crypto

CRYPTOCURRENCY: The race for Central Bank Digital Currencies is more heated than you may think

While we were away, the month of August saw some significant announcements in the realm of international cryptocurrencies -- whether it was Binance launching their stablecoin project: Venus, Walmart developing its own Blockchain, Telegram launching its Gram cryptocurrency, and Japanese e-commerce giant Rakuten unveiling its digital currency exchange, these all instantiated the notion that cryptocurrency is rapidly progressing. Additionally, the continuation of the debate amongst regulators over whether stablecoin project Libra ("Facebook's" cryptocurrency) should become the holy grail to banking the unbanked globally. However, as you may recall earlier this year France's finance minister, Bruno Le Maire, stressing that “it is out of question’’ that Libra be allowed to “become a sovereign currency. It can’t and it must not happen.”

What has happened since the launch of Libra, is the warming of Central Banks, once thought to be antagonists of cryptocurrencies, into the crypto fray, with several announcing that they are exploring or experimenting with Distributed Ledger Technology (DLT), and the prospect of central bank crypto- or digital currencies is attracting considerable attention. This is, in part, fueled by the the underlying motivation for issuance (e.g. decline in the use of cash), possible design features (e.g. 24/7 availability, anonymity) and to some extent technical experimentation (involving DLT). Similarly, concerns regarding CBDCs are focused around the fundamental impact they could have on the current financial ecosystem, ultimately questioning the role of banks in financing economic activities, and making their issuance unlikely in the short run.

The People’s Bank of China (PBoC) recently announced that it was placing the finishing touches on its very own CBDC, placing it at the forefront of 44 other central banks who are researching the issuance of a CBDC. Some examples of CBDCs already under development include: Dubai’s emCash, The Bank of Thailand’s Project Inthanon, The Bank of Lithuania’s Digital Collector Coin, The UAE Central Bank and The Saudi Arabian Monetary Authority’s Project Aber, The Marshall Island’s Sovereign (SOV), The Central Bank of Iran’s Crypto-Rial, Uruguay’s e-peso, and The Swedish Riksbank’s e-Krona. According to a report by the Bank for International Settlements (BIS) Central Banks are also increasingly collaborating with each other to carry out proof-of-concept work. Collaborations include Project Stella by the ECB and the Bank of Japan, as well as a joint project by the Bank of Canada (BoC), the Monetary Authority of Singapore (MAS) and the Bank of England (BoE).

Question is, do we really need a CBDC? To answer this it is important to note that CBDCs are predominantly digital twin of traditional printed fiat currency, and are therefore to be fully regulated by the state and not decentralized. Given this, CBDCs hold two notable benefits: (1) they alleviate the costs related to printing fiat currency, maintaining its usability and security, providing infrastructure to store and move it, and distributing it. (2) CBDCs improve overall accessibility and usability of currency, this is because printed fiat currency imposes large costs on those that wish to use it -- whether its making a cash deposit into a bank account (requiring access to ATMs or branches) or safekeeping large amounts of it (requiring a secure storage mechanism i.e. a safe). Realistically, such use cases only speak to states in which the use of printed fiat currency is high, and thus the cost benefits of introducing a digital currency are significantly high i.e. Emerging Market Economies (EMEs).

The BIS report does a great job to sum up the current state of CBDC projects, noting that "At this stage, most central banks appear to have clarified the challenges of launching a CBDC but they are not yet convinced that the benefits will outweigh the costs. Those that do see clear benefits are predominantly from EME jurisdictions. This seems to be because financial inclusion projects create a clear mandate for central bank action, and a lack of current infrastructure limits the disruption a CBDC could create while simultaneously encouraging the use of new technology." Whilst a CBDC provides users with less costs incurred to use and store paper fiat currency, it will also mean a reduction in deposits with commercial banks. In turn, the resultant competition for deposits among such banks will likely increase deposit rates, driving new innovations to encourage saving and borrowing behavior -- which is good!

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Source: Bank for International Settlements (Proceed with caution - a survey on central bank digital currency)

CRYPTOCURRENCY: Deciphering the $2.26B of Blockchain venture and the $3.39B raised via token offering projects in 2019 so far

According to reports by Inwara and the Crypto Valley Association, as many as 583 token offerings were launched during the first half of 2019, raising a total of $3.39 billion, whilst traditional venture funding into Blockchain-first companies raised $2.26 billion. We think the token offering figure is inflated despite our attempts at scrubbing it, and reserve the right to revise. Quality of the data continues to decline, and several projects self-reported raises in 2019 are suspicious. If anything, our intuition is that real (rather than aspirationally self-reported) ICO funding is below the venture number. 

Let's break down the token offering figure. The $3.39B is made up of 69% Initial Coin offerings (ICOs), 21% Initial Exchange Offerings (IEOs), and 10% Security Token Offerings (STOs) -- see figure below for the distinction between them. Projects stemming from China raised the lion's share ($1.18 billion or 33.2%) of the total, helped by Hong Kong based Bitfinex's $1 billion IEO raise. The USA, trailed behind China raising $255 million or 7.6% -- supported by Algorand's $122 million. Trading and investing (including crypto exchanges) has been the vertical receiving the majority of investor attention with $1.25 billion raised, and core Blockchain projects following within $338 million.

Unsurprisingly, the rise of regulator "friendly" IEOs and financial services "friendly" STOs, has meant that the number of ICO projects have declined 74% to a mere 403 in the last year. IEOs have grown from 6000% to 123 projects, and STOs 16% to 57 projects. The growth of IEOs and STOs "emphasizes a higher degree of institutionalization of large crypto exchanges around the world as cornerstones of the global Crypto Finance infrastructure – and may also be seen as a response to established exchanges moving into crypto".

So is this enough to maintain a consistent growth trajectory for the crypto industry as a whole? Hard to say, but it seems that tokenizing securities tied to real estate, and repackaged ICOs sold via exchanges may or may not result in better capital markets infrastructure, democratization and roboadvisor-led asset allocation. And second, the crypto economy needs non-financial activity to succeed. People should be building software using the global decentralized computer of Ethereum (or R3 Corda or Dfinity or soon-to-be-launched Calibra) and paying for it using the global decentralized currency Bitcoin. More crowdfunding ain't that.

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Source: Crypto Valley & PWC (5th ICO/STO Report), Inwara (Half-Yearly Report H1 2019)

CRYPTOCURRENCY & BLOCKCHAIN: Goldman furthers the institutionalization of Crypto whilst global economic instability furthers its benefits

The Cypto-universe is experiencing what can only be described as a storm of epic proportions. Fueled primarily by warm positively-charged air coming from the launch of the Libra project, and cool negatively-charged air from the dramatic price volatility and speculation in the market. Contrary to some testaments, the likelihood of the former impacting the latter is about as much as the correlation between the price's of Bitcoin and avocados (see here). However, the coincidence of these two developments does speak to how they both capture elements of a massive, worldwide financial transformation, all happening at a time of rising global economic instability and uncertainty.

Let’s start with the mainstream global money movements over the next decade being channeled through a mix of Blockchain-era stable-money services that operate along a centralization-to-decentralization spectrum — from JPMorgan’s JPM Coin and the new Swift Blockchain project at one end, to Facebook's Libra project and more open-standard Crypto stablecoin projects such as CENTRE’s USDC at the other. And it would be safe to assume that as these projects grow in usage and adoption, so too will the demand for Bitcoin as the digital asset hedge of choice. Emphasizing this point was the recent news that the US banking giant Goldman Sachs reportedly wants in on Blockchain now more than ever, with in-depth research going into the concept of tokenization. For the Blockchain community this is Good, for the Crypto community is this Great? According to David Solomon, Goldman Sachs will be using the Blockchain to reduce its transaction costs, and improve access to and overall efficiency of services to clients. More specifically, providing greater transparency, speed of settlement, and more resilient compliance procedures. Such a move will put Goldman in line with JP Morgan, Fidelity, and Citi who have all made huge strides in the space. This is not to discount the fact that the incumbent bank has already backed stablecoin startup Circle, and toyed with the idea of launching its own over-the-counter Crypto trading desk. Yet, Goldman has failed to reveal what exactly they’re working on, and very few are waiting on baited breath. Progress in Blockchain and decentralised ledger technology has recently been so rapid to the point where news of a major financial incumbent signing on is treated as a non-event.

The wider point merges the above with significant global economic uncertainty stemming from US-China trade tensions and the significant capital flight out of China and Hong Kong. This new round of global economic uncertainty is occurring at the same time that Cryptocurrency and Blockchains are establishing themselves as key elements of the emerging financial architecture of the world. Shortly following the financial crisis of 2008, Satoshi Nakamoto posted his/her/their white paper to a select number of online cryptography experts, also known as cypherpunks. Little did they know that such an alternative model for global finance would shift the direction of large institutions and regulators alike -- with projects like Libra playing a critical role in elevating the profile of this new model. As the global economic and political stages continue to experience massive shifts caused by the vested interests of the few, so the instability independent benefits of digital assets and Blockchain are realized. As proven by the chart below indicating a strong negative correlation between Bitcoin and the S&P500.

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ROBOADVISORS & DIGITAL WEALTH: Artificial intelligence battles in financial markets but conquers in cryptocurrencies

It has become commonplace for users of online platforms to expect that their attention i.e. time spent using the platform, converts to loyalty -- in the form of an artificial intelligence algorithm that knows them better over time e.g. auto-populating search fields, recommending preferred clothes to wear, books to read, or food to eat. Yet, when it comes to applying such sophisticated algorithms to financial markets, why aren't such quant funds always outperforming the market?

Artificial Intelligence is most useful where the problem set is narrowly defined, i.e., it is well known what is being optimized and how, and where the fuzzy data needs the structuring at scale that AI provides. A narrowly defined problem may be – given this particular set of personal characteristics about a person, should they be allowed to borrow this particular amount of money based on prior examples. A poorly defined problem may be – predict the price of a stock tomorrow given thousands of inter-correlated data points and their price history. It all boils down to the reliance of quant investment strategies reliance on pattern recognition: models look to correlate past periods of superior returns with specific factors including value, size, volatility, yield, quality and momentum. Such approaches have several fundamental weaknesses: (1) hindsight bias — the belief that understanding the past allows the future to be predicted, (2) ergodicity -- the lack of a truly representative data sample used in the model, and (3) overfitting --  when a model tries to predict a trend in data that is too noisy i.e. too many parameters or factors. Logically, over time the anomalies that these quant strategies are relied upon to exploit should dissipate, given the swift pace at which technology, competitors, and data moves to correct such anomalies. This is not stopping the likes of augmented analyst platform Kensho (acquired by S&P Global for $550 million), crowdsourced machine learning hedge fund Numerai, and the industry-leading quantamental funds of BlackRock. There is an inherent contradiction in that the approach exploits inefficiencies, but requires market efficiency to realign prices to generate returns.

With Cryptocurrencies, the strategies are different. Native Cryptocurrencies i.e. Ether and Bitcoin, are considered unconstrained assets, with limited correlations to other assets. Additionally, the data sets and factors that need to be considered when trading Cryptocurrencies are far fewer — many of which are speculative and co-dependent, resulting in far more predictable patterns than in financial markets. Because most of Cryptocurrency trading is autonomously and algorithmically driven, patterns are more easily discernible and human trading behavior often sticks out in stark contrast to established market behavior.The issue of course is not the opportunity to profit — it’s the magnitude of such profits. Currently, Cryptocurrencies simply do not have the volume and liquidity necessary for autonomous trading strategies to be deployed in large quantums. Percentage returns for algorithmic Cryptocurrency trading may be significant, but beyond certain volumes, especially when assets under management start approaching the hundreds of millions of dollars, traders need to get far more creative and circumspect in deploying funds as the opportunities are far fewer at larger order sizes.

For now at least, AI and machine learning are still some ways away from consistently beating the financial markets, but with a bit of tweaking they may be a lot closer to beating the Cryptocurrency markets. Evidence of this is already beginning to show -- in 2018 Swiss asset manager GAM's Systematic Cantab quant fund lost 23.1 percent, as well as, Neuberger Berman is considering closing their factor investing quant fund over poor performance. All this whilst Cryptocurrency quant funds returned on average 8% over the same period. While the prospect of searching for phantom signals that eventually disappear could dissuade some people from working in finance or Cryptocurrency trading — the lure of solving tough problems coupled with the potential to dip into the $200 billion opportunity means that there will always be more than enough people who will try.

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Source: Autonomous NEXT Keystone Deck (Augmented Commerce), PWC (2019 Crypto Hedge Fund Report)

2019 FINTECH PREDICTION: Real Autonomous Organizations Take Shape

The last 5 years have seen fundamental innovation in crowdfunding, regulatory technology, the digitization of financial services, Blockchain native organizations, and automated propaganda bots to attract human attention. 2018 brought with it sobriety and a back-to-traditional regulatory treatment of financial assets and their structures. In particular, the crypto asset movement (and its crypto-anarchist community construction) has been put into a well-understood, regulated box by most national regulators. While many interesting lego pieces exist, none of them have yet to fit together. Still, regular people have gotten a taste of both the distribution and manufacturing sides of financial mana.

At the beginning of this year we were hopeful that 2019 would re-combine these pieces to instantiate functional autonomous organizations that work in a constrained market environment and perform useful services. In order to achieve this, however, these new DAOs will need a clear corporate form, a regulatory anchor, and to focus on delivering products and services to regular people, but scaled through machine strategy. We toyed with the idea that the automation of company formation (Stripe Atlas) will combine with the outsourced human/machine assembly line (Invisible Tech) and distributed governance (Aragon) to create companies that scale frighteningly quickly.

So where are the systems that deliver most of the financial primitives without human intervention? Let's start with the fact that Facebook's digital currency Libra is far from being considered a form of decentralized finance. For starters, Libra falls on a permissioned or centralized network, meaning the governance structure consists of a fixed number of entities (29 institutions), although this is said to be only for the first 5 years from release. Nonetheless, Decentralized Finance has grown to hold over $589.9 million of value across its lending, exchange platforms, derivatives, payments, and asset management entities. A notable development comes from Maker -- the most popular decentralized protocol focusing on lending -- is considering to expand the assets it uses as collateral for its smart contracts that generate cash loans. Although Maker is only considering digital tokens such as Basic Attention Token, Ether, Golem, Augur etc. at this time, would it be crazy to think that in the near term we could see the likes of tangible assets such as land, property, and commodities in the form of security tokens included aswel?

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Source: DeFi Pulse

CRYPTOCURRENCY & BLOCKCHAIN: An adoption & regulation deep-dive in Facebook's new digital currency Libra

First came digital gold in the form of Bitcoin in 2009, then utility tokens led by Ether in 2014 and now, the global payments world could be turned upside-down by Facebook's stablecoin, Libra. It is very difficult not to be excited over this new digital currency, and without repeating the good work done by many great resources (referenced below), we wish to touch on two aspects that are important to get your head around, namely: (1) Adoption & Scale, and (2) Regulatory acceptance.

(1) Adoption & Scale

Let's get straight to the point here. According to its whitepaper: "Libra's core mission is to enable a simple global currency and financial infrastructure that empowers billions of people". As with most digital goods and services, the issue of adoption and scale is directly correlated to the efficiencies of the onramps and off-ramps (taking deposits and making withdrawals) provided by the infrastructural layer supporting them e.g., exchanges like Coinbase or Binance for cryptocurrencies. Interestingly, Libra's whitepaper mentions the term "global currency" five times, meaning that Libra's ambitions are to skip the intermediate step of concurrently using cash and digital payments, and somehow become a primary currency used by most economies around the globe.

But, just how ambitious is Libra? In short, very! We know stablecoins are traditionally backed on a one-to-one basis by mainstream assets like the U.S. dollar e.g., USD Coin, while others are collateralized by baskets of cryptocurrencies e.g., Havven. Some of these use algorithms to maintain stable values e.g., CarbonUSD. Libra is a different beast that uses a basket of real assets -- currencies such the US Dollar, GB Pound, and Japanese Yen, as well as, government bonds -- to be backed by, in what it calls the Libra Reserve. This has profound implications on adoption in targeted unbanked-heavy economies as Libra will have to coexist with the local currency, and be supported by the existing financial on-ramps and off-ramps (Bank branches, ATMs, MPesa agents etc.). Local governments are thus likely to demand concessions before allowing Libra access to its market, such as: (1) The Libra reserve must contain assets denominated in the local currency, (2) access to facets of the transaction data to track possible money laundering cases, and/or (3) permitting the local central bank to retain control over the monetary supply necessary to implement monetary policies. Iran and North Korea are good examples of a countries whose imposed sanctions by the U.S. could hinder the adoption of the digital currency by its unbanked target market.

(2) Regulatory Acceptance

Facebook have been clever here. Firstly, the Libra Association is made up of regulated entity partners who will provide the front-end platforms (on-ramps and off-ramps). Facebook is not required to become a financial entity as a result. Secondly, Calibra is set to "have strong protections in place" to keep the reserves and private information of users safe. Bank-grade KYC / AML processes are said to form part of these protections, as well as, automated systems designed to proactively monitor activity and prevent fraudulent behaviour on user’s accounts. Lastly, Libra, supported by its Association members, could be the whipping boy of cryptocurrency – defending the ecosystem against regulators, politicians, institutions, and central banks that seek diminish its legitimacy.

Such regulatory question marks have led to the creation of a task force within the Group of Seven (G7) nations to address these. There is a major concern that Libra will severely threaten not only the economic structures of the global economy, but the political dynamics as well. France’s finance minister, Bruno Le Maire, making this explicitly clear by stating that “It is out of question’’ that Libra be allowed become a sovereign currency. The G7 currently consists of Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

Keep a firm eye on the Libra scales over the coming months -- like our artwork for the week depicts -- these are exciting times.

For more detail see the following:
Basic breakdown
10 Takeaways from the announcement

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Source: Libra Association (via Techcrunch), Libra (via Financial Times), Facebook Libra (via Financial Times)

CRYPTO: GAFA doubles down on a crypto future, whilst regulators bite down on a crypto past

A few things here. Firstly, this week at its Worldwide Developer Conference Apple announced the launch of a mightily powerful computer deemed “the cheese grater”, a monitor stand costing as much as an iPhone X...just for the stand, and more importantly CryptoKit . Essentially, CryptoKit is a cryptographic developer tool that allows developers to build more security functionality into their apps with improved support and ease-of-use. Such functionality comes in the form of hashing, public and private key generation, and encryption needed to be integrated into iOS applications. Not to be confused with Samsung and HTC's phones that come with native crypto wallets. Yet, it goes without question that these companies (Apple now included) are reacting to the rising demand for crypto-focused products.

This is not the first time we are seeing the tech giant embrace crypto either. Last month it was announced that debit card and payment app ‘Spend’ -- which supports over 16 different cryptocurrencies -- now has integrated Apple Pay functionality. How this works is cryptocurrencies, such as Bitcoin or Dash that have been bought in / sent to the integrated wallet, will get converted at the point-of-sale for instant purchases through the ApplePay network. 

Another GAFA giant we know is embracing crypto is none other than Facebook with their soon-to-be-launched cryptocurrency GlobalCoin. What’s interesting is that, over the past few months, the social media giant has been hard at work trying to win over financial institutions and tech companies -- such as the Bank of England and crypto-firm Gemini -- around formalizing an independent foundation -- much like the Ethereum Foundation -- to govern the digital asset. We know that the coin will most likely be a stablecoin i.e., pegged to a fiat currency / basket of currencies / or other, making it desirable and easily marketable in emerging markets where local fiat currencies are economically unstable -- such as in Venezuela. The required funding will come from the fees Facebook charges partnering firms to run a node on the network. Essentially, these firms will need to stake their interest and commitment, and tie them into supporting the network. Facebook aims to have 100 nodes at the launch of GlobalCoin, with each node costing partnering firms as much as $10 million. Based on their tarnished reputation to safeguard the privacy and security of the social network's users, we think this is ambitious to say the least.

Facebook is not the only tech firm embracing crypto with a suspect reputation. Just last week, the US Securities and Exchange Commission (SEC) took legal action against social messaging app Kik -- regarding its 2017 sale of one trillion “Kin” tokens to over 10,000 investors, raising around $100 million. The premise being that the sale was not registered with the SEC -- a requirement under US securities laws. As such, the sale is deemed an “illegal securities offering of digital tokens.” 

It is not only the SEC that are leading the fight against previous instances of cryptocurrency-powered crimes. The Joint Chiefs of Global Tax Enforcement or J5 - a team of five criminal intelligence communities from Australia, Canada, the Netherlands, the United Kingdom and the United States whose purpose is to fight against international and transnational tax crime and money laundering. Currently, J5 has opened 60 different investigations specifically related to cryptocurrency-powered crimes. One of these is a Netherlands-based cryptocurrency “mixing service” called Bestmixer.io whose primary function was to hide the ownership history of cryptocurrencies, raking in 27,000 bitcoins ($200 million) over one year alone.

As many would consider the institutionalization of crypto by GAFA and the clamp down by global regulatory bodies a negative, its important to note that if adoption is key to ensuring the prosperity of these mechanisms, then such action needs to be taken to safeguard those vulnerable to exploitation and those that consider the inherent illicit activity too great a barrier to enter.

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Source: Apple Cryptokit (via Apple), Facebook Globalcoin (via The Information), Bestmixer.io (via Europol), J5 crime unit (via IRS)

CRYPTO: Are Stablecoins still poised to be crypto's saving grace?

With all the noise and hype around the recent large price movements of core cryptos like Bitcoin (BTC) and XRP, it's easy to forget the ones hard at work to minimise volatility risk in order to encourage crypto adoption among the skeptics. These are stablecoins of course. The core thesis behind them is that BTC was not used as a transactional currency because of its volatility, and therefore merchants and individuals would not rely on it as a unit of account or medium of exchange. This premise is not entirely true -- volatility is only partially explanatory of why BTC is not being used by consumers. In our view, the main barrier is not volatility but ease of use and form factor. It's just too hard to figure out how to actually pay with BTC or any other digital currency for real (i.e., non-digital) goods and services. And while there are attempts to put Bitcoin and other currencies into debit or credit cards, these are still early in market penetration. 

If you look at stablecoins themselves, there are two narratives to note. (1) Any floating currency needs to be collateralized, whether or not it is printing money algorithmically or has bots arbitrating itself against exchanges. Otherwise you cannot fund redemptions (and if you can't fund redemptions, then you are just printing specious moneys). Holding the peg to your desired currency basket, whether USD, yuan or Euro, requires being able to defend the currency with capital reserves. Any private capital reserve can be broken by a larger private capital reserve -- or even by a government actor. Consider Soros and the Bank of England. As a result, these coins are fragile and ripe honeypots for attack and manipulation. In the case where the reserve becomes so large as to be unbreakable, and where the currency is meaningfully used as a medium of exchange, it becomes a threat to the world's actual reserve currency, the USD. The US sovereign is unlikely to allow private parties to issue and own a digital dollar at scale -- though they may be catalyzed to do so publicly (i.e., central bank coins). These are not farfetched ideas either, with over 20 governments such as Brazil, Canada, Israel, and The Bahamas all considering the prospect of a Central Bank issued digital currency.

The second narrative is much more narrow -- private company networks that ride the blockchain rails need the equivalent of a Cash Sweep. Imagine opening up a Schwab brokerage account. Your free cash in a portfolio -- let's say 1.5% -- would get invested into a cash sweep vehicle, which could be a money market fund, or a trust company cash account, or something similar. For a crypto financial company, you are unlikely to want to hold a financial license for traditional banking or investment services. But you still need to manage the cash somehow. So efforts like UBS settlement coin, or any of the recent stablecoin projects, could fill in the gap of moving USD around within a limited sized network in order to reduce friction between going in and out of fiat. If the network gets so big as to include the entire economy, then it again pops up on the Treasury's radar. That's not to say it's a dead end. Banks print money by issuing credit all the time, they are just massively regulated to do so.

So where does this leave us? Non-financial companies such as Facebook and Samsung have admitted to considering their own blockchains for future native stablecoins. Facebook's reason for this is to provide its 2 billion user base with a centralised medium for international remittances, payment for premium content (e.g. games), and your attention (e.g., advertisements) across its website, Messenger, Whatsapp and Instagram. Samsung, on the other hand, wants your mobile phone to be your crypto wallet. Such non-financial companies are likely to be less risk-averse than traditional financial companies, and have greater incentive to disrupt the payments industry, with the added ability to execute at a faster, scalable pace. As a result, these companies may help defining future key growth drivers for both the global payment and the digital asset industry. But this doesn't mean that this won't create a red ocean where other big banks, social media networks and consumer electronics companies issue their own stablecoins to compete, adding "about as much competitive advantage as having your own .com address" - Bernard Lunn of Daily Fintech.

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Source: Autonomous NEXT Analysis

BLOCKCHAIN & CRYPTO: DLT consortia are racing for the lion's share of the $1.5 Trillion Trade Financing Gap

Financial products -- including their embedded processes and inherent risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to manage, analyze, report on, and safekeep our money. The latest victim of this is Trade Finance - a practice that facilitates $16 trillion of trade around the globe on an annual basis. In short, trade finance covers the financial products, processes, and instruments involved in financing domestic and international trade and commerce. Each transaction often involving multiple actors (+20 in some cases), such as importers, exporters, banks, carriers, customs officials, and insurers. The juicy bit is the potential to digitize and modernize the manual, paper-intensive, and prone-to-risk processes involved in each transaction e.g., managing the cost and time implications of a trade war between two countries -- US v China showdown.

Enter distributed ledger technology (DLT), which has taken aim at the 1-2 week long paper-pushing documentary credit process. Essentially, a documentary credit is a commitment of liability by the issuing bank (representing the buyer/importer) assuring the seller/exporter that payment will be made once the goods have been received -- reducing the credit risk associated with the trade. The immutability of data and speed of distributed ledgers helps reduce the need for manual verification, as well as the risks associated with fraud, human error, and credit. Essentially, reducing the time it takes to execute the process of documentary credit to just 24 hours using smart contracts, and a purported 35% reduction in overall costs.

Interestingly, the first live end-to-end trade finance transactions on a scalable application for a fully digitized documentary credit using DLT took place in May last year, involving HSBC, ING, BNP Paribas, and Bangkok Bank. A year later, and trade finance is the 3rd most targeted sector for DLT use, involving industry consortia such as Voltron and Marco Polo -- built on R3's Corda DLT Platform, we.trade and eTrade Connect -- built on IBM's Hyperledger Fabric platform, and komgo -- built on JP Morgan's Quorum platform, all of which are after the lion's share of the $1.5 trillion trade financing gap and a piece of the $1.1 trillion of increased trade volumes by 2026.

This week at IFLR's Fintech Europe 2019 conference, we learnt that Voltron - a consortia of 12 banks building a single platform to digitize all document collection, tracking, and the facilitation of exchange for Documentary Credit via its network - has recently completed global trials which saw over 50 banks and corporates participate in the simulation of multiple digital Documentary Credit transactions across 27 countries, covering a range of goods traded including soybeans, plastic derivatives, metals and wool.

So what does this mean for the future of Trade Finance? Firstly, it's likely that the International Chamber of Commerce (ICC) will release a governance framework consisting of technology standards and business rules to oversee the practices of industry consortia. Secondly, interoperability of industry consortia platforms will be critical to how they integrate with existing bank systems. Finally, it's easy to relate what Voltron is trying to achieve in trade finance to what the SWIFT Network did in cross border payments -- transferring digital data between banks and corporates, although without the help of DLT. Given this, the possibility of a platform like Voltron to become the next generation SWIFT network -- adding a payments mechanism to its Documentary Credit platform is highly likely. Such a payment mechanism could use tokens enabled by smart contracts linked to IoT devices (See Project Forcefield) tracking the goods traded. In effect, removing the need for multiple intermediaries (e.g., Issuing Bank) required to alleviate risk exposure. We can dream.

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Source: Digital Innovation in Trade Finance (BCG), Trade Finance & Blockchain ReportRebooting a Digital Solution to Trade Finance (Bain&Co)

BLOCKCHAIN & CRYPTO: Part 1 - Crypto Whales, IEOs, and the US-China trade war take Crypto to new heights

Its very difficult to ignore the noise when cryptocurrencies increase in value, especially since the crypto-apocalypse of 2018 which saw $400 billion in value wiped from the market #NeverForget. And as of Saturday May 11th, the noise has been deafening with Bitcoin rallying to price levels around $8,300 which we hadn't seen since late July 2018. So what exactly happened here? Well, to answer this we need to look at a few things:

Firstly, lets look at what triggered the rally in the first place. As recorded by Whale-Alert.io, 47,000 Bitcoins at a value of $340 million were moved in a single transaction on the evening of May 11th. According to coinmarketcap, such a large movement of the digital currency resulted in a 13% increase in bitcoin's price from $6,378 to $7,204, and an almost 50% increase in volumes traded. Transactions of this magnitude or made by "Whales" -- entities with large sums of the cryptocurrency -- who often use such transactions to "burn margin traders" who use money they don't have to stake out long or short positions in hopes of hitting it big or "riding a lambo to the moon" as they like call it. As of Monday, $84 million worth of shorts had been liquidated on Bitmex, with some affected parties announcing crippling losses (see pic below).

Secondly, let's touch on the rise of Initial Exchange Offerings (IEOs). An IEO is different to its Initial Coin Offering (ICO) sibling, in that funds are raised and administered by an exchange on behalf of the startup, whilst an ICO is completely independent of any major entity to enable its fundraising activity. This is important because participants in the IEO need to be registered on the specific exchange's platform in order to get access to the startup's tokens. Regulators obviously love the idea of this as (1) the exchange needs to screen every project it lists on its platform -- eliminating any scams from happening (see how Bittrex cancelled RAID IEO), (2) from a security standpoint, KYC/AML is conducted on each participant by the exchange, and (3) token issuer startups receive better support on marketing initiatives and credibility from exchanges. An increasing number of cryptocurrency exchanges have started to embrace IEOs. One of the first in line was Binance, which launched its IEO platform Binance Launchpad, swiftly followed by Bittrex, BitMax, Huobi, OKEx, and KuCoin. Whilst it's still too early to quantify the significant impact of IEOs, we can report a 220% increase in overall token sales from February this year, IEOs contributing to this are: Celer Network raising $4M, Matic Network with $5M, and Newton Project with $28.5M.

Lastly, such a rally couldn't have happened at a better time for Crypto evangelists. The news of the trade war between the US and China resulted in the fall of the Dow Jones Industrial Average by as much as 696 points on Monday the 13th, and MSCI's index for emerging markets by almost 300 points. Whilst this was taking place, Bitcoin's price was still increasing, and closed 12% up for that day -- unaffected by global markets. Although this is not sufficient evidence to conclude that cryptocurrencies are good hedges against global market volatility, the sentiment towards such a reality is progressing, especially with enhanced institutional support from large incumbents and the launch of regulator-friendly IEOs. 

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Source: Whale Alert (via Twitter), Bitmex Forum (via Twitter), CryptoPotato (IEOs vs ICOs), Autonomous NEXT Analysis

BLOCKCHAIN & CRYPTO: Part 2 - From Main Street to Wall Street, institutions are the key to mainstream Crypto adoption...oh the irony

As we know, one of the aims of cryptocurrency was to provide a means to anonymously and securely transfer value between transacting parties i.e., removing the power away from financial intermediaries whose distribution channels exploit fees from those wishing to transact in the current system. Funnily enough, it seems that the very same institutions that crypto sought to disenfranchise, are key to its success. Success here being widespread adoption.

Let's start with mainstream adoption in retail where Flexa -- a payments network startup is partnering with New York-based exchange Gemini to enable crypto payments to be made at an estimated 30,476 stores, including Wholefoods, Nordstrom, and Gamestop. Flexa works by processing the payments made on its platform using its custodial wallet and mobile app called 'Spedn' which enables spending of specific cryptocurrencies -- Gemini Dollars, Bitcoin, Ether, and Bitcoin Cash. Flexa uses its own native coin -- Flexacoin as collateral to secure payments until the transaction is approved on the blockchain, and custody is taken care of by Gemini. Spedn is custodied with Gemini who provide security for this new payment technology. Finally, adoption is enhanced by (1) ensuring merchant's payment processing costs are reduced whilst the blockchain maintains security, (2) no changes are needed to the existing payment hardware, and (3) revenue can be received in fiat as opposed to crypto.

This institutionalization of crypto is also echoing in larger public companies. See NYSE’s partnership with Bakkt. Or XRP being launched on securities marketplace Deutsche Boerse and Coinbase. And lets not forget the likes of JP Morgan's coin, and Fidelity set to launch its crypto Trading service. According to Fintech Analyst Efi Pylarinou Wall Street institutions are looking at crypto as a new structured product business i.e., ETP’s linked to baskets of cryptos (low-hanging fruit) and tokenised real-estate (main focus) which is good if it democratizes exposure to the real-estate market, but bad if we see a reformat of the 2008 mortgage crisis. We will leave this gem for you to make up your mind – Banco Pactual issuing an STO in distressed Brazilian real-estate. 

As the institutionalization of crypto and blockchain continues to gain traction, it is likely to see the services and products they offer provide the gateway into the crypto markets, which may ultimately result in a surge in fresh capital making its way into these markets, and possibly kindling the flame that ignites the next price rally.

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Source: Flexa Spedn App (via news.bitcoin)

BLOCKCHAIN: Why China's ban on all cryptocurrency mining activity is a good thing

Ever since decentralized currencies came into fruition, they have posed an existential threat to a government's ability to control the purse strings of its citizens -- which is important to prevent illicit activities such as money laundering. In China, this lack of control coupled with the growing rate of crypto-induced bankruptcies led to the swift imposition of sweeping reforms. All trades of legal tender (i.e., Yuan) into cryptocurrencies and vice versa, as well as all Initial Coin Offerings (ICOs) were made illegal. The resultant lack of legal exchanges and ICO activity meant crypto-mining was the last remaining pillar propping up this intangible edifice. Today, China holds around 70 percent of the world's crypto-mining capacity, predominantly due to: easy access to the hardware (i.e., Nvidia processors which are locally manufactured) essential to crypto-mining operations, cheap cost of labor, and crucially, cheap and bountiful energy via massive coal and hydroelectric power plants.

A recent report now suggests that the Chinese government, more specifically the National Development and Reform Commission (NDRC), intends to ban all crypto-mining activity as well. The report lists cryptocurrency mining as one of 450 activities slated for elimination, citing “wasting resources, polluting the environment, being unsafe, or not adhering to law” as the primary reasons, and they wouldn't be wrong on the pollution front -- a study in the journal Nature Sustainability suggests bitcoin alone was set to consume more energy in 2018 than the country of Denmark.

So does this spell disaster for crypto as we know it? Well, not quite, and here's why: (1) China's largest and most visible miners, such as Bitmain's Antpool, will be forced to explore new locations for mining operations specifically where renewable power is cheap and abundant to keep costs low and win favor with the regulatory entities governing these jurisdictions, (2) Mining activity is more likely to become more decentralized and safer, as large Chinese mining pools who dominated the networks, are dismantled into smaller factions, (3) Crypto-miners could use this as an opportunity to pivot into work that is deemed more crucial to the overall success of the ecosystem i.e., blockchain scalability (speed of the network) and interoperability (cross chain information movement) solutions. Such benefits could catalyze adoption rates by addressing the underlying environmental, safety, infrastructural, and centralisation issues that have plagued crypto since its inception. Additionally, a recent survey by Harris Poll for Blockchain Capital suggests, the overall sentiment towards crypto relative to other investable assets is positive with 21% of respondents preferring Bitcoin over government bonds, 17% over stocks, 14% over real estate and 12% would invest in Bitcoin before investing in gold. Finally, although it is still argued whether the NDRC was implying a outright ban or more oversight on mining activity, the resultant benefits fueled by positive market sentiment towards crypto could mean great things to come.

Source: Hans Moeller Illustration, Divvy (homepage), Divvy (Brex comparison)

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Source: CoinDance (BTC Mining Data), OVOEnergy (Electricity Cost per country

BIG TECH & BLOCKCHAIN: SamsungCoin & Blockchain protocol distract us from foldable phone fiasco

Earlier this year, we admittedly took a hard stance on two seemingly meaningful pieces of news from South Korean tech giant Samsung: (1) the launch of the Galaxy Fold, the likeness of which we compared to a pizza box, and (2) Galaxy S10 phones confirmed to be crypto-native, allowing for private key storage (here). To catch you up on the Fold, Samsung have found themselves in the hot seat with their $2000 foldable phone barely lasting a week in the hands of reviewers before experiencing a multitude of battery and screen issues (here). More importantly, Samsung is said to be developing its own Ethereum Blockchain (ERC20) Token or "SamsungCoin" and blockchain protocol. Previously we noted -- having a mobile experience that allows you to interact with the decentralized web and its applications without downloading or thinking about software management is massive. Additionally noting that there should be no difference -- from the customer view -- in using a credit card in Samsung Pay wallet, and using a self-custodied digital asset. Same use case, same ease of use. And this is truly groundbreaking when every merchant that takes Samsung Pay takes crypto, especially if that crypto is native to Samsung itself. But there are some concerns here, mainly surrounding South Korean regulations preventing the issue of tokens via Initial Coin Offerings (ICOs) and banning investors to invest in domestic ICO projects. Whilst rumors suggest that these regulations are likely to be revised by authorities, there is no idea when this would take place. Such policies may lead to the company considering a private blockchain with a B2B approach -- remember what we said about those walled gardens? Yet, there is still the possibility that Samsung could circumvent South Korean regulatory frameworks by establishing subsidiaries in overseas crypto-friendly jurisdictions to conduct its token sales. Doing so without clarification from the authorities, however, may land it in even hotter water than its foldable phone fiasco.

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Source: CNET (Samsung Fold), Blockboard (Samsung Blockchain Wallet), Cointelegraph (South Korea ICO ban)

BLOCKCHAIN: Pay no attention to that Chain behind the curtain...

Enterprise blockchain, is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the front, middle, and back offices. As we deduced in our Crypto Utopia keystone deck, nearly $250 billion of industry cost across payments, banking, capital markets and insurance is available for transformation. But let's not get ahead of ourselves, it's difficult to ignore that blockchain and its true value to enterprise is, now more than ever, met with the same level of skepticism that cryptocurrency now receives post the 2018 crypto-apocalypse. 'The Finanser' - Chris Skinner does a good job at teasing the reasons why this is the case in a recent blog post. In contrast, it's difficult to ignore the significant growth projections forecasted by the IDC -- specifically the 88.7% increase in worldwide spending on blockchain to nearly $2.9 billion in 2019. Such projections make sense when looking through a recent publication by Forbes which lists 50 large enterprises with minimum revenues or valuations of $1 billion, that are leading the way in adapting decentralized ledgers to their operating needs, leveraging industry consortiums and other proprietary projects to do so. Examples include the likes of Spain's second-largest bank - BBVA issuing the first blockchain-based syndicated loan, or Chinese chip manufacturer - Foxconn using blockchain to streamline its supply chain, or US restaurant supplier - Golden State Foods using the blockchain to reduce food spoilage. It is clear that it is becoming more and more difficult to ignore the significant value behind the application of distributed ledger technology on large enterprises, just as much as it was for Dorothy to ignore the man behind the curtain in the Wizard of Oz. The real question for today's skeptics is when they'll realise they had the heart, brain, and courage to believe this reality the whole time?

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CRYPTO: Coinbase's new Visa debit card wants to assimilate cryptocurrency and fiat accounts

We still believe that the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). And in our write-up of Samsung's crypto phone gamble, we stressed that there should be no difference -- from the customer view -- in using a credit card in a digital wallet, and using a self-custodied digital asset. Well it seems the folks over at Coinbase were paying attention, as last week the crypto trading website unveiled a Visa debit card that lets users buy things with fiat money converted from cryptocurrency stored in their online Coinbase wallets. Users can take advantage of the full neobank treatment with Coinbase's app providing nifty visualisations on your spending behaviour, and security controls such as disabling the card if it gets lost or stolen. The card will only be available in the UK, with a wider European release to come later this year. UK users can expect to be charged a 1 percent transaction fee and a 1.49 percent conversion fee, totalling 2.49 percent for every transaction using the card (2.69 percent in Europe and 5.49 percent elsewhere). These fees seem high when we compare them to the C2B credit card transaction fees for US-based retail and online merchants at 2.2 percent and 2.52 percent respectively, per $100 transaction -- as outlined in our latest Payments keystone report. The big question is -- is this new? and our answer is not really. Revolut, amongst others, has offered the ability to make transactions using cryptocurrency for well over a year, however, the merchant doesn't actually receive bitcoin, rather the app does a conversion back to fiat to make payment. From a transaction standpoint, we see Coinbase as no different, as they are simply taking exchange custodied wallet holdings and converting them at the spot rate to make payments. Cryptocurrency-native transactions are difficult because the distributed ledger (Blockchain) requires each transaction be verified through network consensus before it is finalized, which for Bitcoin is 10 minutes -- imagine waiting 10 minutes for the credit card machine to print the transaction slip?. What is notable about Coinbase's card is that it helps cryptocurrency adoption by assimilating one's crypto holdings at Coinbase with their fiat holdings at a bank, promoting a better user experience than before.

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Source: Coinbase (Coinbase Card via Twitter), ComputerWorld (Coinbase Card)

DIGITAL WEALTH: Betterment gives in to its premium retail clients and drops its $100k minimum

Roboadvice – the automation of wealth management services – continues to put pricing and product pressure on the industry. Traditionally, financial advisors assess their fees as a percentage (1-2%) of the individual portfolio amounts they manage. Portfolio minimums have safeguarded the work expended by advisors in relation to the percentage fees earned. Roboadvisors like Betterment or Acorns feature lower barriers for customers as a result of their digitally native infrastructure, and thus low minimum balance requirements for a fixed set of portfolios - which require little human input. This not only enhanced B2C business for such Robos (i.e., individual investors opening accounts), but also B2B business (i.e., other financial firms using roboadvice powered platforms on behalf of clients). Betterment recently acknowledged dropping its $100k portfolio minimums for its 40bps premium service which gives retail clients the flexibility to customize their exposure in certain asset classes. We see this move in two ways, (1) to cater to the customers demanding greater flexibility, and (2) attracting and capturing customers from the ever-present competition, such as Acorns, Wealthfront, and Schwab.

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Source: Valuewalk (Wealth management), Betterment (For Advisors)

DIGITAL WEALTH: Schwab's $30 subscription, Abra and Bitwise on digital assets explain the future of wealth management

Roboadvice is close to our hearts as one of the first themes, but for digital lenders, to erode the walls around the most expensive parts of financial services. Between Mint.com in 2007 and our world in 2019 is an ocean of difference. We highlight three symptoms that show just how far we have come. First, Schwab announced a new pricing model for its digital wealth and financial planning offering. Core robo portfolios will remain free by earning interest on the cash allocation (listen up stablecoins!), while the human-augmented service will cost $30 per month with a $300 onboarding fee. While prior attempts at paying directly for planning services were attempted unsuccessfully by Learnvest, and Robinhood has a freemium model where a subscription fees earn you a margin account, Schwab is a way-bigger fish. 

We've pointed recently to the importance of understanding subscription as a shift from selling a manufactured product for a price (even if it is financed over time) to filling a consumer demand holistically. Subscriptions don't have lockups, can't take excess economic rents if your account grows from $100,000 to $500,000, and shift the business risk back to the business. They also squarely place Schwab among the likes of Apple, Google, Netflix, Microsoft, Salesforce and other *modern* consumer companies. Goodbye 1.5% on a minimum $1 million in assets for overpriced private equity and IPO access.

For now, $30 will only get you traditional money management. But if Bitwise and Abra get their way -- among dozens of other high quality companies -- investment infrastructure and associated choices will be changing entirely. Bitwise, a crypto-index fund with a passive approach, had authored a stellar document linked below describing the state of digital asset markets. In it, they show how to separate the 95% of noise in fake, manufactured crypto exchange volume created by bots to game rankings from the 10 real exchanges on which demonstrable human activity is taking place. We are building in the age of the Internet, and with that comes fake traffic, fake news, fake Twitter followers, and fake financial products. This document, and efforts by folks like Messari and DASA, is clearing the way for digital-native assets to actually work. None of this ecosystem, from investors to products to allocations to exchanges to crypto regulation, even existed in 2007.

So where is it going? One example is Abra, which has grown from a pure Bitcoin wallet to a provider of a synthetic asset allocation built using contracts-for-difference. While CFDs may not be accepted in all jurisdictions, don't look at manufacturing but at the customer. If a user can access stocks, bonds, real estate, private equity, gold, commodities, Bitcoin, tokens, banking accounts, loans and payments all from an app, that is the Holy Grail. And that is what the next 10 years is all about. The custodians and broker/dealers that have traditionally supported investment businesses, from Fidelity to Schwab, will move to integrate, own and support digital assets as well. And in that environment, solutions will not need derivatives to offer what is the most sensible package for the consumer. It will just be on your phone.

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Source: RIA Biz (Schwab), Yahoo Finance (Schwab), The Block (Abra), MessariDASABitWise 

CRYPTO: BitMax and $1.5 Billion in Phantom Daily Volume from Transaction Mining

Once in a while we land on Coinmarketcap's crypto exchange ranking, and choose "Reported" volumes instead of "Adjusted" ones. In that world, everything is topsy turvy. Binance is no longer on the top, and BitMax, Bithumb and other unmentionables float around the meniscus. The answer as to why this happens is called "Transaction Mining", and was a big deal halfway through last year. This practice is not really mining, as much as it is churning. Normally, an exchange charges a fee to the buyer and seller for facilitating a trade on its platform. In this case, however, the exchange also pays the trader a rebate in the form of its own token. The more you trade, the more of the exchange's proprietary token you receive. And some tokens, like Binance's BNB, have become valuable to the tune of $2 billion.

The positive way to look at this practice is to say that it is "growth hacking" the exchange rankings, thereby creating more visibility for high ranking platforms. Imagine you are trying to maximize visitors to your website. Well, you might practice some search optimization techniques, get back links from blogs, and perhaps even pay for some fake ones. Or, you are growing a social media audience, and decide to cheat by buying fake followers to create the impression of engagement. These techniques -- while misleading -- are merely meant to get you noticed, and then real activity can begin. Traditional banks offer $250 rebates to sign up for a new account or credit card all the time! And in the case of crypto exchanges last year, a number of them used transaction mining to growth hack the rankings, spread around their token, and have now switched to more accepted pricing models.

But Bitmax, and its $1.4 billion of mined volume per day, seems an extreme. The negative way to look at this practice is to compare it to churning an account. If a financial advisor with a fiduciary duty directs trades in a client's account in order to generate fees and create the impression of activity, they are breaking the law. In such an example, the financial advisor has full control of the account. You may say that crypto exchanges are optional, and that the decision to churn trades in order to generate/mine exchange tokens is voluntary. Sure. But if bot-driven advertising can swing an American election, certainly misleading financial incentives can skew how people make investment decisions. The belief that the exchange token is worth something -- backed by little other than promises that it will be worth more once other people have it -- leads to destructive financial activity. To us, this looks a lot like a digital-first version of churning driven by a suspect financial promotion. 

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Source: Coinmarketcap (Exchanges), CoingeckoBitmax, Crypto Currency Hub (Is transaction fee mining a ponzi scheme)

PAYMENTS: Is Digital Banking hurting the Underbanked?

Here's a conundrum. You don't have a bank account and therefore cannot set up a digital payment option. Now try ordering and paying for an Uber! This example reveals a simple truth: digital services -- and in particular digital financial services -- can be regressive (benefit the haves, hurt the have-nots). As countries like the United Kingdom, China, India and the Nordics move towards demonetization, driven by technology and policy, the social and structural implications of getting rid of cash could make things a lot worse for the most vulnerable. Based on a recent UK report linked below, lowest grade workers and the unemployed use cash 49% of the time for their purchases, while those in the highest professional occupations use cash only 39% of the time. And conversely, card use is split at 37% (low income) vs. 44% (high income).

Weird. Fintech is supposed to be a democratizing force that allows anyone, regardless of account size, to access quality financial product. Let's stick with the UK for a clean analysis. If you look at penetration of mobile devices, 85% of the populace owned a smartphone in 2017, massively up from 52% in 2012. So that means, generally speaking, most people have some payment-enabled digital hardware that they can lug around in their pocket. And yet that device is not the financial key (yet) for the unbanked and underbanked. Why? One hypothesis is to look closer at the rails on which money travels, and their interoperability.

The first is paper cash. It requires no intermediaries, at least in concept, and therefore 100% of the population is able to "self custody" a little bit of it under their bed, and use it for commerce. The second is banking. Banking intermediates the financial system, and allows for modern services to function and thrive. But it also has an onboarding cost, set by the banking industry's risk tolerance, set by the legislator and the regulator, which may be prohibitive to some share of the population. It excludes "bad risks" by design. Banking also introduces costs into moving money around, which must be covered through business activity, and often warps into unethical economic rents (i.e., overdraft fees). When we talk about mobile payments, what we are really talking about is extending the banking system into the population that has adopted mobile phones -- and this excludes unbanked mobile users. As homework, we suggest the reader think about WeChat (mobile UX, media industry intermediation, government rails) and Bitcoin (mobile UX, hardware industry intermediation, blockchain rails) as being a solution to avoiding the regressive outcome. 

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Source: Access to Cash (Report), Consultancy UK (2017 mobile penetration), Latin America's Banking Revolution (Euromoney)

CRYPTO: Understanding the Decentralized Finance Movement with Data Sources

When digital music assailed the music labels, their first response was to sue teenagers for peer-to-peer file sharing and to hire technologists to write Digital Rights Management software. DVDs bought in Asia wouldn't play in American DVD players, and so on. For finance, as blockchain nips at the ankles of storied industry, much of the response has been to (a) bring sovereign power to bear on the misfits, chasing them around to jurisdictions like Bermuda and Malta, and (b) hire technologists to build up enterprise control of crypto assets for issuance and trading. Symptoms of this abound -- from London Stock Exchange putting $20 million into Nivaura, to Swiss private bank Julius Baer entering the space, to regulators of various risk-tolerance drawing lines in the sand around token activities.

This is all good progress, we think, but it is an intermediate step to the Spotify (or Google or Netflix) of finance. Let us dwell on a distinction for a moment. Fintech players democratized access to financial products -- see our many earlier entries on amassing consumers through attention platforms at discounted prices. Those financial products, however, are still institutionally manufactured. But when you look at music or film today, an increasingly large portion of our attention is going to creator-generated content that sits on Youtube and Twitch. We all watch Game of Thrones (i.e., made by the Goldman Sachs of content production), but we also see Gary Vaynerchuk and Joe Rogan endlessly peddling their hustle -- without traditional institutional backing. The same point can be made about Uber drivers.

Decentralized finance is the latest iteration of the crypto theme, and its core premise is that the manufacturing of financial products across the whole stack will be done by individual creators, or aggregated to scale via crowd cooperation driven by DAO governance like Aragon. For the more traditional readers of this newsletter, these words sound like nonsense, but they are not. Payments is the simplest use-case, and already has a decentralized product that works to this day: Bitcoin. Lending, Trading, and Derivatives -- intermediated by software networks and not by legal issuers -- are starting to come online. The tracker below shows some of the smaller independent projects, the maturity of which reminds us of Ethereum's dApp tracker in early 2017.

The other reading we encourage you to do is check out Multicoin Capital's report on crypto exchange Binance, its BNB token, and decentralization plans. Facebook and Amazon, companies whose value has been built over 20 years, are locked into a public shareholder structure that will disallow them from burning down the house and giving all the value away to users. Not so for a multi-billion dollar phenomenon built in a few years, where the largest existential danger is legal sanction to the billionaire founders for unregistered securities dealing. Atomizing the economic value of a quickly-built monopoly into software running on millions of computers, such that it cannot be shut down or controlled (e.g., Pirate Bay), could be the chassis of real, at-scale decentralized finance. Right now though, this theme is struggling to get off-the-ground with meaningful volumes, so a heroic event will be necessary to properly kick things off.

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Source: Forbes (Nivaura), Finextra (Julius Baer), Cambridge Associates (on Venture), Decentralized Finance (The BlockDeFi Pulse), Multicoin (Binance), Bloqboard (Lending DeFi), ConsenSys (Trading DeFi)