Downtime Double Standards -- Fortnite game praised for black-out, neobank Chime upsets 5 million customers; plus 12 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the recent Fortnite blackout and compare it to neobank Chime's embarassing down time, as well as explore the business model implication of what it means to be the social square where people hang out. Does Finance have such an equivalent? Maybe it is Venmo, crypto Twitter, or the credit unions. We also look at statistics behind influencer marketing, and how influencers have usurped the position of music labels. Perhaps banks should get ahead of this game too.

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.


Long Take

Fortnite is one of the most popular video games of 2018. It generated over $2 billion in revenue from selling digital goods, like virtual costumes, while being technically free to play. The top Fortnite streamer on Twitch earned $10 million last year for entertaining his audience by playing the game and sharing the video. And about a week ago, Fortnite had a global event — it was shut down and unresponsive for several days. That’s the equivalent of dozens of millions of dollars. American Neobank Chime just had a similar outage for millions of customers, and the press did not receive the news very favorably. But for Fortnite, this was a major win. Let’s jump into the Why.

I am going to be borrowing liberally from Matthew Ball’s thinking in talking about these events. If anything, consider it a summary. Fortnite has a funky history. Its software was written to be a shooting game, but instead it has turned into the equivalent of a place for hanging out (like a digital mall) for teenagers. Unlike prior iterations of popular games, which are fashionable according to genre (sort of how movies of a type get popular for an amount of time), Fortnite is less of a game and more of a place where games happen. Hundreds if not thousands of people show up at some 3D rendered island, also known as a map. There, they participate in a deadly competition to survive. But the rules of that competition and its features can be regularly updated by the development team. Imagine if Chess could host games of Checkers, or Tetris, or Minecraft on its board depending on what its customers wanted that month. This is the making not of a game, but of a place. This is the making of an attention monopoly.

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Do you think there could be a Finance focused business model like this? What is this place, where people just hang out and try out different features and ideas? Where could we socialize and consume financial products at the same time, then change our minds and reshape those products according to fashion? In large part, this community building and “social square aspect”, powered by Twitter, is what makes cryptocurrency and decentralized finance tick. There is a million people, give or take, who are playing this next generation Finance game. It was token offerings last year, now it is margin lending, tomorrow who knows — but this tribe is in it together for the adventure.

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Credit unions, I believe perform a similar function. Unlike banks, they are structured for the benefit of their members. These are either local members of a small town, or perhaps share some affiliation to an organization like the Navy and the Army. Could we re-engage our credit unions to be a place of exciting tech innovation and product development, dealing with community issues like local unemployment and the gig economy? Maybe, if those members were more engaged from an attention perspective. Another comparable is Venmo, with its social payments stream. The app has gone furthest in a product definition that marries the social square with financial information — but there is more to do.

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Anyway, Fortnite needed to add a new map, upgrade its infrastructure, and patch some bugs. Instead of letting people know in advance and warning its streamers not to waste time loading an unresponsive program — they didn’t. They turned the event into a mystery by packaging the downtime as something transformative and exciting, resulting even in a Forbes story about ... a game being down. People stared at a black screen for days, waiting for something to happen. This pent up attention and anticipation, however, will likely make up for lost revenue.

In comparing this to payments and banking, the immediate reaction is to say that *money is not a game*. Or that by interrupting service, your are destroying someone’s livelihood! It’s not frivolous, this money thing -- and I can’t argue with that. The downtime for Chime, a banking app that smooths income by lending out a paycheck advance, impacted 5 million customers and was caused by the integration with payment processor Galileo (a Stripe competitor). For some neobanks that offer free services, the economics of the business come out of the payments flow rather than from lending or banking fees. But saving money on infrastructure isn't always the best idea, it seems.

Still, some sort of financial downtime could be less damaging -- especially if financial apps were marketplaces rather than vertically-integrated commodities. Imagine if Chime went dark for 20 minutes, and on rebooting added a new investing feature with $10 in every account (just $50 million of marketing cost, which could be structured as a loyalty token). Or, imagine if, without taking down any of the payments rails, Visa replaced its website or app with an animation saying *Libra is coming* for 48 hours. Or what if, when launching their new roboadvisor, Vanguard replaced its site with a picture of a robot immaculately rearranging itself, with a sign up link. Or perhaps some embedded game that account holders have a limited window of time to solve, and if they do they win a $100,000 account? 

Do you think there would be press coverage? Will “digital users” get it? Yes, there is brand disconnect between what you expect from Vanguard and JP Morgan and what you expect from Fortnite. It partly comes down to the banks making too much money from manufacturing, and not needing to really engage or please the average consumer. If corporate or institutional business collapsed tomorrow, would we be seeing cartoon renderings of collectible stock trading bots and cryptic memes all over Instagram? Imagine if Citadel marketed itself like the Transformers?

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As another example from the entertainment industry, see this write up by Danilo Vicioso on the music labels. The core message is that on Instagram or YouTube, accounts run by 20 year olds focused on particular music niches can garner multi-million person followings. These attention footprints are 5-10x larger than the of the legacy music labels themselves. A digital music artist is better off paying $100 to promote her record to a YouTube channel, than to get signed and promoted in insider music industry magazines. More customers watch the video! More prospects look at Stories! Tower Records is no more. And so, as an artist, you have to be super clever to find the attention moneypots.

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This matters, because manufacturing music today is pretty much free. Thereafter, you can distribute to everyone in the world through Spotify. And even in the best case, you won’t make much money doing so — getting 1,000,000 million streams earns an artist just $8,000. That won't cover a ton of marketing. So when manufacturing and distribution both trend to zero, you should be looking at an equilibrium point that makes sense under new economics. New supply and new demand, not new supply and old demand.

For finance, it’s still a while till we get our moment of freedom. But if you know where to look, you can already see pockets of attention forming on LinkedIn, various Apple Podcasts, Twitter, and thousands of growth hackers figuring out where attention is underpriced. The answer could be surprising. For someone like Assurance, which sold its 700k monthly uniques to Prudential for $3 billion, massive direct website traffic came from Publishers Clearing House — a sweepstakes marketing company. Should finance firms be thinking about acquiring these underpriced social and gaming channels before the rest of the world finds out?

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Featured Interviews, Podcasts, and Conferences


Short Takes

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  • Circle to Spin Out Poloniex Less Than 2 Years After $400 Million Takeover. Poloniex is getting kicked out of Circle, and will have $100mm in funding from Asian investors. I suspect the main issue is US regulation, which doesn't always look favorable on crypto-native exchanges. Also, Circle recently killed its research business -- so maybe it's not Polo, but just increasing focus.

  • China’s Cryptocurrency Plan Has a Powerful Partner: Big Brother. I don't mean to write so much about China -- but the counterfactuals are so profoundly compelling. Imagine that instead of trying to shut down Libra, the US government nationalized it immediately and created the consortium from government entities, like the Treasury and the Central Bank. That's not quite what's happening in the East, but thinking about the difference is valuable.

  • Bitcoin Network Transfers $1 Billion ‘For Price of a Cup of Coffee’. At some point, the financial industry has to understand why this is cool, right? There are certainly counter arguments (e.g., "$1 billion" and "transfers" being mis-labels), but human belief is what makes any socioeconomic system work -- and this is a socieconomic system.

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  • China’s Tencent will seamlessly embed video ads directly into movies. I am guessing that this is a combination of machine learning for image detection and motion, plus some 3D rendered object or maybe a GAN generated image. In the West, we've been focused on fake videos and artistic style transfer. Tencent has commercialized the idea smartly.

  •  The Next Word. Where will predictive text take us? An interesting take from the New Yorker on the latest in predictive writing technology. The words feel compelling, while their meaning is an illusion. However, the busy work of describing charts in equity research reports, for example, could and should be automate away with robo-prose.

  • Destination AI for insurance underwriting. Linking this for the following number -- the global value of insurance premiums underwritten by AI have reached an estimated $1.3 billion this year, via Juniper Research. That's ... not a lot.

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The political limits of commerce -- Telegram's $1.7B US offering and NBA's $1.5B China deal; plus 13 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the boundaries that Telegram and EOS have crashed into in the US with recent SEC actions and lawsuits, and the melting of Facebook Libra. There have been a number of interesting regulatory moves recently, and the positive headlines of 2017 have become the negative headlines of 2019. How does SEC jurisdiction reach foreign institutional investors? We also touch on the $1.5 billion NBA distribution deal now on the fence in China, and how US companies are under the speech jurisdiction of a foreign nation. How does China reach American protected speech? Through pressure, boycott, and economics.

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.


Long Take

There are 7.5 billion of us. That's at least two Facebooks worth of people -- a lot of online trolling and flame wars. And more importantly, it is a wide range of political and social constructs in which we participate. Being a single unit of a human being myself (at least I am told) allows for a pretty limited view of the systemic web in which we live. We can strive for knowledge and clarity, trying to research and understand the broader containers to which we belong. What is your tribe? What is your corporate animal? What is your regional hub? What is your nation? What is your country? How do these machines click together, and at the level of the superorganism, what do they want? What tools do they have to effectuate their desires?

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From my seat here, all I can see are the signalling flags of different colors and stories. Sometimes these are logos of start-ups or investment banks. Sometimes they are political parties, or nation states. In the chart above (showing political regime across the last two centuries under which our species has lived), I used to be in the red bucket, and now I am in the green one. It is easier to write disobedient Fintech newsletters on capitalist social networks from this side, and I like that. But let's not forget that the webs of power and constraint are embedded into the fabric of reality all around us, and that these webs are legion.

You don't have to go deeply into politics or philosophy to understand our animal conflicts. Most individuals want to pursue their wishes freely, without much regard for others. In some political narratives, abilities and rights are endemic to nature (i.e., top down). For example, you deserve freedom from bodily harm, because that is a right bestowed on all. In other narratives, these rights are constructed by social agreement and joint contract (i.e., bottom up). For example, people shouldn't die from the flu, and therefore have a right to healthcare. Check out Wait but Why for a deeper treatment on these overlapping rights bundles.

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The rub is that there are 7.5 billion vectors of countless imagined freedoms, each bumping into each other. Just trying to calculate the factorial of 7.5 billion, which is the number of potential interactions between us humans, breaks the calculator. Add into this all of our groupings, allegiances, corporate rights, and other legal baskets -- and everyone is always stepping on everyone else's foot. Collective agreement, cooperation, and governance is the only path out of the mathematical quandary. Thus we delegate our rights and obligations to systems and their regulators, and enshrine past decisions into law under the principles of stare decisis (adhering to past court decisions). It's generally OK. We all agree that selling fraudulent securities Bernie-Madoff style is bad for business.

In Fintech and Crypto, the 2017 disruption happened faster than our regulators could respond. Using blockchain platforms, about 6,000 different companies across the world launched $10 billion of financing issuances on the open Internet. They generally did not go to investment banks, or get registered with the national authorities, or fold into the growing crowdfunding sector under the JOBS Act. Nope. They just put up a website, made some broad representations, and listed their tokens. Many did not know they were lacking the rights to do so, while some were advised to seek novel structures (e.g., the SAFT) or jurisdictions where cowboy behavior was more condoned (e.g., Malta). But boy, are the regulators responding now!

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Let's also be clear about who matters in the world of capital markets, whose feet have been stepped on by this activity. America, China, Japan, Europe. China had an advanced warning from its Bitcoin mining industry, numerous crypto exchanges, and 5,000 peer-to-peer digital lender scandals. Like an immune system on hyperdrive, it responded by shutting down non-condoned activity. But it also liked the technology -- as an example today, China Construction Bank has over $50 billion flowing through its non-public blockchain. Japan and Europe saw a growth opportunity, squeezed as they are between the Dollar and the Yuan. But the United States turned on its stubborn machinery, and the results are starting to trickle it.

One of the first firms in the cross-hairs of SEC action was Kik, a Canadian messaging app that saw the promise of micro payments and chat combined. It raised $100 million by selling a token, of which $55 million was bought by US investors. The SEC alleged that this was a sale of unregistered securities, and despite initially planning to fight the SEC in court, the tech company is planning to shut down its messenger, fire 80% of its people, and focus on the crypto currency. I can't help but be reminded of the music industry trying to jail teenagers that were using Napster in college dorms.

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Next up is ICO Box, which is an online investment bank that helped ICOs package up their investment materials, create promotional packages and prices, and launch websites that collected payments for tokens. The site was never registered with American regulators as a broker/dealer or Registed Investment Advisor, and has roots in Eastern Europe. ICO Box also ran its own $14 million ICO, which was distributed to 2,000 investors. The SEC is pursuing a lawsuit against this company -- so there is still legal determination to come from the courts. But it is notable that the American regulator has reach to target this company through its exposure and sale to US investors.

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Arguably the biggest and most absurd ICO ever was EOS, which lasted a full year and collected over $4 billion in proceeds to build an Ethereum competitor. Of course, it used Ethereum to do the raise -- imagine if Microsoft fundraised $4 billion worth of Google stock to launch a competitive search engine, and then shorted Google stock for the trouble. The company behind the offering, Block.one, has just settled with the SEC over the purported sale of unregistered securities for $24 million.

This is a pittance relative to the overall amount, less than 1% of the total raise. Under other punitive regimes like GDPR, fines are closer to 4% of the relevant metric (annual revenue in that case). But, we can make the math work out a bit better by assuming that only 20% of the raise went to American investors, and that the market value of the raised amount (i.e., ETH) fell in the markets by 90%, which would mean the $24 million fine was 30% of the current remaining total -- a bit more harsh. My favorite bit is that EOS actually (1) blocked American IP addresses from the raise, and (2) put in the legal documents a clause from the signatory representating that they were not US investors. But you know, they also bought an advertising billboard in Times Square.

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Lastly, the SEC has just gone after Telegram and its TON blockchain. Telegram is like Kik, just bigger, more privacy focused, and run by Russians. The project raised $1.7 billion in two tranches, most if not all of which (I thought) went to large, institutional investors (like venture capital firms Benchmark, Sequoia, and Lightspeed) or foreign exempt persons. The SEC is preventing Telegram from launching its product and distributing tokens to investors, who, in theory, can then sell them into the unsuspecting public markets in the US using crypto exchanges.

The GRAM token is functional, like ETH within the Ethereum ecosystem. Preston Byrne, one of the deeper legal thinkers in the space, thinks that if launched today the Ethereum ICO would be categorized unfavorably too. But the SEC has already indicated that ETH is not a security, and the CFTC has just declared it a commodity. Does the regulator think that TON was using the private placement as a mere instrument to then sell unregisted securities to the public? Let's see what the courts think -- but the supply chart below now seems unlikely.

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Last, but not least is Facebook's Libra. Given the recent public response, and private pressure from the American regulators, Libra has seen a number of high profile defectors including PayPal, Mastercard, Visa, eBay and Stripe. You can read a more detailed take over at TechCrunch, from whom I have borrowed the graphic below. What is worth noting is that the *financial* companies are leaving -- the ones that are already regulated as money transmitters and have a real business to lose. What's left is the attention economy footprint of Uber, Spotify, and Facebook, sponsored by future finance VCs like USV, Ribbit, and Andreessen. Staking (i.e., putting capital at stake to back a currency and generate interest) may be a developing business on Ethereum. But it is not likely to be allowed by the US regulator in US dollars, without a banking license and traditional oversight, no matter how idyllic and noble your mission to save the unbanked!

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I've listed a number of projects and companies that thought they had a right to pursue their particular economic freedom, but actually didn't. They didn't because they were trying to do business with the residents of a particular jurisdiction, which had already congealed a set of laws and practices out of the interactions of the various people and organizations in its sovereign territory. What Kik or Telegram want to build is cool, and I like it (some of it at least). But their circle of rights bumped against those of the American state, uninformed consumers, and financial professionals who had chosen to comply with the regime for decades. That's not to say the line can't or won't change -- I have a strong belief that the line is always shifting. But the friction is there, because we do not float in a vacuum. Our space is littered with other people.

Take an example that is maybe more difficult for Americans, where Western values cut in the opposite direction. The NBA has gotten into trouble after Daryl Morey, the general manager of the Houston Rockets, tweeted support for the Hong Kong protestors. After immediate pressure from the Chinese, Morey apologized and deleted the tweet. The NBA at first also condemnded the tweet, as broadcasters like Tencent blacklisted NBA content from being played to the Chinese audience. The $1.5 billion dollar commercial relationship matters, after all! But American politicians then accused the organization of "retreating" and failing to protect the freedom of speech of a its employee. So the NBA swung the other way, and came out defending Morey and American values. Now, if you search Alibaba or JD.com for Houston Rockets merchandise, the sites will come up empty as it has all been purged.

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Such treatment of third rail issues is not an isolated incident. The video game company Blizzard just punished a Taiwanese gamer participating in its tournament when he showed pro-Hong Kong support by banning him and taking away the prize money, then re-instating the prize money, but continuing to critisize his speech at the event. Blizzard's parent company is 40% owned by Tencent. Joe Tsai of Alibaba penned a post I found helpful in relating to the reasons why sovereign integrity is so important to the political discourse in China -- from colonial history, to military action, to national pride. Yet aren't these commercial boycotts and public pressure on corporations analogous to SEC actions and lawsuits against foreign companies?

You would think private speech on Twitter wouldn't fall under Chinese jurisdiction. But speech anywhere and everywhere that China can hear has come under its domain. The more connected we all become through the veins of technology, the more difficult these issues are to navigate. Maybe the crypto world feels the same way about their money! Doesn't Citizens United v. FEC tells us that money is speech, anyway?

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Featured Interviews, Podcasts, and Conferences

  • Are banks losing the brand war to tech firms? Check out my podcast with American Banker's Penny Crossman. We don't buy Tylenol from the Tylenol store. Why do we buy Wells Fargo bank accounts from Wells Fargo?

  • From Crypto to Decentralized Finance. Another great podcast with Will Beeson at Rebank: Banking the Future. Check out our conversation and subscribe here.

  • Digital Asset Strategy Summit, I've joined the speaking faculty at this great event for asset allocation and financial advisors docused on blockchain based assets, October 20-21st in Dallas. If you are interested in attending, let me know by email as I have limited passes. Only asset managers, pension funds, registered investment advisors, and family offices please.

  • Blockchain Insider. Had a great time with Todd McDonald of R3, Thomas Zeeb of SIX exchanges, and Simon Taylor of 11FS discussing the latest blockchain developments.

  • #ItzOnWealthTech Ep 25: How Software is Eating Banking with Lex Sokolin, ConsenSys. A fun conversation with Craig Iskowitz, covering everything from digital wealth, to artificial intelligence, to blockchain based assets and the evolution of banking. Highly recommended!


Short Takes

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  • Apple Glasses Set for Early 2020 Launch (Report). Without Steve Jobs, Apple has had trouble doing new platforms. Hard to say that Apple Watch is a smash success. I for one am pretty interested in trying out their AR glasses, and am optimistic about the use case.

  • How IoT insurance is helping Groupama reduce claims and accidents. Interesting IBM article about adoption of telematics for car insurance in Italy. Is a 20% insurance discount enough to subsidize people putting a tracking device in their car? I am still not clear on which form factor will win -- a dedicated telematics device, an iPhone, or the smart car itself.

  • Holoride Officially Launches Immersive In-Car VR Experience. Cute. The headset can be connected to data about your car, like speed, and then change the rendered experience to match (e.g., speeding up your VR car in response to your real car). This is also an interesting two screen problem -- you may be in a smart car, which has its own operating system, but then your VR headset wraps around your head with yet another operating system.


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Fintech Price War -- Goldman's $1.3B Marcus burn, Neobank £200MM loss, ETrade's $75MM trading fees; plus 14 short takes on top developments

Hi Fintech futurists --

In the long take this week, I dig into the price war that has been started by Fintechs and is now extending into traditional industry. Goldman is losing $1.3 billion on Marcus, trying to build a Fintech leader. Etrade is going to lose $75 million from cutting trading fees to $0 to keep up with Robinhood. Revolut is losing £35 million on £60 million in revenue, with another £140 million burned by Atom, Monzo, Tandem, and the rest. Until markets become rational again -- from interest rates, to public valuations, to private equity -- the bonfire of technology burn will shine ever brighter.

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.


Long Take

Spend enough time talking with financial operators, and you get the 360 degree view of what is happening in our industry. Talk to a bank CEO, an innovation officer, a venture capitalist, and a Fintech entrepreneur. Do this 300 times. Listen to the public markets, listen to the private markets, gaze at the crypto markets. Watch the blinking lights, until the macro pattern emerges. Human belief, pumping like blood through the organs of our economy. Don't listen to the persuaders (like me), but look instead at the data. What are the results of our collective experiments?

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We are like the hungry at the all-you-can-eat buffet. In the beginning, there is not enough! Let's democratize access to food; to music; to transportation; to healthcare; to finance; to payments; to banking; to lending; to investing. The billions in institutional capital across universities, pensions, and sovereigns are delegated to smart portfolio managers. The day before yesterday, it was allocated by small cap stock pickers (hi Warren!). Yesterday, it was the alternative managers of hedge funds and private equity. Today, it is the trading machine and the venture capitalist. Tomorrow, it is the cryptographic artificial intelligence.

These delegates fund our all-we-can-eat Uber, WeWork, Revolut, SoFi, Coinbase buffets, looking for investment returns. We enjoy the fruits of this labor, don't we? Price competition drives the costs down, and technology drives efficiency up. Everything is free! And still, we are unsatisfied. This time, because we are too full! There are too many banks, too many payments channels, too much lending, too much trading! You know what happens to businesses with large fixed costs (e.g., Airplanes or Compliance) and large volatile variable costs (e.g., Oil Prices or Interest Rates) when margins get thin and shocks hit? Bankruptcies happen. I'll leave it to you to plot interest rates against bank failures -- that's the variable part that has been artificially depressed for a generation.

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Forgive me for being cryptic. What I am really talking about is the funding, proliferation, and pyrrhic victory of the Fintech neobanks and roboadvisors. A great feature in the Financial Times just highlighted the economics of the UK leaders in the space. Twitter is ablaze with early entrepreneurs talking about the correctness of the theme, and the importance of market timing. I'll reproduce a few of the charts below, so we have a common factbase.

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Generally speaking, from a deposit point of view, these are still all small businesses at £1 billion in assets (e.g., Betterment manages $20 billion). But they have done interesting and different journeys to get to consumer prominence. Some leaned into pre-paid cards before getting a banking license and a chance to collect deposits. Others have moved into mortgages, or bought struggling traditional banks. Several have multi-million user bases, capturing large swaths of young consumers and their mobile obsessions. Neobanks don't tend to be the primary banking relationship (which benefit from getting the direct deposit salaries); instead, these are second or third relationships, for everything from travel to easier credit.

The interesting bit in the FT article is that these companies claim to no longer be losing money on the marginal customer. That's a big deal from a venture perspective. Still, the economics are heavily subidized by the "delegates" I mentioned previously. Revolut may generate almost £60 million in revenue, but loses £35 million for the pleasure. Monzo and Starling are not much better. This truth is a stark contrast to the story-telling spin of the founders you usually encounter. When do these companies reach the scale at which they get to break even? When you ask this question to Uber and WeWork, the answer may be -- NEVER.

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I am borrowing an analysis from ARK Invest above, which shows the market valuation of a user in various financial digital experiences, including those of the banks. There are several ways to read this chart. The first is that the Robinhoods and Monzos of the world are 10x overpriced relative to the payments apps. I can sort of buy this -- though money in motion is way easier to capture than money at rest. The second is that venture investors think a finance user is worth $1,500 in a digital bank. Given that a few thousand dollars is the average user balance, this is a pretty insane valuation.

Last, one can spin the higher $3,500 incumbent bank digital user valuation as "room to grow" for Fintechs. That would be overly simplistic. What is happening at the large banks is that a digitizaton process is converting traditional customers to digital ones. This means there will be more incumbent digital customers effortlessly, seeing rapid growth per year -- outnumbering the organic growth the Fintechs can generate. As a result, those high per-user figures will be trending down over time. And second, the average account balances at banks tend to be 5-20x larger. As a result, the venture capital tendency to look at eyeballs and users, rather than assets, is leading to some intense non-economic decisions.

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So what's the net effect? A price war has begun, and it will not end until interest rates have been raised, a recession has hit, venture capital starts drying up, traditional banks get their revenue source back, and the Fintechs go bankrupt one after the other. Look again into the history of the airline industry, and what price competition has done historically. In our world, eTrade, Schwab, Interactive Brokers, J.P. Morgan and the rest have responded to Robinhood by matching is $0 price point. As a result, eTrade will lose out on $75 million in commissions. Revenue generation will likely shift to invisible monetization, like it has done with the rest of the web -- selling order flow, data, analytics, cash sweep, and adjacent services.

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In another fascinating article from the WSJ, we can get a closer look at the Marcus story. The quick takeaway is that -- as Goldman worked to build the Fintech firm of the future -- the investment bank has lost $1.3 billion on the experiment. Maybe that's just the price of admission! Maybe Deutsche Bank needs to fire 18,000 people and spend $13 billion on technology to become positioned for the next decade.

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As an entrepreneur raising $500,000, it can be frustrating to hear that your digital bank is a bad idea from venture capitalists managing a few hundred million, over and over again. It can be frustrating going to corporate venture arms of the Wall Street titans, and getting rejected because these ideas are not part of the quarterly business plan. Some entrepreneurs could start thinking the ideas are bad, or that their money management audience knows better. What you are missing is that your ask isn't big enough! You are trying to lose only a few million. Try a few billion.


Featured Interviews, Podcasts, and Conferences

  • From Crypto to Decentralized Finance. Another great podcast with Will Beeson at Rebank: Banking the Future. Check out our conversation and subscribe here.

  • Digital Asset Strategy Summit, I've joined the speaking faculty at this great event for asset allocation and financial advisors docused on blockchain based assets, October 20-21st in Dallas. If you are interested in attending, let me know by email as I have limited passes. Only asset managers, pension funds, registered investment advisors, and family offices please.

  • Blockchain Insider. Had a great time with Todd McDonald of R3, Thomas Zeeb of SIX exchanges, and Simon Taylor of 11FS discussing the latest blockchain developments.

  • #ItzOnWealthTech Ep 25: How Software is Eating Banking with Lex Sokolin, ConsenSys. A fun conversation with Craig Iskowitz, covering everything from digital wealth, to artificial intelligence, to blockchain based assets and the evolution of banking. Highly recommended!


Short Takes

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You don't get to cheat just because you like to win -- on WeWork, Politics, and Fintech

Hi Fintech futurists --

In the long take this week, I recap the industry temperature across my last 10 industry conferences (from SIBOS to DeFi). A realization bubbles up about stagnation in Fintech innovation and the gradual maxing out of the private venture markets. What happens when private and public valuations do not interoperate? What happens when the financial world is like WeWork, Trump, and Brexit? And what path takes us individually out of the labyrinth?

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.


Long Take

This last month has been quite the trip. I've bounced around ten different conferences, ranging from small entrepreneurial affairs to gigantic, industry-wide banking battlegrounds. While not a statistically significant sample, having several dozen conversations across the industry can give you the temperature on where we are in the economic and innovation cycle. And while it's been nice to refresh the slides and kick-off a story telling tour, dad-jokes included, there is also a change in the air. WeWork, Uber, Trump, Brexit, Facebook. There is explosive powder below the deck, and we are playing with matches.

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The Conferences

Feelings and emotions at industry events matter. The narrative at the more traditional conferences is that Fintech innovation is just incremental improvement, and that blockchain has struggled to bring production-level quality software and stand up new networks. This isn't strictly true -- see komgoSIX, or any of the public chains themselves -- but the overall observation does stand. Much of Fintech has been channeled into corporate venture arms, and much of blockchain has been trapped in the proof-of-concept stage, disallowed from causing economic damage to existing business.

To me, this is like denigrating Real Player for how it was always buffering, and not understanding that the future of the Web was to become video. Bandwidth, ad networks, and HTML standards were missing, but the concept was right. Similarly, if considering existing capital markets value chains, we all know that post-trade capital markets should be faster and more efficient, mutual funds should be packaged through shared workflows and token baskets, collateral can be managed with a single engine. The SIBOS crowd knows this too, but the road to get there will take a meaningful amount of time. And it is unlikely such a road can be taken only on the private, permissioned networks that do not inter-operate with the public ones.

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At events like RoboInvesting and Lendit, the core European Fintech events for somewhat mature themes like digital lending and roboadvice, the new entrants I saw were vendors selling technology integration services. Not high-risk companies with fresh ideas for the world, but rather practical companies trying to make things "real". This implies to me that the audience for these conferences has shifted from early stage pioneers, to large bank decision makers growing their innovation programs. In other words, nothing dangerous is going on here.

The data for Fintech funding somewhat aligns with these observations. I'll pull in a few sources below for variety, but generally we are seeing a little bit less activity this year than last year. There is no Ant Financial to shake things up, only emerging decay across the markets (which I'll shortly address). Payments and Lending continue to power the funding engine, with VCs like Andreessen see lending as the key to the heart of the consumer. Of course! It is easy to give money away when it is cheap -- and once gone, it is hard to earn it back.

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The most imaginative stuff in finance is happening in the DeFi markets. Take for example the launch of the Actus Protocol, aimed at making composable, programmable financial instruments. Or the recent launch of Lira by eToro, an open competitor to DAML that can allow for the writing of any financial instrument on Ethereum. Or the API library of Defire, a connective tissue for the current set of protocols issuing loans or managing money through DAOs. As another theme, I also like what is happening with mixed reality and insurance claims assessment (see the Short Takes section), but that is more middle office than manufacturing. And making manufacturing free is as close to being dangerous as you can get.

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The Reality Check

It is 2019, not 2009. As a financial industry, we cannot pretend that tech companies have not entered finance. They have, and they are winning. How do you access your bank account, if I may ask? By having artificial intelligence scan your face and open up the iOS or Android operating systems on your phones, with finance as a feature. How do you pay? Through Google, Apple, PayPal, Stripe, or some other tech company connecting modern commerce with Visa or Mastercard rails. How do you lend, borrow, or invest? Who hosts that data? Who underwrites your loan? Whose machine learning software is being used? Who is necessary?

It is 2019, not 2009. As Fintechs, we cannot pitch innovation and cost-cutting without understanding that people have been doing this for decades. How many times must venture investors write Series A, B, C, D, E checks into early stage companies on the premise that something or other is better optimized 20%? The time for incremental change as disruption has passed. Fintechs are not underdogs; they are asset allocation bets arbitraging the pricing differential in the venture markets and public financial markets. You fund your company on 10x revenue, you buy your revenue at 5X EBITDA. How long will this arbitrage go on? How many dimes can entrepreneurs pick up before the game runs out?

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There is friction and then there is fall from grace. WeWork's unbridled rise upwards in the private markets has met the flames of the public market sun. The former CEO had taken every advantage available -- from controlling the board through a high-voting share class, to a variety of self-dealing via real estate assets and intellectual property, to an external messaging that has become too much even for a company burning billions of dollars. Such advantages are not personal exceptions, they are structural outcomes. When demand from venture outstrips available opportunities, hyper-competitive behavior remains unexamined for quality and rewarded for results. The ends justify the means.

So why then is WeWork able to fire Adam Neumann, cut his top 20 lieutenants, and start to deconstruct the business into something that more resembles a functional company? Because it is dead otherwise, burning cash with wings on fire. Super-organisms must survive, even if it means lopping off their own appendages. The distribution of gains from company building matters. Markets can clear at a number of different equilibria, but that does not imply those equilibria are equally Pareto efficient. Markets shouldn't clear in favor only of Adam Neumann. This is especially true as we make public and private equity increasingly interoperable.

Fred Wilson, arguably one of the most influential venture capitalists of our generation, just penned a post suggesting the venture industry stop chasing unicorns and instead look at company profitability as a metric. To go public today is to lose 50% of your private valuation. Why? Because the public markets are making their allergy to things like WeWork known, and that means nobody gets paid. Early employees do not get paid. Venture capitalists do not get paid. Asset allocators working at pensions funds do not get paid. And you can forget about the pensioners.

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I would make the same argument around the Trump impeachment inquiry related to the use of Executive power to undermine a political opponent, or Boris Johnson's loss in the UK Supreme Court after trying to shut down the Parliament to achieve a hard Brexit. Yes, short term tactics can be incredibly successful. But we live in a long term world, powered by the scientific method and a global infrastructure for information transparency. You don't get to cheat just because you like to win.

The World Economy and its stock markets also like to win. Have they been cheating all this time too? Consider: Negative Rates, Designed as a Short-Term Jolt, Have Become an Addiction, or What could tip the bond market equilibrium? Central bank interest rate policy has been designed to create the impression of growth, and it worked. But now we are backed into a corner where fragility is baked into the system, and the safety buffer has been boiled away. We are staring down a trade war, massive geopolitical risk, and exhausted private and public equity markets. What can you, a single person do? The answer is right there, in front of you.

Build something real and share it. Find the truth and say it. Turn down the volume from the world, and turn up the volume from your True North.


Featured Interviews, Podcasts, and Conferences

  • Blockchain Insider. Had a great time with Todd McDonald of R3, Thomas Zeeb of SIX exchanges, and Simon Taylor of 11FS discussing the latest blockchain developments.

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  • Digital Asset Strategy Summit, I've joined the speaking faculty at this great event for asset allocation and financial advisors docused on blockchain based assets, October 20-21st in Dallas. If you are interested in attending, let me know by email as I have limited passes. Only asset managers, pension funds, registered investment advisors, and family offices please.

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Short Takes

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Facebook's Supreme Court is like Compliance in Banks, or Chinese Communist Party entities in joint ventures; plus 13 short takes on top developments

Hi Fintech futurists --

In the long take this week, I dive into how the governance issues around Facebook's oversight board and WeWork's struggling IPO are leading to the creation of political bodies in private companies. We talk about Chinese Communist party panels as one example of a solution (!), as well as why banks like to call themselves technology companies. Exploring the macro-economic data around inequality provides a nice starting point for thinking about the next decade of story-telling in finance, which I see as increasingly open and free, literally.

The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.


Long Take

I've seen a whole bunch of headlines this past week about how Facebook is launching its version of the "Supreme Court", as if that were an app feature. The oversight board is meant to police controversial content decisions, and have the power to overrule Zuck's judgment on political matters. Its charter is drafted as if Facebook's 3 billion users were citizens of an Internet nation. Add to this the insanity over WeWork's failing IPO plans, where the CEO has been personally named in the amended filing documents with clear checks on demonstrated abuses of power. We are drifting into a Twilight Zone episode where modern corporations act as if they were feudal states run by divine kings negotiating with their nobility over a Magna Carta. Which is actually sort of where we are.

So this got me thinking about the broader concept of narrative and the zeitgeist, which got me thinking about our elections and political disasters, which got me thinking about the direction the financial wind is blowing. And the productive conclusion of all this thinking is simple: you can see how the language of business is changing, and what values people are starting to articulate to be relevant in the modern world. These are the values around which finance will coalesce over the next decade. So learn the story now, and spread the word.

But let's step back. I want to point you to two sets of background reading; both I have mentioned before. The first source is Epsilon Theory, which is by far the best blog about macro-economic investing and understanding the Zeitgeist I have come across. To quote liberally: "The zeitgeist is the macro scale of our social lives as investors and as citizens. The zeitgeist is the long-term ecosystem of narrative colonies. It is the spirit of an age, the driving ideas of social interaction, active over decades. Although never seen and hardly felt at the human scale, the zeitgeist is exuded by a society, like placards held up by a stadium crowd."The Zeitgeist is what I believe you believe, and what you believe I believe, and what we each believe everyone else believes we believe. It changes all the time -- if your time scale is centuries or millennia, rather than next quarter's cashflows.

The second source is Wait But Why, again. One of the recent posts discusses how a population within some polity, or some organization, is a collection of humans cohering into a super-organism. This super-organism is subject to evolutionary pressures and therefore must survive through macro competition. We all recognize this as Capitalism -- as Wealthfront vs. Betterment, Goldman vs. JP Morgan, and Apple vs. Google.

But some super organisms have an internal operating system, or a brain -- depending on your preference for a technological or biological analogy -- that allows them to update their values, thinking, and future action. Such dynamic organizations can outcompete static ones. This is true both for corporations fighting with each other for markets, as well as for nation states fighting on the global stage using ideas and soft power (e.g., Hollywood movies, Russian propaganda bots). Below, you can see a visualization of one such political topic arranged as a distribution of the population's preference, shifting over time to modern values. Nothing is sacred -- not even the sacred things.

I bring this up to queue up the following: our collective conversation changes in response to underlying symptoms. There are many underlying symptoms that have led to the Trumpian and Brexit outcomes, but let me just highlight the clear economic one. In this case, I quote from Odin River's newsletter. Synthetic interest rate policy -- unnaturally low rates for over a decade -- have led to inflated asset prices and increasing inequality. The fact that over 20% of the global bond market has negative yield was an eye opener.

The math is easy. In a discounted cash flow model, which is the backbone of corporate finance and stock prices, you divide profits by the discount rate to bring the value forward into the present. If your firm makes $100 next year and interest rates are 10%, then today this is worth $100/110%, or about $91. If rates are 1%, then it is worth $99. We just made 9 bucks! And as time horizons get longer and terminal values get bigger (e.g., WeWork), that interest rate sure makes a fat difference. Wealthier people tend to hold more capital market assets, like stocks, and their nest eggs grow even if their income doesn't. Practically, there is also demand for higher rates. As a result, large investors put money into private markets and speculative opportunities. These private opportunities (e.g., WeWork) stay private longer, because there continue to be large investors who want a bite of the apple. Since these opportunities are reserved for accredited investors, and generally people with time and not three jobs, returns naturally accrue to people in the higher wealth bands.

Let's just look at a chart.

Political bodies have reacted by changing the story from a neoliberal narrative of democratic capitalist progress, to one that is re-oriented around global, open, socialist populism vs. nationalist, protectionist, xenophobic populism. The winning political position today is how to benefit the many rather than the few -- with the disagreement being primarily about who counts as the "many".

If you have been in Fintech over the last decade, you actually are complicit in this narrative change! I know, because I did it too. We used to say at NestEgg and AdvisorEngine -- "democratize access to investing". I am sure LendingClub wants to democratize access to lending, and Venmo wants to democratize access to payments, and Revolut wants to democratize access to banking, and Lemonade wants to democratize access to insurance. And of course our friends at Facebook are on the same story train, wanting to democratize access to financial services more broadly.

I am not saying we are all insincere in these aspirations. But I am saying that this positioning comes from a place of current social consciousness, caused by the economic outcomes derived out of the policies of prior governance models. Something though, something is a bit off. The cracks are showing. In his great Techonomy op-ed, David Kirkpatrick links the (structurally caused) endless supply of venture money with both (1) an unrealistic subsidized model of consumer benefits, highlighted by Uber, Airbnb, WeWork and other loss-making giants, and (2) the messed up incentives those companies operate under, creating the feudal outcomes that I described in the beginning of this post. In order to create massive unicorn outcomes to support the asset bubble in which we operate, the "game" of building companies requires management's tranformation into a genius-Steve-Jobs-level-founder. This has catalyzed increasingly sharp behavior on behalf of executives. It is no surprise that sharks emerge out of the Shark Tank.

What *is* somewhat surprising is that tech companies think they are as sovereign as countries. Being motivated by the drive to increase shareholder value, and the heft of your own wallet as a side effect, is not the same thing as governing citizens and thinking about their welfare. So it is alarming when pseudo-governmental entities are formed as appendages. Or that government entities actually see large corporations as such. Take for example the following: ECB executive board member Benoit Coeure says that the arrival of Facebook's putative cryptocurrency Libra has been a "wake up call" for central banks, and that public authorities should step up co-operation on the development of central bank backed digital currencies. Why is the ECB motivated by the top-down implementation from Facebook, but does not care about the bottom-up democratic adoption of Bitcoin and Ethereum? Is it a sovereign greeting its own kind?

I am also reminded of the practice in China to have Communist Party committees as part of the governance framework of private business. Perhaps such symbiosis is actually the correct answer. Imagine if democratically elected and governed political bodies were infused into our largest banks and corporates. This would be the next step after what the global CEO-led business roundtable (previously led by Jamie Dimon of JP Morgan, now led by Walmart) had announced a few months back -- a commitment to include customers, suppliers, employees, and communities as stakeholders, in addition to just maximizing shareholder value. Words are nice, but giving up power makes it real. I mean, I know this isn't the right idea, but at least we should talk about it!

Banks have been saying that they are technology companies wrapped around balance sheets ever since public company valuations for tech became embarassingly better than those in finance. Sorry for pulling up P/E ratios below rather than something more rigorous, but you get the point. Financials are not sexy -- they are utilities and commodities. Silicon Valley tech firms, on the other hand, tell a story that correlates with the growth of software and our attention getting sucked into mobile phones. And we all have mobile phones.

But banks and finance firms are far more like the Communist party example above than the tech companies, because they already have an embedded government appendage called Compliance. This is why, while Facebook is getting beat up for trying to create Libra, JP Morgan, Wells Fargo, and now even the not-so-modern asset manager Franklin Templeton are launching functional crypto currencies without much ado. The only thing that banks have no figured out -- nor have the Fintechs to be honest with you -- is how to tell the story the right way for how our political climate has shifted.

Here is what they need to do in order to outcompete, in the sense of the macro super-organism, the venture-capital backed attention arbitrage machines powered by our data. The answer is simple, and it is rooted in the language of the political debates across the world. Just say this:

We are all aggrieved. Our data has been stolen. Our financial wealth has stagnated. We are victim to mistaken economic policy. Robbed by inequality and monopoly, we now take the power back. We use software that is open source. We contribute to the commons. Financial products are free. Markets are open. Truth is carved into the stone of blockchain. Society's warts are purified in Artificial Intelligence. Shared aspirations are projected into Augmented Reality. This is our song, and we do it for you.

At least it sounds better than "we make money for our clients".


Featured Interviews, Podcasts, and Conferences


Short Takes

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