How digital cash is being used in Finland to help refugees

The best part of writing on consumer finance, is that there could be more drama to it than the other sectors within Financial Services. As I discuss socially impactful financial services with people, I frequently encounter the view that you can either have social impact or you can make a profit. It is viewed as a hard choice and a trade-off. I firmly believe that technology can be both socially impactful and profitable. The refugee crisis is bringing the kind of problems that we normally associate with the developing world, to our neighbourhoods in Europe and the rest of the developed world. However, a few Nordic startups are working with their governments to onboard the refugees into their society.

We talked to a company in Finland called MONI that is using pre-paid cards to help refugees get onto the ramp to being a productive member of society in their host country. Before getting to the details of MONI’s work, I would like to touch upon a research done by Tufts University on digital and financial inclusion.


Research on Cashless Economies:

No discussion on cashless economies is complete without discussing the Nordics and their progress in this space. They have clearly defined the blueprint for going cashless by creating the ecosystem to do so. Based on the research conducted by Tufts University, there are two main drivers to identify countries that would benefit the most from going cashless:

  • Digital evolution and
  • Cost of Cash

The Digital evolution Index provides an overview of how mature the financial services infrastructure is and also more importantly the level of digital inclusion. This is because, financial inclusion becomes a lot easier if policy makers and industry leaders first focused on digital inclusion. Africa is a great example where mobile payments growth followed penetration of mobile services. The Nordics are the leaders in this space, where digital evolution has been exploited well by policy makers to drive cashless initiatives.


The other factor that would optimise benefits when a country went cashless is the current cost of cash. Cost of cash is generally high where the banks have to take a lot of efforts in keeping ATMs stocked up and where the cost of access to cash is high due to the country being large like Russia, Australia or the US. Another factor that increases the cost of cash is the lack of effective governance around tax. For example, in India, the shadow economy was about 20% of GDP before the cashless drive kicked in late last year and that was about $500 Billion approximately. No wonder the cashless drive kicked in even though digital inclusion wasn’t as good.

The Refugee Crisis

One key point that we can infer from the research above is that, when the digital evolution/readiness is higher, the cost of cash can be proactively kept under a threshold, even in crisis. One of the largest crisis of our generation is that of the Syrian refugees. About 11 million people have fled homes and about 400,000 have lost their lives. There is help with funds pouring in from various parts of the world, and technology firms creating new ways for NGOs to collect donations. However, one of the key challenges for refugees is inclusion into the society they have moved into. One ray of hope in this space is the relentless efforts of the Nordic start-ups that have supported their governments in providing the refugees digital and financial inclusion.

It is important to understand the challenges that the refugees and the supporting governments faced. Most refugees don’t have identification that delays immigration and visa processes. However many of them are skilled enough to add value and are keen to work. Without work, some form of normal life, educating kids, and integrating into the society by contributing to it also becomes hard. Also, from the government’s perspective distribution of monthly allowances to refugees have been inefficient, insecure and expensive, thus making Cost of Cash pretty high. There couldn’t be a better situation where digital innovation could have helped the situation. I had an opportunity to interview MONI, a fintech startup who have been working with the refugees.

The MONI Story

MONI, a Finnish startup based out of Helsinki, focusing on digital payments have pioneered the cause of helping refugees by providing them and the Finnish government the ability to move to a cashless infrastructure. (Thanks to the team at MONI for accommodating an interview at short notice). Moni with good support from the Finnish Immigration Service have been able to distribute MONI prepaid cards to the refugees, thereby providing them means to manage their own accounts when they get their jobs and salaries. This wouldn’t have been possible with traditional banks where the KYC processes couldn’t have passed for refugees without identification.


MONI’s accounts are customizable and their features can be easily switched on and off. This is particularly important as both the Finnish Immigration service and Financial Supervisors impose strict controls on accounts used by the refugees. MONI have also gone one step further and provided its user interface in Arabic, Farsi and Somali. This has now resulted in a super-efficient financial onboarding process for the refugees. During my interview with MONI, they also mentioned that refugees and the unbanked would be their key customers. They believe that by helping refugees into the financial ecosystem, they would not only be able to sell other products to them, but also create a huge customer base that are loyal to the MONI brand.

MONI are not alone in their efforts to help the refugees, and have support from other tech startups for the social integration of the refugees. In one of his interviews, Antti Pennanen CEO of MONI had mentioned that the people within the Finnish Immigration Service have been very entrepreneurial with a “lets do this” attitude, and have a genuine interest to integrate the refugees into the society. That goes to show how public-private sector partnerships can work like a charm when both parties are driven to create impact. MONI’s partnership with the Finnish Immigration Service is an excellent case study for countries that are aspiring for better financial inclusion after having cracked the digital inclusion challenge. If only we could have more MONI!

What yet another InsurTech in Berlin (Element) reveals about Brexit 9 months post the earthquake 


This was not a planned three-parter. The fact that our last 3 InsurTech posts all feature Berlin ventures – WeFox, Simplesurance and now Element – was not planned. It simply turned out that way, because Berlin seems to be where the action is in InsurTech today.

The story about Element and TIA is not just about Berlin. It also reveals how fast an innovation platform is forming in InsurTech. More on that later.

The 1,2,3 story of WeFox, Simplesurance and now Element all being from Berlin did prompt me to look at the state of VC in Berlin and the post Brexit landscape 9 months after the earthquake and the Fintech Capital of the World debate.

9 Months after Brexit

The dust has settled. Article 50 has been triggered. It is time to take stock. Disclosure, I am British but have lived most of my life outside Britain (Asia and America and now Switzerland) and from that global perspective Brexit looks like a mistake. Plenty of good friends and family disagree and this is not a political site, so I will restrict my comments to Fintech.

We have not seen any dramatic game of thrones type drama in Fintech. No single city has grabbed the Fintech capital of the world crown. What we have seen, which could be as bad in the long run is multiple hubs all with a specialty taking parts of London’s business such as:

In the Fin part of FinTech we are also seeing Dublin, Frankfurt and Paris get some trading rooms moving from London. The big driver is the automation of trading. Relocation and regulation is simply background noise. It was reported that Goldman Sachs replaced 600 traders with 200 engineers. This makes it natural for big global banks to consolidate operations back home. When traders go, the back office and tech and all the supporting functions do eventually go as well. So I think German banks will go to Frankfurt, French Banks will go to Paris, American Banks will go to New York and so on.

The one center that might be different is Dublin. The soft factors – language, culture, fun – make Dublin attractive in a way that Frankfurt struggles with (and Paris for all its great charms struggles with if you are not French). A Brit can feel at home in Dublin (this post in the Guardian outlines the issues for bankers considering relocation). What I envisage for Dublin is less corporate relocation and more like Hedge Funds moving from Manhattan to Connecticut. These will be “privileged refugees” who leave a bank in London to to set up shop in Dublin for some new tech enabled “techfin” hedge fund or prop trader venture.

This shows that the post Brexit landscape is becoming decentralized. There is no single hub. Instead we are seeing networks emerge with each node in the network serving key functions. In this emerging reality, corridors become key. These corridors, such as between Zurich and Berlin as illustrated by WeFox, are more important than individual hubs.

Let’s look at the story about Element and TIA to see how it illustrates how the Innovation Capital funnel in Berlin is forming.

The Innovation Capital funnel in Berlin

The story about Element and TIA is by itself not that significant. It caught my eye simply because it was one more Berlin + InsurTech story within weeks and my mantra is:

Once means nothing, twice is coincidence, three times is a trend.

So I went digging to see what could explain this trend. What hypothesis fits the observation?

If you go to Element you see a digital insurance startup saying they are “A new way 
to think about insurance”. The jaded journalist response is that sounds like so many other startups.

The PR announcement is that they have partnered with TIA Technology. This is a well-established Danish company that provides software to insurance companies. TIA falls into what we call Traditional Fintech.  This part of the story illustrates a theme we have covered on Daily Fintech about how Traditional Fintech is transforming to become a platform for Emergent Fintech (i.e for companies like Element).

The Berlin Copenhagen partnership also shows that geographic Europe is more important than bureaucratic Europe or monetary Europe or regulatory Europe.  This geographic Europe has shared culture, timezone and travel connections. The UK is part of geographic Europe. That is simply fact. The timezone and the travel distances are fact not opinion. The culture is more about opinion and point of view and on that front, Brits are divided. If the UK goes isolationist within geographic Europe and breaks the cultural ties, my country will turn a problem into a disaster. I don’t think that will happen.

Culture beats strategy. Culture also beats capital and regulation.

There is a European culture. You may love it or hate it, but it does exist. This European culture coexists with a German culture, a Danish culture, a Swiss culture and so on and has nothing to do with Brussels or the Euro.  I hope it will continue to coexist with a British culture.

However that is only one part of the story. The other part of the story is FinLeap, a Berlin based Fintech accelerator (or “company builder” which is the term that they prefer and which I also think is better).

Jaded journalist response – ho hum, yet another accelerator. Accelerators (or incubators or company builders or venture engineers or whatever label marketing wants to apply) are critical to crossing the chasm from MVP to PMF, but they hardly new.

FinLeap is also a new venture. So it is worth checking to see who is behind FinLeap. Crunchbase tells us that FinLeap closed a EUR21m round in June 2016 (Brexit earthquake month as it happens) from two investors:

  • HitFox Group. This is another Berlin based company builder that is not Fintech specific but which has some good Fintech ventures in its portfolio.  Why one company builder invests in another company builder is the subject to be explored later. What is clear is that Berlin already has a reputation for good execution by company builders, thanks to the pioneering (and occasionally controversial) work of Rocket Internet.

It will be interesting to see how BAFIN reacts ie how quickly Element gets a license. The components of a successful Fintech Hub, which Berlin is clearly becoming, include forward-thing, tech savvy regulation.

Glass half full view of decentralisation for London

There is a glass half view of decentralization for London if you see this within the context of that “mother of all Hubs” known as Silicon Valley. It is a power law graph where all the other Hubs (even big ones like London, New York and Singapore) are simply part of the long tail.

At least that is how it was in the past.

If there is only one crown, only one Fintech Capital of the World, then it belongs to Silicon Valley. Period, end of story. Silicon Valley has more great ventures, more capital and more venture scaling expertise than all the other hubs put together.

However, if the future looks more decentralized, both technically (e.g. Blockchain) and economically (the diffusion of capital and expertise around the world), then the idea of a single dominant hub will fade away.

Alert: in each major transition, Silicon Valley  has been counted out and yet has found the key to unlock value. Proclaiming that “this time is different” is dangerous.

Silicon Valley residents will breathe a sigh of relief – maybe traffic jams on Route 101 will decrease and house prices will come down to earth.

In that decentralised networked world, London will have a more level playing field with Silicon Valley – and with Berlin, Luxembourg, Dublin, Paris, Zurich, Geneva, etc.

Londoners who want to drive value creation for an ecosystem in London need to think about what role to play in this more decentralized, networked world. Hanging onto Fintech Capital of the World dreams maybe as counterproductive as hanging onto Imperial dreams.

Image Source.

Bernard Lunn is a Fintech thought-leader 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.

As this is another InsurTech success story from Germany we again asked Karl Heinz Passler (initiator of to translate this article into German .

Ein weiteres InsurTech Startup (Element) tritt 9 Monate nach dem Brexit in der Fintech Stadt Berlin ans Tageslicht

Ursprünglich hatten wir gar keinen Dreiteiler vorgesehen. Unsere drei letzten Artikel handeln jedoch von den Berliner InsurTech Startups – WeFox,  Simplesurance und jetzt Element. Da sich in Berlin derzeit so viel ereignet, hat sich dies so ergeben. In diesem Artikel über Element und TIA geht es nicht nur um Berlin, es geht auch darum, wie sich in Berlin eine Innovationsplattform für InsurTech entwickelt. Später mehr dazu.

Die drei Ereignisse von WeFox über Simplesurance und jetzt Element (alle aus Berlin) habe ich mir zum Anlass genommen, die aktuelle Entwicklung von VC in Berlin näher anzuschauen.  Insbesondere 9 Monate nach dem Brexit und den Debatten über die zukünftige Fintech-Hauptstadt der Welt.

9 Monate nach dem Brexit

Der Staub hat sich gelegt. Der Artikel 50 wurde nun ausgelöst. Es ist Zeit sich die Sache mal genauer anzusehen. Um ehrlich zu sein, ich bin ein Brite. Ich habe allerdings die meiste Zeit meines Lebens außerhalb gelebt (Asien, Amerika und jetzt Schweiz). Aus meiner globalen Perspektive sieht der Brexit allerdings wie ein Fehler aus. Meine Familie und viele meiner Freunde sind anderer Meinung. Da dies kein politischer Blog ist beschränke ich also meine Kommentare auf Fintech.

Wir haben keine dramatischen Szenen wie bei Games of Thrones gesehen. Keine einzelne Stadt hat versucht die Krone für die Fintech-Hauptstadt der Welt zu ergreifen. Was wir allerdings beobachteten und dies könnte langfristig genau so negativ wirken, ist dass sich mehrere Städte als spezialisierte Drehkreuze etablieren und London damit Geschäft wegnehmen, wie z.B.:

– Berlin für InsurTech, was wir heute beschreiben

– Zürich und Zug für Bitcoin sowie Blockchain Crypto Währungen

– Luxemburg für Finanztransaktionen

– Estland für digitale Identität und E-Governance

Im Fin-Teil von FinTech beobachten wir in Dublin, Frankfurt und Paris den Umzug einiger Handelsräume von London weg. Der Haupttreiber ist hierbei allerdings die Handelsautomatisierung. Echte Umzugspläne und Regulierungsanforderungen sind hier eher Hintergrundgeräusche. Es wurde berichtet, dass Goldman Sachs 600 Händler und 200 Techniker ersetzte. Wenn die Wertpapierhändler wegfallen, trifft dies auch das Back-Office und die Techniker sowie alle weiteren unterstützenden Funktionen. D.h. große globale Banken haben es mit der Automatisierung nun einfacher ihre Niederlassungen an ihrem jeweiligen Heimatsort zusammenzuführen. Daher glaube ich, dass deutsche Banken nach Frankfurt gehen werden, französische Banken nach Paris und amerikanische Banken nach New York gehen.

Nur bei einem Finanzzentrum könnte es  anders verlaufen, Dublin. Die weichen Faktoren wie Sprache, Kultur, Unterhaltung machen Dublin auf eine bestimmte Art attraktiv, mit der Frankfurt zu kämpfen hat (und Paris mit all seinem Charme kämpft, solange man kein Franzose ist).

Ein Brite kann sich in Dublin zuhause fühlen (Guardian Artikel). Daher bewerte ich einen Umzug nach Dublin eher wie den Umzug eines Hedge Funds von Manhattan nach Connecticut. Mitarbeiter dort sind dann eher wie “privilegierte Flüchtlinge” zu sehen, die in Dublin eine Niederlassung oder Filiale mit FinTech unterstütztem Fonds- oder Handel eröffnen.

Dies zeigt dass die Post Brexit Landschaft immer dezentraler wird. Es gibt kein einzelnes zentrales Drehkreuz (Hub) mehr. Stattdessen sehen wir Netzwerke entstehen, bei denen bestimmte Knotenpunkte wichtige Schlüsselfunktionen für das gesamte Netzwerk erfüllen.

In dieser nahen Zukunft werden Korridore zum Schlüssel.

Diese Korridore, wie zwischen Zürich und Berlin (Beispiel WeFox) sind wichtiger als einzelne große Knotenpunkte. Schauen wir uns an was bei Element und TIA passiert, sieht so aus als ob in Berlin gerade eine bedeutende Innovationsplattform entsteht.

In Berlin entsteht eine neue Plattform für Innovation und Kapital

Für sich gesehen ist die Sache mit Element und TIA nicht so bedeutsam. Sie fiel mir nur ins Auge, weil sie ein weiteres “Berlin und InsurTech Ereignis ist” und mein Mantra lautet: Einmal ist kein Mal, doppelt ist ein Zufall und drei Mal hintereinander ist ein Trend. Also ging ich der Sache nach um zu sehen welche Hypothese diese Beobachtung bestätigt.

Wenn man sich die Elements Seite anschaut, sehen sie ein Versicherungsunternehmen, dass aussagt “Eine neue Art über Versicherungen zu denken”. Für Journalisten bedeutet dies, bitte Hinten anstellen. Die Pressemeldung beinhaltet die Ankündigung mit TIA zusammenzuarbeiten. TIA ist eine bekannte und etablierte dänische Firma die Software für Versicherungsgesellschaften anbietet bzw. herstellt.

TIA ist in unseren Augen ein traditionelles Fintech. Was das ist haben wir in diesem Artikeln beschrieben: Traditional Fintech is transforming to become a platform for Emergent Fintech (i.e for companies like Element).

Die Zusammenarbeit zwischen Berlin und Kopenhagen zeigt, dass das geografische

Europa enger zusammen sizt als das politische Europa und das Europa aus finanztechnischer Sicht. Dieses geografische Europa teilt sich eine Kultur-, Zeitzone und hat gemeinsame Reiseverbindungen.

Großbritannien ist ein Teil des geografischen Europas; mit fast der gleichen Zeitzone und kurze Reisedistanzen, dies sind Fakten. Die britische Kultur ist jedoch gespalten in die welche Britannien getrennt und in die die Britannien gemeinsam mit den Festland-Europäern sehen wollen.

Aber ich glaube nicht, dass meine Landsleute dieses Problem in eine Katastrophe verwandeln werden. Kultur schlägt Strategie. Kultur schlägt auch Kapital und Politik.

Tatsache ist, es gibt eine gemeinsame europäische Kultur. Sie können es lieben oder hassen, aber diese Kultur existiert gemeinsam mit der deutschen, mit der dänischen, einer schweizer Kultur und so weiter. Und dies hat nichts mit Brüssel oder dem Euro zu tun. Ich hoffe dies wird es auch weiterhin in der britischen Kultur geben.

Das ist aber nur ein Teil der Geschichte. Der andere Teil ist FinLeap. Ein Berliner Fintech Accellerator bzw. Company Builder (was ihre Tätigkeit zutreffender beschreibt). Der normale Journalist denkt sich dabei, ah noch ein Accellerator, stell dich am besten gleich hinten an.

Accelleratoren und Company Builder sind wichtige Akteure die helfen die Kluft zwischen

MVP und PMF zu überbrücken (crossing the chasm). FinLeap ist ein junges Unternehmen. Also schauen wir nach was sich dahinter verbirgt. Crunchbase sagt: FinLeap schloss im Juni 2016 (während des Brexit Monats) eine Finanzierungsrunde über 21 Mio. Euro ab. Zwei Investoren waren an dieser Transaktion beteiligt:

– Hannover Rück, eine der größten Rückversicherungsgesellschaften der Welt. Dies passt zu unserem Artikel ” Reinsurance As A Service”

– HitFox Gruppe. Ein weiterer Berliner Company Builder, der zwar nicht Fintech spezifisch ist, aber einige interessante Fintech Beteiligungen in seinem Portfolio hat. Warum sich ein Company Builder bei einem anderen investiert wird noch aufgezeigt. Klar ist aber, dass Berlin bereits einen guten Ruf im Bereich der Company Builder hat, dank der (gelegentlich auch umstrittenen) Pionierarbeit von Rocket Internet.

Interessant ist, wie schnell die BAFIN reagiert und Element eine BAFIN-Lizenz zum Betrieb eines Versicherungsunternehmens erteilt. Die Erfolgs-Komponenten für einen erfolgreichen Fintech-Standort (Hub), was Berlin eindeutig beabsichtigt, sind vorwärtsdenkende Akteure und technikfreundliche Regulatoren (IHKs und BAFIN).

Bezüglich der Dezentralisierung ist das Glas für London halb voll

Aus der Sicht von London sieht das Glas halb leer aus, wenn man  dies im Kontext der “Mutter aller Hubs” bekannt als Silicon Valley sieht. Es ist ein ganz anderer Hebel, wenn alle anderen Hubs (auch große wie London, New York und Singapur) einfach nur ein Teil des Rattenschwanzes sind. Zumindest war es so in der Vergangenheit. Wenn es nur eine Krone gibt und nur eine Fintech Hauptstadt der Welt, dann gehört diese Silicon Valley. Punkt, Aus, Ende der Geschichte. Silicon Valley hat mehr Unternehmen, Finanzierungskapital und Skalierungspotenzial und Know-how als alle anderen Hubs zusammen. Aber die Zukunft wird dezentraler sein, sowohl aus technischer Sicht (z.B. Blockchain) als auch aus wirtschaftlicher Sicht (durch die Verbreitung und Verfügbarkeit von Kapital und Fachwissen über die ganze Welt). Die Bewohner des Silicon Valley können erleichtert sein, vielleicht gibt es bald weniger Verkehrstau auf der Strecke 101 und die Immobilienpreise könnten sinken. In dieser dezentralisierten und vernetzten Welt wird London eine bessere Chance haben sich  gegen Silicon Valley zu behaupten, ebenso gegen Berlin, Luxemburg, Dublin, Paris, Zürich, Genf usw.

Londoner die hierzu einen Beitrag leisten wollen, sollten darüber nachdenken, welche Rolle sie in dieser dezentralisierte, vernetzten Welt spielen wollen. Träume wie die “Fintech Hauptstadt der Welt” sind wahrscheinlich genauso kontraproduktiv wie der Traum des “Britischen Imperiums”.

Image Source.

Bernard Lunn is a Fintech thought-leader 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.

Own the heart and you’ll fix for the head in SME financial decision making

Recently I came across an interesting piece of research out of Mexico that sought to uncover the impact of financial decisions and strategy on small business competitiveness.

While the authors acknowledge weaknesses around financial data collection – a large degree of raw inputs are qualitative and survey based – the results tend to skew towards a conclusion most of us would readily come by anecdotally;

  • Companies that efficiently manage their short-term assets and liabilities are more competitive (when competitiveness is measured as time in market)
  • SMEs show little to no alignment between business strategies and financial decision making

Financial decision-making is a wide-ranging topic, but can generally be considered as being comprised of three core building blocks: working capital needs, funding options and then investment decisions. Helping a business owner make better financial decisions, especially around working capital, should be the primary concern, as according to the study (and general business wisdom) this is what leads to operational longevity.

We all know small business owners typically lack the sophisticated financial analysis techniques commonplace in larger businesses that support good decision-making on working capital allocation. Which means up until now, the obvious technology led approach to solve for this has been to somehow distil these techniques into accounting platform add-ons and apps, which automate cash flow predictions and forecasting.

And while they’re good at shining a light on the business’s cash flow problem, most tools lack the confidence and intelligence to equip them with the teeth required to make a recommendation on what decision to make next. They’re like a bridge you can only cross if you’re willing to pay an additional advisory toll.

Many of these platforms still require heavy lifting on the part of the business owner from a ‘background theory’ perspective. Which to me means there is still something relatively inelegant from a product perspective when it comes to solving for improved decision-making using these crash-course models.

Instead, could we achieve the same outcome – better decisions – by solving for other decision-making weaknesses that are indirectly related? Theory is only one part of making great decisions. Emotions play a large role as well.

A growing body of research in the behavioural sciences field suggests a number of emotional states negatively affect our decision-making ability. Financial decisions are not exclusively impacted, but they do have far reaching ramifications if we get them wrong.

So if we were to attack poor financial decision making at a micro level, by helping to create positive decision making emotional states, could we impact macro level decisions like the ones mentioned earlier? Almost certainly. Behavioural science tactics could be the path of least resistance to creating systemic changes to an SMEs financial decision making patterns.

Whether we like to admit it or not, as humans we are programmable. Not only do we have an inbuilt survival manual hard coded into our DNA, but our behaviour can also be modified by external nudges. It can be adapted to the extent that our core programming can be significantly changed – even late into our adult life. Emerging research into adult brain plasticity is proving old dogs can in fact learn new tricks.

I don’t have an answer (yet) as to how this could be realised in practical terms for SMEs, but it’s heartening to see a number of startups in the personal finance space starting to take a behavioural framework approach to core product design. The Common Cents Lab at the Center for Advance Hindsight lists a number that are worth checking out.

Most of us are familiar with our heart interrupting our head when it comes to making decisions in our personal lives. So why would it be any different in business? To put it another way, ‘Most of our mistakes, the big ones at least, are the result of allowing emotion to overrule logic. We knew the right choice but didn’t obey.’ Fix for that and maybe you’ll solve for the far bigger and messier problem in the end anyway. I’m all for the fastest and simplest way to achieve the best outcome, and, something tells me small business owners are as well.

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.

Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0

Today is the slowest day of the rest of our lives.

Entrepreneurs at heart move to launch new projects, new businesses as they are committed to pushing the boundaries of existing business practices. They are driven by their genuine desire to seed the unimaginable.

Brian Armstrong, founder and CEO of Coinbase, a leading app in the digital currency space, is known for his ability to form teams that create value, by hiring entrepreneurs whose CVs may not reflect their potential. Olaf Carlson-Wee, was one of his hires and part of the core team, who is now moving on to launch Polychain Capital that I am so excited to share my understanding of this endeavor with you today. I guess Brian’s intuition, while very rewarding in the first phase of building Coinbase as a scalable business, comes with the demise that Olaf had to move to something more avant-garde. Polychain Capital clearly qualifies for avant-garde currently and most probably will need 2 years to move to the next phase.

Screen Shot 2017-03-23 at 10.48.31

This is all the info that is on the website of the business that Andreessen Horowitz and Union Square Ventures recently funded with $10million. In this post, I explore this hedge fund, its investment strategy, and how its positioning in the ecosystem of innovation in Wealth Management. I will discuss the kind of assets Polychain will invest in, and why it has chosen to do so.

The story started in 2014 while at Coinbase, Olaf found himself exploring the potential of Protocol 2.0 ventures, like Mastercoin or Counterparty. This is different than researching companies, simply because they are entities that are not owned by shareholders but rather from birth are decentralized and therefore, the users are essentially the equity owners. The next trigger towards coming up with the Polychain Capital idea, was when Coinbase included Ethereum in the summer of 2016.

Polychain Capital wants to invest in Digital assets at the Protocol Layer, not at the App layer. They are interested in investing and creating value for their institutional investors, at the Protocol Layer.

So the kinds of ventures that they have on their watch list, are

  • Ethereum – a more knowing decentralized protocol that can enable innovation to be built on it, that can attract developers, and that can enable all sorts of applications from digital IDs, file storage, messaging, wallets, supply-chain finance etc.
  • IPFS ecosystem
  • Tezos
  • Rchain
  • PolkaDot
  • Difinity
  • Cosmos

Most of these are early in their life and the million dollar question is which of them will be the enabler for a full stack app creation, or in other words which one will power off Web 3.0. Will proof of stake and proof of work, be replaced by another combo? What is the unimaginable decentralized web going to look like?

What is clear is that Polychain Capital is NOT looking to invest in ventures at the App layer. So, for example, they are not including in their portfolio Melonport, an asset management platform built on the Ethereum protocol, or Augur, a trader’s forecasting tool also built on the Ethereum blockchain.

Polychain Capital is based on the belief that the Bitcoin Blockchain protocol will continue to lose market share (in the digital assets space it has dropped from 97% to roughly 85%). Bitcoin is actually suffering from the innovator’s dilemma and Polychain Capital doesn’t see any killer app built on the Bitcoin Blockchain (these are views of Polychain Capital from the Ether Review #59 interview with founders Olaf Carlson-Wee and Ryan Zurrer).

Therefore, Polychain Capital wants to capture the growth of other protocols that will outperform the Bitcoin protocol (stuck in Innovator’s dilemma land).

Polychain Capital is positioned as a hedge fund because not only it is suitable for institutional investors but it’s investment strategy approach has taken elements for the VC approach and combined them with active trading from the hedge fund world. The way that they will be dynamically managing the portfolio holdings isn’t clear yet (at least to me) but the principle of how they will go about capturing this next wave of compelling innovation, is laser clear.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.


Crypto equity via ICO and the other innovation chasm



Are you a bull or a bear on this question?

– Crypto equity via ICO is the secret to unlocking innovation capital and is the bridge across the chasm between crowdfunding and public market liquidity. This is the bull case.


– Crypto equity via ICO is a haven for scamsters and needs to be heavily regulated. This is the bear case.

Today we shine a light on that question. First we outline the bull and the bear case. Then we ask some experts to give their views. Bias disclosure: I am a bull, but having seen a few waves of disruptive change I know that change takes a LOT longer than people think and that the early unregulated wave of any disruptive change has a lot of what are politely referred to as “sketchy characters” and less politely as scamsters.

The other innovation chasm

The old saw is “if it ain’t broke, don’t fix it”.

The corollary, for entrepreneurs, is “if it is broke, find a way to fix it”.

The innovation capital business is broken.

Most entrepreneurs understand the chasm between MVP (Minimum Viable Product) and PMF (Product Market Fit). The low cost to build MVP increases supply, but real demand does not change that fast, so lots of MVP ventures fall into the chasm (i.e. they fail).

The next chasm is less well understood. This is the chasm between PMF and Liquidity (via an IPO on the Public Markets and failing that via trade sale).

Today, we don’t see this chasm so clearly because there is a very expensive bridge across it – in a few locations. The very expensive bridge is provided by the big PE/VC Funds. Uber has raised over $8 billion and is still supposedly not ready for an IPO. That is an expensive bridge a) for the Limited Partners (aka the LPs aka the real investors who pay the PE/VC Fund Manager their 2 and 20 cut) and b) for the entrepreneurs (faced with all those preferential equity terms that toss founder and management equity to the bottom of the stack).

Not only is the bridge very expensive, but it is only available in a few choice locations. If you are in Silicon Valley, no problem, there are lots of expensive bridges. If you are in New York, London, Singapore, you have a few bridges. Outside those centres you are scrambling and doing so in the knowledge that some entrepreneur in Silicon Valley just raised 10x what you raised and is planning on using that to crush you.

It gets worse. Unless you do your IPO on NASDAQ or NYSE, you will face a discount. Look at the valuation discount of great companies trading on reputable stock exchanges all around the world. So now you have a second very expensive bridge operated by the “bulge bracket” investment bankers (such as Goldman Sachs and Morgan Stanley) who you use to “take you out to IPO”.

So, yes it is broken. The innovation capital business does need fixing. Whether some variant of the ICO is the fix is what we now turn our attention to.

Crypto equity via ICO 101

ICO = Initial Currency Offering.

It makes you think of IPO. That means it also makes regulators think of IPO.

Yet it is C for Currency, not company shares. You buy a Crypto Currency Token that you can use on the network.

Some examples of ventures that have been funded in this way include:

  • Storj
  • Lykke
  • Ethereum
  • ZCash

In all cases, traditional VC were not in control. Sure they could invest alongside everybody else. But they had no information advantage.

The Howey test (from an SEC legal case from 1946) is basically – if it looks and acts like an equity it probably is. Many ICOs fail this test, putting them in the regulatory cross hairs.

Crypto Equity Bear Case

It is very simple to raise money via an ICO. This will bring out honest entrepreneurs who are fed up with the current way of raising capital. It will also bring out crooks. It already has. So far the losers have been people playing with found money. For example if you invested in Bitcoin in 2009, putting some of those profits into Ether in 2014 seems pretty easy, even if you follow it up by losing on the DAO in 2016. It is quite different when Joe Q Public is invested from earnings that took 40 years to accumulate and which he is banking on for a comfortable retirement. If ICO scales, more crooks and more Joe Q Public actors get involved.

Crypto Equity Bull Case

Crypto Equity – done right helps ventures get across both chasms:

  • Chasm 1 between MVP and PMF. The investors are often also the users. They use the tokens on the network. So they help get the venture to PMF.
  • Chasm 2 between PMF and Liquidity. The Crypto Currency Token is traded. Speculators provide liquidity.

The fat protocol thin app thesis

This thesis was articulated by Fred Wilson of Union Square Ventures in August 2016. I urge you to read the whole post and the very informed comments from the community. If you don’t have time, these two pictures paint a thousand words:

fat app layer

fat protocol layer



The original thinking, from 18 months earlier and, amazingly prescient being  a few months even before the Ethereum ICO, was from Naval Ravikant (founder of Angel List who we have written about here, here and here).

What do the experts say?

The experts we reached out to are in what I call the “Other BBC” space (Bitcoin Blockchain Crypto), so they will be inclined to a bullish case. If you have an alternative view, please let us know in comments.

My questions to them are:

  • Use Case Suitability. Is ICO only suitable to businesses at what USV call the fat protocol layer? This will be very few companies. Or could the ICO, with some modifications and regulations, be used for any company? If yes to the latter, what do you see as the essential modifications and regulations?
  • ICO Lessons. What key lessons should entrepreneurs, bankers and regulators draw from the ICOs that have happened so far?

Use Case Suitability

From Fabio Federici

“I think we need to distinguish between two types of tokens. On one hand, we have the tokenization of equity, where the token does not serve any specific purpose in the product/protocol but rather represents a digital form equity as we know it today. While this will improve liquidity and efficiency, I don’t believe this to be a paradigm shift.

On the other hand, we have decentralized blockchain-assets, ranging from currencies (BTC), over commodities (ETH) to application-specific tokens like Golem (a decentralized AWS) or Storj (a decentralized Dropbox) (see @ARKblockchain). These are just some examples blockchain-based assets, where the value of the network is captured by its users, rather than a centralized entity – and that is what will power the next phase of the Internet. I believe that the most exciting use-cases are yet to come. Just like it was hard to imagine Google, Snapchat or Uber in the early days of the Internet, it is impossible to predict the applications that decentralized blockchain protocols will enable.”

From Oscar Jofre  (see our review of his Korecox venture here).

“I am a bull/bear crossover on this subject because of the lack of oversight even by the industry to make sure proceeds are used in a manner that will not cause a domino affect of disgruntled coin holders in an empty network.

Not everything needs regulations but given that the retail market is just learning of the crypto currency, the industry needs to mature so this can be a very viable method for companies to utilize.  Unfortunately at the moment we are not seeing that and my bear comes out because I am seeing first hand, how companies are using ICO as a form of equity raise and not having a care if the person purchasing their coins makes any return on that investment.”

Richard Olsen of Lykke:

“In future, any company will be able to take advantage of the ICO route. No regulatory changes will be necessary, because Lykke will acquire the necessary legal licenses and future ICOs can happen under the Lykke umbrella,

ICO Lessons

From Fabio Federici:

“I think it is important to distinguish between the tokens representing pure equity, and blockchain-based assets that serve a purpose in a protocol. While the first is just a digital version of what we know today, the latter represents a new type of asset class.

Also, one should always take a close look at each asset before making a decision, whether it’s building on it, investing in it or regulating it. Many factors play into the evaluation of these assets, from the aforementioned purpose to the fundamentals, the code, the team and many more. We are still in the early days – ontologies and (e)valuation methods have yet to be developed.

The main lesson for me is to keep an open mind and evaluate each token or asset individually. We are in the midst of the rise of a new asset class that will change the world.”

From Oscar Joffre

“ICO’s are here and need guidance. They are not used to harm but to really bridge the large funding gap we have globally for companies.  The industry can choose to be proactive and self-regulate, which in the end will be better than regulators injecting in.”

Richard Olsen of Lykke:

“The new future has started – entrepreneurs, bankers and regulators have understood that ICOs are a new reality and are essential funding tools. They combine cost efficient funding with building a motivated network of supporters.”


Crypto Equity is a gamechanger – if done right.

Those three little words –  if done right – cover a lot of complex detail.

We can leave that to regulators in each jurisdiction to create their rule books. That can take a lot of time and will devalue the frictionless cross border nature of ICOs today. Or the community can create a self-regulatory code of conduct as Oscar Jofre suggests. We have opened a thread on Fintech Genome where this initiative can be crowdsourced.


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Wrap of Week #12: Orbian, ProfitSee, Simplesurance, Fintech tour in Greece, Fintech in Africa

This week covered rare insights in the SME sector, from an Interview with Tom Dunn of Orbian about the past present and future of Supply Chain Finance to an Interview with Peter Vessenes, Founder & CEO of ProfitSee who is focused on Fiscal management for SMEs.

In our post The $20m Simplesurance funding shows how Berlin is becoming an InsurTech hub we looked at close at the traction that Simplesurance is gaining.

As we traveled to Greece, not on any Fintech hub list, we reported back in Fintech Global Tour goes to Greece to find both local & global innovation.

We covered two uses cases of leading edge technology in Africa in IOT Meets DLT and Blockchain meets M-Pesa in Africa.

We finished the week with an official welcome note to Arun (Arunkumar Krishnakumar) who is taking over the Friday Daily Fintech slot – where we cover how technology is changing consumer banking and finance around the world. Read more here.

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Welcome Arun to Daily Fintech

Arun (Arunkumar Krishnakumar) is taking over the Friday slot – where we cover how technology is changing consumer banking and finance around the world.

Arun epitomizes our mission at Daily Fintech, which is to create conversations that make things happen. We are delighted to welcome him as one of our constellation of stars.

One reason why senior people give us their attention is that we connect the dots between Fin and Tech. We translate Fin to Tech and Tech to Fin. Arun is equally comfortable in both worlds, as a quick glance at his LinkedIn profile will reveal.

We do that all across the globe because “bits don’t stop at borders”. Arun is from India originally and currently calls London home. Arun has the experience and global mindset to cover innovation wherever it comes from, whether from hyper efficient wealthy economies such as the Nordics and Switzerland or from rapidly growing big population economies such as India and China (and all points in between).

Arun has a particular passion for impact investing.

FinTech is being driven by big agile companies as well as scrappy upstarts and the relationships between the two. Arun’s experience spans both. His big company experience includes Barclays and PWC. In his current role at Angels Unleashed, StartUp Bootcamp and Funding XChange, Arun swims in the world of the scrappy upstart.

Our mission is to enable productive conversations. Our Authors job is to ignite and facilitate those conversations. Please welcome Arun’s unique voice to this conversation.