FINTECH: Prediction Surprises for 2017 and a Year in Review

It's prediction season. But before we get into 2018 and the coming trends (which we'll publish on January 2nd), we wanted to grade ourselves on 2017. How did we do in thinking about the future, relative to what happened? And more importantly, why? None of the prediction text is edited -- we add a subjective accuracy verdict, rationale for the score and an update on the sector.


Top 2017 predictions ( Published on January 03, 2017 )

(1) Revival of Cryptocurrency. 10 countries will have issued central-bank backed cryptocurrencies, and Americans will still not understand why that's important. And a multi-billion dollar enterprise will finally try to use the public Bitcoin blockchain as an application layer. 

Verdict: 85%

We got this one mostly right. At the end of last year, several African countries were looking into using a private labeled blockchain system to run their own crypto currencies, and we thought that would revitalize interest. Today, Russia is working on the cryptoruble, Japan the J-Coin, the US Federal Reserve isat least thinking about it, as are SwedenChina, and many others. Not to mention Venezuela. What can also be highlighted as progress are the capital markets settlement coins between large financial institutions, and the role of Ripple in developing international payments. Certainly the ASX announcement of adopting Digital Asset Holdings for its core trading system resonates here as well. What we were wrong about is just how much reach crypto currencies had into the lives of regular people, and the wealth transfer implications of the public blockchains (at least $400 bilion worth). Certainly none of the central bank issued crypto coins are yet worth anything when compared to Bitcoin.

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Source: Cointmarketcap


(2) What Roboadvisors? Almost all roboadvice assets will be (by %) at Vanguard, Schwab, and Bank of America. Every large firm in the wealth management business will have gone digital. And we will see a large tech firm unexpectedly acquire an Acorns or Digit, and totally scare everyone that they're getting into finance.

Verdict: 90%

Ah, you have to feel bad for the unicorn roboadvisors. Betterment, Wealthfront and the rest have been in this game since 2008 or so. And yet, while their assets have been creeping up to about $5 to $10 billion each for the independents, powered by hundreds of millions in Fintech venture capital, the incumbents are putting up a massive fight. Vanguard alone has more than $65 billion in its digital hybrid, Schwab is likely over $20 billion, and of course Morgan Stanley,Bank of America Merrill LynchWells FargoDeutsche Bank and most others are in the game. And that's not to mention the asset managers, like BlackRock launching its digital wealth division. We haven't seen an acquisition of Acorns or Digit, but the partnership between PayPal and Acorns certainly looks like the right theme, and reminds us of Ant Financial and Baidu.

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Source: Atlas (mid-2017)


(3) APIs Everywhere but Disappointing. In a watershed moment, every single large retail and corporate bank will have a Developer portal with open API keys. However, most of those APIs will do nothing other than pull information. Actionable APIs will be too expensive to use, but Venture Capital firms will overfund companies that tell a story about how to tap into them.

Verdict: 60%

So maybe we were a year early with this. The PSD2 (European regulation) date is in January 2018, and by then European banks are mandated to share APIs with the world. We thought that means banks would get ready and open up in advance, but instead we have a smattering of portals from select providers. This Daily Fintech thread has done a nice job of collecting those available. And there are many non-bank financial APIs, for example collected by Programmable Web orLetsTalkPayments. Still, we get a kick from seeing a Deutsche Bank developer portal site open to all. What's happened with this theme instead is (1) the creation of a few bank-as-a-platform startups as a venture backed investment (e.g., Cross River Bank in US, ClearBank in UK), (2) some existential hand wrangling by traditional banks as they watch Amazon move into lending and Apple move deeper into payments, and (3) Ethereum becoming the world's API and programming language for things like crypto-banks.

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Source: BBVA


And here is the long form update on all the themes we track and the lessons we've learned this year.

Digital Wealth Management (Roboadvice)

Predictions:

  1. Angel and small Series-A funding into B2C roboadvisors will be pretty much $0. Series B funding into digital wealth management companies more broadly will be a little more than half that of 2016. 
  2. One digital wealth company from the second generation, like Acorns, Stash or Digit, will get bought for a ridiculous amount by an unlikely and surprising bidder.
  3.  Almost all roboadvice assets will be (by %) at Vanguard, Schwab, and Bank of America. 
  4. Everyone will start saying "artificial intelligence" instead of "roboadvice" but none of the business fundamental will have changed

Verdict: 75%

The higher granularity than in the top 3 predictions makes us more wrong. Indeed most roboadvisor funding and interest shifted to micro-investing services (e.g., StashAcorns) and financial chatbots (e.g., Earnest, Trim, Cleo). Instead of AI for roboadvice, people do say micro-investing or chatbots. The underlying business change, however, is that those services have now customers/users numbering in the millions. That implies very small accounts (about $1,000) at very large scale. And nobody has been bought just yet at a massive price.

 

Blockchain and Digital Ledgers

Predictions:

  1. Bitcoin, the technology and not the $ value of the digital currency, will be relevant again, and will see at least one multi-billion dollar company leverage its public blockchain 
  2. Big banks will try to patent troll their vertical solutions on top of the open source projects (Hyperledger, etc.) and will feel a sense of false confidence. It will be the year of lawsuits between the incumbent and startups communities, and open source will win.
  3. A blockhain-based production ready system,in either trading or money movement, will replace the legacy tech stack of a multi-billion dollar firm. It will actually increase costs in that year, and observers will draw the wrong conclusions even though the firm is more competitive in the long run.

Verdict: 90%

Still feeling pretty good here. While the Bitcoin $ value did become extremely important (climbing towards $20,000 at one point as futures on CBOE were about to launch), the technology of the blockchain has catalyzed over $4 billion in Ethereum-based token launches and thousands of related startups. Banks certainly are trying to patent their enterprise blockchain solutions, but that is unlikely to matter in the long run we think as open source code bases grow exponentially.

 

Artificial Intelligence

Predictions:

  1. Intel and AMD will keep making hadware chips optimizing for neural networks, and will drive the execution speed of image recognition and similar tasks to be 10x faster than what we have today 
  2. Real time video face recognition and editing will become a consumer toy. The first instance of someone releasing a viral video impersonating a politician using face-overlay and voice-replacement technology will get a massive negative backlash from conservative thinkers
  3.  A political movement against unemployment caused by self-driving cars, chatbots, and other AI products will rise, but it won't be able to articulate its concerns in a way our political system understands or can address

Verdict: 80%

It wasn't Intel and AMD, but NVIDIA that experienced the most growth resulting from their neural network hardware and developer resources. There is an arms race in determining who will power all our self-driving cars, trucks and augmented-reality devices. That race is not yet over. In terms of image editing and forgery of people's visages, check outFaceApp, which allows you to morph gender, age and other variables in real time. And as this Verge story describes, such algorithms ("deepfakes") are now being applied to adult content. This dangerous technology has not yet hit the mainstream and crossed wires with fake news and propaganda bots, but we have a better idea than ever just how dangerous AI-based communication has become, and the political effects it has had

 

Neobanks & Challenger Banks

Predictions:

  1. Incumbent banks will wake up and come down extremely hard on challengers and neobanks. They will fight them on mobile apps, chatbots, instant payments, and user experience. You won't be able to tell apart the website designs of new and old firms. 
  2.  Startups will try to do everything to become financial supermarkets. Expect to see lending, payments, banking, data aggregation and insurance combined in an attempt to grab at least some consumer attention. Regardless, neobanks will struggle getting to any scale beyond 10,000 early adopters.

Verdict: 75%

We were right that all established banks will trend towards becoming neobanks, with native mobile apps, chatbots and digital capability. One example of this is payments app Zelle vs PayPal owned Venmo. We also got the trend of unicorn Fintech startups becoming financial markets generally right (though it was easy) -- see SoFi, N26, Paypal/Acorns, or across to China as Ant, Baidu and Tencent build the Fintech of the future. We were wrong on the magnitudes. Incumbents aren't particularly scared of Atom or Monzo, as the tech banks struggle to get licensed or funded. The real story in licensing is the ability to hold deposits to lend out -- you know, to have a business model. The other part we missed is the scale of early adopters. Revolut has a million customers, as does Transferwise. You can say that those are international payments apps, to which we say, yes, you mean global banks?

 

Financial APIs & Banks as a Service

Predictions:

  1. In a watershed moment, every single large retail and corporate bank will have a Developer portal with open API keys. However, most of those APIs will do nothing other than pull information. Actionable APIs will be too expensive to use, but Venture Capital firms will overfund companies that tell a story about how to tap into them.
  2. BBVA and Santander will retain their position as marketing leaders of a BaaS offering, and we will start to see apps using their infrastructure.
  3. Someone will write a malicious app that crashes one of the API stores, generating tons of press and cyber security premiums.

Verdict: 60%

APIs are coming not with a bang, but with a whimper. 2018 will be the year where APIs really get test and implemented by incumbents, so we were off here. BBVA and Santander indeed do maintain their marketing positions, reinforced in a quantitative study we've done on bank innovation. But JP Morgan and Barclays also matter. And the biggest security breach of the year wasn't from these APIs, but from horrible security procedures at Equifax, exposing over 140 million Americans.

 

Chatbots, Conversational Interfaces

Predictions:

  1. Virtual assistants will start to appear in business locations, from banking branches to shopping experiences. People in customer service from a major brand will be laid off.
  2.  Amazon Echo, Google Siri and Google Home will start a nuclear war over the connected smart home. Like with its other products (Kindle, Fire), Amazon will lose its lead, especially as self-driving cars develop their own AI assistants. 
  3.  Facebook will get into the hardware business through an acquisition, and Messenger/Whatsapp will gain a physical form

Verdict: 60%

Hmm, maybe too much science fiction juice in this one. 2017 did see millions of hardware sales of virtual assistants -- Google Home vsAmazon Alexa has Amazon in the lead; Apple HomePod is nowhere. But anthropomorphic AIs are still in early development. As an individual data point, the incredible human renders from Soul Machines are starting to emerge from the uncanny valley. Not so much for the robotic Sophia, who despite being granted citizenship in Saudi Arabia is still a pretty creepy robot. And we're not aware of any hardware acquisitions yet to give the brand-name AIs tangible form. Amazon did buy Body Labswhich does 3D scans of human bodies, but that's probably to sell clothes in Augmented Reality.

 

Democratization, Regulation and Crowds

Predictions:

  1. As consumer protection is rolled back, equity and real estate crowdfunding experience major scams that lead to a public backlash.
  2.  Crowdfunding technology ends up creating asymmetric benefits for those already in power (think about who can really use Syndicate investing on Angellist, stock earning estimates from Estimize, or invest in Numerai's crowdfunded AI hedge fund). Income inequality becomes sharper despite equality of access to cheap investments.

Verdict: 100%

This happened in a surprising but big way with the crypto economy. Consumer protection did not exist at all as Initial Coin Offerings raised increasingly more capital in 2017, fulfilling on the original promise of crowdfunding. The year ended with over $4 billion in ICO funding. Scams and hacks proliferated, from the $170 million Parity failure, to fraudulent ICOs being shut down in China, to the hundreds of millions of crypto locked up in the Tezos litigation. And of course, the story would not be complete without the huge concentration of mining power in Bitcoin, the 170 crypto funds trying to profit from the opportunity, the billions "created" in the Bitcoin Cash fork, and the general distribution of wealth in favor of crypto whales. Black swan outcome.

 

Bitcoin & Cryptocurrency

Predictions:

  1. 10 countries will have issued central-bank backed cryptocurrencies, and Americans will still not understand why that's important 
  2. Another massive Initial Coin Offering like that of the DAO, over $50 million, will get people's heads shaking again. This one won't get hacked. Traditional Venture Capital firms will have invested 10% of the amount.

Verdict: 100%

Again on the ball here, especially around ICO funding. Think about Filecoin, the CoinList powered SAFT launch where venture investors put in $50 million at $0.70 per coin and regular investors bought $200 million worth at $2.50 per coin (give or take). That's a 20% allocation of the overall raise to private investors, and a massive uptake by the public. More generally, ICOs are a 10x increase on all annual venture investment into blockchain and Bitcoin companies.

 

Insurtech

Predictions:

  1. Venture investment will continue to pour in, increasing by over 50% globally.
  2. There will be a major exit at a price point comfortably above $100 million to a legacy insurance company
  3.  A scandal, either on the underwriting or regulatory side, like the licensing issue with Zenefits, will hit an insurtech startup and lead to renewed finger-wagging

Verdict: 70%

According to Coverager, venture investment in Insurtech sat at $4 billion in both 2016 and 2017, so the theme is not seeing increased YoY activity. But it's not falling off either. In terms of acquisitions, there is healthy appetite in the sector to modernize and own software assets, with over$10 billion being spent on M&A. One example that fits the bill isTravelers buying Simply Business (online broker for small business insurance) for $490 millionCVS acquiring Aetna is certainly a big deal, but that has more to do with the state of healthcare in the US than artificially intelligent drones powered by machine vision. There is also something to be said for China's Ping An Insurance going public at a $200 billion valuation, but it is a stretch to tie that to the predictions above.

And on the scandal point we did get it directionally right. SoFi, which does have an insurance offering via partnership, got into the news on account of the CEO's sexual harassment allegations, which led to his resignation amid the broader transformation of our society with the #MeToo movement.

 

Generational Shifts

Predictions:

  1. Generation Z will become a bigger buzzword than Millennials. Banks will wonder whether then Snapchat generation even knows if banks exist. 
  2. Valuations in the Gig economy (AirBnB, Uber, Task Rabbit) will crater, due to poor exit opportunities in the public markets and a churning contractor force dissatisfied with the lack of stability and benefits

Verdict: 50%

So Gen Z is definitely on the radar, and includes everyone born after around the year 2000. But Millennials still reign. The brightest example is Olaf Carlson-Wee, the 27 years crypto-king of Polychain Capital. And the gig economy is still around. Despite setback for companies likeUber in London, most private unicorns are continuing their journey, and the crypto economy in particular is adding more steam to pinballing valuations. The perceived failure of Blue Apron's IPO (falling from a $2 billion offering to $800 million), however, does create a cautionary example.

 

Attention Economy

Predictions:

  1. Snapchat holds on to its lead with younger demographics by understanding its customers better than anyone else, resulting in a flashy public exit that leads to multiple new businesses being started in the Los Angeles ecosystem, many of them in VR film
  2. One of Google, Apple, Facebook, Microsoft and Amazon will get into financial services in a way that makes financial incumbents extremely anxious, and will create public outcry. Financials will fail to understand why the tech firms are pursuing what seems like a dead end, but is really a way to engage with users and get more data

Verdict: 80%

Snapchat certainly did go public, at $24 billion, but has since fallen to $18 billion. But unlike the GAFA tech giants, it has not been perceived as an artificial intelligence leader, and its bet on Spectacles has not gone the way it wanted. But the big tech firms have indeed gone further into finance -- from Amazon's SME lending, to Apple and Facebook messaging payments, to Google's machine learning and financial cloud. We would highlight Amazon's digital lending moves as particularly threatening to incumbents, given their higher quality data for automated underwriting.

 

Virtual and Augmented Reality

Predictions:

  1. Millions of virtual reality headsets will hit homes across the United States, leading to an explosion of VR apps powered by Valve's Steam store, Playstation, and Google. 
  2.  A multi-billion dollar investment firm will open a virtual reality branch with live customer service, potentially on Google Earth or another VR world
  3.  Payments in VR will go live in Asia first, and will set the default behavior for the rest of us to follow. Credit card networks will open VR incubators or invest in VR companies.
  4.  Augmented Reality will still be mostly unknown to consumers, but will see multi-million dollar contracts between enterprise clients

Verdict: 85%

This is one is almost right, helped by Apple's latest hardware. Millions of VR headsets have indeed been sold to American consumers, but the general sense is that VR is not ready for mass adoption. Augmented Reality, however, has absolutely landed in the hands of consumers in the form of iPhone X, which comes with a ARkit, a development kit of software engineers. Ikea, Amazon and other retail apps are thinking about how to implement AR commerce, which we continue to think will drive payments activity. And of course, don't forget Alibaba's $20 billion revenue "singles day" shopping spree, in part powered by this technology.

 

Internet of Things & Wearables (IoT)

Predictions:

  1. Unsexy businesses in the "old economy" of manufacturing physical objects will position themselves as technology companies that generate terabytes of proprietary data. Hedge funds and other investors gladly pay for that data, repeating the experience of expert networks.
  2.  Self-driving cars continue to beat performance expectations and end up in production-mode on roads all across the world, leading to unemployment and outrage. Governments, trying to stem the bleeding, file lawsuits against tech companies for breaking regulations. It doesn't work.

Verdict: 50%

Broadly speaking, Alternative Data is a big growth area with many companies looking for ways to monetize their internal data exhaust. But the role of old manufacturers is perhaps not as drastically helpful as we had hoped (yet). As for self driving cars, we got it backwards. For some reason, the US House of Representatives is in favor of looser regulations for self-driving cars, and had passed a bill as such. Perhaps the auto industry as a whole, and not just Tesla, is seeing this as a way to boost its fortunes. And the cars aren't quite in production mode at scale, but may hit the roads by 2020.

 

Singularity

Predictions:

  1. Human addiction to technology will reach a new height. People will spend more than 12 hours a day on their screens.
  2. The cost of sequencing the genome for an anonymous consumer falls to $25. Genome data can be made available between services via API.
  3.  3D printed organs will be implanted into human patients successfully.
  4. Scientists will claim they have simulated a full rat brain, which will become easier due to newly available hardware. There will be no implication in the physical world from this discovery.

Verdict: 65%

Yep. People now spend 12 hours per day on media. The cost of sequencing a genome is somewhere between a $1,000 and $70, depending on granularity. Organs are not routinely 3D printed yet, but a Wisconsin company offered to implant NFC chips into its employees. And no, there are no stimulated rat brains yet -- but here's a worm brain in a robot body and optical neural nets on a silicon chip.

CRYPTO: Kittens, Star Trek and the Internet

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In a classic Star Trek episode, "The Trouble with Tribbles", cute furry aliens reproduce so quickly in the Enterprise that they get everywhere and clog up the ship's systems. The same fate befell the Ethereum blockchain last week, as adorable virtual cats ate up more than 10% of its processing capacity. ICOs, payments and other smart contracts all waited in line as collectible cats were born into the world according to a generative algorithm. Each crypto kitty is a blockchain-powered digital object, meaning it is scarce and true. All in, over $7 million has been spent on these troublemakers in about a week, with the top cat going for over $100,000.
 
This is not silly. It is, instead, the perfect storm of internet culture, ground breaking technology, and human behavioral hacking. Consider that in many emerging technologies, the motivating examples that find quick mainstream adoption are driven by cute animals. The cultural language of the Internet, memes, is in part a large production factory of kitten pictures. Machine vision, the technology that enables Tesla cars and trucks to drive autonomously, was trained on millions of publicly available dog and cat photos as a benchmark, and can now recognize dogs down to their breed. Augmented reality, the technology that Amazon is using to enable a new type of virtual commerce, has had its first viral hit in the form of Pokemon Go. Which, you guessed it, was about collecting a variety of cute cartoon animals. On the Internet, first come the cats, and then mainstream recognition.

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So is investing in a crypto cat a great idea? Probably not -- even though the utility of a virtual pet may be higher than many ICO tokens today, it still looks like the irrational exuberance about beanie babies (once 10% of eBay sales) or collectible trolls. But what is relevant to understand is the underlying technology. Because of blockchain, anything from a cartoon cat to a traditional equity to an autonomous car can have unique digital presence, engage in commerce, and be traded in capital markets. If generative DNA can be stored on the blockchain, and effectively managed to create over 100,000 unique individuals, it's not that big of a stretch to imagine medical data or personal identity taking a similar path. And all of this is happening right meow.

Sources: Crypto KittiesStar TrekAmazon / VergePokemon Go / Zugara

REGULATION: The Ethics of Sovereign Technology

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The Chinese tech companies sit comfortably between media, software and finance. No distinction needs to be made between using someone's social media data, search history, shopping habits, education and financial track record -- all of these data points flow into massive AI power-houses with half a billion users, inside Alibaba, Baidu, Tencent and others. Now, imagine if your Facebook friends and Google searches and Amazon shopping and Visa purchases determined if you could get a student loan to go to university. China's social credit system will do just that, reports Futurism.com while referencing an infamous Black Mirror episode that explores a dystopian view of this concept.  While countries like the US certainly struggle with systemic bias in the commercial activities of free participants, at the least such bias is not put into software by the federal government and used to determine access to services. 

Or is it? Consider that a regulatory agency, the Federal Communications Commission (FCC), is working to remove net neutrality rules in order to allow Telecom companies to meter how and where Internet traffic flows. While Comcast may not turn off access to some particular site, they could in theory tier the speed of the Internet according to economics, politics or whim -- such that, for example, Goldman Sachs or Amazon load quickly, while Crypto Kitties or Telegram load slowly. And loading time is a major determinant of consumer behavior and information exposure. We can't trust the Telecoms to not extract economic rents. Therefore, this policy choice will strengthen the ability of entrenched commercial interests to determine what people have access to, and consume.

And what if the rationale for such policy decisions is not even driven by the sovereign, or the collective will of that state's people? Data Scientist Jeff Kao deed a deep dive on the FCC comments using natural language processing analysis. In the best case, at least 1.3 million of the pro-repeal comments sent to the FCC were automated. In the worst-case, only 800,000 of the 22 million submitted comments came from real people, with 99% of those opposing the repeal. In the graph below, the height of the bar shows how often a campaign was repeated on an exponential scale. The color Red is associated with repealing and the color Green with keeping net neutrality. The clustered Red middle suggests the work of spambots that can generate slightly different language with the same meaning. The long Green tail is likely to be written by real people, though the first top bar shows a form letter repeated 7.5 million times. This cuts in every direction.

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And of course, other examples of propaganda bots are well documented -- already in use by 30 governments, with election impact in 18 countries. According to a recent report from Freedom House, Internet freedom is declining on a global basis. The mental stretch from a government controlled social credit system to global information warfare over national policies is not as unlikely as it may first appear.
 

Source: Freedom HouseJeff Kao

FINTECH: Behold Production Blockchain!

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With public crypto funding at $700 million in November alone, it is easy to forget that anything else matters. But let's check in on the progress of sovereigns and incumbents in capturing and controlling blockchain technology. Take for example, the Australian Stock Exchange working with Digital Asset Holdings ($115 million in venture raised) on replacing the entire trading chassis with a proprietary "Distributed Ledger Technology", i.e., a private blockchain with the attributes of confidentiality and scalability.  ASX is moving forward with DLT as a production system, which is a big deal. For context, the sum of market capitalizations on ASX is $1.5 trillion, or 3 to 5 times larger than all of crypto. Which of course raises the question of how private and public chains will interact. For that, see AionPolkadotBlocknetWanchain, and various others.

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Another development is the growing progress towards sovereign digital currency. Certainly the US Federal Reserve is flirting with the idea, especially after Russia has indicated strong interest in building the crypto ruble. Also surprising is the news that Venezuela, famous for putting people in jail for Bitcoin mining, is going to launch its own cryptocurrency. The planned offering sounds like an ICO of the country's national resources. If you can't beat them, join them.

The silliest data point we've seen is this. Bulgaria, a country with a $60 billion GDP and $16 billion of national debt realized it owns on $3 billion of Bitcoin, which was seized in a law enforcement action earlier in the year. 5% accidental GDP growth (or 20% national debt repayment) is nothing to sneeze at. Will Bulgaria go long BTC or hedge out some of that risk using CME futures? Or, manipulate public opinion with some soverign propaganda bots to impact the price?

Source: Australian Stock ExchangeDigital Asset Holdings

CRYPTO: Value of All Economic Activity (or Max Bitcoin)

Source:  WSJ

Source: WSJ

Ah, Bitcoin opinions -- it used to be that only geeks cared, then it was millionaries and financiers, and now everybody has one. With the advent of crypto-derivatives, institutional investors can bet on these opinions. You can steal one from this Bloomberg visualization telling us what every "important" business magnate thinks about BTC. Of course, most of these folks have little technical understanding, thereby lacking at least some subject-matter credibility, so why not check out the ground zero of Reddit or BitcoinTalk.

Assign no magic importance to today's price. The only thing special about $10,000 is that it is a round number, made special by the fact that humans are social animals that use shortcuts in their thinking. The growth from $1,000 to $9,839 vs to $11,483 is not meaningfully more or less impressive. Further, BTC can be subdivided into teeny fractions. So owning "1 Bitcoin" or "0.93 Bitcoin" or "0.0001 Bitcoin" is technically equivalent. No argument should be based on the unit. What we need to think about instead is the overall stock, and the best we have today is the total Price x Quantity of about $200 billion. Looking at all crypto, that is trending at $350 billion. But remember that this is also a fragile number -- it is both extremely volatile and also not particularly liquid. If I pay $100 USD for 1 percent of 1 percent or 1 percent of a company, that company would have a market capitalization of $100 million. How confident would you be that, let's say, another party would put in $5 million at the $100 million valuation based on my $100 USD?

So let's go on a numbers adventure. Suspend all disbelief (as you should when trying to take seriously an argument on its own terms), and imagine that Bitcoin is not a cryptocurrency but an inevitable technology that required first the global adoption of the internet. Or put a broader way -- the crypto economy, that uses blockchain as infrastructure, grows according to Moore's law and is not merely a foolish human meme

What can crypto become? See the spectacular visualization from the WSJ. Total US currency in circulation is $1.6 trillion, about 5x the size of global crypto. Total marketcaps on the Nasdaq in the 1999 DotCom bubble reached $3.2 trillion (adding $1.6 trillion in a year prior), which is about 10x. All gold ever mined at today's prices would be valued at $7.6 trillion, let's say 20x. Global foreign exchange reserves are at $10 trillion, or 30x. All equities of all public companies are worth $80 trillion, or 230x, and if we add in all other asset classes including alternatives and real estate, we can get up to $500 trillion. Another way to get to $500 trillion is to get the net present value of global GDP (obviously a silly exercise, but why not). That would be about 1,400x today's global crypto. And if we want to go completely bonkers, we can estimate the statistical value of all human life on the planet -- that would be $5 quadrillion, or 14,000x current crypto valuations. So there you have it. Now you know how much more it can go up, adjust your belief system accordingly.

Source:  Adamant Research    

Source: Adamant Research
 

CRYPTO: Skeptical View on Pinball Machine of Bitcoin Valuation

Source: Pinball machines (in different flavors like Crypto tokens) by  Rob DiCaterino    

Source: Pinball machines (in different flavors like Crypto tokens) by Rob DiCaterino
 

Much of the current price movement in crypto currencies today is speculation, which we may want because there is a precious grain of underlying technological breakthrough and innovation. For example, avoiding the Bitcoin fork was helpful to keeping the community together and correlates with a positive price impact. Or, token launch activity shows Ethereum being used for a "killer crypto app" and validates blockchain for enterprise, which should therefore correlate with a price increase. These things can be naively measured as transaction volume on the blockchainrelative to the value of the overall market supply.
 
But on the concerning speculation side, price seems to go up regardless of whether the news is good or bad. Just having crypto in the media increases mindshare and exposure. So, for example, Bitcoin futures being launched on the CME and CBOE is in large part a way for traditional financial companies to take short positions on the price of Bitcoin. But the market is interpreting all developments in financial services around Bitcoin as positive. Or, China cracking down on ICOs mostly just puts ICOs into the news, which leads to retail investors reading about crypto coins, which creates a desire to invest, which leads to them buying Bitcoin. So there's this unintended consequence. Perhaps we can separate out technology or mindshare adoption from actual utility or financial adoption to justify the rapidity of growth, but that requires some science fiction thinking.
 
Further, the private, public and crypto markets are connected like a Pinball machine. Valuations in the private markets for Fintech can be 5x higher than those in the public markets -- see OnDeck vs Kabbage. Valuations in the crypto markets are 5x higher than those in the private markets. Venture investors see this price disparity, where ICO funding is driven by a near limitless supply of crypto capital gains, and some push their (unprofitable) portfolio companies to do ICOs. Because those companies have VC credibility and an operating product, like Kik for example, they raise multi hundred million dollar rounds without much effort. Venture investors have a fiduciary responsibility to monetize this, so they may exit after the ICO and lock in their pre-sale discount. Traditional fintech is also bleeding into crypto markets because fundraising is easier, there is no equity dilution, and startups can tap a narrative of actually disrupting the incumbents, rather than supporting them as vendors.

As more and more companies launch ICOs, retail investors become aware of the trend. Most are not technically savvy enough to buy Crypto, other than perhaps at Coinbase. Note that Coinbase now has more accounts than Schwab. They also look in the public markets for anything resembling blockchain, bidding up assets like Overstock. Supply and demand means that very few public companies will get this asymmetric benefit right now -- thus the rush in by traditional finance to offer products that trade on regular exchanges (e.g., Van Eck). And in response, the crypto markets look at the public markets and see "the mainstream economy" adopting or pricing up crypto companies. That is interpreted as a positive development for the whole ecosystem. But it could, instead, just be capital flows looking to find a way to back an idea in low supply. 

BLOCKCHAIN: History of Bitcoin and the Crypto Economy

Source:  VisualCapitalist

You may not have been a crypto native from the beginning, so how did this whole thing get so big? The journey started with Bitcoin in 2008, stuck in incremental open source development for many years, until venture capitalists began to fund infrastructure (2012-2014) that could compete with financial incumbents (wallets, exchanges, miners). That funding proved some amount of scale, but the corporate world still did not trust a decentralized currency deemed to be for hackers and drug dealers. So by 2015-2016 there was a major shift to “enterprise blockchain”. Funding moved to corporate venture capital, and financial institutions joined consortia like R3Hyperledger and EEA among many others. All talk was of distributed ledgers, not public markets.
 
But while this was happening, Ethereum did its own token launch and came pre-built with a way for projects to be written in a Turing-complete development language, and to simultaneously raise money. This led to first a trickle and then a waterfall of Initial Coin Offerings leveraging the Ethereum blockchain. Much of that funding into ICOs came from capital gains in Bitcoin and Ethereum by early adopters. Fintech innovation shifted to crypto, and the movement became global. It started to involve regulators across the world, created debate among CEOs, and put something from the crypto-economy into the news every single day. It brought in Paris Hilton and other celebrities.
 
The issue is that investing into an ICO is technically challenging. The first step is just converting USD or EURO into crypto, and Bitcoin is the de-facto winner by having the largest liquidity and biggest network. Once a user has BTC however, they have to figure out a wallet, what addresses are, how blockchain works, what an ICO is, how to invest in it, and whether to trust the provider. And last, they have to contend with the regulatory overhang and uncertainty. Thus, fiat flows into Bitcoin and very likely gets stuck there.
 
The narrative around what is happening in crypto currency in the second half of 2017 is the entry of traditional financial incumbents into the space. First, there are now about 170 crypto funds dedicated to crypto alone. Second, the CME, CBOE and LedgerX are all providing futures product on liquid coins. Third, asset managers are starting to build more traditional vehicles, like trusts or ETNs, so that retail investors can participate using established markets. Fourth, large public companies are fueling the story with their own developments in the space. Fifth, private capital is moving in through vehicles on CoinList and Republic Crypto. And last, the media is combining all these narratives with the price of Bitcoin, which leads to even more people getting interested in the space (without understanding it).
 
Ethereum and Bitcoin are correlated with the overall market, so attention on any sub-part of the ecosystem catalyzes the rest. But there is also a lot of science fiction thinking about where this could end up. Will all trees be put on blockchain and their carbon production put on carbon trading markets? And of course, market manipulation, multi-level marketing schemes, and other unethical market behavior is rampant as well. What is the next stage? Regulation, rationality and legitimacy. 

PAYMENTS: PayPal Plus Acorns Looks like Asian Fintech

PayPal was going to be the money of the internet, but instead it became the payment mechanism behind e-commerce (see Peter Thiel on Bitcoin). From that position, it grew to 6 million merchant accounts and 203 million consumer accounts, and hedged the future by buying Venmo. That may be impressive, until you compare its $94 billion market capitalization with that of Alibaba, a $500 billion behemoth that owns Alipay and multiple vertical and horizontal adjacent businesses in e-commerce and fintech.

But for regulatory barriers, PayPal has the potential to get closer to the Asian conglomerate. Investing $30 million into Acorns, the microinvesting app, and now partnering with it to provide piggy bank services to PayPal customers is the first step. While Acorns has "only" 2.4 million accounts, at an average of ~$1,000 each, consider YueBao. The money market fund plugged into Ant Financial is now the world's largest, with over $200 billion in assets. 

This approach is the right strategic direction for building a scaled fintech company that is customer centric, rather than product centric. The customer journey starts with payments, then savings, then investments for the future, and finally retirement. PayPal has a large built in consumer base, and this deal shows Acorns participating earlier in the client funnel. It also shows that Acorns is a tech company first and an investment company second, and its technology enabled product can be integrated into other ecosystems. We would not be surprised to see similar integrations with other payments providers, or messaging providers like Facebook Messenger.

ONLINE BANK: Blending Neobanks into Cryptobanks

Source:  FTPartners

Source: FTPartners

Revolut is adding 3,500 people a day to its digital bank, reaching 1 million accounts, because it will provide the ability to store Bitcoin this December. The startup does not yet have a banking license.

The concept of neobanks or challenger banks is notoriously imprecise, blending in somewhere between online banking, mobile apps, digital lending and personal financial management. Here's a try: neobanks are (1) primarily consumer focused, often with integrated budgeting, (2) mobile or chatbot first, and (3) replicate the use-cases of deposit savings, lending, and money movement. That doesn't mean they have bank licenses or need them. Plenty of tech startups can build user experiences, and API those into financial backends from firms providing bank-as-a-service. Apple did this, for example.

Adding to the complexity is the emergence of cryptobanks, a set of institutions trying to replicate the functionalities of traditional banking services for crypto consumers and investors. And these things will blend together soon enough as you can see in the charts below from Financial Technology Partners and Slava Solodkiy. While neobank darling Monzo has raised EURO 71mm (and let's not forget Transferwise's $280mm), cryptobanks are on the path to raise $150mm this year according to Slava. If the trajectory follows ICO funding in general, we would see an exponential rise in financial institutions dedicated to crypto. Oh wait, we already do.

Source:  Slava Solodkiy

The reason that neobanks have taken off in Europe, but not in the United States, is because international money transfer can be priced at near-zero by digital challengers, pushing out the incumbents. And that matters in Europe in a way it does not in the US. A 3% credit card markup added to a 3% foreign exchange markup makes for expensive international travel. In the US, this is nearly irrelevant, which is why much more time is spent on personal financial management and roboadvising. But once we get to crypto, watch two things: (1) the use of cryptobanks in failing third-world economies, and (2) the toll booths along the crypto/traditional economy border. Hats off to Revolut for leading the way.

PAYMENTS: Billions for Zelle

Let's bring this payments story home. Payments is the life blood of the economy. It is the signifier of a positive utility exchange between economic participants. Value transfer over the blockchain is the chassis on which digitization will be built over the next 20 years. Digitization of an object, like a physical record into digital music, is not sufficient because it does not emulate the properties of human commerce. Truly digitizing payments and the accounting properties around them unlocks a creative space that was previously unavailable for technology growth.

It is still possible that the financial incumbent banks will win, the way they have subsumed the Fintech wave. See for example Zelle, the consumer payments app and inter-bank digital payments rails built by bank-owned company Early Warning to combat PayPal-owned Venmo. For the third quarter, Zelle announced 60 million P2P transactions worth $17.5B. In October alone, Bank of America saw 5 million Zelle transactions worth $1.5B from 2.5 million users. The trend is up. But for some context, Asia fintech claims 90 million users for Baidu wallet and 450 million users for Alipay (Ant Financial) as of 2016. And they are coming to the UKEurope and the US.

Can public cryptocurrencies, like Bitcoin, Ripple and Ethereum get there? Though scale continues to be a problem today, leading to Bitcoin developer infighting that could have existential consequences, answers are being developed. For a taste, dive into Vitalik Buterin's description of how a technology called sharding can help complex smart contracts function as fast as Visa transactions while leveraging crypto validation. To the uninitiated, the sound like science fiction. But isn't the whole thing science fiction anyway? So what does all this tell us about firms like Visa and Mastercard? That the value-added services, like consumer rewards and implicit credit insurance, are paramount. And that the core payments rails are under attack.

PAYMENTS: Alibaba's Virtual Reality Commerce

Source: CNN, Alibaba

Source: CNN, Alibaba

 If you want to look at retail and Fintech innovation, no better place to learn from than China. In a consumerism celebration called "Singles Day", Alibaba just sold $25 billion worth of merchandise. Last year, the company premiered a platform called Buy+ that rendered a mall in virtual reality and allowed customers to purchase items digitally. This year, the firm reportedly created an augmented reality game like Pokemon Go, where the users interacted with digital characters that led to physical shopping. Cute apps like that are already available in US app stores as well.

The Buy+ VR platform did not reappear this year, however. And despite the hype about the medium as an empathy machine and digital overlay on the physical world, there are still very high barriers to its adoption. See this account of a journalist trying to spend a day working in Microsoft's mixed reality operating system. The experience is clunky, physically uncomfortable, disorienting and tiring. Our current computer and mobile equipment is far better optimized for tasks, while mixed reality is still in its "toy" phase. Or see this view that even the entertainment VR industry will fail, because the expectations gap is too strong between the current hardware and marketing slogans. This stuff is not ready yet.

But, we know that companies like Alibaba and Tencent have some of the largest user bases and data sets in the world. Even in Fintech, payments subsidiary Ant Financial has 450 million users, more than the entire population of the United States. While Amazon's efforts in mixed reality are just beginning, understanding where the more experimental Asian tech giants are going in this space will be an early indicator of what is possible.

ROBO ADVISOR: Schwab Digital Wealth Takeaways

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We spent two days this week presenting at Schwab IMPACT, one of the biggest financial advisor conferences on the planet with 4,000 attendees in the ecosystem of a multi-trillion dollar asset manager. One presentation was on the effect Fintech was having broadly across wealth management, featuring slides with Neuromancer, Terminator and BladeRunner art, and concluding that AI will build the "first draft" of all work, and humans will finish it for human consumption.

The second presentation was on how advisors should leverage technology to drive efficiency and scale. We now know that roboadvice is not about customer acquisition, but about customer processing. This means robos are very good at creating operational efficiency, automating allocations, opening accounts, but terrible at attracting new customers. This is the learning from most of the private-labeled digital wealth platforms to the RIA segment. So in order to use roboadvice efficiently, advisors need to understand how to use social selling and online marketing to attract customers.

This is different from being a local expert in a town -- a strategy that supports 10,000 different small and mid-size firms today. Instead, it means competing in the attention economy against everything that distracts us, in world where people have only 5 financial apps on their phone. One of those apps may be the new Standard Chartered AI chatbot. We have also talked before about how people consume 11 hours of media in 9 hours of consumption by multi-tasking across several screens, The competition to financial services is not just other financial services, but Kanye West, Grumpy Cat and Snapchat. So financial professionals must develop a powerful voice and story that focuses on the things their clients want. After the session was over, one skeptic stopped by and said --  "But many people here have nothing to say that is differentiated". Indeed.

CRYPTO: We Need Real Crypto Custody

Source: Coinbase

Source: Coinbase

Sure, the crypto economy has valuable infrastructure innovation that will change the world. But "code is law" is just not enough, because code is full of bugs and humans don't know what they want. The finance people are right about at least one thing. And that thing is custody.

In today's world, owning Bitcoin or Ethereum means learning a mish-mash of technical information while risking accidentally losing all your money. And if you don't lose your money through technical error, or the endless ICO phishing scams, there's a good chance something else can go wrong. We know of the hack last year that pulled $150 million from the DAO project on Ethereum, which was reversed through the hard fork but to the creation of Ethereum Classic -- $1.7 billion value out of the ecosystem. Another $160 million just got flushed down the drain, with users locked out of their money permanently due to a mistake in the fix of a previous $30 million hack of the Parity wallet for the cryptocurrency.

We can keep saying that there's nothing wrong with the blockchain technology, and it is the infrastructure providers like the Parity wallet, or the Mt Gox exchange, or the smart contract writers for the DAO that made the mistake. But that is a cop out. Users shouldn't care about why they lost money, if it happens to them by no reasonable fault of their own. The answer is to build safe storage of these assets up to the standards of the traditional financial economy. Sure, we may lose some crypto anarchists in the process to Monero and Zcash, but we will gain the global economy. The good news is that this is indeed in progress. Coinbase plans to offer institutional custody to crypto funds starting at a $100k fee (ouch!). And see Alex Batlin leaving BNY Mellon to start Trustology at Consensys, delivering crypto custody as a service. This is what needs to be finished before we invent the rest.
 

FINTECH: Open China and Global Fintech

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

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

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

ONLINE BANK: Wells Fargo Roboadvisor and Neobank

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

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

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

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

CROWDFUNDING: Sculpting Crypto Maturity

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

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

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

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

CRYPTO: How to Value Bitcoin and other Crypto Assets

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

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

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

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

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

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

Source:  Woobull  (NVT)

Source: Woobull (NVT)

PAYMENTS: Amazon's Augmented Reality Commerce

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

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

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

Source: Amazon

Source: Amazon

Source:  Sam Snider-Held

SOCIAL MEDIA: Should our AI Overlords be for Sale?

Source: Twitter

Source: Twitter

Source: Facebook

Source: Facebook

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

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

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

BLOCKCHAIN: Rise of Crypto Capital

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

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

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