CRYPTO: Did ICOs raise $300 million or $2 billion in September? Depends who you ask.

Last week we published some grim ICO figures, which made the rounds in the media, suggesting that token offerings are 90% down on a monthly basis relative to the peak. We were challenged on our figures based on two sources: Elementus and Coinschedule (ICO Rating is another great reference). While our number floated down to $300 million, some of the others saw September as $1B+. As an aside, we want to show the largest number possible to frame the best story for a delicate and growing space. This is why we began adding venture capital equity investment into crypto companies. When looking at that particular chart, our trend is at over $1 billion in August. So let's explore the delta.

First, there are some chunky and problematic figures which we chose to treat differently. For example, CoinSchedule lists Rubi-X as a $1.2B ICO entry for the month of September, which we have not been able to verify otherwise and chose to exclude. The Venezuelan Petro ($700MM+) we also ignore, as it is at best a government-backed monetary unit, and at worst an experiment in sovereign fraud. Second, there are various timing differences. Take the $134MM into tZero, which we had already accounted for at announcement in July. Lastly, taking a closer look, many of the ICOs we chose not to include are self-reporting a "completed" ICO, and then a data spider is taking their softcap as the amount raised. We generally exclude data where the confirmation of a meaningful raise ($10MM+) is hard to pin down.

Further, Elementus tracks monthly flows as they happen. This means if an ongoing ICO is 40% through its time period, they will have counted accrued fund flow. We track data at period end, meaning that only closed offerings are counted. Such an approach will not give credit for capital in flight, and perhaps there are good months ahead if indeed flows are strong. But this methodology difference should generally wash out, unless large chunky and unusual things are happening (e.g., Telegram and EOS). 

Our final point on this is to revisit our data sources. We focus on analysis, and leverage other primary sources for much of the underlying gathering, which we then scrub. In looking at the process, we counted over 30 ICO trackers used in our aggregation process. The kicker though is the short half life of the sources -- charted below. We find ourselves swinging between various sites and their increasing and decreasing data quality! So if you ever think there's something we should pay attention to, do let us know. And without further ado, here are the adjusted figures, telling the same story as before.

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Source: Cryptoglobe (ICO data reporting), ElementusCoinSchedule

ARTIFICIAL INTELLIGENCE: Explaining Black Box Algorithms to Avoid Discrimination

Speaking of Amazon, news broke that the company had built out an AI-based recruiting tool that was supposed to help it rank candidates at scale. They certainly are not the only ones -- the tech startup space is littered with applicant management and analysis software, especially given that employees have many more jobs on average than in prior decades. What this AI did, however, was systematically discriminate against women, down-weighting resumes that included the phrase "women's" in descriptions or candidates that came from all female colleges. This result came unintentionally from the underlying data. If you correlate the language in thousands of employee resumes, you will get the status quo, which is that on average the Amazon employee, or any tech employee, is more likely to be male. Another artifact that mattered is the way candidates used language itself, which can be gendered in output.

Other examples of unethical AI are plenty. For example, image recognition algorithms make an error of 3% for white male faces but 30% on black females faces. Or, when used in automating sentencing criminals in the US, algorithms punish minorities more harshly. Or, when underwriting credit, AI disfavors historically disadvantaged protected classes using Zipcode. But the math isn't wrong -- it is in fact painfully correct. These outcomes are a mirror to how things are, not a solution for how we want things to be. Yet AI will be used regardless. Just this week, Lloyds adopted speech to text passwords for telephone banking, replacing pins with the sound of a customer's voice. Will this service work better for majorities and not minorities? Further, such security can be gamed using pre-recordings, or generated voices. Similarly, image recognition can be gamed with photos or by twins.

This is why we are excited to see two initiatives make the news. The first comes from the MIT Lincoln Lab, focused on machine vision. The software builds a visualization based on how a neural network sees an object, highlighting which parts and features of the object drive a particular decision. The picture below shows how the computer detects "large metal cylinders", first looking for size, then for materials and finally for shape -- each  highlighted by importance-ranking heatmaps. The second comes from IBM, called the Trust and Transparency service. In an example around insurance claims automation, the company shows an explanatory overlay on the AI that points out the probabilistic weightings for different drivers of an approval/rejection decision. A human analyst can then understand why the machine made its judgment. We think such tools will be required for any serious AI company.

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Source: Reuters (Amazon), IBMMIT Media Lab, Business Insider (Amazon), FS Tech (Lloyds)

INSURANCE: Monopoly gains to Amazon's platform from Travelers Insurance channel

Travelers, the home insurer, has partnered with Amazon to sell smart home and security devices. The company is getting its own digital storefront (amazon.com/Travelers) on the Amazon site, where channel customers can get SmartThings water sensors and motion detectors, Wyze cameras, as well as Amazon's Echo Dot. For Amazon, this is a proprietary hardware and marketplace sale. For Travelers, it is a home insurance sale, bundled with the telematics. Additionally, Travelers has integrated two skills into Amazon Alexa, rationalizing to some extent why you need all this technology to interact with your insurance policy.

This is a powerful symptom. On its face, it may look merely like a new marketing channel for a web-first demographic with a few gimmicks thrown in. Couldn't Walmart, Overstock, and the rest launch some product pages and cross-sell financial products? Here's the distinction: Amazon is a marketplace platform, whose value increases if it can grow two sides of its network: (1) manufacturers of stuff, and (2) retail customers. The manufacturers could make financial or physical objects, which don't matter. In order to win the platform game over traditional retailers, Amazon can throw in bleeding edge tech for free (or at cost). Walmart makes no phones, tablets or Artificial Intelligence-based assistants. Amazon does, and it has Big Tech leverage over all the aspiring startups in the space that want its consumer pipe.

Relative to other Internet companies, Amazon has the luxury of being post search intent. The Web is not a free-market endless bazaar, but a few walled gardens with monopoly-like attention ecosystems. Google sits in the pre-intent part of the funnel. People search "home insurance" into the box and get third party websites formatted according to their own logic. These results are driven by two markets: (1) bidding against keywords and (2) optimizing search engine results against a global, non-discriminating algorithm. Amazon is fundamentally different -- a king-maker that can select who wins business within its platform, and which has no need for an open web for Prime customers. This means insurance companies should race to claim their own custom channels on Amazon's version of the web (i.e., Amazon On Line?), which incidentally ends up selling Amazon hardware. This leads to a dynamic similar to that which Apple had on the music labels with iTunes and the iPhone. No competitors in sight.

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Source: Company Websites (AmazonTravelers), Media (DigInWSJ)

CRYPTO: September ICOs 90% Down from January, but Venture Funding is Ray of Hope.

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  Source: Autonomous NEXT, Pitchbook Data, China     Microlenders

Source: Autonomous NEXT, Pitchbook Data, China Microlenders

We're really trying to make this look good! But it's not working. We've scrubbed token offering data from September, and the trend continues generally to be down. Last month saw about $300 million in ICO funds raised, with the month before that revised to a bit over $400 million, a far cry from the $2.4 billion in January of this year. If we include EOS and other chunky private token raises, the highs go to over $3 billion, suggesting that monthly ICO activity is down 90%, which of course looks a lot like Ether's price performance, but with a 3-month lag.

There are three narratives at play, which are worth exploring. First, perhaps investors have devalued the idea of buying a utility token (does nothing yet, legally non-binding), and instead want to buy equity in the same companies. To test this, we looked at Pitchbook's data on blockchain and Bitcoin venture capital raises, which you can see in the second chart below in the magenta color. There is indeed a lagged effect in venture as well, with increasing drips of capital, reaching over $1 billion in August 2018. Why is that? Two reasons: (1) fintech companies like Robinhood and Revolut pivoting into crypto and (2) Bitmain trying to vacuum up capital before the public offering. This gives us a slightly more balanced view of funding in the space -- with recent months seeing a decline in public crowdfunding, but an increase in private checks. Anecdotally, projects are selling equity and giving matching tokens for "free" to investors in the capital structure.

The second narrative is Security Token Offerings (STOs). We know many different platforms working on this space -- from Templum, to Tokeny, to Sharespost, to Indiegogo, to tZero. And while we'd love to plot STOs on this chart as well to offset the decline, truth is that STOs won't hit the market in earnest for another half-year at least due to regulatory indigestion. We tried to find that extra monthly billion in STO land, but it's not there yet. And last, we're testing a narrative about the collapse/crisis in Chinese P2P lending since 2015, and whether that risk-seeking capital wound up in ICOs. If you've got any hints on that last one about Asia, let us know!

ARTIFICIAL INTELLIGENCE: Paying by Smile with Alibaba or by Blinking with Ping An

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Chinese commerce is very digital already, far outpacing the US in both nominal and percentage terms. Since almost no mobile payments in 2011, China now sees almost 100 trillion yuan, or $14 trillion USD, in mobile payment transaction volume. This compares to less than $100 billion in the United States -- a 10x difference in adoption of using phones, rather than cards or cash, to pay for things. Further, unlike in the West, the vector of payments intersects much more closely with social identity and networking, which is the platform globally for developing artificial intelligence. Just check your Facebook Newsfeed.

So we give to you implementations of AI for payments in the East. The first is from Alibaba. If the customer has Alipay's app and has enabled facial recognition, a smart vending machine is able to scan your face and associate it with the payment account. We would guess that there is a geolocation element involved as well for two factor authentication, or perhaps just a phone or pin verification. The second example is the newly launched Ping An partnership with Danyang Rural Commercial Bank. The plan is to use facial recognition combined with "blink detection" to authorize a payment. The Bank claims to target 1,000 merchants for the initial pilot of the program. Reminder -- Ping An has built out machine vision capabilities to cut down on time processing insurance claims, and here it is trying to rent it out as a cloud service to other providers.

We end with a few questions. First, if Ping An was able to stand up real machine vision capabilities within a couple of years, what's stopping Visa or Mastercard or JP Morgan from building the same? Why have American finance firms failed to own the AI technology layer and its associated cloud? We think the answer has to do with the role of enterprise tech firms and implementation consultants in the US, which make the default option to out-source rather than in-source such capability. Why build, when you get this from Google for free as part of a cloud deployment? And second, we observe that massive data processing and hosting infrastructure is needed to accurately process image recognition on video for millions of people in real time. Likely, you also need high definition images to pick up blinks and smiles. So let's refresh that 5G network!

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Source: Walk the Chat (Charts), Fung Global Retail & Tech (Chart), TechCrunch (Alibaba), MPayPass via CrowdFundInsider (Ping An)

AUGMENTED REALITY: Government and Military Use Will Drive Magic Leap, HoloLens Adoption.

Last week, we spent a bunch of time talking about how consumer VR as a standalone platform is not turning out to be as good as iTunes, the iPhone, YouTube or the Web. One problem was the form factor, another problem was the lack of pirated content -- though games and adult content will slowly address this. This week, we want to point to IoT (Internet of Things) and Augmented Reality (AR). Do these themes have a reason for being and are they an opportunity for a major retooling of our interaction with technology? Here, we think the answer is a stronger Yes. But this is due to a surprising reason -- government and military use.

The Web was popularized through consumer use and now powers our digital selves. But it was brought to life and initial use as ARPANET in the 1960s through funding by the US Department of Defense. Imagine unlimited funding with life and death use cases by a nationally-embedded client base. This is also what the Chinese government is doing in relation to AI, blockchain and quantum computing, and get to the meat. First, Bloomberg reported that AR companies Magic Leap and Microsoft's HoloLens are bidding on a $500 million augmented reality Army project. The order is for 100,000 headsets which would run the Integrated Visual Augmentation System, overlaying intelligence on the physical world. These would be used for both training as well as in live combat. The manufacture of these types of devices would create an economic base on which consumer versions could be created, as well as condition a whole generation that using AR headsets is normal.

Another data point supporting this idea is the investment by local government entities (e.g., UK councils) in digital twins of their neighborhoods for urban planning. In particular, Liverpool is running a £3.5 million IoT program that combines the rollout of a 5G network with innovative health and social care services for residents. Of the 11 proofs of concept in place, examples include video connection between vulnerable people at home and their pharmacy, AR maps that bridge physical distance and combat social isolation, and sensors that monitor whether older adults are dehydrated. Similarly, earlier this year, Bournemouth was mapped into 3D, incorporating 30 different data sets, also as part of planning the 5G network. These live 3D maps, which could then be projected into the real world via AR devices, are a social good and should be part of centralized infrastructure. This in turn can further move the needle in consumer adoption and market maturity.

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Source: Magic Leap (BloombergNext RealityDaily Mail), UK Authority (LiverpoolBournemouth), Wikipedia (ARPANET

ONLINE BANK: Santander, DBS Getting Mobile First Right

You can split the last decade of Fintech into (1) unbundling of banking and investments into niche financial apps, and (2) the re-bundling of these apps into cross-selling machines once some amount of scale has been reached. See N26 (a bank with investments), SoFi (a digital lender with wealth and insurance), Acorns (a micro-investing app with a debt card). But direct to consumer startups are not the only ones getting it right. Today, Goldman with Marcus, JPMorgan with Finn and YouInvest, DBS, BBVA, Santander and the Nordic banks all have smart digital strategies that copy (or buy) the Fintech playbook.

The issue is that digitization is, to some extent, discrete. If you bring financial products into the 21st century, the remaining field for competition is audience gathering. So we note that Santander's Openbank has launched the following in addition to its neobank -- (1) micro-investing that saves a small amount per time period, (2) goal based planning and investing, and (3) a roboadvisor powered by a BlackRock investment team priced at 55 bps (unclear if this is FutureAdvisor, or just a BlackRock asset allocation model). On top of this, the app will have a password manager (surely people trust banks with their passwords, said no one ever), and a data aggregation service like Mint.com. For what it's worth, the app has a 3 star rating on the App Store, so perhaps people don't love it like they love Revolut or Monzo. But the Spanish bank claims to already have 1.35 million accounts, and is coming to the UK next.

Another forward thinking offering is Singapore's DBS. Like Openbank it has all the latest Fintech features, as well as a Facebook Messenger integrated chatbot. As a comparison, independent chatbot Cleo now supports 500,000 users. But of course, it is going to be much harder for Cleo to monetize, well anything, without manufacturing some sort of financial product as people don't pay for information alone. In the case of DBS, the tech-first approach has allowed them to double the revenue generation off a digital vs. a traditional customer (S$1,300 vs. 600), and decrease meaningfully the servicing cost (S$468 vs. 348), leading to a far better lifetime value. Can an independent fintech build that scale and product set as well?

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Source: FSTech (Santander), Coverager (CLEO), Bloomberg (DBS)

VIRTUAL REALITY: VR Failing as Platform as Headset Shipments Stall.

Virtual Reality isn't working out as a platform. Below, you'll see the declining popularity scores of the major headsets being sold on Amazon, as scraped by Thinknum. Samsung's Gear headset slipped from the top 100 after November 2016, Facebook's Oculus by July 2018, HTC Vive in June of 2018 and Sony Playstation in April of 2018. IDC also just updated their headset tracker and shipments are down across device types. Headsets that insert smartphones (e.g., Samsung, or Google Cardboard) have declined from 1 million in 2Q 2017 to less than 500,000 a year later. Tethered headsets (those that connect to PCs and devices) fell 37% year over year.

The only category that did grow is standalone headsets, which is a completely independent device for which you need no other peripherals. Oculus Go and Xiaomi Mi VR are examples. And while there might be several dozen million devices installed out there, the technology is not showing the hardware growth of the iPhone, or the software growth of a Whatsapp. So what can we take away from this stalling? First, VR is meant to be a platform war for tech companies, including a dedicated app store, video and gaming content, and the other benefits of owning the customer. However, to be a platform, you need to capture an audience. And to capture an audience, you need to have spectacular differentiated design and proprietary content which forces adoption. The design part is still in wild flux, looking for a form factor people like. 

On content -- today's platforms bootstrapped themselves off existing media. Youtube started out as a place to park bootleg movies. iTunes grew on being able to play pirated music and sync it to your iPod. Facebook gave a home to college kids' digital photos. VR does not have this luxury, because the making of VR content remains far outside the capabilities of the average user. Nor is there a large library of interesting things to digitize. So the bootstrapping is much more difficult, because not only do you have to create all the content from scratch, but you also have to teach your clients about a new experience, which suggests the audience is not built in. That's not to say that the payoff for winning VR is small, but in the short term it is primarily a novelty gaming system.

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Source: Thinknum (VR ranks), IDC (Shipments)

BLOCKCHAIN: Goldman, JPMorgan and Ripple Fight About International Payments

Here's the old analogy about the correspondent banking system. Let's say you want to fly from Chicago to Hong Kong. Well, to save on costs, you might take a local flight from Chicago to New York, then from New York to London, and then from London to Hong Kong. Or maybe the Travelocity algorithm will route you to Dubai for the optimized fare, who knows. And so it is with international payments -- an American business might try to pay its Chinese supplier, and the bulky enterprise payment will hop between various accounts in correspondent banks across countries, trailing instructions as to where to park this money. Cross-border payments volume is about 15% of total payments in the world, and within that 90% is business to business, representing about $300 billion in revenue.

The above system is clunky and slow. It's also expensive. Think about what Transferwise has done for consumer remittances, crushing bank revenue of 3% for FX spreads and 3% for convenience fees into 0.35% + $0.80 per transfer. Now if such cost savings could be applied across international payments, businesses would have a lot more to put back into their pockets. Anyway, all this is context. The three news items in this theme are (1) Ripple talking about how its xCurrent 120 bank payments blockchain may involve the cryptocurrency XRP, (2) Google and Goldman investing $25 million in Veem, which uses Bitcoin to replace correspondents, and (3) JPMorgan going public with the Interbank Information Network to 75 banks, including Santander and Societe Generale.

It's odd that all three of these items came up essentially within a week. The approach is different, but the target is the same. Ripple's game is to leverage its proprietary currency as the accounting unit, and thereby also inflate the market cap of this digital assets. It seems unlikely that banks would endow a third party's coin with such value (rather than say the utility settlement coin), but anything is possible. Veem has grown very quickly in just three years to 80,000 customers by focusing on small business, and its CEO had previously sold a business to Western Union. And the JPMorgan effort is expecting to see 15,000 payments a day in the new network -- though the company had previously had trouble getting the rest of the industry to adopt its Quorum solution. All that said, there's $300 billion up for grabs.

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Source: Autonomous NEXT (Payments Pools), FT (JPMorgan), CNBC (Ripple), Forbes (Veem)

ONLINE BANK: Square's Unique Advantage in Rebundling the Bank

Square has $200 million of balances in its Cash app. At a Recode conferences focused on commerce, Square's CFO suggested that the payments company is thinking about expanding beyond its core competency (enabling long tail merchant commerce) to wrapping the full suite of financial products around those $200 million in balances. That includes savings accounts, investment offerings within the app, in addition to the current capability of buying Bticoin. This is why Square has looked into an ILC license and is expected to take advantage of the OCC Fintech license, once the legal dust has settled. For context, about 66% of banks and 80% of credit unions in the US are below $250 million in deposits, which is roughly 10,000 institutions in total of approximately the same size.

But on the other hand, this long tail has no tech DNA. Square, on the other hand, started out as a hardware solution to empower payment-taking by micro enterprises (e.g., comic book vendors). It now runs at approximately $80 billion in annual volume. It also quickly spun itself into a platform, by building out lending capability for the merchants using its payment systems. Now it originates about $400 million of SME lending per quarter, or $1.3 billion over 12 months, leveraging access to both (1) payment data at the point of purchase and (2) its network of merchants at the moment of financing need.

On the other side of the network, it has built out an active consumer user base of 3 million for its Venmo competitor, Square Cash, which has been downloaded over 30 million times. Adding crypto capability to the app has reportedly added another 6 million to the user-base. This has been a successful financial marketing and customer acquisition strategy for others as well, with Revolut doubling its user-base, Robinhood adding another million, and eToro growing 6 million as well for crypto trading. Unlike the long tail of small banks, these players grok young customers and build the features they want. And unlike the rest of the Fintech apps, Square has a physical hardware footprint and a merchant network that gives its "Bank of the Future" an asset in corporate banking, B2B payments, and various other higher margin activities. So when they talk, we would listen.

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Source: Recode (Square Investments), TechCrunch (Square Cash screen), St Louis Fed (Number of banks by size), Statista (Lending)

INVESTMENTS: New York on Crypto Exchanges, Robinhood and the Ethics of Trading

The Attorney General of the New York State just released a report on the integrity, traditionally speaking, of the crypto asset markets. The exchanges surveyed included Bitfinex, bitFlyer, Bittrex, Coinbase, Gemini, HBUS, itBit, Poloniex and Tidex. Notable, it excluded Binance, Huobi, and Kraken who refused to participate -- as well as another 100+ crypto exchanges that operate globally but steer clear of New York. Kraken is known for having rebuked the questionnaire from the Attorney General as overbearing and disrespectful, and at first glance we had agreed that perhaps it was overreach. But after reading through the report, we changed our mind entirely. It has great information and provides transparency around best practices, or lack thereof, helping investors focus on the right concerns and conflicts of interests.

Let's snooze the questions about KYC/AML, poor security or service, and instead focus on conflicts of interest. Unlike in traditional online brokers, crypto exchanges are both a venue connecting parties, broker/dealers that represent trades as agents, proprietary traders for their own accounts, large owners of the underlying traded assets, and also issuers of their own tokens. Why do we care about conflicts of interests like this? Because misalignment leads to rent seeking, corruption and manipulation. Think about the separation between equity research and investment banking that came about after the DotCom collapse (e.g., Henry Blodget). Or something simpler, like an exchange giving better pricing to large institutional traders that can trade ahead of retail sentiment.  Or worse, an exchange using its own large capital to trade, creating the impression of volume or price movement. We care about things like this because the retail investor is literally having value transferred out of their pocket into that of an arbitrage robot, unknown and unpoliced so far.

Let's now take a 90 degree turn into Robinhood, the free trading app with millions of Millennial customers eyeing an IPO in the billions. A recent take down article on Zerohedge walked through the start-up's business model. How can you give away something that has hard marginal costs, other than burning venture money? Freemium and selling your customers. On the freemium side, Robinhood does have the margin offering and can earn interest on cash sweep. But on the latter, it certainly does get paid for the activities of its customers in the aggregate. How? By directing order flow (i.e., those millions of little trades for AAPL) to quant trading firms like Citadel (70%) and Two-Sigma (16%). In turn, those firms can use the retail sentiment to make directional bets, or to mask large block trades without moving the market, or perhaps to find another pricing advantage. Robinhood users don't see the costs, but they could be in the execution -- though we note that Robinhood has released a statement re-affirming they deliver best execution. Tense!

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Source: New York State (report), Zerohedge (Robinhood), Medium (Robinhood privacy arbitrage), Robinhood (statement on orders)

PAYMENTS: Mastercard League of Legends Sponsorship and the Censorship of Attention

Mastercard has thrown a sponsorship behind one of the most popular e-sport games, League of Legends. We think finance people should pay a little more attention to next-gen attention machines, and competitive video games are a black hole for user growth. As symptoms, we point to the $1 billion acquisition of Twitch by Amazon, or the $400 billion market cap of Tencent with an $18 billion revenue run-rate from its game division. Further, e-sports are growing massively as an audience aggregator, with over 300 million people globally. Some events (e.g., League of Legends finals) command 40 million concurrent viewers, larger than many traditional sporting events (e.g., 20 million for the NBA finals). Perhaps not surprisingly given the Tencent example, over 50% of that attention comes from Asia Pacific.

What does this sponsorship really mean? As far as we can tell, it's a combination of (1) banner branding during the games themselves, and (2) creation of rewards related to the video game in Mastercard's Priceless program. Rewards include behind the scenes access, preferred live stadium seating, and the chance to test-drive computers used by the "athletes" at the World Championships. To be eligible for these scarce experiences, users have to input their Mastercard information as a payment rail directly into the League of Legends game platform. What is there to purchase inside such a video game? Usually cosmetic upgrades and other microtransactions -- $1 billion worth of revenue for League of Legends.

Going back to the Asian fintechs: video games are a gateway to messaging, messaging is a gateway to payments, payments is a gateway to banking, savings, lending, and investments. In addition to those watching these games, there are also 200 million active players in these ecosystems, all of which could become a Mastercard user. Further, starting at the attention end locks people into a brand that they actually like, rather than tolerate. That's why entrepreneurs have been trying to "gamify" finance, not "financialize" games, though such financialization is now happening through tokenization and cryptocurrencies. The last bit we'll leave you with is that Chinese regulators think video games to be such an addictive and powerful vector, that they are working on laws that limits time spent and number of new titles released. A freeze on new release approvals has wiped out over $100 billion from Tencent's marketcap.

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Source: Mastercard (Press release), Newzoo (Esports market size), Statista (number of players), BI Intelligence (number of viewers), Fortune (Chinese Video Game regulations), Newzoo (Tencent revenue), PC Gamer (LOL revenue)

ROBO ADVISOR: Are robos managing $1 trillion of digital wealth yet?

The center of gravity for digital wealth in the US is the In|Vest conference, and the update this week from its publishers is excellent. Let's call attention to the following phenomenon. All of a sudden, everyone wants to claim to have roboadvisor / digital wealth assets, and to get rewarded from a valuation perspective for understanding the future customer. As soon as JP Morgan started bragging about its YouInvest free trading app to compete with Robinhood and Schwab, Bank of America released an update on how much asset under management sit inside of Merrill Edge, its online investing division, and its digital strategy. So here are a few interesting numbers on the size of the robo market, broadly speaking. 

For incumbents, Merrill Edge now has $200 billion in assets under management. This is, end of the day, the small client channel. But after combination with Bank of America, Merrill gained a retail footprint in the form of bank branches. The firm is planning to put 600 new investment centers into those branches by 2020, for an omni-channel digital client experience. Another examples is Ric Edelman's post-merger mega RIA, composed of Edelman Financial, Financial Engines (formerly FNGN, the original 401k roboadvisor), and the retail footprint of the Mutual Fund Store. That's $176 billion in AUM, plus 125 physical locations, plus Ric's own $15+ billion. Let's add to that Schwab ($33 billion) and Vanguard ($112 billion). Fidelity, TD Ameritrade, Capital One Investing and others also have a similar service, so let's round that up to $10 billion generously.

On the disruptor side, we have Betterment ($15 billion), Wealthfront ($11.3 billion), Personal Capital ($8 billion) with the most assets, and maybe another $3 billion from players like SoFi, WiseBanyan and the others. Let's be kind and say micro-investing services (Acorns, Stash Invest and the rest) have $2 billion between them. That's not a knock -- those apps have millions of users, but they don't optimize for AUM. For good measure, let's throw Coinbase into the mix as well, with $20 billion in custodied crypto assets managed in a digital app. The tough part remaining is the B2B2C players in the form of SigFig, AdvisorEngine, Jemstep, FutureAdvisor, Trizic and Envestnet. We'd be willing to bet on $50 billion in total true digital delivery. Sum all that up, and we get to $650 billion. Now, these are very loose definitions. You could still add in (1) quite a bit in asset allocated crypto assets, (2) the Asian fintech digital investing numbers (e.g., Ant Financial), (3) the digital bank arms of the Europeans (e.g., BBVA, Nordea) and then get pretty close to a trillion. Do we still think roboadvice is a failing theme? 

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ONLINE BANK: Varo Money Banking License and the OCC Charter

Let's review. In the US, the OCC hands out national banking licenses at the federal level. States also regulate and charter banks at the State level. Such regional banks and credit unions are subscale relative to players like Bank of America or Wells Fargo that have a national branch footprint and digital apps. But these small banks have community ties and are protected business interests within the States through lobbying. If the OCC makes it too easy for digital players to create online banks that live in our pockets through mobile phones, regional banks (with poor technology and digital client experience) will lose out. That dynamic actually has not at all played out with roboadvisors, who face the same regulatory jumble with the SEC and local Registered Investment Advisors, but so the story goes. 

Digital lenders perform a banking function (i.e., lending), but don't have a banking license or FDIC insured deposit capital. Their money comes mostly from investment funds, which is a shadow banking set up. They got around licensing by partnering with Bank-as-a-Service players. Some, like Square and SoFi, have looked at becoming an Industrial Loan Company in Utah -- a sort of quasi bank entity -- but haven't been able to pull the trigger. Neobanks in Europe got around licensing by riding the rails of pre-paid cards from the likes of Visa and MasterCard, pretending to have checking accounts while really just digitizing gift cards. Until now, as Monzo and Tandem have powered up the ability to take deposits via the FCA. So now we come to the point.

Recently, the Treasury encouraged the OCC to issue Fintech bank charters, and the OCC opened its doors for business. And immediately, the Board of Directors of the Conference of State Bank Supervisors (CSBS) announced that it is moving forward with litigation against the OCC. Way to kill the vibe! But that has not stopped fintech Varo Money / Varo Bank from getting a conditional de novo national bank license -- it can take deposits, move money and underwrite lending. Almost none of these have been granted since 2008, and so such a charter going to a digital-first player is a shot across the bow (granted, Varo needs to raise $104 million). The other interesting piece is that Varo is going to use Temenos, a European B2B2C bank platform for its core processing. Not FIS and Fiserv, the US versions of the same that power that long tail of State banks and credit unions. That's a big shot across the bow.

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Source: CrowdfundInsider (Varo Money), CSBS (States suing OCC), Davis Polk (Varo Charter)

CRYPTO: Enterprise Blockchain Back in Vogue as SEC goes after ICO fraud

There was a moment in the development of peer-to-peer file sharing when the music labels, with cheerleading from Metallica, began to sue teenagers for millions in damages. We are ramping up to a similar period in crypto land. Davis Polk documents the bump in SEC enforcement actions targeting companies like TokenLot, Crypto Asset Management and FINRA registered brokers like Timothy Ayre. None of the violation descriptions are a surprise, especially if you've been listening to Preston Byrne: (1) TokenLot selling ICO tokens that qualify as unregistered securities without registering as a b/d and, (2) CAM raising a fund without registering as an investment vehicle while lying about having done so, (3) and Ayre brokering unregistered security tokens personally. Separately, the New York court in the ongoing United States v. Zaslavskiy has applied the Howey test in a motion to dismiss by the defendant, and found that a reasonable jury could conclude that the ICO was a securities offering.

This is good news, cleaning out the opportunists trying to sell everyone their fake lottery tickets. The flip side, however, is that we now have far more human and financial capital in the space, and it needs to be directed at something. And as far as we can tell, it is again directed at the enterprise blockchain space, which is morphing to become part custody, part digital assets, part OTC trading, part consulting implementations. Remember, enterprise blockchain is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the back office. Now that ICOs posited scarce, functional digital objects into digital economies, the Security Token wave is re-running the traditional crowdfunding theme through token-based securitization on public blockchain rails.

Which is why the recently announced acquisition of Chain (a payments enterprise blockchain company) by Stellar (a public chain with a built-in exchange and strong throughput capabilities) makes sense. In this way, Stellar and Chain are moving closer to Ripple's model, owning both a public digital asset and a private enterprise software. This allows the firm to build both equity value in the company, and monetary value in the tokens. Not that we think Ripple's model is necessarily right, but it's right for this market, where token prices are collapsing and good news are scarce. As another example, we attended R3's CordaCon and were impressed by the progress of the bank consortium. There are over 50 apps and 200 different company implementations, including big tech, finance, and supply chain. One example is the ECB's TARGET Instant Payments Settlement for large payments and settlements. The borders between this world and the next are getting erased.

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Source: Davis Polk (SEC Enforcements), Reuters (Stellar / Chain), Preston Byrne (on ICOs), R3 (marketplace)

BIG DATA: The Beauty of Global Networks of Data Exhaust

As the human world becomes more digital, our connections and interactions are recorded and shared. We go from knowing 150 people and analyzing a few stories a week to 2 billion people sharing hundreds of millions of stories constantly. But humans still need to understand what's going on underneath. In this entry, we want to highlight how massive, machine scale systems are visualized through mathematical methods to tell new stories. These charts -- giant sprawling data webs like airplane traffic patterns etched onto the globe -- are the future of literacy in the machine age.

In the first example, we borrow two images from Google. The Google Cloud team created a service which grabs the entire Ethereum blockchain, backs it up on Cloud, and makes it easier to analyze. The first image shows the Crypto Kitty universe, with color attached to owner of the contract (kitty whales!) and size of the bubble ranking the quality of the asset. We can certainly imagine this done on regular old financial assets. The second visualization is for transactions: points are wallets and lines are asset movement. You can immediately seen wallet clustering, which shows entities that have more frequent transactions between each other closer together. In this way, one can ferret out exchange wallets or bots. Hey there Bitfinex!

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The second source is a ConsenSys write up on decentralized exchanges, and is truly a spectacular chart. Do yourself a favor and click to zoom in. The dataset comes from IDEX, EtherDelta, Bancor, 0x, OasisDex, Kyber Network, and Airswap Protocol -- today's decentralized exchanges. Each point is a trading pair, the width of the line is number of normalized trades, and the line colors signify the exchange used. You can immediately see the most popular trade contracts, as well as exchanges where trading hops through an intermediate token, rather than through ETH itself. We'd love to see this for traditional FX markets, or maybe all trading period!

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The last chart is from Geoff Golberg, who mapped out all Twitter accounts engaged in the Ripple XRP community with the purpose of identifying bots. And yep, the 40,000 point cloud has multiple bot armies across the world used to manufacture opinions and drive social engagement. It takes a robust mathematical approach to visualize this information, and a detailed article written by a human to infer the relationships and their activities within the data network. This is a flavor of future skillsets required to thrive in a machine world.

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Source: Google (Ethereum), ConsenSys (Decentralized Exchanges), Medium (XRP Bots)

INSURANCE: $300MM Acquisition of IoT MiddleWare by Munich Re

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Let's move into the physical world. Very very physical. Reinsurance company Munich Re has just written a $300 million check to acquire Relayr, a startup in which it previously invested. Relayr digitizes industrial manufacturing, installing IoT sensors in production lines on various machines that capture information at the edge, layering an artificial intelligence layer that helps maintain these machines before a breakdown happens, and then integrates this information into manufacturing enterprise software through middleware. Like in the consumer world, data exhaust can power the automation of human intelligence, but it must first come from the digital twins of physical objects.

The phrase that stuck with us was that the company's solution "reduces the risk of failure". For an insurance company that wants to minimize losses and improve underwriting accuracy (i.e., know the risks better and take better bets on average), more data and transparency goes directly to the bottom line. Insurance companies are data science companies (more so even than advertisers), so we think they are in a unique position to apply AI to the physical world. A cute question: will Google underwrite insurance for its own self-driving car, or can an insurance company start selling third party cars with built in IoT insurance after learning all the risks? 

We point to a few more symptoms in the sources below. Oxbow Partners, an insurtech research firm, just highlighted Geospatial Insights as an interesting machine vision implementation on top of satellite data. The resulting data sets include oil tanker inventory, retail parking lot car counts, crop yield predictions, and real estate infrastructure value. At least 50% of the business is insurance companies, with the rest going to investors and strategy teams. Oxbow suggests that the main barrier to success is integration of such data into workflow and middleware -- something that Relayr had clearly gotten right. If you're hungry for more Insurtech, check out below a top 49 trends article from Tearsheet, and a screenshot of a chatbot from Hi Marley, a private label insurance automated customer agent platform.

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Source: Companies (RelayrGeospatial Insight), Business Insider (Relayr), DigIn (Hi Marley), Tearsheet (49 trends)

CRYPTO: As ICOs wind down, Developers code and Financiers finance.

Hope you like bad news. We are in an Ethereum sentiment downward spiral. As prices fall both (1) quite naturally as design result from fundraising in ETH, and (2) from an increasing number of financial derivatives shorting token economies, i.e., BitMex, ETH as a currency is less attractive to hold for a newly formed company. Dissenters from the ETH thesis are becoming louder, with some claiming that all utility token values trend to zero, and others (see TechCrunch discussion source) suggesting that ETH will bleed out all of its value into those utility tokens. While we don't agree with either and it can't be both, the end result is that ICO funding has meaningfully slowed to a bit over $300 million. That's a 2017 May equivalent. 

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Hope you like good news. Ethereum's use as a decentralized computing platform is growing. While many other Dapp stores (i.e., Dfinity, EOS, NEO, Cardano) are only now getting funded on future claims, Ethereum is churning away at building useful apps. ConsenSys backed Alethio put together a chart of operation codes, which we take to mean how much computing the system is doing. More is better, as is more diversity of operations. The chart has been going around the web, but we think it's useful to reiterate as a counter to the ICO fundraising data. First you raise, and then, you build. Actually, first you sell, then you hire, then you build.

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Second, while non-equity token funding is failing, security token offerings (STOs) are starting to hit the market. Should we be counting this in our ICO numbers? Take for example Tokeny, which used to be primarily an ICO technology platform. Since the shift in the winds, it has pivoted to enabling STOs. The latest projects to use its system are a $250 million real estate tokenization and a $50 million equity tokenization in a fintech company. These two deals alone match the entire ICO market from last month and are just the tip of the iceberg. No wonder that Bank of America is rumored to join Nomura and Fidelity in the crypto custody race. Investment banking fees and exchange listing fees for all asset classes are in the cross-hairs, in a way that enterprise blockchain cannot solve (e.g., accepting crypto as payment). 

Unfortunately, by the time the incumbent custodians are in the game, there may not be much left of the crypto currency market caps. The snake will have eaten its own tail (thanks Cardano!). So instead of messing with digital assets backed by the techno hope of Millennials, they will turn their sights on the familiar glow of securitization.  

Source: Autonomous NEXT (ICOs), Tokeny (STO vs ICO), ICO Journal (Bank of America), Reddit (AlethioTechCrunch editorial

ONLINE BANK: How Revolut, Goldman and Google are doing the same thing

While we are fretting about whether tech companies will enter finance, whether Fintech startups can compete with incumbents, or if their business models make sense, these things are just happening. Ideas get recycled, regurgitated and presented as new again. This is the good messy stuff of creative destruction. The first data point is Revolut’s recently launched premium Metal card (an actual 18g metal card!), which provides 1% cash back on purchases outside of Europe, flight and bag delay insurance, and a dedicated concierge. Cash back is a novelty for a UK provider, and the offer has already made quite the splash with the global Instagram Millennial crowd. The rewards card gives Revolut a subscription revenue stream while being cheaper than comparable products, and creates the impression of exclusivity. The best part --  the first heavy metal card was released by Western Union in 1914, and later by JP Morgan and American Express. Long live innovation!
 
Speaking of premium banking services offered to the masses, Goldman Sachs is neck deep in the consumer banking opportunity. In the US, the investment firm has a $20 billion deposit online bank and digital lender Marcus (i.e., a Lending Club). It was just reported that Goldman is opening the same platform to its UK employees, in advance of opening a neobank across the pond. One way to analyze this is to see the millions of users for Revolut, Monzo, Tandem and Starling as a sign of market demand. Barclays, Lloyds, HSBC and the like have left their flank wide open for new names, given a stodgy brand and ongoing customer frustration. Another is to think about the cyclicality of Goldman’s business. Interest rates have nowhere to go but up, while equity markets are at historic highs. Goldman’s investment businesses are equities correlated, so perhaps they see the cycle turning.
 
The third leg of this stool is Google. The advertising firm (we jest) is rebranding its Indian app from Tez into GooglePay, which is to become the umbrella app for Google’s financial services in the country. More than 50 million Indian citizens of over 300,000 villages use the app for payments already, amounting to $30 billion in annual transactions for Venmo-like use cases. Google is now partnering with HDFC, ICICI, Kotak Mahindra. and Federal Bank to offer consumer digital loans within the app interface, underwritten in a few seconds. Sounds like Goldman, like Lending Club, like Revolut, like AmEx, like Western Union to us. The sincerest form of flattery.

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Source: UK Card Association (Western Union), Forbes (Revolut), India Times (Google), Reuters (Goldman Neobank)

ROBO ADVISOR: UBS sells SmartWealth robo to its SigFig robo tech provider

This is an oddball, but first some context. UBS has two distinct businesses in Europe and North America. In Europe, they are a high end private bank that manages money for the extremely wealthy, in a market that can charge up to 200 or 300 basis points (i.e., 2-3%) per year. Roboadvice in Europe has not matured yet, despite the efforts of Scalable Capital and Nutmeg, which we believe are due to cultural factors that promote neobanks as the Fitnech app of choice. This means wealth management margins are not a melting ice cube yet. In the States, UBS is a tweener – not as big as Merrill, Smith Barney or LPL (15,000+ advisors), but not quite a lean boutique. Further, American wealth management in general costs about 80 to 150 basis points, with barely 50 bps for roboadvice. This implies that outsourcing roboadvisor technology is the right answer if you are subscale, or are not a technology power house.

Over the last several years, the firm has had a two pronged approach to digital wealth. In the US, they invested in SigFig and private labeled its third party tech. This implies dozens, if not hundreds, of implementation headcount from the startup to be dedicated to its gigantic client. In the UK, UBS built out a separate and unrelated service called SmartWealth. It was expensive for clients, simple by US robo advice standards, but integrated into the UBS stack. The item that hit the news is that this service is now being shut down, and the tech is being sold into SigFig. Here’s why we think this isn’t just a raw fail.

Having two approaches to deploying roboadvice across the organization is likely a logistical nightmare. You wind up with different data architecture, user experience, investment choices and pricing. Coordinating between an external vendor in which you have an interest, and a home-grown application (which is likely a lighter offering), is tough because they are competitors for the same management attention and customer business. The combination is a win-win, in that it allows SigFig to enter Europe, while letting UBS have a cohesive internal offering with a single counterparty responsible for tech delivery. End of the day, they should have just either gone all proprietary or all outsourced. Better late than never.

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Sources: Reuters (SmartWealth), Company Websites