Gm Fintech Architects —

Today we are diving into the following topics:

Summary: Today we highlight several micro developments, like the fines from the SEC against Kim Kardashian and Hydrogen and the CFPB suit against MoneyLion, as well as the raises for DeFi roboadvisor Exponential and alts platform Equi, in the context of the broader environment. What do these things mean, if anything? We then open up the deeper, more fundamental problems by walking through the United Kingdom pension crisis to highlight the connection of financial engineering to economics, and the connection of economics to politics and the social contract. Lastly, we suggest ways that the social contract itself can be evolved through software, and the changing roles of software developers into builders of sovereign network states.
Topics: network states, digital investing, macroeconomics, politics, entrepreneurship, Web3, product development, cryptoeconomics, pensions, fixed income
Tags: Exponential, Equi, United Kingdom, USD, GBP, Credit Suisse, CFPB, SEC,

If you got value from this article, please share it. Long Takes are premium only, and we need your help to spread the word about how awesome they are!

Share The Fintech Blueprint

Long Take

Focusing Scope beyond the Micro

Life is short. All you have is your attention and your time.

You can do the little things, or you can do the big things — often, it’s a matter of ambition and opportunity, and takes the same amount of energy and time.

Surely the inanity of the Elon Must emails about Twitter highlights that the celebrity entrepreneurs are just like us, just playing with more money.

Elon Musk's texts to Twitter CEO Parag Agrawal reveal heated negotiations — Actual tweet from Actual business genius Elon Musk

It is also a matter of seeing at the right level of detail. This is why we spend so much effort on combining micro, e.g., the operating details of some payment rail or the valuation mechanics of a SPAC or the marginal economics of a customer, with the macro, e.g, the state of the world economy, interest rates, and philosophy about civilization.

So that we, like you, can adjust our focus to things that actually matter and move the needle. So that we, like you, can match up our abilities with a problem whose scope is as big as we can handle.

39,793 Camera Lens Focus Stock Photos, Pictures & Royalty-Free Images - iStock

Last time we covered this similar topic here —

Fintech Blueprint 🤖🏦🧭

Long Take: Is Finance asking *interesting* questions? Exploring startups, industries, and the nature of work.

Hi Fintech futurists -- This week, we look at: What it means to ask questions and find answers From asking simple questions that result in neobanks and roboadvisors. Who will win — Schwab or Robinhood? To asking macro questions about the finance / high-tech competition. Who will win — Goldman Sachs or Google…

2 years ago · 1 like · Lex Sokolin

And look, it is 2022, and the world is either on fire, or under water, or covered in bullets, exploding gas pipes, or war-zone nuclear reactors. Meanwhile, fintech and crypto commentary is keeping its head down in the minute details.

Why is a the CFPB suing a particular destructive marketing practice of MoneyLion? Or, why is the SEC going after a market maker creating liquidity in the small Hydrogen token from 2018? Or Kim Kardashian’s $1.3MM settlement for that matter.

These are the questions we are getting in the discussion of the current state of the industry. Is this stuff no good? Yea, it’s no good. Is it the type of question that is going to help us change the axis of the financial world?

It might educate about some aspect of the exercise of power and breaches of honest conduct. But it will reveal no deeper secret, no profound treasure map according to which we build our life.

Or, look at some of the familiar screens and launches making the rounds in our own coverage. We love these things. They are things we would build, over and over again.

Exponential is following the path of a number of projects, from Zerion, to Zapper, and Instadapp, with an even more mainstream interface. We think about the 2010 days of SigFig, Betterment, and Personal Capital, and how novel it was for a user to log into beautiful, functional financial software in the browser. It’s cool to see the same starting to incorporate the latest from Web3. But note the scope of the project — to distribute what DeFi has accomplished.

It is the protocol and the EVM-based financial manufacturing that is exponential.

Or, look at Equi, a digital investing platform for alternatives. We think of Addepar and Artivest and iCapital.

Again, super compelling — passing $100MM in AUM faster than the other roboadvisors and digital investing apps — but playing for a narrow scope.

If you pause, you can see all these things now clearly for the digital interfaces that they are. Just like sneaker brands have gone from (a) big retail stores to (b) Instagram based influencer brands, alternative investing and crypto investing and real estate investing and banking and lending and whatever else has gone from the (a) bank branch to (b) mobile app.

People will still say this will democratize access to investing. But when we used to say it, we meant that “this will change the fabric of our economic structure”, that putting money on the Internet will *literally* make the world better, and the lives of millions of people better. Something that Jack Ma accomplished with Ant Financial. Yet today, these digital storefronts are just that — customer acquisition into the various capital markets.

So for your own sake, zoom out.

The Importance of the Social Contract

Ray Dalio has stepped down from managing money at Bridgewater, the $150B hedge fund that he has built. We hope that Ray will continue to deepen his explanations of how civilization-scale systems work, giving clarity and metrics as to why the world is moving in the way that it is on century-long horizons.

You invest enough, handling the slippery nature of money, and what emerges is not profit, but the view of human behavior at the level of the global world order.

Banks are not some independent caricature of immoral evil greed. They are an unavoidable and desirable attribute of the state. The nation, the sovereign, and its money are the same, and financial services are an appendage thereof. You cannot logically sever the limbs from the body and hope for the organism to function.

Look at last week’s UK pension crisis, which is intertwined with social policy, economic philosophy, popular power dynamics, and global financial pressures. There are two types of retirement plans, generally — defined benefit, where you get paid some multiple of your earnings by your company, and defined contribution, where you are the Chief Investment Officer of your own 401k or ISA or IRA and get whatever the market gives you.

Defined benefit plans work pretty well when you are in a post-war growth economy with lifetime corporate employment, and more young people than old people. But there sure are a lot more old people now, and a lot fewer young people relatively. Also, you know, stuff about growth.

So handing off the investment responsibility, and the outcome implications, to the individual worker is the right trade from the perspective of an employer. This is an economic philosophy change — a change, if you will, in the social contract between individual and society. And the result of this, according to some at least, has been a reallocation of capital within defined benefit plans to fixed income exposure in order to meet particular liabilities as plan participants retire and need cash. On top of that fixed income exposure sits a complicated web of derivatives to smooth out payments and get rid of volatility.

Following the macro narrative we highlighted last week, with the pound falling to historic lows, the UK central bank announced the buying of long-dated government bonds in order to support market prices, which had been shocked by the simultaneous tightening of rates and loose fiscal policy. The resulting volatility triggered margin calls on the derivatives of the pension funds holding all these bonds, who in turn had to sell the bonds to make the margin calls, which creates a death spiral. The Financial Times and CNBC describe this more clearly than we can.

Such system-level financial engineering issues that are at the core of what we should be trying to understand.

This is the stuff that is the actual meat of “democratizing access” to financial access and well-being. It is not about how easy it is to access a website that shows you a report of how much money sits in your retirement. It is about the value of that retirement as engineered, or perhaps derived, out of the very social fabric around us.

The defined benefit is an annuity. It needs to eat returns and output cashflow. To smooth cashflow, it needs to hedge bond market shocks in different economic cycles. Economic cycles are subject to the operating economy, yes, but also to the financial engineering performed by our central banks and political functions. The tug of war between populism and institutionalism determines how fiscal policy is shaped locally, and then its implications ripple out globally.

Meanwhile, the United Nations is trying to tell the central banks of the Western world to stop hiking rates, given the economic contagion through the rest of global economy. Do you think the US will listen? Is this a fintech question, or a financial one, or a political one, or a sociological one?

Now in the past, we might have looked at all of these issues and decided that they were above our pay grade. We would rationally say that entrepreneurs, at best, can follow the Silicon Valley playbook, raise venture capital, create a business with customers, and that the market will determine the rest. Digital access to financial products was the best we could hope to accomplish. And capitalism funds useful products, and kills inefficiency.

And anyway, how do we influence nation state politics with the mere ability to code and dream up science fiction utopias?

Fintech Blueprint 🤖🏦🧭

Long Take: Focusing on the social contract…

Comments on this post are for paid subscribers