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!

Crypto Exchange Listing Fees

  Source:  Nasdaq

Source: Nasdaq

We’ve done some sleuthing on the crypto rumor mill, from Telegram groups to whispered numbers between entrepreneurs. It sounds like the market price to list a crypto token on an exchange is $1 million for a reasonably regarded token, to $3 million for an opportunity to get quick liquidity. We don’t know these numbers with certainty, but suspect the order of magnitude to be roughly in line with today’s reality. In comparison, according to Autonomous partner Vincent Hung, listing fees on traditional equity exchanges are about $125-300k, with annual fees of $100-500k to remain listed. And that is for fully registered securities that have gone through an IPO process and are likely generating meaningful cash flow via operating businesses.

This implies an odd mechanic in today’s long tail of the crypto markets. First, you sell non-dilutive digital assets that are in many ways just free funding. You owe nothing to your utility token buyers by law, no more than a Kickstarter campaign doing its best to deliver a product. Only Internet reputation reigns here. Second, you overfund the project by a factor of 5-10x relative to early stage Fintech. While many Bitcoin maximalists may have a philosophical preference for crypto gold, tech companies, for better or worse are still embedded in fiat economies. ICO fund-raisings come with an illiquidity premium (can’t find a bank), a block conversion premium (good luck selling your $5mm of ETH for USD), and a regulatory premium (hope your jurisdiction is permissive), among other handicaps. We think these will dissolve over time, but are definitional to the space currently.

And third, ICO projects are now expected by buyers to get liquidity on the crypto exchanges. There is a natural rank order for these exchanges — sometimes a token will need to be listed on a small unknown one before making it up the food chain to an exchange with bigger volume. Fiat off/on ramps are king. These listings are seen as important and good for early supporters, even though it does lead to immediate selling action of tokens representing projects that likely have no production software. Thus the $1mm fee on the backend to the exchange, since ICOs have that buffer built into the raise amount. And on the front-end, ICOs pay out 5% to advisors, not unlike the 3-8% in fees that go out to investment bankers in IPOs. But ICOs also have to pay out bounties and other marketing expenses, since in large part the process is self-run. 

As a result, we see a bifurcation in the early crypto markets. On the one hand, there’s a known path to liquidity straight from idea that we’ve just described here. It costs “other people’s money” to startups, so they are incentivized to do it, but it is in many ways expensive, and benefits the Wild West of crypto capital markets infrastructure providers. On the other hand, well connected teams with traction or reputation can skip ICO entirely and go the private sale route. See Telegram, raising now over $1.7b, and perhaps even outraising the endless $1b+ EOS public token sale. We have such complexity in traditional equity markets, so it should be no surprise an analog is developing in crypto.

12 Million AR/VR Devices via Pop Culture

Despite all the talk of mixed reality hardware leading us towards augmented commerce, it still feels like nobody has a AR/VR headset. Will this be an actual platform shift, like mobile phones, or a dud like 3D films? First, the numbers. Last year, about 8 million headsets shipped to consumers, with 12 million expected in 2018. These include a variety of quite different devices — screenless viewers into which you plug in a phone (good for 360 video, but laggy), stand-alone headsets (VR rendering hardware and software in a single package), tethered headsets (plugged into a desktop for rendering horsepower). We are also on the verge of seeing more augmented reality devices, like Magic Leap and HoloLens, that have semi transparent lenses and render virtual objects in the real world, as well as wireless headsets for full VR.

The developer ecosystem is also moving well along. Google has released its developer kit a while ago, turning Android devices into AR units. It now has 85 apps, of which several enable commerce. See EbayOverstockWayfairIKEA, and the Food Network. Google is also opening up its Maps API to help catalyze the development of location based AR apps (think PokémonGo). Microsoft’s HoloLens has done the same in 2016, targeting industrial applications, like architecture and construction. And Magic Leap is opening up its hardware for developers now, promising a high end augmented reality experience — the least they could do after over $2 billion in private funding. And in the crypto world, projects like Bubbled* are exploring augmented reality land titling, to keep vagrants trying to catch some rendered critter out of your backyard.

It’s hard to catalyze a change in human behavior. If you do it, and then own some dimension of the ecosystem along which you can take economic rents (e.g., hardware or capital or data), the outcome is a multi-billion dollar honeypot. Thus HTC, Facebook, Google, PlayStation and others are all throwing billions into the sacrificial fire. But getting people to change how they pay for things, or what currency they use, or what data they share is immensely hard. 

Which is why, we think, there’s the beginnings of a media content wave that’s meant to normalize mixed reality hardware. See for example the blockbuster film “Ready Player One”, where the main character’s life is dreary in the real world, but full of potential in the virtual one. Or the teen show called “Kiss Me First”, where the main characters struggle with social media, identity and the requisite drama in part through adventure in a virtual world. If iconic cultural experiences tell us that mixed reality is normal and here to stay, well you get it. You might not care, but your kids will tell you to buy it.

Roboadvice B2C and Incumbent Collision

  Source:  Betterment ,  Raisin

Source: BettermentRaisin

We’ve long said that the digital wealth is finished. We don’t mean that it is dead, or that it’s fully adopted by the customer, or that the startups won (they haven’t). What we do mean is that the answer is fully known, and it is only time that will move us along the adoption curve for a solution that is now permanently part of the wealth management process. We have two data points on this from last week — Betterment and Vanguard.

In the latter case, Vanguard is partnering with German fintech company Raisin, which has 100,000 customers and €5b in assets. Raisin wasn’t yet an investment platform, but instead an international banking app. We’ll be self-indulgent and call it a neobank, one that integrates with savings products across Europe and allows customers to pick the best interest rate. The accounts are insured, and the financial institutions underneath are nothing more than widget manufacturers. This is bank-as-a-service, and we expect to see more of such apps after PSD2 is fully adopted. With the Vanguard partnership, the company will be adding roboadvisor capabilities built out of ETFs. Completing a financial product suite in such a way has been also done by N26SoFi, and other fintechs that have customers but not enough revenue. So which roboadvisor wins here—startup or incumbent?

And the other example of how the lines are blurring and digital wealth is just wealth management, is Betterment. The company announced several features last week which suggest a re-engineering if some of its asset allocation and trading systems. At the B2C end, the firm is allowing its larger customers ($100k+) to tweak portfolio parameters while retaining the other benefits of the automated portfolio. This is useful for creating the impression of value (and price differentiation), as well as battle the perception that B2C robos are commoditized. But more importantly, this architecture change likely stems from the financial advisor side of the business. Betterment had an early lead in their advisor channel as a robo-TAMP (turnkey asset management platform), and was particularly effective with advisors that wanted to outsource their investment management. But, it’s capability was narrow — a channel for millennials rather than a digitization strategy. Companies like SigFig, FutureAdvisor, AdvisorEngine* and Jemstep have all been more advisor-accommodating. The new change allows advisors to tweak asset allocations. That is a "give" to traditional financial firms and their approach.

  Source:  Betterment ,  Raisin

Source: BettermentRaisin

In each of these examples, a small step is taken towards the collision of different solutions into the same thing. Digital wealth is complete—we can see what it looks like in Raisin, in Betterment, at Vanguard, at Merrill Edge, at UBS, and Fidelity and many others. Independent advisors can rent the exact same thing for their clients too. And on the broader scale, we see not just digital wealth, but personal digital finance getting glued together into what may eventually resemble WeChat. A Frankenstein of payments, savings, investments (traditional and crypto), and retirement, with an overlayed AI financial assistant doing your bidding. This ain’t bad at all for the customer, but probably not so great for the robo venture investor.

Next Generation Blockchains - Interoperability, DAGs and the Enterprise

How many developer hours are being spent on building the next generation Bitcoin or Ethereum? We attended an event held by Novum Insights, where Rajesh Gopi of Wanchain, Bob McDonall of Cardano, Gilbert Verdian of Quant Network , and Jeremy Miller of Consensys discussed what such a next generation can look like. The core of the discussion centered around (1) blockchain interoperability and (2) scalability. It's a fairly widely held view that we will have many functional blockchains running optimized use case software for their relevant industry, and so moving tokens and messages between these paradigms and doing so reasonably quickly is important.

  Source:  Wanchain

Source: Wanchain

Cardano is focusing on building regulation and standards into the architecture itself, and has been rewarded with a $5 billion market cap for its token despite not yet having launched a public product. Wanchain is a finance-focused inter-chain layer that has privacy as a feature. And Quant Network is working on Overledger, an infrastructure for cross-chain smart contracts. Of course, there are others in this space -- from Aion, to Cosmos to Polkadot. This brings us back to the concept of decentralized exchanges, and the idea of atomic swaps, which would allow tokens to move across chains. Consensys believes that these are all solvable challenges, and that the Ethereum community is well beyond the white board stage in building these features -- implying we don't need any new blockchains to do these things, because the largest smart contracts platform in the world will have them soon enough.

We could go even further into science fiction to say that next generation blockchains will instead be Decentralized Acrylic Graphs, like IOTA's Tangle (a controversial history) or the HashGraph (just raised $18 million), or something like the block-lattice from Raiblocks. For these to be successful, not only does the underlying technology have to work in a general sense, but there must be network adoption by both users and developers. We're certainly not there yet. Or we could down to Earth, closer to centralization, tech incumbents and sovereigns. For example, Google is looking at leveraging its cloud for a proprietary blockchain, Nobel-winner Myron Scholes (of Black-Sholes) is working on a version of a stable coin resembling the central bank logic of adjusting token supply based on economic activity, and JP Morgan is exploring spinning out its enterprise blockchain, Quorum.

Quorum was built for financial services (and integrated into Ethereum) with an eye towards the ability to know your trading counterparty and avoid AML issues. This makes it one of several potential options that have come out of enterprise blockchain efforts and industry consortia -- from Digital Asset's solution for ASX, to IBM Fabric deployed out of Hyperledger, to R3's Corda. While Quorum is custom tailored to financial companies, competitors have been slow to adopt it because it is owned JPM. Generally speaking, blockchains are meant to be open-sourced code shared by a community, and proprietary solutions built to take economic rents are very unlikely to be adopted. Thus building out a patent library for blockchain IP (hey there, BofA) seems like the wrong direction of travel.

So that clears it all up, right? Just holding Bitcoin while this fight takes over the next decade seems like a reasonable idea.

Facebook's Propaganda Failure is a Feature, not a Bug

The best thing we've seen on Zuckerberg and Cambridge Analytica is this piece on Slate by Will Oremus. Cambridge Analytica and data scientist Alex Kogan did pull lots of Facebook data out the system and create "psychographic" profiles of users. This means that advertising could be targeted towards particular belief groups, surrounding them with different messages that would lead to behavior change at the margin. This is mass customized propaganda, and it had real impact on the 2016 elections.

But the real takeaways are that (1) Cambridge Analytica wasn't actually that good at its job and was really pretending its software worked, (2) Facebook has always been in the business of monetizing user data, from Farmville to Tinder, and (3) Facebook's current third party data sharing policies no longer allow companies like Cambridge Analytica to grab the data to do AI-based advertising, because Facebook does the work of mass-targeting itself. There's no need for a malicious third party -- just use the native Facebook tools.

This is what happens when we put no value on human data and put it up for rent. Machines can use that data to manufacture preferences and behaviors at scale. This is not a surprise or a malfunction -- quantitative advertising technology has been a massive venture investment sector for years, seeing $3 billion in funding in 2011. Since then, GAFA has swallowed up the market. And the technology of this sector, in particular artificial intelligence for profiling customers through unstructured information, has spread everywhere, including financial services. See for example the $30 million investment into Digital Reasoning by BNP Paribas, Barclays, Goldman Sachs, with prior investors being Square Capital Nasdaq and others. The product processes audio, text and voice data overlayed on top of internal communications to prevent fraud or add customer insights.


What symptoms like this mean in the long run is that we don't even need a Facebook data leak to be trapped in the AI bubble. Our interactions with each other are now nearly all digital, which means they can be used to impute a personality and a profile that we may not have ever shared. And AI hooks live everywhere -- from media, to finance, to commerce. Mass customization of our products and information is inevitable, and Facebook is not special in empowering this trend. Rather, we need a new literacy to live in an AI-first world.

Institutional Crypto Trading & Custody vs Binance

  Source:  Coinhills

Source: Coinhills

Autonomous hosted 3 panel sessions with experts from the crypto world in London last week (Alex Baitlin of Trustology, Kevin Beardsley of B2C2, David Siegel of Pillar ProjectJohn Pfeffer, and Alexander Shelkovnikov of Semantic Ventures). We talked about the development of infrastructure surrounding crypto, the institutionalization of ICOs, and approaches to valuation. Two key developments are needed for traditional finance and the crypto economy to meet -- and get us out of a place where the only tradeable product is a derivative settled in cash.

First, custody of traditional financial instruments is not the same as the custody of crypto - controlling someone's key to access a digital asset is fundamentally different from keeping books and records of stock ownership. Hot wallets (online storage) expose your private key to hacking, and cold wallets (printed note) expose it to the elements (weather, xrays etc.) where the wallet is based. Multisig solutions, where 2 or more sets of keys are required to sign transactions -- one owned by you and one by the service which operates the custody -- are an effective means to ensure custody security but are hard to operationalize. A crypto-custody smart account may match private banks on bespoke features when built. But it could take the large custodians (BNY Mellon, State Street) several years to get through a budget cycle, get a product planned, and put software in place. While this happens, firms like BitGo and Xapo have an open field.

  Source:  Coinhills ,  Xapo Custody

The second layer that's needed for capital markets is effective institutional exchanges. Today's exchanges are lightly regulated, have no best-execution requirement, have widely different liquidity, and offer different prices. OTC brokers like B2C2 and Genesis have been building out software and capital solutions in the space, but we are still early. Decentralized exchanges, like Republic Protocol raising $34MM, are a potential solution in the future, but that infrastructure is not here yet either. A good example of the current state of play is Binance, which is getting chased out of Japan by regulators, and is now headed to Malta.

Binance has grown incredibly quickly (rumored to be running at an MRR of $10-100 million) to be one of the top retail crypto exchanges world-wide for several reasons. First is the rush into altcoins out of the large cap cryptocurrencies -- with retail investors chasing 100x returns, while the beta of the crypto space drags everything else down. You can imagine regulators being least comfortable with these types of assets. Second, Binance has a referral program that rewards people in a percentage of commissions from anyone they refer into the exchange. By paying users commissions on referred trading, they are essentially turning all their clients into unlicensed brokers of potential securities

And last, the Binance Coin ICO tokenized a coupon token that discounts trading on the Binance platform, a token with a market cap all-time-high of $2 billion. The company also promised buy-backs (burning) in order to influence the price. Mature companies do plenty of financial engineering through share buy-backs, but it is a highly sensitive and regulated area of the capital markets to avoid market manipulation and insider trading. So it feels like we are still 6-18 months away from an institutional chassis. The question is -- does that matter, and for whom?

Hypocrisy on Fiduciary Rule in Bitcoin Age

  Source: Federal Bar Association - Fifth Circuit

Source: Federal Bar Association - Fifth Circuit

The financial services industry seems lost without a moral compass, like a tin man searching for his heart. On the one hand, take the role of financial advisors. During the Obama administration, the Department of Justice put forward a "fiduciary rule" that implicated financial professionals selling investment product to behave as a fiduciary on their clients behalf, if that investment product somehow reached into retirement assets. Of course, most investment product does reach into retirement assets, and by association extends to brokerage assets. Acting as a fiduciary generally means charging the lowest-market fee reasonable for funds, not getting paid additional kickbacks, not promoting proprietary products, and planning for the client's future. A federal appeals court (Fifth Circuit) just overturned this attempt to legislate the standards in the industry, but the rule was out of favor anyway as Trump's officials in the DOJ kept postponing enforcement.

Why do we need something like the fiduciary rule? The answer is that financial professionals selling investment product are kind of like doctors in a lab coat. Their self-branding creates the impression of professionalism and knowledge, which in turn persuades retail investors to purchase investments. Abusing that power by delivering inconsistent or biased advice (i.e., clients with similar needs getting different prices and products) is a social negative, which is why the SEC is now looking into creating some alternative to the DOJ fiduciary rule. And the SEC regulates investment advisors, making it more likely that they have jurisdiction over the standards. It is generally believed that such a rule helps roboadvisors and augmented financial advisors, because technology can record the standard to which advice is given, and all the legal documents and financial recommendations are tracked and can be compared to client circumstances. Not having the rule excuses choppy behavior and implementations and the inconsistent behaviors of brokers. Deregulation lowers the need for technology to keep us honest.

And yet, look at the inanity of the congressional hearings on crypto currency. Senators unfamiliar with the underlying software or the drivers of innovation in digital assets are spouting judgments about what investors should and should not be able to purchase. Representatives are claiming that they will not sit idly and "fail to protect investors". While it is certainly true that investor protections, and especially clear and transparent information should exist, there is a deep hypocrisy here. Deregulating the sale of traditional financial asset such that the sales processes can be biased is fine, while allowing for a self-funded global ecosystem of digital assets that is literally building its own capital markets is dangerous.

A consistent policy for Fintech would favor the efficiency of financial technology over the human status quo, which would mean distribution through software platforms of modern packages of a variety of investment vehicles. Financial professionals (and their software extensions) should be selling reality to their clients. But if individuals want to shoot for the moon based on personal decision making, the best we can do is global financial literacy and transparent data. Instead, we have a circus.

$275 Million from Experian for 6 Million ClearScore Users

  Source: ClearScore, Banknxt / Atom Bank

Source: ClearScore, Banknxt / Atom Bank

Neobanks, like roboadvisors, are still trying to make sense of the wilderness. On the one hand, there are stories of fast, massive success. For example, credit bureau Experian just splashed $275 million on ClearScore, a 3-year old fintech startup with 6 million users that provides a credit tracking dashboard and refers users to financial products. How is this still a market opportunity that banks missed, when did personal financial management right in 2007 (and sold for $170 million) and Credit Karma, an American version of the same, has 70 million users and a reported $500 million in revenues? Or, as another example, Smart Asset, which offers financial calculators that help people decide whether to rent or buy, has 35 million monthly users. Other examples of clearly working neobanks are Revolut and Transferwise, each with over a million users benefiting from reduced pricing on international money transfers.

We are being loose with definitions on purpose. Anything digital- or mobile-first, customer centric, and related to personal finance and depository or lending products looks like a neobank in our book. This is because banks are supposed to help us with these functions. They are supposed to help people save for the future, have convenient access to their money, and pay quickly and easily. And instead, most banks are either buying fintech companies that manage to grab a large chunk of digital users, or are investing so much into challengers as to effectively own them. See for example, Atom Bank's £149 million round, where BBVA will own 40% of the company. Atom's got a loan book of about £1.3 billion -- does the financing makes sense on its own merits, or does it make sense when you apply Atom's customer experience across the entire BBVA footprint?

  Source: ClearScore, Banknxt / Atom Bank

Source: ClearScore, Banknxt / Atom Bank

But something is off about the story. We know that the first round of neobanks -- Simple (also acquired by BBVA) and Brett King's Moven didn't really work out. Some, like Seed, are now focused on providing online account opening solutions to existing banks. This is the identical pivot we saw in digital wealth management, as roboadvisors turned into workflow automation tools for financial advisors. So what's the trick that makes some neobanks and PFMs worth hundreds of millions with massive traction, while others scrape at building a software-as-a-service business?

The answer lies in how clearly and quickly value accrues to the user. Credit tracking solves an immediate problem somebody is having, costs nothing, and has an engagement model. Cheap international transfers are instantly actionable, and immediately deliver value over what a traditional bank charges. SoFi's student loans sell themselves, reducing student obligations by thousands of dollars on sign-up. Building a pipe big enough that prospects know you exist is where the $100 million in venture capital has to come in, but then the product can have a positive viral loop. That's different from trying to sell an undifferentiated mortgage, or checking account, or retirement 40 years in the future. The benefits of such financial products are outweighed by the pain of having to interact with them. The questions to ask are: how much demand is there for this thing today, how bad is the current experience, and does your customer know the experience to be bad?

The GDPR Battle over Data and Identity - IBM or Crypto

  Source: Text of GDPR,  Truata   (click to enlarge on both),  Pillar Project

Source: Text of GDPR, Truata  (click to enlarge on both), Pillar Project

GDPR is about to hit Europe. The regulation is designed to reverse the power dynamic between large tech and finance companies, that gather and save user data, and the individuals whose data is at stake. The regulation creates a right to be forgotten (on the Internet!), the right to move personal data between companies, data protection standards, and other consumer-friendly amendments. The implementation of such regulation is massive, and IBM and Mastercard are teaming up by creating a company in Ireland called Truata to deal with the change.

Mastercard has immense amounts of financial data. IBM has cloud, blockchain and artificial intelligence capabilities. Will it thus be the tech and finance giants that solve the very problem the industry has created? Or can this be done better by the Crypto economy? Open source movements have for decades tried to solve the data question in favor of consumers -- see for example the FreedomBox project or the Ello social network. But there was not the financial leverage to re-engineer the entire direction of power and information on the web.

  Source:  Truata

Source: Truata

Crypto projects like Pillar, on the other hand, are motivated to create user-controlled wallets of private data which can be tokenized and then submitted as part of some particular economic activity. This can include medical records, financial activity, KYC/AML and government data, attention and browsing information, and so on. When such information sits at an address controlled by a particular owner with a particular wallet on a blockchain run by a decentralized, shared, distributed network (rather than one company), the promise of what GDPR is trying to accomplish becomes technically trivial. Of course the user can allow or revoke access to her data at will, and move it between different services securely! We think regulators would be well served in understanding this data architecture instead of being upset about the enabled rise of digital assets.

  Source: Text of GDPR,  Truata   (click to enlarge on both),  Pillar Project

Source: Text of GDPR, Truata  (click to enlarge on both), Pillar Project

Fintech AI Kensho Sells for $550M

  Source: Kensho / Forbes

Source: Kensho / Forbes

Big news is big. Finance startup Kensho has just become one of the largest artificial intelligence acquisitions in history. What is even more impressive is that the acquirer S&P, is also a financial services firm, and not the ever-present boogeyman of Google, Apple, Facebook, Amazon. Forbes claims this is the most expensive AIacquisition to date, though we see you Otto (self-driving trucks) at $680 million in Uber equity.

There's a nagging question around the acquisition price. Pitchbook shows a bit over $100 million raised into the company to date, with the last check being $50 million, led by S&P, and with a post-money valuation of $595 million in March 2017. So the acquisition price is essentially identical to that of a year ago, with none of the investors taking a downround, and S&P effectively not paying for their own slice. Across all rounds, it looks like the company sold about 50% of the equity. Why exit now without an uptick for control -- the other investors from last March, like Goldman, JPM, Bank of America, etc., can't be happy to just get their toys back.

Anyway, wat does Kensho do that is valuable? According to Goldman, which was one of the original investors, the answer is not that the AI manufactures investment product. Instead, it augments human analysts so that they are more powerful and can get more done -- like running a quantitative analysis in seconds rather than days. "It never disrupted the underlying business model". That's a lot of exit money for something that didn't disrupt any business models. Also not a surprose -- very few fintech companies are standalone businesses, but many will work when levered up 1000 times on a large incumbent client base. This was the logic behind BlackRock's $150 million spend on FutureAdvisor, a company with about $3 million in revenue. And a similar logic must animate the need to have the industry's best known AI asset to distribute to thousands of S&P institutional clients. 

Crypto Index Fund from Coinbase still not ETF


One of our key predictions for 2018 was the rise of vanilla investment product packages for digital assets. That means we would get to see ETFs and boring-old portfolios, rather than the wild contortions of 2017, where public companies pretended to always be into blockchain to get a crypto halo. And in large part, we put the responsibility for irresponsible retail investment behavior squarely at the feet of American regulators. Instead of a 5 bps ETF with some crypto exposure, we continue to see coin mania and sentiment-driven speculation. 

Coinbase is not standing still, and has announced a subsidiary called Coinbase Asset Management that will oversee a Coinbase Index Fund. While Coinbase has never been one to list a lot of assets, it is disappointing to only see 4 crypto currencies (BTC, ETH, BCH, LTC) in the package. Not to mention that this product comes with a $10,000 minimum and a 2% annual management fee. Looking at crypto assets, 2% may not sound like much given 1000% returns last year. Looking at digital investment management, 2% sounds like 10 times the price of the entire Betterment service. That price is expensive and inefficient, and is another reason why we need an ETF structure.

Last, investors have a track record of experience with the Bitcoin Investment Trust structure (about $2 billion of GBTC), which shows some of the disconnect between holding a crypto asset directly, versus through a wrapper. The wrapper can trade at a discount or a premium to the actual assets it holds. Below you can see that depending on the time period, you would have had quite different return profiles investing in Bitcoin directly versus the investment trust. And at times, you would be buying the fund where the net asset value was 20-30% higher than the value of the holdings in it. The solution for better pricing is more liquidity, not less, and lower fees, not higher.

  Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

Amazon's "Checking Account-Like Product"

  Source: Edelman

Source: Edelman

Lots of chatter last week about how Amazon is in discussions with JPMorgan about partnering on a "checking account-like product". This is right on the heels of similar discussions with Bank of America about putting capital behind its SME lending business. So since when are banking products or lending products or investment products just a "-like" product. Meaning, don't you have to have a bank to offer the trusted service of a bank account? Don't you have to have a trusted banking brand to hold on to people's money? Quaint questions for the last century.

Not really. According to a study from Bain, 74% of 18 to 24 year-olds and 68% of 25 to 34 year-olds expect to buy financial products from technology firms. And according to the Edelman trust barometer, people still trust Finance less than absolutely every other industry, while trusting Technology more than any other industry. There goes your core value proposition.

The implication of a GAFA sector that offers all the financial products without manufacturing them isn't the safe passage for the financial services industry to the future. Rather, it is the full commoditiziation of financial services, as the main manufacturers of financial products squeeze themselves into the customer acquisition and engagement channels of the big tech AI companies. When the AI knows clients better than anyone else knows clients, financial services are mere features within the rich tapestry of services called Amazon Prime. Why would anyone choose the pain of shopping for and opening a third-party bank account, if one comes pre-installed in our virtual assistants?

So you can see how puzzling it can be to read that JPMorgan is investing $20 billion in 400 new branchesDoes 75% of deposit growth really come from customer visits to those branches? Do 60% of Americans still prefer to open an account at a branch, rather than digitally? Maybe, but these are decreasing data points in time, part of a larger trend towards digital. As shown below, each year these numbers go down, not up. Or, maybe, JPMorgan recognizes a corporate responsibility for its employees in a world that is moving towards automation and unemployment, and is doing its part in trying to stabilize local communities and the industry's reputation?

  Source: Bain

Source: Bain

  Source: Edelman, Bain, Tradestreaming/Cuebiq

Source: Edelman, Bain, Tradestreaming/Cuebiq

$10 Million In Crypto-Games per Week

  Source: DappRadar

Source: DappRadar

We've talked before about how important CryptoKitties was to the new web -- with all sorts of technologies like artificial intelligence, augmented reality, streaming video and online commerce getting their start from pictures of cute animals. Content is the killer app of the Internet. And putting aside adult content, video games have been a key driver for the development of online communities (e.g., MMORPGs), virtual economies (e.g., Second Life), video technology (e.g., Twitch), bandwidth development (e.g., Battlenet), hardware that runs AI and Bitcoin mining (e.g., GPUs), and many other key pieces that are responsible for innovation across the web.

It's not a surprise to see that, when analyzing the spending volume in decentralized apps on the Ethereum blockchain, over $10 million of economic activity is happening weekly in gaming, according to tracker DappRadar. So if we put aside the financial speculation in crypto currencies, i.e., trading them as assets or launching fundraises, what's most vibrant in the public ecosystem is video games. From CryptoKitties to EtherIslands or CryptoCities or EtherBots, developers are creating software that functions like a toy around digital assets. In a case of imitation being a source of flattery, decentralized gaming Chinese blockchain TRON launched a Crypto Puppies game for Chinese users and now has $3 billion marketcap.

And this, in our view, is the key insight about the space. What matters most is not the network or the mining, but the ability to make digital assets scarce and transferable. If it works for digital toys, it will work for digital equities, attention tokens, land titles and so forth. Games are the perfect proofs of concept for ownership and designing economic systems, as they are starting from scratch, and are not entangled with existing regulatory and legal regimes. How games turn into reality however, is a matter for the sovereigns. See the latest actions from the SEC, the Milken Institute's report on Fintech legislation, of the German Federal Financial Services Supervisory Authority's statements to see how we are progressing.

 S ource: Tron Games

Source: Tron Games

$400 Million Acquisition of Crypto Exchange

  Source: Circle

Source: Circle

Fintech startup Circle bought crypto exchange Poloniex, allegedly in a $400 million transaction. What's Circle? It's a mobile wallet / neobank that let's users text money to each other, with technology rooted in Bitcoin payments. Think about it as a combination of Venmo and WePay. According to Crunchbase, Circle has 50-100 employees and raised $136 million from Goldman Sachs, IDG China, Breyer Capital, Accel and General Catalyst. There is no way these guys have $400 million cash on hand, so we would expect this to be in large part an equity deal. And the latest Circle post-money valuation is about $500 million, so this was a big gulp if the reported numbers are correct.

What's Poloniex? Poloniex was an early exchange in the space that was quick to list new alternative tokens. It provided access to Ethereum before Coinbase did. In the process of getting popular, it acquired more users than it could handle. It was well known in the ecosystem that the company’s customer support took a very long time, and that conflict resolution processes were overwhelmed. This transaction should benefit Poloniex customers with new features and support services, while giving Circle a larger revenue base in the crypto economy.

One angle that gets lost in all the ICO talk is equity checks into blockchain and crypto companies by venture investors. About $1 billion was invested into the ecosystem from the venture side in 2017, of which $400 million was from Corporates; and over $300 million was invested in the first 2 months of 2018. In terms of the $400 million acquisition price, this would put the Poloniex below Coinbase’s $1.6 billion valuation, but well above that of enterprise blockchain unicorns like Chain ($130 million) or R3 ($250 million). So it is certainly motivational to see a transaction that bridges that public and private crypto worlds, and values tokens as an asset class rather than a mere operating improvement.

Some are also focusing on the fact that Goldman has a stake in Circle. As security tokens gather steam, with projects like Polymath raising $60 million and air-dropping their tokens to a large community base, traditional investment banks need to think about the future of their business. This is an existential question for the securities industry, and building correct exposure will be key over the next 5 years. Or the investment banks will end up like the music labels.

  Source: Circle, Autonomous NEXT (Pitchbook data)

Source: Circle, Autonomous NEXT (Pitchbook data)