Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 29th May 2017

The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

This is week 7. For the index and the intro, please go here.

News Item 1: Bitcoin Establishment Declare Civil War is over.

Digital Currency Group published a proposal for scaling that was supported “by more than 50 companies and 83% of the network’s miners”. Basically the proposal called for a governance change where Segwit would be implemented with 80% of the network’s mining power. In what looks like a blow to this group, Blockstream formally declined to participate.

Decrypted: Yes, I made up that headline. This was reported on CoinDesk which has this disclosure: “CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Abra, BitGo, BitPay, Blockstream, Bloq, Circle, RSK Labs, ShapeShift and Xapo”. Those are the key companies referenced in the Press Release.

Our take:   It ain’t over till the fat lady sings. This week was a tale of two Bitcoin Cities. In one, we hit record price highs yet again. In another we had people planning for a hard fork.  I believe a hard fork will be technically like a stock split i.e. no big deal but it will be a massive blow to confidence and sentiment. Explaining Bitcoin is hard enough, explaining two Bitcoin will be too hard. Bitcoin could be a 10x or 100x investment from here or a total loss. That is quite a delta. My best guess is the price drops back to around $1,000 and after some period of doom and gloom it will go back up again.

News Item 2: Bank Of Canada Backs Off Blockchain

Bank of Canada (BOC) announced today that blockchain technology is currently incompatible with its central banking system.

Decrypted: BOC had experimented with settling bank transactions on a blockchain using CAD-Coin, a digital alternative to the Canadian dollar. The problem they discovered was that fixing issues such as scalability and privacy led to single point of failure dangers.

Our take: This will be the first of many announcements like this. This is what will happen to all those news items saying “Central Bank X Studies Blockchain”. The concept of a permissionless, decentralized monetary system is fundamentally at odds with how central banks work and no amount of studies will square that circle.

News Item 3:  Coinbase has a FailWhale moment

Yes, I also made up that headline.

The news is that Coinbase suffered an outage on May 25, 2017, claiming “unprecedented traffic and trading volume this week.”

Decrypted: FailWhale was what we called Twitter’s technical scaling problems and outages. Coinbase did not have enough server capacity to handle the load.

Our Take: Like Twitter’s technical scaling problems the Coinbase news can be read two ways:

  • unprecedented traffic and trading volume is a good thing and they will fix the server problems. That was the Twitter story.
  • Bitcoin is a decentralised market with crazy volatility and huge spreads and centralized businesses will always struggle in that environment.

I incline to the latter view. By 2017, a well-funded company should know how to handle peak traffic loads and an outage is more reputation damaging where money is concerned than losing a tweetable moment. A representative tweet by @callux: “You have money. Your fees are astronomical. Buy better infrastructure.” Coinbase is a broker and we saw what happened to FX brokers when the Swiss Central Bank dropped the peg with the Euro (which we reported on here). A centralized broker model like Coinbase and a decentralized network may not mix well.

Opinion: A gloomy technical view of Bitcoin’s scaling challenge

The analyst has an overall optimistic view, that the scaling issues will be fixed, which I concur with. However he also makes one critical point which is that Bitcoin’s network effects work at a marketing level but at a technical level there are negative network effects. Each new user adds to the load, compared to a network like Skype where each new user makes the network run better.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Wrap of Week #20: BlockchainBitcoinCrypto, Melonport, Zuper, Lemonade, Root, Slice, Cyber Attacks

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Cyber Attacks in Cashless India – Ransomware just the start

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In November last year India went through a demonetization drive when the government banned the Rupees 500 and 1000 notes. It caused a lot of near term pain with some serious liquidity crisis in a primarily cash driven economy. However, sanity returned in a few months with various private and public sector initiatives driving the move to a cashless economy. But the lack of governance and awareness on cyber has left the consumers and banks exposed to large scale cyber attacks. The recent ransomware attacks were very successful in India, and that feels like just the start.

Attacks by Country

Wannacry Ransomware attacks were reported across about 48000 computers in India with 60% of targeted victims being institutions and 40% being consumers. On investigation, it was revealed that the weak link that allowed many of the attacks was Windows XP and unpatched Windows operating systems used by institutions. However, about 70% of the country’s ATMs run on these operating systems and largely remain unpatched, hence posing a huge risk to consumer banking credentials.

During the attacks, Cyber Peace Foundation (CPF), which is running a research project monitoring cyber attacks, saw nearly a 56-fold increase in breach attempts at sensors installed across eight states in the country. Computer Emergency Response Team (CERT-In) asked the Reserve Bank of India (RBI), stock exchanges, the National Payments Corporation of India (NPCI) and other vital institutions to safeguard their systems against the ransomware.

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Just a few weeks after the demonetization announcement, Prime Minister Mr.Narendra Modi announced the BHarat Interface for Money (BHIM) mobile application, which was downloaded 17 Million times within two months of launch. PayTM, India’s leading mobile payments service crossed the 200 Million users mark earlier this year, and have most recently launched PayTM bank with about $1.4 Billion raised from Softbank valuing the firm at $7 Billion. The “Jan Dhan Yojna” scheme successfully brought about 200 Million unbanked consumers into banking. Post demonetization, bitcoin has started to be more widely used.

This is all great news, but it feels like the country is doing it all too fast, without the right governance, and more importantly consumer awareness on cyber risks. Over the last few years, India has consistently been identified as one of the most vulnerable countries to cyber attacks as the digital infrastructure was growing at a crazy pace without the necessary controls in place. The country has about 300 Million internet users of which about 150 Million are only using mobile internet. However many of these phones use vulnerable operating systems and are easily hacked.

One of the common modes of cyber attacks in the country happens through malicious applications on smart phones. This occurs when users download mobile applications that come with some online offers, and allow access levels to the applications that in turn allow the hacker to ask the users’ contacts to make payments using mobile wallets. With a booming e-commerce industry projected to reach $64 Billion by 2021, banks and payments providers lack the capability to keep Cyber attackers at bay.

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Challenges in handling cyber attacks are different depending on if the victim was a bank/firm or a consumer. The problem with banks is the secrecy they maintain about cyber attacks on their systems. A few months ago, data of about 3.2 million debit cards was lost in what is claimed to the India’s biggest breaches. SBI, HDFC Bank, ICICI, YES Bank and Axis were all hit by the breach of debit cards. RBI has hence mandated banks to reveal any cyber attacks that banks have had to suffer. Cyber attacks cost Indian businesses about $4 Billion every year as per latest estimates.

Banks in India have also managed to set up shadow or decoy systems which resemble the actual systems and have developed honey pots to trap such hack attempts. However, they still lag behind their western counterparts in sophisticated techniques and forensics needed to counter cyber attacks.

Still, banks are much more prepared to handle cyber attacks than consumers who are easily manipulated. This is primarily because consumers lack awareness of cyber attacks and social engineering techniques by the hackers are getting more and more sophisticated. There are measures from the government (unlike old times) to bring awareness to people on Cyber risks. 90% of the consumers are unaware that the government runs a 24X7 TV channel “Digi-Shala” that focuses on digital payments.

When Demonetization was announced, the Modi supporter in me felt super thrilled about the possibilities as the economy accelerated towards a cashless state. Even the near term pains faced by the common man felt justified in some ways, but it feels like India is ill-prepared to take on cyber risks inspite of efforts from the government and central bank. Watch this space.


Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

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Lemonade, Root and Slice and Asian Insurtech go for full stack

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The accepted wisdom in InsurTech is that it is all about partnerships rather than disruption. New ventures offering a new digital experience work on top of a platform provided by a Reinsurance company that provides the data and models for underwriting risk. This is what we call Reinsurance As A Service and we have reported on it many times.

Some companies are bucking this trend. They still believe that they can offer a full stack solution and compete head on with the incumbents.

In recent news, both Lemonade and Slice started offering products in California.

Root is also going State by State, starting in Arizona.

Doing this in America is tough as it is a replacement market with tough incumbent competitors. This is only for deep-pocketed startups and all these have raised significant rounds. It remains to be seen whether it is enough to compete head on in multiple states let alone multiple countries. The cost of both regulation and marketing is very steep. We may see a lot of M&A action soon as incumbents buy the ventures that get traction.

It is easier to do this in Asia, as it is more of a greenfield market. This is where we see action from companies such as PolicyPal and Inzsure as reported here. In Singapore, we see action from Singapore Life and CXA Group (who we profiled here). In China there is Zhong An.

The battle will all be about data. It is similar to banking (where the front lines of the data battle are around PSD2). If Insurance incumbents control the data, they will add digital user experience (buy or build). If that data can be aggregated online, the startups will win. This is where the data rich behemoths we calll GAFAM (Google Amazon Facebook Apple Microsoft) may hold the best cards.

Image Source.

Bernard Lunn is a Fintech thought-leader, investor and deal-maker. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Fintech Zuper to tap into $2 trillion superannuation opportunity in Australia

This week I’m deviating from my usual small business themed post to bring you exciting news about a new fintech venture I’ve joined.

After 6+ amazing years working at Australia’s flagship fintech Tyro, across business development, marketing and product, I’ve decided to jump into startup land, taking on the role of co-founder and CEO at a superannuation startup called Zuper.

What is superannuation?

For those of you further afield than Australia, superannuation is the equivalent of the UK’s pension scheme, or 401K in the US. Since it’s inception in 1992, the industry has amassed a phenomenal $2 trillion under management. I say ‘under management’, because despite growing evidence passive investment strategies, not active, are possibly the cheapest and most effective mechanism for long term investing for the masses, not many Australian super funds (or their armies of well paid fund managers) seem to agree.

As early as 2015, Sunsuper was one of the few super funds to buck the active trend, partnering with Vanguard to reduce its reliance on stock pickers. A more recent blow to active managers across the broader funds management industry was an announcement in May this year by the Future Fund, Australia’s biggest investor, that it too would rejig its portfolio towards passive vehicles.

The opportunity and problems to solve

We think superannuation as we know it in Australia needs to be retired. Alongside a massive digital overhaul, we want to use Zuper to empower Australians to align their values with how their money is invested, for a future they care about. We’ll also be using passive investment vehicles to do this.

To give you some idea of the opportunity in the space, here are a few startling superannuation stats.

High costs for little real value 

  • According to the Productivity Commission, in 2014-15, Australians paid about $12 billion in fees to APRA-regulated funds. Just over $2 billion of this is attributed to investment fees alone.
  • For FY14, a Rice Warner report estimated fees averaged out for members across the industry at 1.10% (110 bps). And while fees should never be looked at in isolation from performance and value, the lack of product differentiation across the sector makes for slim pickings on the value front.
  • According to the Association of Superannuation Funds of Australia (ASFA) March 2017 Superannuation Statistics report, the average 5 year investment return for the industry is 5.2 percent. Compare that with the Vanguard Australian Shares Index ETF, which tracks the S&P/ASX 300 Index, and managed to return just over double that, 10.61 percent, over a similar period for 14 bps. As a result, the industry is facing churn from members with $250K balances and above into Self Managed Super Funds (SMSFs) that invest in products like this.

Systemic implementation problems make it hard for average Australians to build wealth

  • According to the Productivity Commission report, 40 percent of Australians hold more than one super fund, paying multiple sets of investment fees and insurance premiums (life insurance, income protection and total permanent disability insurance is often wrapped into superannuation products). This dramatically reduces the effect of compounding. There has been a lack of will and coordination by the industry as a whole to tackle this consolidation problem.
  • Despite it being 2017, Australian women retire with half the balance of men. In 2013/2014 men, on average, retired with $292,500 while women ended up with $138,150. This can be attributed in part to a gender pay gap of 16%, time out of the workforce to raise children, and no superannuation payments on the unpaid portion of maternity leave. The disparity exists today for younger Australians, suggesting the trend will continue without intervention. Oh, and need I remind you women live longer than men? Double whammy.
  • Of the 176 retail and super funds, roughly 10 have a mobile app, resulting in disengagement and apathy.
  • Each year an estimated $3.6 billion in superannuation payments aren’t even made by employers (mainly small businesses), leaving 30 percent of the Australian workforce out of pocket to the tune of $1,489 each year.

Housing used to be most Australians retirement stop gap. But even in a low interest rate environment owning a home in Australia’s major cities is now almost completely out of reach for the millennial generation . The median house price in most centres is over $1M.

And, due to over-leverage during an individual’s working life, many retirees will be forced to use their super to actually finish paying off their mortgage. Those who own no property at retirement will also still need to pay rent. Deloitte estimates that the projected retirement balances of millennials of $1.1M will fall short by around $500-$600K – with rental added this could be even higher.

Superannuation is an awesome idea. We are incredibly fortunate to have it in Australia. But how it is executed has room for improvement, and only the whole industry can benefit as a result of increased digitally minded competition.

I’ve written more about why I joined Zuper in the post below. I’d love you to read it, share with me your thoughts and if you believe in what my co-founders and I are doing, help us spread the good Zuper word!

https://www.linkedin.com/pulse/why-i-started-superannuation-fintech-business-jessica-ellerm

 Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Daily Fintech is Pleased to Announce Our First Round Table.

 

 How tech innovation enables investors to gain access to previously inaccessible assets and managers.

On the 3rd anniversary of our founding, we are hosting an invite only discussion in Geneva on the afternoon of the 28th of June to explore investing in new assets and new managers created by the changes in Fintech.

Attendees include Family Offices (both Single and Multi), Private Banks and Asset Managers.

The format encourages peer to peer knowledge exchange by having a maximum of 20 attendees, no sales pitches, absolute confidentiality (no press and Chatham House Rule), and an expert Moderator Bernard Lunn, CEO of Daily Fintech.

Topics covered will include:

The changing business landscape due to digitization, transparency, commoditization and regulation.

New Fixed Income Assets coming from Lending Marketplaces, Supply Chain Finance, and other open platforms in consumer/SME loans and corporate bonds

New Equity Assets emerging from Crowdfunding platforms, block-chain based token offerings, peer networking/club deals and quant approaches to VC.

New value chain partnerships emerging from Open Data and Open API access.

New managers emerging from these marketplaces using the copy/follow model.

A Changing Delivery Stack including the emergence of real time settlement and the race to zero in equities brokerage and asset allocation.

Bitcoin Disruption and the possibility that permission-less innovation and decentralization will change the game.

Global Regulatory Backdrop in a politically uncertain world.

As Daily Fintech is based in Switzerland, we are partial to Swiss Wines! We look forward to a small tasting with guests at the end of our gathering.

Thank you to the following people on our advisory panel:

Michael Warszawski, CFA: Senior Managing Director at Manchester Capital Management.

Nicholas Hochstadter: IBO – We Compare Investment Performance.

Alexandre Gaillard: CEO at InvestGlass.

Marc Lussy: Mentor at F10 Incubator & Accelerator

If you are interested in attending this Round Table, please email julia at daily fintech dot com. Please note that our June 28th Round Table is limited to those who fit our criteria of Family Offices, Private Banks and Asset Managers.

The infrastructure for asset management of Digital Assets – Melonport

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I confess that I hadn’t been to Zug in 2017 and I grabbed the opportunity of the Crytpovalley meetup last Thursday at GG6 with its catchy topic “Crypto Valley – A better Silicon Valley?”. Max Wolter and Alexander Bremin, have captured moments about the people that have made and continue to make Crytpo Valley in Zug a unique and vibrant place. Read more in Alvalor Mission to Crypto Valley – a tale of the big world of crypto around the little town of Zug and about the many amazing people who make this place a reality. From Bitcoin Suisse, one of the first startups in Zug before Crypto Valley’s birth; to Monetas, one of the instrumental ones in nurturing the Crypto ecosystem in Zug, all the way to Søren Fog, founder of the Crypto Valley association and the crypto-expert legal partners MME.

The Alvalor project is a live example of a venture in its very early stage that is choosing to grow in the vibrant Zug ecosystem. As we were sipping wine, Max shared his excitement around the Alvalor new blockchain platform “that extends state channels to allow arbitrary applications to be executed, eliminating limitations of block space and blockchain size. We are modeling after the Ethereum foundation as a non-profit Open Source project, with a focus on research.” Mark and Alexander also confessed “Opening our offices near teams that serve as an inspiration to the blockchain community, such as Melon Port, Akasha and SingularDTV, will be a privilege. There can be no doubt that Alvalor is primed for success in a location as unique as the Crypto Valley.”

Melonport is my pick today for many reasons that I can sum up in one word as “My biases”:

  • Melonport is co-founded by a woman, a young ex-Goldman Sachs trader and a Swiss blockchain developer who is an expert in the Ethereum world
  • Melonport is a blockchain venture focused on digital asset management
  • “Melon” is the Greek word for “Future”

A Swiss Ethereum expert with a background in mathematics from ETH Zurich and a female tech leader creating a venture that brings transparency, lower entry and running costs for hedge funds and asset managers, and access to a new asset class that promises genuine diversification; a vision that is broad and will be needed in the future world that is under construction.

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I will start from the future that is beckoning infrastructure that can accommodate the new financial instruments and the new value creation.

  • Melonport wants to be able to accommodate all kinds of Digital Assets.
  • Melonport wants to be able to accommodate all kinds of Digital Asset management strategies (passive, active, open-end, closed-end). This encompasses the entire lifecycle from setup, to trading, custody, redemption, valuation, etc.

Melonport is a Decentralized blockchain protocol relying on the Ethereum Blockchain. In plain vanilla terms, Melonport is a protocol which means that they are building a core part that allows all sorts of Modules, that can function on top of the core part. Melonport is expecting a live beta version over the next couple of months. This will include the core part and 7 modules that Melonport has promised to offer in their green paper. These are the basic functions that a portfolio manager (PM) needs to setup his/her business. Once the PM chooses the parameters of the modules, the portfolio is ready for deployment in a secure and decentralized way (to be explained later).

Foundational Melonport modules:

  1. Registar: this where the PM chooses which assets will be traded. I love this, because the smart contract that operates this module, re-assures me that when I invest with a hedge fund manager who has promised to offer Alpha by a Long/Short strategy in one sort of tokens; the PM can’t “punt” on the bitcoin/TUSD rate.
  2. Functionality: PM can customize the rights around the use of the funds which may vary from one asset to another. This module determines whether penalties apply or not for certain actions by the PM.
  3. Price Feeds: PM picks the feed module (one or several) that will be used to evaluate the portfolio for mark-to-market purposes. This smart contract solves in a secure and transparent way the problem of ambiguous pricing for various assets and manipulation by the PM.
  4. Exchanges: PM chooses on-chain exchanges for trading.
  5. Trading: PM sets various rules around trading and risk management. For example, caps on leverage, caps on trade size with respect to total volume of the asset, caps on concentration exposure etc
  6. Management Fee: PM specifies the calculation of the management fee which typically is linked to the gross value of AUM.
  7. Performance Fee: PM specifies the calculation of the performance fee which typically is linked to the increases in the gross value of AUM. It also typically, involves a high-water mark, which means that if the PM is performing below a designated benchmark since inception, then the performance fee is not paid. This module will allow for more customization by the PM

Since Melonport is an open-source protocol with these 7 basic functionalities, anyone can develop more Modules on top of the Melonport protocol and create a new portal to access it.  If a hedge fund manager or a passive asset manager designs his/her portfolio parameters using the 7 basic Melonport modules, that can be seen in Blockchain land as the offering of a legally binding contract. The contract terms are defined by the smart-contract terms that are operating the modules. Melonport will be partnering with data feed providers and exchanges like CryptoCompare for price feeds from various exchanges, or  Oraclize for fetching data.

I won’t get into the tech details of how shares are created and how they are redeemed in the Melonport world (anyone interested can read the green paper). I will however, outline what value is created in the Melonport world. I foresee, that this will be a world that will reduce substantially the costs of setting up a fund for many reasons but mainly because the costly custodian and fund administration function will be given over to a few modules operated by smart contracts. The cost of using the Melonport protocol is MLN tokens. At the same time, there will be large efficiency gains because the processes will be real-time, without human errors, and fully transparent. These features are absolutely necessary for investing in protocol tokens and their derivatives.

The Melonport protocol is creating a digital asset management world that offers both Decentralized storage and Decentralized execution. I am excited about this future world that the assets, the track records, and the smart contracts are stored on a decentralized Blockchain. This reduces the centralized custodian risks that showed their ugly head especially during the 2008 financial crisis. In addition, decentralized execution using the Ethereum virtual machine, reduces counterparty and settlement risks.

We can all foresee a future world in which a variety of hedge funds are using the Melonport portal but also for the creation of passive investments focused in the protocol token asset class. We can foresee that Funds-of-Funds (FOFs) will be able to offer value since costs will be reduced and multi-layered risks mitigated. We can foresee better diversification across digital asset classes that would be expensive to design in the analog fund world that we currently live in.

Before ending my coverage of the Melonport protocol, I want to circle back to the variety of Digital Assets that are being created by companies like Lykke, Digix, T0 platform etc.

I like to think of the growing Digital Assets space in 3 main categories:

We will be watching Melonport rollout the infrastructure for asset managers to create new strategies focused on digital assets: protocol tokens, derivatives, and tokenized old assets. Mona El Isa says:

We are primarily building “Melon”, as an infrastructure to set up and manage funds built around protocol tokens — an asset class which we fundamentally believe will have a place in every single diversified portfolio ten years from now.” Source The Difference Between Protocol Tokens and Traditional Asset Tokens

Efi Pylarinou is a Fintech thought-leader. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.