Open China and Global Fintech

More than 60% of Fortune 500 companies are incorporated in the State of Delaware. Why? The state has the most developed legal system for corporate law, which leads to painless dispute resolution and efficient courts. On a global scale, one question we ask is -- what country will be the Delaware of Fintech? Which country is best positioned in terms of talent, regulation and capital availability to foster the future of financial services? Will it be Singapore, Switzerland, Luxembourg, Dubai or Gibraltar?

Or Will it be China? Bloomberg broke the news that China is lifting the limitations on foreign ownership of financial servicescompanies -- (1) for banks and asset managets, that limit is lifted immediately, (2) for securities, insurance and fund management companies it is increased to 51% and gone by 3 years. If international investment does flow in as a result, it may mature the capital markets, making the Chinese companies more competitive, and also dispurse some of the pent-up wealth management product risk in the ecosystem (see our explainer here). And Chinese Fintech companies will likely intensify their attempts to globalize, using a talent pool of Artificial Intelligence developers and ability to leverage Big Tech (Ant Financial, Tencent, JD.com) as the tip of the spear without regulatory overhang.

Almost in response, Keith Noreika, the acting head of the OCC has uttered financial regulation heresy in the US by suggesting a re-examination of the separation between banking and commerce. Today, the GAFA (Google, Apple, Facebook, Amazon) can only flirt with the manufacturing of financial products. And they have done that well enough -- see Apple competing with Zelle leveraging a bank-as-servce partner Green Dot, or Facebook delivering payments through Messenger. But that is nothing compared to what Big Tech could do if the regulatory barrier protecting the financial incumbents were lifted, and their artificially intelligent assistants both engineered products and owned the customer relationship.

Wells Fargo Roboadvisor and Neobank

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One of the conclusions of our Bankosaurus analysis was the wide dispersion of fintech solution adoption by incumbents, including the large banks. JP Morgan, Wells Fargo, Bank of America and Citigroup are all involved in the ecosystem, but some (i.e., JP Morgan) were ahead of the pack. As of last week however, Wells Fargo has meaningfully moved forward with their fintech offering.  First, they announced the release of "Intuitive Investor", the SigFig powered private label roboadvisor. The firm's bet is that a digital wealth can be a successful cross-sell into its 72 million bank customers, though the $10,000 minimum investment size seems high given where technology is today. Notable is the inclusion of Goldman smart-beta product in addition to BlackRock's investment menu.

The second data point is Wells Fargo's neobank release, called Greenhouse, on the heels of the JP Morgan app Finn. The app is a budgeting and savings app that leverages the work that firms like Bank Simple (acquired by BBVA) and Moven had done several years back. These are both needed moves and improve Wells' ranking in our innovation methodology. And yet, it is the Fintech baseline and not true innovation. Personal financial management apps ("PFM") should not still treated as groundbreaking in the year 2017. Mint.com did PFM in 2007, from data aggregation to budgeting.

So while it is spectacular that the incumbents are rolling out Fintech across the banking and digital wealth space, we are not surprised that solutions are moving from startups to incumbents. This is the natural path of digitization, and the incumbents have a customer-acquisition advantage in the platform shift we are experiencing. That advantage breaks down with the financial virtual assistant apps and the micro-investing apps, which reduce the difficulty of engaging with finance. Acorns, Digit, Robinhood (3.3 million users) have all broken through into the mainstream attention economy by being less financial and more tech. Their challenge is to re-bundle the banking / investment product suite together so that when Millennials want more than just auto-savings or PFM, they stay with the new brands.

That's where Wells Fargo has the advantage. When someone using Greenhouse or Zelle grows up to need a mortgage or a retirement portfolio, the integrated model is a natural fit. But regardless of who provides the app, the consumer of financial services benefits. For example, if Greenhouse helps people to not overdraft their account, and thus means fewer overdraft fees for people that are financially crunched, the world is a better place.

Sculpting Crypto Maturity

“Every block of stone has a statue inside it and it is the task of the sculptor to discover it”, said Michelangelo. And oh boy, is there a lot of carving now going on in the public crypto world before uncovering the hidden statue. First, Tezos, the $232 million ICO with conflict between the token-holding foundation and the founder-controlled operating company, is now facing a new first in the space -- a class action lawsuit for selling unregistered securities and making material representations. And second, the planned IPO of NextBlock Global, a venture firm that raised $20mm privately and planned to raise $100mm more publicly, has been cancelled as Forbes uncovered misrepresentations in its offering documents.

While obviously bad for the projects, these are fruitful growing pains for an industry trying to find its footing. They inform the developing infrastructure that will fix issues of governancelistinginteroperability and standards. Software will be supplemented by human law, and vice versa. But what's confusing to us is the range of different paths across regulation and jurisdiction to arrive at similar outcomes. For example, we are excited by the launch of Republic Crypto, a project from Republic (an equity crowdfunding site) with roots in AngelList. Their approach relies on Regulation CF (crowdfunding) and a new instrument called "Debt Payable by Assets", where the assets are tokens. That is distinct from the approach CoinList, from AngelList and Protocol Labs, is taking by targeting only accredited investors for an investment via a SAFT structure.

And that's just the venture community. For brokers that enable crypto securities, look to Overstock tZero and new entrant Templum, which is an alternative trading system that will be regulated by the SEC. Who will be able to raise money better -- Silicon Valley, Wall Street, or the crypto economy? Another project worth understanding is the German Neufund, which wants to put equity tokens on the blockchain, ICO its own token to the community, create an investment platform for crowdfunding, and then build smart contracts that are in line with regulation. Or the Pillar Project, which is planning to offer an exchange for accredited investors that offers crypto index funds through an integrated wallet that simplifies ICO participation.

This wave of complexity is unfolding in the ecosystem as more ICOs come online than even before, but fewer and fewer are hitting their targets (34% in October vs 93% in July per Architect Partners), and therefore raising less on average. We hope this sculpture does not shatter.

How to Value Bitcoin and other Crypto Assets

Source: EconomyMonitor (Clustering, sample from the Bitcoin B2X social network)

Source: EconomyMonitor (Clustering, sample from the Bitcoin B2X social network)

As the space matures, so does the thinking about what it's worth. We seem to be at least somewhat out of the "Why is Bitcoin worth anything" valley, with macro arguments about the evolution of money no longer needed to pacify critics. For those, see Nick Szabo's treatise on history of valuable tokensOle Bjerg's discussion of the commodity, credit and fiat theories of money applied to BTC, or the thesis that BTC intrinsic value comes from the economic cost of mining. These are important ideas as to why humans value things at all, but we are now in a place (i.e., BTC marketcap at $125 billion) where supply and demand have taken over.

The value of crypto tokens is also starting to be modeled more formally, and thankfully is moving away from being traded merely on technical analysis. Crypto investors are discarding the theory of the firm, and all of its associated discounted cash flow analysis, for a theory of token projects as circumscibed money/utility supplies within a machine economy. A major articulation of this approach was done by Chris Burniske, who starts with MV = PQ (money supply times velocity of exchange equals price of token times quantity of token), and expands the arithmetic to include timeline and structure of token issuance, percentage of long term holders, likely size of target market, discount rates, and generated token utility. Another iteration from Brett Winton implies massive devaluation in the VC and traditional financial markets as a result of crypto networks.

Vitalik Buterin is not entirely convinced that the money supply approach does the right thing longer term, and encourages token sinks and token buy-backs. Perhaps investors can then discount the impact of the buy-back to get to a more tangible valuation (fewer tokens worth more at a fixed rate) -- though it's likely that other factors influence token price more. For more articulated thoughts on Crypto dividends, see also CryptoFundamental.

Another useful tool is the Network Value to Transactions Ratio (NVT) from Woobull or CoinMetrics, that functions as a P/E ratio for crypto assets by comparing their activity to valuation. In reality, that is simple arithmetic in the face of complexity economics, a field of study that leverages the mathematics of physics, fluid dynamics, machine learning and network analysis to model economic activity and structure. A fascinating, albeit quiet difficult, article by EconomyMonitor traces the role of the attention economy in separate crypto ecosystems. One of our takeaways is that specialization -- i.e., ecosystems that have more actors with non-overlapping functions and high information density -- is a leading indicator of economic activity, and potentially, market value. So did we clear all this up? 

Source: Woobull (NVT)

Source: Woobull (NVT)

Amazon's Augmented Reality Commerce

It seems insufficient to talk about augmented reality, and much more powerful to show it, so enjoy the images below. We are seeing the first iterations of thinking about AR commerce taking shape, with Amazon joining Ikea in deploying a product Preview (not Review) app that takes a rendered version of an Amazon product and places it in the shopper's home. One image below shows a chair being placed into a carpeted room. Other examples in the linked video show vases, kitchenware, and Amazon Alexa being projected around the house.

Commerce matters for Fintech because of payments and financing -- how will we pay for things in this future? Will we still use the iPhone or something like Magic Leap? The other two images show the power of artificial intelligence when it intersects with AR. In the first image, a neural network is used to "transfer" Van Gogh's artistic style on a rendered portrait. Think about how this could be applied to a customized bank experience, creating environments targeting the appropriate demographic with the right aesthetic. Popping gradients and futuristic designs for Millennials, marble and mahogany for Boomers?

The last image uses a neural network interface to build objects in a virtual world. You can see the user creating a house by drawing an icon of a house and placing it on the ground. The AI part comes into play mapping the house drawing, which would be different each time a user creates it, and the rendered object that appears. You can think of this as a freeform gesture that beckons a product. If AR is built into all operating systems and mapped to commerce via Amazon, anything you want is just a flicker of the hand away.  Already, Google is building out the rendered library.

Source: Amazon

Source: Amazon

Source: Sam Snider-Held

Should our AI Overlords be for Sale?

Source: Twitter

Source: Twitter

Source: Facebook

Source: Facebook

Facebook, Twitter and Google testified this past week in from of the American Congress about the activity of propaganda agents on their platforms during the 2016 election cycle. Putting aside anything relating to politics, we want to focus and highlight the incredible takeaways about the reach, power and ethics of what is currently for sale to the highest bidder. Let's just say the tech giants did not have the strongest hand in the conversation and are likely to face regulations on their attention economy monopolies.

Here are the data points. Around 126 million people on Facebookwere exposed to advertising campaigns associated with a propaganda organization, and another 20 million people were exposed on Instagram. On top of that, Facebook may have 270 million fake accounts (i.e., non-human agents) that may help spread misnformation. On Twitter, there were 37,000 accounts generating 1.4 million automated, election-related questionable propaganda Tweets, leading to 288 million impressions. That's a small number in the context of all tweets in the period -- only 1% was election related, and only 0.74% of that was automated propaganda. But given that American elections are nearly always 50-50, and flip based on the marginal voter in a marginal state, those numbers have real impact. 

One major point, highlighted by the always insightful Stratechery, is that the tech giants really have no practical way to scan and make ethical judgments about each and every ad and post.  The reason for this is sheer scale -- Facebook runs 276 million unique ads per quarter, most delivered via automated self-service interfaces. Nor do we want our tech companies to become filters of free speech, akin to the great firewall of China. And yet, sovereigns, corporations and online communities have developed the language and weapons of "memetic warfare". See for example this article on how disinformation spread into the mainstream using swarm networks, botnets, and massive social media distribution. We don't need to freak out, but do need to understand the modern distribution of information and start making informed ethical guidelines and building appropriate defenses. These same information highways are being used in the crypto economy, and will make their way to the financial markets.

Rise of Crypto Capital

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An alien spaceship has landed on Earth. Its technology is superior to ours. Its pilots speak a different language. Do we fire our regulatory weapons at it? Do we build bridges and find ways to adopt its technology? Do we berate it for being alien? Or do we think it is a hoax, operated by some Wizard of Oz behind the curtain? Such is the entry of the crypto economy into our financial system. We have been tracking closely the response of the financial industry, and to many participants (120 crypto funds in fact), this spaceship is a savior that helps them ascend to another plane (i.e., not be destroyed by passive ETF roboadvisors).

Financial infrastructure is maturing. First data point is LedgerX, an institutional derivatives platform for crypto currencies regulated by the U.S. Commodity Futures Trading Commission that has completed swaps and option trades with exposure over $1 billion in a single weekCBOE and Gemini will do the same. Second data point is Overstock and its announced ICO for tZero, an alternative trading system approved by the SEC, leading to 150% appreciation in its public equity. Remember also the planned $50mm IPO for NexBlock Global, the Tapscotts' liquid venture crypto fund. Third point is Airswap, the decentralized exchange ICO coming out of ConsenSys that has just raised $36 million to move trading from a central counter party to smart contracts themselves. There are other decentralized efforts as well. And last, CoinList has officially sprouted out of AngelList and will champion the SAFT Agreement and crypto as venture capital, rather than day trading.

The work is of course not done. One open question is how to build traditional FIX connectivity into the new ecosystem and plug it into existing trading workflows. The lack of such infrastructure means plenty of room for automated arbitrage bots and dedicated AI/Quant crypto funds, of which there are at least 13. Exchange regulation and common data standards are yet to evolve, and projects like Messari will lay the groundwork for open-source financial data. Valuation frameworks are still speculative, but thinking from VitalikBrendan BernsteinEvan Van Ness, and Chris Burniske help move the conversation forward.

Virtual Assistants: Chase, Finn or Facebook?

Source: Chase, Tearsheet

Source: Chase, Tearsheet

Financial virtual assistants. They will know everything about us, give us sage financial advice, and implement everything through financial products available via open APIs. Roboadvisors and microinvesting companies have pointed the way, but these FVAs will be far more powerful and embedded into the core of our daily life. So who will be the winner? First contender is non other than JP Morgan, leader in our Bankosaurus innovation analysis and heavy investor into Fintech. The banking giant launched a neobank app called Finn, which is targeted at Millennials. While the design may be new, the idea has been pretty well established before by companies like Simple (not to mention Mint in 2007) -- a Personal Financial Management tool. The idea could get incumbent traction by default, like Zelle, but doesn't seem particularly thought leading.

Speaking of Finns, the second alternative to win the FVA market is a software like Finn.ai, which is a chat-based AI-powered private label software that banks can deploy to interact with their customers. Not just interact, but check balances, move money, and pay bills. The company  raised $3mm and launched a partnership with ATB financial. One day it may live inside all other chat and voice bots, like Facebook and Alexa, or connected in a decentralized manner through something like Hut 34.

Speaking of Facebook, the tech giant is in a prime position to own the virtual assistant market more generally, and also control the feature set of financial products that access their customers. McKinsey just pointed out that big tech is a bigger danger than Fintech, something we highlighted in the Future Vision analysis. Two examples of Facebook following an Amazon strategy are (1) integrating Visa's tokenized payments services into the platform for digital payments and (2) lending made available to small businesses on the Facebook platform for up to $500,000 in growth capital via digital lender Clearbanc. Finance is a platform enabler in this equation, not a standalone product pushed at strangers. The cash advances are often spent back on Facebook advertising, which provides insights into how well businesses connect with customers, which could further inform underwriting risk. We still need the manufacturer, but they are far less powerful.

Insurtech Virtual Reality vs Machine Learning

Source: Farmers, Fortune, Tractable

Source: Farmers, Fortune, Tractable

For something even more futuristic, check out this news of Farmers Insurance using virtual reality to train its property claims representatives for 500 scenarios of damages and customer interactions. The course is about 15 minutes long, rendered in video game engine Unity with randomly generated layouts, can be watched by other reps and managers on a big screen, and leads to a performance assessment on completion. 

This year, 50 reps will be trained using the simulation, growing to hundreds or thousands in the years to come. You can see the hyper-realistic rendering in the linked image. Other enterprise examples of using VR to simulate human experiences and create learning outcomes have popped up in medicine, such as surgical training, and education

What's curious, however, is that we are using machine simulations to enable human learning. At the same time, we are using real world imagery to facilitate machine learning, for essentially the same job. See for example this article, which describes how 70% of auto damage claims could be analyzed and estimated by machine vision by insurtech Tractable. Race between the AIs and the transhumanists in on!

Game Over for Equities?

Source: State Street

Source: State Street

Let's land the ship in traditional equity markets. Josh Brown of Ritholtz Wealth Management summarizedthis development as "Game Over". State Street announced a new line-up of prices and names for its SPDR ETF family, which you can see in the graphic below. The average expense ratio shifted from 16 basis points to 6 basis points, a 65% decrease in cost for exposures to nearly any asset class for the regular investor. We have long been saying that industry digitization leads to revenue collapse in the short term as products become more automated. Think about music industry revenue falling 50% since the early 2000s, the retail industry owned nearly 50% by the online retailer Amazon, and roboadvice creating a wealth management price point at 25 bps instead of 150 bps. Here we are with investment management.

Not surprisingly, asset managers are shifting down the value chain from manufacturing financial product to building technology solutions for financial advisors. We discussed BlackRock's digital wealth strategy last week. Competition to gain market share and drive the cost of delivering financial advice is accelerating. This week we want to also highlight one way of mismanaging such acceleration. TD Ameritrade announced that it was refreshing its ETF Center for financial advisors with the SPDR line up, an in the process removing iShares and Vanguard alternatives from the no-transaction-fee line up

Here's why this matters. TD Ameritrade is a custodian, and holds hundreds of billions of assets overseen by independent financial advisors. It also has several partnerships with private-labeled roboadvisor technology providers, like SigFig, FutureAdvisor and AdvisorEngine. This software is used by advisors to deliver automated asset allocations for their smaller clients, which can only be done using no-transaction-fee ("NTF") instruments, otherwise the commissions from trading would destroy any gains on small portfolios. But of course, it's hard for a broker to make no revenue at all from these assets, which were mostly in Vanguard and iShares allocations. Michael Kitces, an industry consultant, suggests that State Street is paying for that NTF shelf space in a way that the other fund companies were not. The downside is that now the financial advisors have to rebuild their allocations with new products, and trigger capital gains for clients when rebalancing from Vanguard to State Street. Oops.

Token Performance is a Coin Flip

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So a lot of new tokens are getting launched, a lot of new funds are sprouting up to find value in them, a lot of investment bank incumbents thinking about how to enter the space longer term. But is it worth it? If we go back to Token Mania, the key stat about the DotCom bubble was that 84% of tech IPOs between 1997 and 2000 were entirely gone within 10 years; yet Amazon and Netflix survived and monopolized their industries. What are the early signs of ICO performance?

To answer the question, we analyzed a data set from our friends at Token Data, covering about 130 tokens. For the adventurous among you, once can compare the data with ICO Stats or CryptoCompare. Our conclusion is that outcomes for ICOs are very binary at this point, meaning it is almost a coin-flip whether a particular projects goes to zero, or skyrockets. There are very few in-the-middle outcomes. Further, given the increasing growth of opportunistic fundraising in ICOs, we expect that finding a good launch and getting access is becoming harder among the noise, not easier over time. If someone is soliciting using bots on LinkedIn and offering discounts to a pre-sale, we question as to whether that is actually a private pre-sale.

You can see the data below. First, 70% of ICOs have underperformed either Ethereum or Bitcoin since inception. That's fairly in line with how poorly actively managed funds perform in traditional markets against their own benchmarks. But on the other hand, about 50% of ICOs did deliver a return greater than 100% in the TokenData set of tracked instruments. The caveats about bubbles, extraordinarily high risk, fraud potential, and diversification apply to that conclusion, but such a return profile is compelling in the context of traditional asset classes, as well as in the context of venture capital. For more, see Bloomberg's article leveraging this data.

Over 100 Crypto Hedge Funds, Over $3B in ICOs

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The crypto economy is moving faster and faster across regulation, assets and new financial ecosystems. We spent much of last week trying to update our understanding of where everything stands on October 2017. Here are a few key data points. First, we have been tracking token launches since the Token Mania ICO report in July, with the criteria that the ICO must have already raised the capital and that the total raised is greater than $1 million in USD equivalent.

Our current figure up to date is $3.04 billion. The underlying data sources leverage multiple ICO trackers -- ICO StatsCoindeskICO Alert, ICO DataToken MarketToken Data, Smith+Crown, and others.  In the chart below, you can see the additional context, which is quite sobering. We pulled total Bitcoin and Blockchain funding, updating our Fintech Phenomenon charts, from independent and corporate venture capital since 2013 globally. It is hard not to conclude that the market has shifted considerably from Enterprise blockchain to the public chains in terms of committed resources (even if you assume 50% of 2017 ICOs are scams). This data was used by CNBC in Wall Street veterans are trickling into digital asset management to highlight the platform shift.

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A similar story can be seen in the inception dates of crypto funds. We continue to build out a database of crypto hedge funds, which follow one of the following strategies: (1) liquid venture investing in tokens, (2) cryptocurrency traders and former hedge fund managers, (3) token baskets, akin to software fund-of-funds, (4) crypto-indexes and (5) artificially intelligent or automated bot funds. For now, we exclude investment vehicles built by traditional asset managers that package exposure to a single currency, such as the Bitcoin Investment Trust from DGC/Grayscale. While data visibility in this space is quite poor, and not all "funds" are actually funds, we are able to piece together a fairly coherent story about what is happening. Our current view is that 75%+ of these funds were started in 2017, that in total they manage between $2 and $3 billion, but aspire to manage $8 billion, and that size is concentrated among the few early movers like Pantera and Polychain. You can see this data used by Reuters and CNBC. Please email us or tweet at us if you'd like your firm added. 

Alibaba $15 Billion for AI, IoT and Fintech Research

Source: Kakaobank, Counterpoint Research

Source: Kakaobank, Counterpoint Research

Banks have sticky customers and large competitive moats, right? How long will that last in an artificial intelligence first world? Here are 3 data points. First, Alibaba is spending $15 billion to build a research and development program that they see as the future of financial services. It will have hubs in Beijing, Hangzhou, San Mateo, Bellevue, Moscow, Tel Aviv and Singapore. This will give the company access to a diverse talent pool and build a path out of China to the global market. The areas of research are artificial intelligence, Internet of Things (IoT), Fintech, quantum computing, and human-machine interaction. Sound familiar? Putting that into context, JP Morgan spends $7 to $9.5 billion on IT per year (depending on how you cut the data), with a fraction for Fintech and not mere maintenance. That's as good as it gets for what American financial firms can do.

Is it a big deal if an attention economy firm like Alibaba builds AI and Fintech capability? Here's a narrow example in Korea. KakaoBank is a mobile-first bank that was championed by messaging platform KakatoTalk, which has 42 million users. The bank opened 300,000 accounts in 24 hours of launch this past July, and reportedly has 45% share of all new opened bank accounts in the country since then. That's better neobank traction than Monzo, Tandem, Simple and Revolut combined. Similarly, Ant Financial and Tencent are using their chat platforms to scale some of the world's largest money market funds. What happens after putting $15 billion and AI-powered virtual assistants behind this strategy?

Here is the other boundary of this strategic vector. Numerai, the crowd-sourced machine learning hedge fund / competition / crypto-currency company has shared its strategic plan and traction to date. There are delicious bits -- 30,000 data scientists have contributed predictions and including the value of the fund's native crypto-tokens, rewards to participants have been in the $USD millions. Predictions are pooled together using a staking tournament, where the data scientists express confidence in their algorithms by committing financial resources. A meta model aggregates and combines algorithms into a trading strategy implemented by the fund. The next step is to move away from human data scientists accessing the Numerai website to APIs that are accessed by Artificial Intelligences on demand. What does this mean? It means a black hole is developing in the capital markets, and is in the open for all to see. Numerai has the ambition to monopolize intelligence and capital, and then decentralize the monopoly. Will a global conglomerate that is committing $15 billion to building the world's most powerful AI be as altruistic?

BlackRock All Chips on Digital Wealth

Are asset managers on the way to being technology companies? Financial Planning reports BlackRock is launching a dedicated Digital Wealth division, and Bloomberg reported it is looking to expand the technology portfolio to include risk assessment firm Capital Preferences. The asset manager previously purchased FutureAdvisor, invested in European robo Scalable Capital, funded iCapital Network, and delivers enterprise risk and portfolio management software Aladdin to investment managers. The firm is moving closer to becoming a technology enabler of its distributors -- broker/dealers, wealth managers, financial advisors -- which is a strategic play to be closer to the end customer and enable the selection of underlying investment products. Additionally, the firm has been building out its "quantamental" investment product, which combines big data and associated machine learning tools with fundamental security selection.

The first angle is the top-down industry view. There is no such thing anymore as "non-digital" wealth. All wealth management is technology powered, and some is powered by better and faster technology than others. Consider the Envestnet/Folio deal and the wealth tech powerhouse that created. Or the assets that Schwab and Vanguard have gathered under their branded umbrella. All wealth services, bar none, face greater automation, better consumer interfaces, and an increasing reliance on third party software. So in that sense, even though BlackRock had been fast in buying FutureAdvisor, it had not been fast in getting to market like Schwab and Vanguard. As other asset managers, like Fidelity, and traditional wealth managers, like BAML and UBS, offer their own roboadvice, the writing is on the wall. You either have the digital asset and are able to use it to compete for the distribution of future wealth, or your firm becomes a utility.

The second angle is around building out the full wealth tech platform. It is not enough to own a Millennial-focused roboadvisor (FutureAdvisor) or an enterprise-grade risk engine (Aladdin). The firm also needs to have trading, performance reporting, financial planning, client portal, automated billing, online account opening, and many other emerging features. BlackRock has been investing or purchasing some of these firms, but it is a long way to being Envestnet, or fostering the ecosystem of a Pershing or TD Ameritrade. So it makes sense to build a concerted effort around this if they believe in a tech-forward future. The third angle is that this is an overdue clarification of the digital strategy. Prior and through the FutureAdvisor acquisition, BlackRock had opened its doors to partners to support channels they were not ready to pursue. Their enterprise focus meant starting conversation wth $50B firms, not $50mm RIAs. But it's impossible to be open and closed at the same time -- meaning you either have an ecosystem of partners, or you focus on pushing proprietary solutions. This announcement shows their interest in leaning into owning the asset, and using tech as a growth vector.

Bitcoin Larger than Goldman Sachs

Source: CoinMarketCap, Autonomous NEXT analysis

Source: CoinMarketCap, Autonomous NEXT analysis

The cryptocurrency that started it all has been shrugging off the bad regulatory news from China, Russia and South Korea and reaching a price over $5,800, with a market capitalization of nearly $100 billion. If you're not a true believer in the crypto future, you are probably asking why, and shaking your head along with Jamie Dimon. But a market is a market, and there are things to learn here. One direction to explore is hard forks, as noted by Coindesk. Back in August, Bitcoin Cash forked/split out of the main Bitcoin blockchain. The market is now anticipating two new forks: Bitcoin Gold (scam?) in October and Segwit2x in November. 

Many people, including us, thought the Bitcoin Cash (BCH) fork to be a destructive development for the community. As a comparison at the time, Ethereum Classic constituted 6% of the market cap of Ethereum. How could an alt-coin that pulls value from an original cryptocurrency add anything other than confusion. Won't it hurt the network, its speed, and trust in the community? In one of the best posts on the topic, Nic Carter argued that by Metcalfe's Law (value of a network is proportional to the square of the number of nodes on the network) BCH would lead to a destruction of 25% of Bitcoin's value. Instead, the value of Bitcoin doubled, and BCH is worth about $5 billion. Like Ethereum Classic, that's about 6% of the market cap of Bitcoin. 

How can something divide, and both parts become greater than the whole, especially when network effects are in play? Shouldn't all non-Bitcoin altcoins that compete for the same use case go to zero? We struggle with this, but here's one hypothesis. Corporate spin-offs can create win-win situations for both the seller, who can now better focus on their core strategy, and the spun-out company, which is free to pursue its own direction and use case. So if the use-cases are sufficiently distinct, and the customer bases, developers and miners are sufficiently separate, growth in both projects is possible. From a biological or evolutionary perspective, splitting an organism and reseeding it elsewhere allows each branch / ecosystem to grow within different niches, and evolve along separate paths. So ask yourself -- are these paths sufficiently separate? 

The last quick point on this is Coinbase. The exchange stood against the Bitcoin Cash fork by refusing to include the BCH its users were due proportional to their Bitcoin holdings. But it then faced large withdrawals, legal questions about fiduciary duty,  and quickly reversed course to include BCH by January 1, 2018 in client accounts. Coinbase has a much more supportive tone on the matter for future forks. The exchange may be more inclined to adhere to sovereign laws, rather than influence the path of the ecosystem.

Neural Networks Managing Money at Man Group

Source: Soul Machines

Source: Soul Machines

We still need humans to figure out how to value new assets like crypto tokens. Or do we? In what seems like an incredible story, $96 billion asset manager Man Group outlined exactly how it is already using artificial intelligence to help trade its portfolios at scale (on some products, not all). To quote directly: "By 2015 artificial intelligence was contributing roughly half the profits in one of Man’s biggest funds, the AHL Dimension Programme that now manages $5.1 billion, even though AI had control over only a small proportion of overall assets." The firm has since decided to use AI as a cornerstone across trading and investment selection, running neural networks on massive data sets in both supervised and unsupervised learning approaches. This requires a big infrastructure: terabytes of data worth of financial information, weather forecasts and global shipping schedules on specialized computers running deep learning software.

Investment management product manufacturing is a particularly thorny problem for AI. Unlike computer vision (concerned with finding a cat photo in a sea of dog photos) or even lending/insurance underwriting (allowing new data to proxy for risk), figuring out what variables to solve around or even what data to use is much more nebulous. As the article describes, data is noisy and outcomes are uncertain. Yet we are likely to see more of this type of machine intelligence, not less. For example, Wells Fargo is augmenting its equity research analysts with a AI bot of their own. Earnings are a narrower problem and MiFID II will push prices of humans down.

How will we visualize these artificial intelligences? While they live inside voice interfaces in the current platforms, that may not be sufficient to actually trust Man Group or Wells Fargo's automated investment philosophy. Even Millennials still like to have a human face on their roboadvisor. Perhaps something like this smart hologram from VNTANA or this virtually rendered baby from Soul Machines? These AIs will need to manufacture some empathy before selling us mutual funds! 

$2 Trillion and 10 Million Accounts

Source: WM Today, FolioDynamix

Source: WM Today, FolioDynamix

That's the sound of major consolidation in the wealth management technology industry. While roboadvisors gets excited about a billion dollars, a single traditional wealth management infrastructure provider will power $2 trillion dollars of individual accounts. Envestnet, a $2B+ market capitalization company, is acquiring FolioDynamix, one of its closest competitors for $195 milion in cash. This is the second acquisition for Folio, which sold to SaaS holding company Actua in 2014 for $199 million. Doesn't seem like there was a lot of value to holding software across different verticals.

Three things stand out. First, a B2B2C strategy for a startup properly executed can lead to massive traction. Landing a single client like LPL, with its 15,000 financial advisors, can lead to deployment of the technology across a very large asset base. Good luck gathering those trillions at a B2C $500 acquisition cost per individual investor! But on the other hand, 10 million accounts is not so far off from Robinhood's 2 million users ($1B+ private valuation), Acorns' 2 million investment accounts, or even Coinbase's 30 million crypto-wallets ($1B+ private valuation). So, while the traditional wealth software does have impressive scale, it is not unmatched by new types of entrants. What remains unmatched are (1) the asset base and (2) the complexity of offering.

And that brings the third observation. Folio's software is complex, with horsepower in trading, rebalancing, and performance reporting. It is not glossy like the latest from SigFigFutureAdvisorJemstepor AdvisorEngine. It is a collection of workflows that helps advisors and middle-office staff trade. Which explains why despite addressing $800 billion of assets and 3.2 million accounts, the firm was sold for less than $200 million. It is software for an age of financial advice -- highly custom trading/commission/product-led brokerage -- that is being eclipsed by a customer-centric approach built around goals-based planning and convenient mobile and chat interfaces. 

Overstock's Alternative Trading System vs Decentralized Exchanges

Source: RadarRelay  

Source: RadarRelay
 

 It's important to have a zero in the name of your token exchange. Here are two interesting data points, as tokens transition from internet curiosities to something closer to legal financial instruments. The first is Overstock's t0, and Alternative Trading System set up to create a market for ICO tokens as regulated securities. This offering will be launched in partnership with RenGen, a fintech firm, and Argon Group, an early entrant in the "crypto investment bank" space that advises on ICOs.

This was a meaningful move for Overstock, but one that has been building for years as the company explored blockchain technology, hired the right talent, and issued its own securities on the blockchain. Traditional financial firms are all looking for ways to onramp safely into crypto, and a regulated exchange for tokens without legal risk seems like a reasonable approach. However, all efforts like this, as well as those by centralized crypto-exchanges like Coinbase and Kraken, remind us of Napster and the Digital Rights Management days in music. Sure, file sharing of mp3s was more popular than ever at that time. But activity either went through a centralized set of servers that could be shut down, or came bundled with ridiculous built-in restrictions on where the files could be played and how. Sound familiar?

That situation led to BitTorrent, a way of sharing media that shards files to users and removes the need for a central server. This is why it has been impossible to stop international music sharing -- there is nothing to shut down but millions of computers running some software. The crypto-finance equivalent is the concept of decentralized exchanges, with project 0x having raised $24mm in a somewhat recent ICO. They are building the ecosystem (check out their vision) for OTC-like functionality to be embedded within software tokens themselves, with 9 different implementations in flight. One such example is crypto-derivatives. If these concepts succeed, then no amount of existential attempts from regulators (see latest Token Economy for updates on South Korea, China, Australia, Switzerland and US) will matter. Pandora's box has opened.

Apple's Augmented Reality and $1 Billion for HTC

AR/VR is such a divisive topic. 50% of you will think what we are saying is obvious and inevitable. 50% of you will think that we are crazy and on the moon. In a recent conversation with a portfolio manager of a multi-billion dollar fund, we heard "Maybe in 10 years my kids will shop for things in Augmented Reality". And yet, here we are, today, with Apple's ARkit powering live apps that you can download that deliver the future without much fanfare.

This is a case of show, not tell. In the pictures below you can see (1) how Ikea is selling furniture in a live AR app on iOS today, (2) how a neural network can be trained to extract a 3D reconstruction of a face from a single photo image, and (3) a virtual reality space built for meetings and social networking by VR Chat, which just raised $4mm from HTC. Can you connect the dots to see that within just a few years the line between the physical world and the rendered one will be gone, and that commerce, payments, bank branches, and virtual assistants will all live in a world access to which will be tolled by Apple, Google, Amazon or Facebook (or Alibaba/Tencent)?

If these data points are not enough, consider that Google is about to spend $1.1 billion on a slice of HTC, the phone manufacturer. Why? To own the capability to make hardware that competes in the Artificial Intelligence / Augmented Reality age. In order to deliver these futuristic capabilities, chips have to be architected in way that optimizes for neural networks (see NVIDIA and Intel) and massive graphic rendering, and cameras need to support volumetric recording and facial recognition. That is a hardware game. One in which financial companies will be price takers, not price setters.

Source: VR Chat

Source: VR Chat

Do Criminals or Bankers want Crypto-Privacy?

Source: ChainLink

Source: ChainLink

Ask any self-respecting financial incumbent about why public blockchains aren't good enough for enterprise use, and you get roughly the following response on why private chains (e.g., Ripple, Chain, R3, Hyperledger/IBM) are preferred. First, public blockchains don't have privacy, and large financial clients (e.g., hedge funds that do not want to reveal their trading positions) require it by definition. Second, interoperability is a problem -- financial institutions already have large enterprise technology vendors that power their complex workflows. Those workflows are the lifeblood of the middle office. One cannot just "put data on the blockchain" and disconnect the internal glue of the institution. Third, scale and speed are a problem. And last, banks are in the business of being Trusted Counterparties, not some hacker scheme like Bitcoin.

And yet when it comes to those exact same characteristics for the public blockchains, the banks assume that crypto-privacy is for criminal activity. At a recent ICO panel, we discussed whether gray market activity frequency was different on public chains vs banks. CEO of blockchain compliance company Coinfirm and former head of global AML for Royal Bank of Scotland in Europe suggested that the rates of illegal activity are similar inside of crypto and traditional finance. The only exceptions were Zcash and Monero, which are essentially impenetrable to crypto-Regtech firms.

Well, crypto-privacy is about to get another big boost. The Dandelion project could make Bitcoin transactions more anonymous. And the Metropolis upgrade for Ethereum will allow developers to leverage zero knowledge proofs, which are the cryptographic tool that make Zcash tick. Crypto-scalability is also around the corner with several projects -- LightningPlasmaRaiden -- and could get Ethereum to be competitive with Visa and Mastercard networks within a few years. On interoperability, consider Chainlink linking external data through APIs to blockchains and raising 32 million, or TenX converting any crypto-asset into purchasing power in the real economy, or the decentralized crypto-transactions that are powered by "atomic swaps". Privacy and scalability are pretty good when everything happens in a global interconnected decentralized mesh. Which leaves us the last point -- who is the Trusted Counterparty? Not banks.