quiet on meaningful progress, but for ASX & Digital Asset. Seems like that's going to change.

A few examples. JPMorgan, Goldman, Legg Mason, and National Bank of Canada just tested a $150 million debt issuance on a platform derived from JPMorgan's Quorum, mirroring a transaction done traditionally. Quorum may end up getting spun out, but each bank likely has proprietary vertical software sitting on top, which plugs into existing architecture. Separately, BBVA just worked through a $90 million corporate loan issuance, reducing the negotiation time from days to hours. Credit Suisse and ING moved $30 million via R3's Corda. TD Ameritrade embedded their flag in ASCII into Bitcoin's distributed ledger. So it's not just unicorn Millennial technology or a libertarian utopia!

And the other angle is big tech. Amazon announced that it is introducing Ethereum and Hyperledger to AWS, a cloud storage business unit that just generated over $5 billion in revenue (good luck Filecoin!). That is a lot of out-of-the-box crypto that regular businesses can leverage. It matters what default technology comes pre-installed on these servers, since it will be the default choice for most of developed industry. Amazon joins Microsoft, IBM, and Oracle in building out an option in the space. How decentralized is our future again?

  Source: Amazon, Microsoft, IBM

Source: Amazon, Microsoft, IBM

$1 Trillion in Exposure from Artificial Intelligence on Finance.


We looked at the applications of AI across the front, middle and back offices of banks, investment managers and insurance companies, highlighting a rich ecosystem of sophisticated software. The outcome is Augmented Finance --  an investor’s guide to how AI is pulling apart and breaking down the financial services industry. We estimate the economic impact of AI on financial firms globally, finding nearly 20% of costs potentially reduced through implementations, equivalent to $1 trillion by 2030.

AI is not a panacea nor a single thing. It's math, data and software, searching for the right use case. In this dive, we looked at conversational interfaces, biometrics, workflow and compliance automation, and product manufacturing in lending, investments and insurance. In the front office, the most promising applications focus on integrating financial data and account actions with software agents that can hold conversations with clients, as well as support staff. In the middle office, as regulations become more complex and processes trend towards real-time, artificially intelligent oversight, risk-management and KYC systems can become very valuable. And in product manufacturing, we see AI used to determine credit risk using new types of data (e.g., social media, free text fields), take insurance underwriting risk and assess claims damage using machine vision (e.g., broken windshield), and select investments based on alternative data combined with human judgment.

In the US alone, 2.5 million financial services employees are exposed to AI technologies. There is potential cost savings of $490 billion in front office, $350 billion in middle office, $200 billion in back office, totaling $1 trillion across banking, investment management and insurance. Not surprisingly, many firms talk about AI, but very few actually hold intellectual property in the space. And the best performer -- Bank of America -- is still leagues behind the GAFA. Talk about Black Swan risk!


In mapping out the future of AI in financial services, we saw several routes. One potential path is that AI tech companies like Amazon and Google continue to add skills to their smart home assistants, with Amazon Alexa sporting over 20,000 skills already, outcompeting finance companies and stealing their clients. Another potential path is the example of China, where tech and finance merge (e.g., Tencent, Ant Financial) to build full psychographic profiles of customers across social, commercial, personal and financial data. And last, but increasingly tangible, is the path is towards decentralized autonomous organizations that are built by the crypto community to shift power back to the individual, with skills made from open source component parts. 

Uncanny Examples of AI applications


We want to highlight a few fun and unexpected outcomes of AI technology. The first is a textbook example of how to manipulate public opinion, get celebrities to talk about ICOs and stocks publicly, and power propaganda bots. Just fake a video! In this example, actor Jordan Peele provides a vocal track of his impersonation of Barack Obama, saying various outlandish things. A deep fake AI does the rest.

What does that actually mean? First, hours upon hours of footage of Obama were fed into a machine learning algorithm, which is taught to recognize how sound data correlates with visual data. Next, the process is reversed to generate images instead, with the original algorithm acting as a gatekeeper to assess whether the generated image is good enough to pass for Obama. And with a bit of magic dust for interpolation, we have the uncanny outcome where we can make anyone say anything that we want.

Another odd example is this -- a dog was wired up with various sensors that used machine vision to its daily activity. From this data, researchers were able to isolate the dog's ability to choose on which surfaces to walk. This involves quite a bit of judgment, understanding whether the path is too high or uncomfortable. After this experiment, an AI has a statistical layer that represents a dog's pathfinding in the world based on visual data. Perhaps we'll see this making its way into a Boston dynamics death critter.

How do we translate this back to financial services? The short term answer is this -- anything that humans do in a rote manner, where the task is a result of human intuition of reasoning but has a fairly stable decision process, can be done by machine learning. Full stop. 


Will AI Be Exponential, Creative and Emotional?


To answer this question, we looked at the fundamental drivers of the space to put together Machine Intelligence. The work is a primer that explains how artificial intelligence works, what is motivating the revolution in neural networks, provides examples of technology and top players, and highlights the potential future of the software. If you're yet not a client of the firm, we've combined the primer and financial services analysis into a single comprehensive document for free download. If you are a client of our research, then we offer two separate analyses that go even further than the public version.

One key takeaway is that the science behind today's software is half a century old, seeing several peaks and valleys of excitement, investments, and disillusionment. We've been here before, but not with the needed hardware (there are 20 billion smart devices) and software to make it work (cloud computing is a $100B market). Many of the math concepts underlying current advancements come from prior academic work, powered by the massive computing power and data sets with millions of data points across various types of human activity. All courtesy of the web.


Further, designing software by automating a process top-down is fundamentally different from using machine learning and neural networks, which create probabilistic models that change in response to new data. What is most surprising is just how creative the outcomes can feel. In this way, AI can also be used in a creative capacity to explore a space of ideas quickly or to do emotional tasks.

The growth and potential of Artificial Intelligence is a massive challenge for the traditional economy, and its development is likely to only accelerate. There are several sources of exponential growth: open academic archivesopen source code, some form of Moore's law, increasing interest from students in AI, and ample venture capital. 
But it is important to be grounded -- today’s narrow Artificial Intelligence is not a panacea and does not have general reasoning capacity. Still, there are many practical applications of automated human judgment. And those applications are subject to myriad ethical and existential concerns with which we must engage before it is too late.

Investment Management Fees Approach $0

  Source: Fidelity

Source: Fidelity

Is automation finally catching up with the traditional investment management industry? A few data points say yes. First, Fidelity has unveiled the Fidelity Flex funds, which have management fees of ... you guessed it ... zero basis points. While there is a catch (these funds have to be held in Fidelity managed accounts), there is also pretty good exposure to asset classes. From bonds, to money market, to real estate, to small cap, the marginal cost of putting money into getting beta index exposure is nothing. As context, Fidelity's roboadvisor costs 35 basis points, while its human advisors cost 160 basis points. Same allocation we presume. Hmm.

Second, roboadvisor WiseBanyan has 30,000 clients and about $150 million in assets under management. Not a large business, but one that has good engagement with its customers and just raised $6.6 million. As a reminder, FutureAdvisor was sold to BlackRock for $140 million when they had about $700 million under management. And ... you guessed it .. WiseBanyan charges 0 basis points for financial advice. We don't have to remind you about fee-free trading from Robinhood for stocks and cryptocurrencies, their 5 million users, and $5 billion valuation


Two observations from this information. First, free is not a business! Unless you sell the data to someone who cares, or you upsell another product. And the latter is exactly what is happening all across Fintech. Investment Management is a loss-leader for other banking or insurance services. See for example, Stash partnering with Green Dot to offer banking accounts, or Goldman's digital lender Marcus moving into savings, or any of the other players (Acorns/Paypal, SoFi, Transferwise, Revolut, N26, etc). So the strategy is to get to the Millennial consumer, earn loyalty with at least one good service, perhaps free, and then lock them into a full financial services relationship. Sounds hard!

The other point is that some firms seem to be quite disconnected from this reality. For example UBS and SigFig have been working on an American roboadvisor for several years, just now launching UBS Advice Advantage. Strangely, UBS already has a platform in Europe called UBS SmartWealth. Two brands, two technology stacks, same market. This signals that there are still underlying legacy systems that require bespoke integrations. And second, the Advice Advantage product is priced at 75 bps, which is a price that reflects cost of manufacturing, distribution, and a line item for profit. Does the UBS roboadvisor have enough of an audience to build in that profit? Does it provide enough value to deserve it?

The Mega ICO and Future of Crowdfunding


Let's dive one more level deeper into the 1Q 2018 numbers. Our accounting methodology puts ICO funds raised into the latest  month in which the ICO was still active, which can make for lumpy data as the market becomes more institutional. This becomes painfully clear with EOS and Telegram, which we define as Mega ICOs and exclude in industry estimates. But what do things look like if we DO include these two projects?

Well, ICO fundraising jumps from $3.4 billion to $6.8 billion, which is the total amount raised in all of last year. According to this version of the story, there is no token fundraising slow down of any kind, whatsoever. We have already matched what happened in the past. And if we look on a monthly basis, instead of seeing a normalization in April/March that takes us to the levels previously seen in last September/October, the funding totals are accelerating to all time highs. What is going on?

  Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Two things. First, the Telegram raise of $1.7 billion highlights the trend of outside venture capital money moving into the crypto economy to buy tokens. This is not the "crypto capital gains" thesis of 2017, where early winners wanted to diversify their holdings, but instead the "let's not miss out" thesis of venture chasing last year's success. The other side of the coin is that high-profile projects can lean into this fear of missing out and run pre-sales, rather than offer tokens to the public. In turn, this can minimize regulatory risk if done for accredited investors only.

Second, the year-long EOS token offering took in about $800 million of value in 2017, and 1.6 billion of value in 2018 according to EOSscan. Talk about a financial black hole! EOS is the opposite of Telegram, publicly open to the world for contributions of any size. One way to interpret its approach is a prolonged attack on Ethereum at the protocol level, pulling the currency of one "world computer" to fund a direct competitor.  Maybe it's some sort of futuristic M&A, where a decentralized Internet super-organism eats its own tail and rises anew. And last, we found the below chart on non-Ethereum token offerings very interesting. Meaningful competition for the use-case of launching an ICO are already out there -- NEM, Waves, NEO, Stellar. Ethereum is seeing over 100 monthly new projects, but the race is not yet fully won. Are decentralized networks a winner-take-all market? Are they a market at all?

  Source: Token Report

Source: Token Report

Initial Coin Offerings: 1Q 2018 in Review


There's a bear narrative in the air about ICOs and crypto currencies. It starts out by suggesting that last year was a bubble around Bitcoin, that many unscrupulous parties tried to jump on the bandwagon and take naive investors' money. This spilled out in the fintech, crypto and public markets. See, for example, Long Island "Blockchain" being de-listed from NASDAQ. Or India cracking down on crypto currencies. Or the ban on Venezuelan crypto petro currency. And on top of this, regulators across the globe are recognizing Initial Coin Offerings for what they are -- unregistered securities offerings from unlicensed institutions. Not surprisingly, we don't quite agree.

We looked at $1 million+ ICOs over the first 3 months of 2018 for an updated set of charts (see below). But first, a review. 2017 saw $6 billion in token sales (non equity), as compared to about $1 billion of traditional and corporate venture equity going into blockchain companies. That means 6x the funding, 6x the human capital, 6x the interest. So far in 2018, the same pattern holds. Despite the macro crypto slow down, we see $3.5 billion of capital flow into tokens in Jan, Feb and March. Now, there is some underlying slow down relative to November and December of last year, and the number of projects starting fund-raising in March is lower. Some high profile companies are choosing to airdrop instead of ICO. But at a high level, the crypto economy is going to be far bigger this year than last year. This is because, we believe, the early stage ecosystem of company/project formation should be uncorrelated from large coin cap prices. The same can be said about -- for example -- the price of BAML stock and the number of startups raising Seed funding.

Further, there is continued differentiation in the projects across industries. The infrastructure layers of various currencies and protocols are still being negotiated, representing about 25% of the 2018 raises. Many investors continue to look for value in fat protocols (we think this is hard due to network effects). The financial infrastructure, like banks, investment tokens, and decentralized exchanges, are still being put in place, also about 25%. Real growth, however, is coming from things like Identity, Gaming, IoT and other decentralized applications. File that one under obvious.


As a last point, we're sharing our latest number of crypto funds: about 251, not including the 9 or so that shut down or pivoted. The number is not growing as quickly as we'd expect -- partly because it's a more difficult environment to raise, and partly because folks are being less vocal about what they're doing. Our intuition is that there's probably 60 or so vehicles we are yet to identify. And on the other side of the equation, many traditional venture funds are starting to buy tokens. Does this mean traditional venture should start being listed as a crypto fund? Blockchain is infecting all the capital markets, which is just what technology does.


$34 Million for Hacked Exchange

  Source: Coincheck

Source: Coincheck

Bloomberg picked up our note last week about how crypto exchanges are taking sky-high fees to list tokens and altcoins. Looks like the traditional finance world is noticing too. First, the Gibraltar Stock Exchange has a platform called the Gibraltar Blockchain Exchange (that’s why some many startups were jurisdiction-shopping Gibraltar!) that has a standardized ICO process with disclosure and vesting baked in. For a more open version, see Messari. There are multiple efforts from the capital markets as well as legal community to create such standards, but so far nothing has stuck. Some ICOs still just list on a website, others go through a SAFT, and yet others are shopped around by investment banks. Perhaps a defined path to liquidity can motivate some best practice.

Second, TMX, the operator of the Toronto Stock Exchange is working with Paycase Financial to launch a Bitcoin and Ethereum trading desk. This will be a regulated broker/dealer under Canadian regulations, launched in the second half of 2018, and (we expect) would offer a more direct ownership structure of the underlying asset than the CBOE/CME futures product. Reminds us of Exante in Europe. Maybe with this in place, someone can finally build at ETF? Further, the Canadian ecosystem seems to be quite forward thinking in its approach to blockchain. Though last year’s bungled attempt by the Tapscotts (due to misrepresentation) to launch a public vehicle holding $100 million for crypto investingdid take a toll on reputation.

And third, Monex Group (not the American Monex) is cutting a $34 million check to buy Coincheck. Yes, that Coincheck -- the one that lost $500 million of NEM tokens earlier this year. While this is a far cry from the Poloniex acquisition, it’s still real capital from a publicly traded financial institution. Maybe the largest financial institutions are not impressed with the tech behind crypto exchanges given limited speed, scale, and liquidity, but we think the revenues are too tempting to pass up for the middle market. It’s a land-grab, and the risk-takers will get there first.

Governance of the Attention Economy

  Source: Reddit, Statista

Source: Reddit, Statista

A fascinating piece at Polygon this week takes issue with an aspect of Ready Player One that points to a fundamental question that separates science fiction from our attention economy. In the movie, the protagonist adventures through a virtual reality world, where future society spends the majority of its time. This world has rules and goals, but they are woven into the background. Polygon argues this is highly unrealistic not in its technology, but in its community. Take an existing example, such as VR Chat with its millions of users and a growing online community. What we see in anonymous places like this is an amplification of the edges, extreme opinions and weird behavior becoming louder, and armies of trolls and celebrities emerging.

This has happened repeatedly on the web – from Twitter, to Youtube, to Reddit, to Facebook. Such radicalization can come from either human behavior, or amplification of human intent through propaganda bots. And it is also spilling out in the other direction. Take YouTube. From the thousands of software-created violent and bizarre children’s videos, to celebrity trolls like Logan Paul getting paid millions to act out hijinks for followers, all the way to the tragic shooting at the YouTube headquarters by an erratic personality taking issue with a change in the economic model.

This means that moderation is key. A community with successful moderators is a connected and enjoyable place to be. A community without moderation leans into its edges, and can become hostile and aggressive. See Jack Dorsey and Twitter. But, you know, moderation of an online community is really just regulation, isn’t it? And governance standards for content (or crypto economic activity) are really just government. So in this new wave of technology, all we are doing is re-inventing the same old solutions for the same old human problems -- how to be social animals, how to create successful tribes, how to trade off freedoms and rights. Rights and freedoms in the abstract mean nothing. Only when the right of one person collides with the right of another person (your backyard, our recording drone), do we need intervention to decide how the conflict is resolved.  

As we enter the machine age, the challenge is the scale of what needs to be governed. While humans may successfully moderate human content, they have very little chance of manually moderating the big data tsunami in which we are tossed about. And as augmented reality is layered on top our physical world, expect this issue to get an order of magnitude worse. Thus our new communities, like Facebook, LinkedIn or Amazon, are already governed by artificial intelligences. We may call these things “NewsFeed” or “Recommendations”. But don’t be fooled for a moment. The mathematical selection of content in response to human fashions is the most powerful voice in the world. It shapes opinion, economy and political power. Shouldn’t we at least be allowed to elect our AI overlords? Maybe we can moderate them.

  Source :   MIT/Reddit


Convergent Evolution of Financial Standards

  Source: IMF

Source: IMF

Convergent evolution in nature is a fascinating phenomenon. Organisms that have entirely different histories can develop similar solutions to a recurring problem in the environment. For example, take the flight skills of birds and bats, or the eyes of mammals and cephalopods. Natural selection has a way of chiseling away at wetware until we get a serviceable answer. In a similar vein, we expect to see similar governance outcomes in the traditional financial services industry and the crypto economy. And we don’t mean the vanilla stuff, like the regulator presence, or industry boards that create standards. Instead, we are pointing to two different phenomena that should have the same effect: (1) the Dodd Frank legislation requiring capital standards from banks (and especially the FSB rules for Globally Significant Banks), and (2) the steady move in several public blockchains towards Proof of Stake.

Let’s back up. In traditional finance, sentiment and impression of financial stability is key to the functioning of the system. The simple reason is that banks are massively levered, especially when involved in capital markets activities, like trading and investment banking. And even in the case of the depository bank, the bank lends out the deposits it collects from clients. A run on the bank occurs when all the clients try to pull funds out at the same time, learning that the funds aren’t there, and causing further panic. Thus things like government insurance (FDIC). And in complicated cases like 2008, the run was on the banks by the banks themselves. When Wall Street thought Lehman couldn’t pay its overnight commercial paper because it was insolvent, credit dried up. And so did Lehman.

Which brings us to capital requirements. In brief, this is a regulation that forces financial institutions to hold a certain amount of assets on its books, rather than circulating out there in the markets earning a return. Instead of being 30x levered, you may only do 15x or 20x, depending on how important you are and what assets you hold. Having cash on the books is better than a bunch of junk bonds, and so on. When a confidence crisis happens, the institution – so goes the theory – will have enough buffer to absorb a shock, and no government insurance is needed. In the abstract, that means that today’s banks all hold assets in order to participate in the financial system as players (and take their economic rents). But remember the refrain – banks supposedly manufacture trust, trust in the economic system, in the presence of cash, in payments, in commerce. This capital is the government’s (and if we believe in effective representative democracy, it is our) way of putting institutional “skin in the game”, which scales with importance to the industry.

If you know your crypto consensus mechanisms, you may know where we are going. Today’s Bitcoin and Ethereum chains are secured by a computationally expensive method called “Proof of Work”, where the “Work” is the burning of electricity to power processors good at solving arbitrary math. Various groups are unhappy with this power consumption, and the centralization of mining power it has caused whispered complaints. Different consensus algorithms exist, as do controversies about them. But generally speaking, approaches like Proof of Stake, or EOS’ Delegated Proof of Stake, will work of crypto resources instead of physical ones. Your “stake” is the capital you hold, that may be committed to participating in the system and manufacturing trust, through voting or forging or something else depending on the project. Built into the economics of committing such capital to validate blocks is a probabilistic rewards, which looks a lot like interest on average.

  Source: Cointelegraph

Source: Cointelegraph

What this means is that crypto and banking have converged on the same solution. Some central authority declares the guidelines of the system, and how much capital is required to be committed to keep it humming along. Then, parties that manufacture trust put this capital aside as table stakes to be in the rent-taking business. And, by the nature of the beast, scale efficiencies of running such operations lead to consolidation and some form of global oligopoly A large bank today may find such a system to be pretty familiar and comfortable – and they certainly have the capital to deploy. Goodbye crypto utopia!