Shifting from Institutions to Retail Clients -- NYSE direct listings and Central Bank digital currencies; plus 12 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the similarities between the NYSE building out direct listing products to augment or replace IPOs, and Central Banks considering launching consumer-facing digital currencies. In each case, the value chain of the respective financial sector is compressing, as the underlying manufacturers of financial product move closer to the consumer. I also highlight how a few blockchain-native alternatives to trading and rebalancing software are developing, and the reasons to get excited about things like Set, Uniswap, and Aragon.

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

A core thesis I've held for a decade now is that personal finance -- what many in the industry call "end clients" -- is the tail wagging the dog. If you are a multi-billion dollar portfolio manager at KKR, or a multi-million dollar trader at Morgan Stanley, this might not be super obvious yet. The machinations of the high finance factory, with its blinking lights and massive bonuses, still feel like the primary activity in the industry. Once upon a time, so did the whirring of a newspaper printing press. But the examples keep piling up, and there is a way to draw a line that ends in an arrow, which points the way.

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Take for example, the offering of shares to investors. The New York Stock Exchange is working on making direct listings more easily available to companies that want to go public. In short, more venture backed companies have been staying private longer, the average IPO size and cost of issuance have been going up, and the public/private market off-ramp is broken. Traditionally, investment banks intermediate private companies going public by building "liquidity" in the form of a willing book of public investors. Investor types include mutual funds, hedge funds, other banks and asset managers, and ultra high net worth investors. Maybe even some single-digit millionaires, grudgingly for the bankers of course.

It's a type of permitted market manipulation, where investment bankers often price the IPO at a discount, and the IPO purchasers often get to experience a "pop" in the price. Often -- but increasingly not at all. The breakdown of this carrot is causing private companies to re-think how they go to market. And by private companies, I mean venture investors at the top of the equity captable, like SoftBank. The failures of WeWork and Uber in the public market are key data points for this mental model.

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Anyway, the large stock exchanges including NYSE and NASDAQ are exploring direct listings, which both Spotify and Slack recently used. What's a direct listing? To quote the Bloomberg article -- "Under a direct listing, a company makes its shares available for trading on a stock exchange without the formalities of a traditional IPO. That means no road show, no underwriter and no offering price". This implies that there is such built-in brand-demand that the stock starts trading without needing the guarantee of an underwriter. Popular companies are willing to take the jump and freefall into the market.

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Remember Initial Coin Offerings, or its 2019 cousin Initial Exchange Offerings? Put aside your presumptions about regulation and desireability of the underlying asset. A direct listing is an Initial Exchange Offering. Or perhaps, an Initial Exchange Offering is a direct listing. You package up the investment asset, find an exchange with the largest network effect (in the crypto case, most certainly Binance; in the STO case, maybe CoinList or ConsenSys Digital Securities/Codefi), and lob it over into the ecosystem. Investors should be careful not to confuse the method of offering with the quality of the underlying investment. If all the good IPOs suddenly decided to list directly, direct listings would garner premier status. If all the good IPOs decided to tokenize and list on Coinbase (properly regulated), tokenized securities would garner premier status. This lemons problem is solvable, and direct listings are potentially the first step.

Let's look now at Central Banks. I like having to capitalize "Central Banks", because it makes them seem Official.

What does a Central Bank do? There are some differences between the Federal Reserve, the Bank of England, and the People's Bank of China. But the primary function of such institutions is to control monetary policy to accomplish economic outcomes for the government. You control policy by issuing or redeeming debt, thereby increasing or decreasing the supply of money, thereby equilibrating the interest rate at which the market clears, thereby setting the risk-free rate for your local region, thereby driving the pricing of all capital assets in the economy, thereby controlling both wealth creation and wealth accumulation through borrowing.

Another thing you do is let banks hold accounts with you as a lender of last resort. Perhaps you ask the banks to hold some sort of reserve to support systemic stability. Perhaps you also route the payments and print the money, though such functions often sit in other parts of the government (e.g., Treasury, ACH). What you do not generally do is let "end clients" open Central Bank accounts, provide credit to consumers, or generally hold their money. That's generally, of course! More recently, the Swiss and Swedish Central Banks have considered getting into the consumer game. And now Denis Beau, the First Deputy Governor of the Banque de France, has come out to suggest that there is appetite to experiment with a Central Bank Digital Currency ("CBDC"). With the Euro under pressure in a Brexit world, perhaps this can become a mainstream European opinion.

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By implication, if a Central Bank designs and implements a collateralized stablecoin that is at least loosely based on cryptocurrencies, then it has gone into the business of standing up a digital money for consumers. Since blockchain-based assets don't really need custody or bank accounts (blah blah key custody blah), as the blockchain is the system of record, this puts government entities into the business of providing digital banking as a public utility to the individual. It is what China seems to be doing already, with a focus on retail payments and cross-border money flows. The nodes don't have to be decentralized to cut banks out of the value chain.

So we end up in this interesting, weird place. The institutional finance value chains -- whether investment banking functions leading to exchange offerngs, or retail banking functions leading to consumer financial accounts -- is shortening as technology removes various gears from the provision of services. For payments, this is pretty straightforward. We know that Bitcoin and other crypto monetary instruments are simultaneously the money-like commodity, the payments network, and the payments processor. See the operating flow for making a credit card transaction on a website using the VISA rails below. The user experience sitting on top of that mess has been polished to shiny bits.

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For investments, it's a bit more complicated. But I hear often, for example, that it is the capital markets exchanges that are interested in tokenizing various financial instruments, rather than the broker/dealers that rely on exchange services. Why? Because exchanges and broker/dealers in the blockchain space are collapsing into the same thing. The function of trading and exchange is being built into the software itself, and the human work boils up to a layer of financial instrument structuring and client aggregation.

What do I mean in saying that trading and exchange is being built into the software itself? Let's compare what it means to have trading and rebalancing for a financial advisor vs. a blockchain-native asset. In the case of a financial advisor, there is a human being who has a contractual relationship with a custodian, like Fidelity, Schwab/TD, or BNY Mellon. They use a software on their computer to look at a set of assets. From Envestnet Tamarac, to AdvisorEngine, Oranj, iRebal, there are many such solutions. Maybe this is a roboadvisor like Betterment or Wealthfront, and the software is home-grown. Regardless, it looks something like this:

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This software is plugged into the custodian, and has an interface in the form of a CSV file that is uploaded to the custodian's FTP, likely once a day and processed overnight. The CSV file makes its way to a bigger bundled set of trades that the custodian/broker does for all of its advisors, which gets sent through a trading system via FIX to a set of exchanges (e.g., NYSE, Nasdaq) for execution. Does the exchange really hold the assets? Sort of. Underneath the exchange, there is something like Euroclear, which provides clearing and settlement, and sometimes the function of a Central Securities Depository ("CSD"). So you know, this is a lot of abstraction layers to do a stock trade! And at every stage of information interfaces, things break down.

For blockchain-based assets, the blockchain stores the asset's current location and its transaction history. The trading software, as well as the rebalancing software, are open source pieces of software that are written as "smart contracts". In other words, it's not a computer on the advisor's desktop that does math and sends instructions to the custodian. It's not the server in the custodian's closet that does math and sends instructions to the exchange. It's not the exchange's cloud instance that does math and sends instructions to the CSD. Rather, it is the network itself that computes the math, and propagates the transaction throughout the network.

All I can do to illustrate further is show pictures of what I am talking about. See Set for investment management, which uses smart contracts to create self-rebalancing portfolios. See Uniswap for a decentralized exchange, which has created $30 million of liquidity across over a dozen trading pairs and is now being considered for real estate-backed security tokens. See the payments bridge Wyre is creating to attach bank accounts to blockchain addresses via what looks like a Plaid integration, such that any cryptocurrency hitting these addresses is liquidated and placed in the fiat bank account. See Aragon, the software-based arbitration court!

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I know that for many of you, at this point it appears that I am just hand-waving and saying magic words. There is a definitely a non-zero chance that I am a wizard, and all of this is nonsense. But there is also a non-zero chance that when you see Central Banks and massive capital markets venues like the NYSE looking to deal directly with a consumer, something in the air is changing. There is a hard, pioneering path ahead for those of us that can find and follow the yellow brick road. I can only point at it with my heart.


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Implications of Schwab's $26 billion acquisition of TD Ameritrade, and Tesla's black swan truck; plus 12 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the $26 billion acquisition of TD Ameritrade by Schwab, and the implications that has for innovation, frontier technology, aggregation theory, and corporate strategy. What can you do to remain competitive if your business is behind the top dogs in the industry, even just a little? How risky of a bet should you be making, and how can that be consistent with fiduciary duty? We end on Elon Musk's insane cybertruck, and ask whether there were any cybertrucks TD could have launched to stay independent.

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

Well this morning started out as a bit of a bummer! See -- Charles Schwab to buy TD Ameritrade in a $26 billion all-stock deal. The $55 billion market cap Schwab is gobbling up the $22 billion TD Ameritrade at a slight premium. Matt Levine of Bloomberg has a great, cynical take on the question: Schwab lowering its trading commissions to zero is actually what wiped out $4 billion off TD's marketcap a few months ago. For Schwab, the revenue loss from trading was 7% of total, while for TD it was over 20%. Once Schwab dropped prices, TD started trading at a discount and became an acquisition target. You can see the share price drops reflected below in the beginning of October.

The reason for this impact disparity is that Schwab has been diversifying into asset management, wealth management, banking, lending, and a full suite of other products. The firm has a hand in all the cookie jars, and are known for a proprietary and closed approach. Some would say they have a reputation for sharp elbows as a result. TD Ameritrade, on the other hand, was arguably the most customer-centric discount brokerage, and did not conflict itself as much by going vertically into its own value chain. For example, there are no default TD ETFs that its roboadvisor customers were forced to hold. Oh well!

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I disagree with Levine only on one thing. It was not Schwab's trading discount that killed TD. It is SoftBank's massive venture funding engine that was the proximate cause. Without swaths of venture capital backing for firms like Robinhood and Revolut, and by extension the API-first DriveWealth, there would be no free commissions. Without the ability to burn $250 million per quarter and get away with continued hiring and spending on Google Ads, TD and Schwab and Fidelity would still have commissions as a source of revenue. But let's not blame the Fintech start-ups -- they are just trying to survive after all.

Let's point the finger deeper at Napster and Facebook, and the Internet as a whole. Generations of people have now been trained that digital products are free, open, and available to all. As a philosophical tenet, this is amazing and empowering! It is the world we should live in -- only if that were the truth. Of course, it is not the truth. The costs of Facebook have become revealed recently, hidden somewhere between the effectiveness of propaganda bots and our twitchy anxious attention spans. Bodies flooded with dopamine, and eyes bloodshot from staring at a tiny machine sun. I mean, I love my phone.

Would we make this trade again? Probably. The cost of Napster has been a renaissance for music, and the seamless user experiences on Spotify, Apple, and Amazon. People get access to millions of songs for $10 per month across all their devices! That's what you used to pay for a single CD at Tower Records.

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So of course entrepreneurs would design Fintechs in this way too -- free, open, available to all. The finance firms have been saying for a while that they are not scared of this. None of the Fintech software is truly new. It rides existing infrastructure rails of custody, exchange, brokerage, banking, payments. It is subject to the same regulation. And finance firms can simply match Fintechs, because the software is "easy to build" after a few years of corporate venture and innovation theater. Further, incumbents supposedly have the scale to defend against Fintechs with large customer network effects.

Well guess what! This is what the newspapers said, as they digitized themselves and built out a free web presence. This is what they said, as the mid-sized ones starved and the large-ones struggled to survive.

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It is exactly this part that discourages me. The necessary consequence of building out a large, free service with hidden costs is that it creates monopolies ("attention platforms", "aggregation theory"). Perhaps you can call them utilities in the good case. But the middle of the market is hollowed out. In the newspaper data above, you can see publications with 100,000 to 250,000 subscribers struggling last year. Similarly in finance, it isn't the Robinhoods, or the Betterments, or the SoFis that will kill you. It is the JPMorgans, and the Goldmans, and the Schwabs. The best players in the industry can survive the longest without oxygen, because they have adjacent businesses, good operating margins, strong cross-sell, and the cash reserves to make transformative decisions.

Schwab is going to have $5 trillion in assets. That's like, more than a lot of countries.

TD Ameritrade, being the smaller player without a fully diversified business, had to be the most nimble and innovative. It has an institutional custody business for Registered Investment Advisors, and opened up third party API services for Fintechs as early as 2012. My roboadvisor was one of the first companies to integrate with their financial advisor channel. TD had no choice but to take such risks -- to be open, innovative, and supportive of others in order to compete against the larger providers like BNY Mellon, Fidelity, and Schwab. Now, 10,000 TDA RIAs are panicking about finding a new custodian that doesn't compete with them by offering wealth and asset management products. They will panic, but where can they realistically go?

On the retail side, TD was also taking risks. While JP Morgan, Merrill Lynch, and Schwab were collectively raising their eyebrows, TD launched Bitcoin Futures and invested in ErisX. Will the combined larger entity have the same risk tolerance? Of course not. It will spend the next 3 years working on a multi billion-dollar integration project, and speculative stuff like this is unlikely to have highest priority. For those 3 years, Fidelity has a gift in the form of lead time. Will they capitalize on it, or face an even more powerful integrated behemoth? Looking at acquiring Coinbase sounds like a good option right now.

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I should end there, but I really want to tie this story into the Tesla cybertruck launch. And here is how. If you are a company in the middle, like TD, then you are getting squeezed at the top by the large incumbers through power laws, and by new entrants and the chaotic churn of capitalism at the bottom. So as the middle, you absolutely have a higher risk tolerance for innovation. But you cannot outspend on R&D and acquisitions, simply due to the smaller size. That leaves you with either (1) lots of small innovation around the edges, like connecting to roboadvisors or matching trading pricing or offering someone else's Bitcoin futures, or (2) a single Hail Mary bet. A single irresponsible large systemic bet on some wild frontier thing.

That would certainly be irresponsible for a public company like TD. A company sale to Schwab may be detrimental to the industry, but is a positive for TD shareholders. The board of a public company has a fiduciary duty to maximize investment returns, even if that means doing less exciting stuff. Taking strange, black swan risks may not seen as the right approach to exercising the duty of care. But you know, that's what Elon Musk is all about! His whole career is one insane bet after another. The whole public company life doesn't really suit him very well -- to the point of official censure for fraudulent tweets to manipulate Tesla's stock price.

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You don't see TD's management tweeting about securing imaginary counter-offers denominated in cannabis meme jokes. But you also don't see them building crazy electric cars from the future, and hammering Ford into the ground on market capitalization and mind share. It was also typical for Musk to blow his product presentation and give fuel to sceptics -- fuel for his own entrepreneurial engine. Regardless, Tesla is defining a new category and industry. What could TD have done to achieve the same?

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Ok, Boomer -- a meme for the broken political economy; plus 12 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the merits of Generation Z's memetic dismissal -- Ok, Boomer. Is it justified and backed by data, or is the world getting better while the young get softer? We dig one step further to think about the political economy of when Baby Boomers were growing up, and whether it is fair to generalize their experience to others at all. The answer comes down to a failure to negotiate -- with each other and the world we live in -- which may leave everyone worse off as a result.

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

Chlöe Swarbrick, a 25-year old climate MP was presenting her climate change case to the New Zealand parliament, and was heckled by an older audience member. Without missing a beat, she acknowledged and dismissed the challenger with a pithy “Ok, Boomer.”

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The recording has since gone viral, inspiring everything from merchandise to Vogue articles. While the incident isn’t the source of the phrase “Ok, Boomer”, today it is the most well known manifestation. So what does the phrase mean? If you are inclined to more colorful language, see Urban Dictionary. But the meaning is obvious on its face — Gen Z is dismissing utterly and without consideration the judgment and protestations of society's elders on multi generational issues like economics, climate change, and social norms.

For example — If you hear Warren Buffet call Bitcoin rat-poison-squared, “Ok, Boomer” may be the proper response. I don't think Warren is running any nodes.

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The interesting thing to me about this isn’t necessarily that teenagers are disrespectful — isn’t that what teenagers always do? Rather, it is that the term has struck a nerve in America’s consciousness, offending and deeply bothering some Baby Boomers as an ageist slur. Of all the things that have been said of the younger generations (e.g., snowflake, spoiled, lazy, etc.), this little memetic bite is barely a counter attack!

It is sort of like Elizabeth Warren’s or Bernie Sanders' proposed Billionaire tax. The tax is so politically impractical that it should be seen as a rallying cry rather than policy — except that multi billionaire Bloomberg nearly jumped into the race, purportedly backed by America's top dog Jeff Bezos, days after the tax entered the public debate. The overreaction is valuable information. It betrays a fragility and defensiveness of some unspoken current in our society. This is too sacred! This is too precious! We can push, but you cannot push back.

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I want to bring this closer to Fintech and economics, but let’s first talk about negotiation. When you are trying to change someone’s mind and persuade them to give you a slice of their economic pie, the best approach is not to yell your position most loudly until one party collapses from exhaustion. Rather, the best tactic is to find the point of belief within your counterparty’s current belief system or negotiating range to which they can still say *Yes*. Even if you disagree, proposing some position beyond the scope of your opponents capacity simply won’t work. Instead, it will provoke them into dismissal and disengagement.

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What’s happening with “Ok, Boomer” is that for Gen Z, the world view of a certain type of person — whether fairly or unfairly stereotyped as white, old, male, conservative is debatable — is simply outside the bounds of engagement. They know it is pointless to negotiate with some people, because there is no fruitful overlap. This implies that from a macro view, we would rather see a young generation full of anger or argument, rather than nihilism and depression. But the data tells a different story, supercharged by the coils of the Internet. In recent history, young people have never been this depressed.

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What are they unhappy about? Below is the quantitative core of the argument and the complaint is well known, since Millennials have been squeaking about it for a while. First, there is massive involuntary student debt of $1.4 trillion, up from "merely" $300 billion fifteen years ago. This burden has resulted in delayed adulthood and a shrinking set of opportunities. Growth in income inequality is also well documented, but it helps to see that for many in the bottom income quintiles, the inflation-adjusted economic pie has effectively shrunk 10% since the late 1990s, while top incomes have seen extreme gains. Analyzed on a relative basis, the emotional story for the bottom quintiles becomes even worse.

Home ownership opportunity is the lowest it has been for 40 years for both 35-44 year olds and those under 35, while those over 65 have experienced a relative increase. Families have delayed having children too, for many well into their 30s. Baby Boomers simply did not face this type of economy, nor this particular depressing frame about the future. A single-income family in the post-War years in the US could afford a house and a child, something many twenty year olds today do not think possible.

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But that’s not the full meat of it. Surely many qualities of life today are preferable to that of fifty years ago! From a general increase in life expectancy, a decline in war and violence, greater human rights, fantastic technology and nutrition — there are many individual issues to which the older generations can point, and claim that Gen Z and Millennials are soft, spoiled brats to complain about life in 2020. It is certainly true that my parents had a harder set of issues to deal with than I do, and that their parents survived two World Wars and a nuclear threat. On the global macro metrics, life is better.

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And yet! I talked to Aaron Hall, a legal and political historian, to find a more intuitive answer as to why younger generations have the right to complain, beyond simply the cycle of life. It's not that Gen Z is jealous of previous opportunities, but rather that it is rejecting the libertarian austerity lecturing of people who had received a unique gift from history and do not display the self-awareness about its benefits.

The “political economy” between the Great Depression and the early 1970s saw a massive rise in demand-side economics, from the New Deal social safety net, to wartime spending, to post war construction. Aaron pointed me to a book called The Great Exception, which suggests that economic growth came not from some divine American progress, but an artificial moment in history fueled by social choice -- one which created a lasting impression that children should have a better economic future than their parents. For a data-backed argument, see below for how inequality falls in the 1930s, and slowly boils up to historic levels in the United States just recently.

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The growth default has been hollowed out and transformed into the divided political mess we see today. I am trying hard not to suggest distributional outcomes or political regimes; but it is safe to say that today's social unrest is correlated with neoliberal economics and the various synthetic economic policies under which we operate our systems today. That over 20% of global debt is bearing negative interest rates, inflating both real estate and stock market prices, is the tip of the iceberg.

One loose comparison to this is the slow deflation of the SoftBank-led venture capital bubble. Having made billions from Japan's Internet growth and an early investment into China's Alibaba, SoftBank became price-insensitive to building industry leaders. As a result, it put transient capital into transient companies, like OYO, Uber, WeWork and others. These companies in turn have persuaded people to join based on the over-promise of a sunny future. This was often economically motivated, guaranteeing some particular payments over time or simply advertising entrepreneurial freedom. A hotel owner may get pre-payments from OYO, or an Uber driver may rely on some unrealistic, subsidized payout rate.

Now, as blitz scaled companies are shedding valuations, or being refinanced into nothingness, the same workers that were pulled into these ecosystems are losing employment en masse. The political economy of SoftBank — endless venture money if you are showing growth — is ending just like the Great Exception. So would you be willing to taking moralizing career advice from Adam Neumann, who pulled over $1 billion out of WeWork as it ate its own tail in slow motion?

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Whatever version of “Ok, Boomer” is applicable to Neumann, or Zuck’s Libra, we should say it without hesitation. Similarly, this is the same utterance every Fintech entrepreneur has had to say under their breath to venture capitalists that have never started a financial services business and look for eye-balls, not assets. Or to large bank executives that asked startups to present their software, only to have internal teams copy the feature-set and call it innovative. It is what that entrepreneur has had to say to the world when they had bad market timing — too early, too late, not enough, too much. It is, end of the day, a failure to negotiate. A failure to make it work. It is the lack of human connection, on both sides of the story, on how to build the future together.

If someone stereotypes you with an ageist disregard in response to a “reality check” you provide — perhaps you’re not sharing the same reality. What is the context in which Gen Z is looking at the world? Will they keep buying gold, mutual funds, pay bank fees and trading commissions, and come to your office for meetings? Or will they stream financial advice on Twitch and pay for it in DAI or Bitcoin? Will they want you to sue the fiduciary rule into oblivion or cancel the OCC Fintech charter? Or will they build global tech networks to flow around the barriers we have put in place?

They will learn their own lessons in time. And if we are lucky, we will learn those lessons together.


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Blockchain progress through the lens of Binance's $180MM profit and Greensill's $1.5B SoftBank raise; plus 12 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at the difference between (1) building out the crypto asset class, and (2) operating infrastruture for a blockchain-based digital economy. There are so many little logic pot holes into which you could fall! There are so many things one could believe that make the whole thing make no sense at all! I am anchoring around two primary data points -- a Multicoin report about Binance's financial progress and its massive (though unaudited) $180 million profit in Q3 of 2019, and a post by supply chain company Centrifuge about marrying cashflow financing with the decentralized web.

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 have been thinking about blockchain use-cases, adoption curves, and jumping the chasm for Web3 software. Let's start with the easy stuff. Binance is killing it. Since 2017, they have out-executed crypto exchanges, decentralized exchanges, fintech broker/dealers, and everyone else trying to get day traders to day trade. As I understand, this was accomplished through a combination of multi-level marketing, extremely quick technology builds, some of the lowest pricing in the industry, and regulatory arbitrage. The crypto trader market is now 60% owned by Binance, and Binance is being a fast mover to capitalize on this advantage. They are throwing off massive amounts of cash -- $1 billion to date -- and reinvesting that in the business. The difference between subsisting on venture financing and being cashflow positive is the difference between being underwater on your mortage and owning your home outright.

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Further, Binance is quickly going horisontal and creating cross-sell between trading, margin, staking, and decentralized offerings. Whereas American exchanges like Coinbase are wading their way throuh a morass of a regulatory landscape, Binance is launching features and spreading its jurisdiction octopus across the world. Where it needs to be compliant, it is spinning up subsidiaries and following local law. But for most of the crypto trader world, this is an afterthought. Binance may not get every large token offering from CoinList (e.g., Nervos), and it won't ouperform ConsenSys on Ethereum, but it will certainly get many others.

Yet after all this profit and success, it does not feel like sufficient progress to me. And the reason is simple. There are two vectors for blockchain innovation worth considering -- (1) investing in the asset class itself, and (2) the operating transformation of the digital economy. Crypto was born for payments on the web with Bitcoin, but quickly became a killer use-case for day traders, speculators, and gold bugs (bless you!). Instead of most transactions being used for buying sandwiches, most transactions are about outcompeting investors on some trading thesis. And then fake transactions for fake competition around fake trading (bless the Internet!). So here's a quick segmentation of what I get even more excited about.

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On the vertical axis is the bit we already discussed, with the bottom part of the chart focused on capital gains. The horisontal axis plots private vs. public blockchains and some examples of local progress. So, for example, because trading in the trustless context became so appealing to so many, capital markets operating improvements were a natural blue ocean to explore. Firms like R3 quickly moved to set up permissioned chains in existing financial industries that follow established standards and protocols. If you want to see this on an even more massive scale, just check out the tidal wave of 500+ Chinese government and technology projects that use permissioned chains for global competition. Are they real blockchains? If that is your only concern, you are missing the game.

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Programmable blockchains -- not those representing just one asset, but those that can be used to write distributed software -- are the real game. I am biased to say that Ethereum is that programmable chain, because it can shift between public/private and investing/operating. Of course, it is not the only solution, and the careful thinker would appreciate the progress others are making in the space, particularly around infrastructure. But the way Binance dominates on users, Ethereum dominates on its core market, developers.

And yet, I am afraid that the risk of failure for winning this long game is high. If you are not focused on doing one thing well and having a major cash-flow engine, like the currency traders and the Bitcoin miners have to date, then there is no room for re-investment and expansion. This is why I think we will see the permissioned operators, who have cash-flow from existing industry consulting, and decentralized capital markets players, who have capital gains to spare, spend the next decade trying to move into the digital economy. The Chinese proprietary blockchain giants will power billions in business activity. Binance may become as widespread and adopted as WeChat or AliPay for digital wallets. It is much easier to win something from a base of users and revenue, than from smart, aesthetic ideas.

We have no shortage of beautiful, aesthetic ideas for decentralized economic activity. I am taken with this write-up by Centrifuge about how their technology could be extended to help businesses with supply chain financing, using MakerDAO. During the ICO boom, I had spent time with a Lithuanian business called Debitum Network, which approached the problem for invoice factoring from a digital lending perspective -- but they were saddled with a token economic framework that aged out of favor. Since then, decentralized finance approaches have dropped transaction tokens in favor of more open systems.

With Maker, today you collateralize a position with ETH, and receive an algorithmically dollar-pegged currency. Very soon, you will collateralize that same position with *whatever* and be able to get your dollar equivalent. This approach fits cashflow problems like a glove. Businesses in a supply chain often get quite differing payment terms (i.e., we will pay you in 30, 45, 90 days) while having to pay their own bills on yet another set of terms. To smooth things out, they will sell or finance these cashflows. In fact, one of the largest UK fintech startups, called Greensill, has raised $1.4 billion from SoftBank to solve problems around working capital that traditional banks are too slow to address.

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Another company to keep in mind is Taulia, which raised $170 million and powers working capital for 1.5 million businesses. I bring this up, because the folks behind Centrifuge have a background from Taulia and Greensill. Is it possible to stand up a decentralized working capital solution today? Technically, the elements are there. Special purpose vehicles from Centrifuge could be spun up quickly through a service like Vauban (disclosure, I am invested) and tied through software to Maker smart contracts. You then have a mix of real-world legal enforcement and blockchain-based programmability. But can we get the industry to opt in, and how? Can we do this before most small businesses even know how to operate a blockchain-based payments processor?

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Coming back to the analytical segmentation of the space, this is where permissioned chains may actually be helpful. Think about media piracy if you will -- I sure do. When you go onto Pirate Bay, a popular Bittorrent tracker (i.e., a distributed software for file sharing), there is a list of files you can click. Each file has Seeders, and Leechers. The Seeders already have the file, and are sharing it with the community. The Leechers are just downloading the file from the Seeders. The more people share, the faster the downloads go. Conversely, if you have very few Seeders for your very specific niche search, then your download may not go at all. This is, in some sense, a market with an intersection of supply and demand. In the decentralized world of Pirate Bay, some requests simply aren't possible because there is not enough supply. There are a lot more people interested in the Avengers than in Tron.

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Permissioned file sharing providers, like Netflix, Amazon, and HBO do not have this problem. There is no market clearing mechanism involved to support how fashionable some particular movie is today. Nobody needs to persuade the millions of nodes to host Tron, it is just available on those permissioned platforms -- as are the likely horrible spin-offs to come. As a comparison to the potential DeFi-based supply chain solutions, look at ConsenSys-built komgo, which is owned by the industry that uses it and is already in production today. This is why I think the digital economy path for blockchain use-cases must also be powered up by the private blockchain providers, and then made interoperable into the public ecosystem.

We need to move past day-trading. We need to bring over both retail and business users. We need to have operating cashflows. That's the real game for everyone in blockchain.


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Understanding Uber Money and its threat to the financial industry; plus 14 short takes on top developments

Hi Fintech futurists --

In the long take this week, I look at four different strategic lenses to analyze Uber's official entry into financial services with Uber Money. We discuss gig-economy focused neobanks, employer-provided personal finance management apps, car financing and insurance as a service, and of course the global super app competition. It doesn't seem that the financial industry will collapse from this announcement -- but there are fewer and fewer places for sleepy banks to hide.

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

Uber has entered finance! The end is nigh! The boogeyman is here!

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Oh. So what's involved? There's a debit card and a "debit account" powered by Green Dot, the same bank that's behind Apple Pay's person to person service. That means that Uber isn't a bank, but is renting shelf space on one. There's a wallet that will be integrated into the Uber app, within the driver's experience. So tracking your earnings and spending will be a feature that is part of the app -- not unlike what Amazon has had for years for merchants. There is a credit component, letting drivers withdraw money against their payckeck. And there's a Barclays credit card, private labeled for Uber, riding on the VISA rails.

Hear ye, hear ye, beware the disruption and tremble under its glory!

So maybe you can tell I am not terrified of this offering, as it relates to the position of banks in the world. But it would be a mistake to underestimate it, and in particular, to miss the various trends that are pulling this together. One lens to understand these developments is the Gig Economy theme. The 2008 Great Recession created high levels of unemployment across the world, and the technology sector was ready with solutions. It is expensive to have employees – they have all sorts or rights, like the ability to organize and the expectation of health and pension benefits. On the other hand, contractors have no such expectations and can be hired and fired at will. To that end, contracting gig websites – from home repairs, to deliveries, to driving pseudo taxis – sprouted like flowers after a fresh rain.

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The issue with lots of part-time work, other than being a psychological nightmare for people that want full-time work, is that you lack the benefits and stability employers provide. In the nonsense world of the United States, employers are responsible for worker healthcare and retirement, and compete to provide such benefits. One could reasonably expect that such social benefits should come from society, but that’s a topic for another day. So when you take away employers, and replace them with venture blitz-scaling start-ups like Uber, the end result is a lot of people who have earnings volatility, a lack of access to traditional financial services, an inability to buy a home under a mortgage, a lack of affordable health care, and a variety of other monsters.

No good pain point is left unserved, however. A number of neobanks have been formed to help with exactly these problems, across categories. The examples below, including Oxygen and Joust, offer a full financial solution for contractors. This includes accounts and consumption smoothing through credit, but it also includes things like merchant gateways and other enabling small business and freelancer technology. Uber's entry point into finance is first and foremost competing with companies like this -- the teams trying to build good financial offerings for those with a contractor's set of problems. And these are more fully featured apps, though they are less tightly coupled and not integrated directly into Uber's experience.

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If these targeted gig-banks are too niche from your point of view, we can then just highlight the US neobanks that focus on the same income/wealth demographic. The killer feature for those is credit, not information or aggregation. See Chime or MoneyLion below, with millions of customers each. Who doesn't want to get free money every week? The pro-Uber argument you could make is that Uber has advanced data on its drivers, like Amazon for its merchants. Amazon can better underwrite merchants, because it knows the web traffic to their pages on its own marketplace, and the conversion rates into purchasing a product. Similarly, Uber can project out the trips an individual driver will likely experience in their location based on the massive data set, and use that to adjust the underwriting model. But still, there is real competition.

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Another lens you can take to analyze the offering is by looking at personal financial management companies that focus on the employer. Two examples come to mind, though there are countless available. Hello Wallet was a fintech start-up focused on helping employers provide a Mint.com-like benefit to employees, with the concept that financially healthy employees are better at their work. You can see the screenshots below. The company was sold to Morningstar for about $50 million, and then sold off again to KeyBank. The largest analytics company was not able to sufficiently commercialize the data/analytics play, and divested to a bank, for whom PFMs are more core and strategic. Times change certainly (e.g., Plaid vs. Envestnet), but this commercialization challenge remains real. Further, Uber is just a single employer, albeit with 3 million drivers, while these PFMs had targeted a broader market.

Think also about Financial Engines. One of the original digital wealth management companies, FNGN was started in the early 2000s (way before you, Wealthfront) to target corporate workplace programs and sit on top of 401(k) retirement providers. It helped employees make better investment decisions, and focused on the place most of us actually make that investment decision. FNGN was eventually combined with the Mutual Fund Store (a store! of mutual funds!) and Edelman Financial to create a $200B+ assets under management player. Could Uber roll out a meaningful competitor? Can it offer a digital financial advisor that moderates between investments, banking, and credit to Uber drivers? Yes, but remember that for most of the drivers, the key issue is to have enough money for rent during the middle of the week.

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Another banking service relevant to the Uber demographic is vehicle financing. As the number of drivers starts to hit millions and millions of people, the core thesis starts to erode. Originally, it was car-owning Americans with some spare time that were going to drive Ubers. Now, many people will rent a car and insurance package in order to provide on-demand transportation or delivery services. At first, traditional banks would take on this type of credit, but over time some like Santander have pulled out given what's actually involved on the ground. You are back in the taxi medallion business, though of course far less expensive.

People that need to borrow money to drive the car are likely to be your worst credit risk (i.e., cannot afford to buy the asset), and this adverse selection problem, and therefore credit contagion problem, prevents growth. A number of car financing and insurance start-ups have created packages for Uber drivers with an all inclusive price. Take for example Fair, which can get you a vehicle for $200 a month. The company just got a $500 million credit facility from Japanese financiers Mizuho and Softbank. That we are seeing venture-type risk assets finding their way onto the balance sheets of these start-ups is a symptom in itself. Still, Tesla offers its own smart car insurance -- perhaps Uber has a data advantage in such a line of business as well.

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Finally, and perhaps most importantly is the strategic lens from the perspective of the Asian super apps. I have written about this consistently, so let's not belabor the point. By analogy, in the West, the operating systems of phones are a competitive marketplace of ideas mediated by the technology platforms of Apple and Google. Whichever point solution is most preferred by customers is the point solution likely to win an app icon location in your phone. Sort of like dog-eat-dog unbridled capitalist competition. In the East, however, super-apps are nested operating systems that pull features into themselves from the rest of the phone. They combine e-commerce, travel, taxi, money movement, savings, and wealth management -- among a dozen other things too. Sort of like a centrally planned utopia of functionalities. Uber and Facebook both have central planning envy.

Look, Western companies can do this too! In India, for example, Google is following this playbook aggressively with Google Pay. They have just powered 320 million transactions through the universal payment interface (an instant real-time payment system developed by National Payments Corporation of India) over the last few months -- twice more than Paytm! They've also aggregated various business lines into the app, which you can see below. Similarly, Uber has recently bought the Middle-Eastern Careem for $3.1 billion. The reason Careem beat out Uber and required this acquisition could in part be explained by its financial integrations around Careem Pay. In geographies where banks are too sleepy to build big brands and attention platforms, tech companies have the opportunity to bundle into finance much more closely and grab the consumer.

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So to summarize, we have a few frameworks and comparisons to analyze Uber's official entry into finance:

  1. Gig economy neobanks focused on credit

  2. Employer personal finance management apps

  3. Car financing and insurance as a service

  4. The global super app competition

You are very likely to hear the story in that last option repeated over and over again, overlayed perhaps with the number of app users and something about Libra. But it isn't the only story. If I ran Uber, would I focus on the financial pain points of my captive drivers? Maybe. That's the most readily available customer segment, whose payments I already touch every day. But I would also focus on the financial pain points of my users, and perhaps try to enable other financial services categories with the type of infrastructure that drivers have received for transportation? Can we have gig economy financial planners, insurance experts, blockchain integrators, wealth managers? Uber already knows who needs the help.


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