访问亚洲数据透视亚历山大·斯蒂芬·戈德斯坦

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What follows is a translation to Chinese of todays InsurTech post by Zarc from InsurView. You can read more about his company when we interviewed them here. This article will also appear in Chinese on the InsurView site.

本文是今天保险科技文章的中文翻译,翻译作者为来自互联网保险观察(InsurView)的作者张翀。更多互联网保险观察的资讯,请见(本站采访)。本译文也将在(互联网保观网站)上发布。

Pivot Ventures是新加坡的一家风投基金,他致力于为亚太地区有潜力的保险科技创业公司和传统的大型保险和再保险公司建立连接。今天我们采访的对象,Stephen Goldstein是一位连续创业者,如今他正在Pivot Ventures任职。

在今天的采访中,Stephen将分享他对于保险科技在亚洲地区发展的看法,以及亚洲地区保险科技和欧美的区别。

Stephen的论点有三:

1、跟欧美市场相比,亚洲市场的保险市场本身还很年轻。因此,亚洲的保险市场和保险科技市场都处在发展初期,两者正在一同进化。

2、大部分亚洲的保险科技公司都是由大型公司的创新实验室所孵化的。但这会导致一个问题,孵化器一般不太注重财务上的效率,这使得创业公司在初期没有养成控制成本的好习惯。

3、从保险业务的角度来看,亚洲的保险渗透率还很低。亚洲保险还是一片蓝海,市场教育有待加强。欧美的保险科技创业公司更注重优化现有的保险流程。而亚洲的保险科技公司则注重加强销售渠道。有时,亚洲地区国家的监管部门会加强销售流程的监控和管理,比如佣金问题。

我难得能和这么专业的从业人员聊天,因此我还问了Stephen一些目前保险科技领域的热门话题。

比如,我们讨论了区块链在保险科技中的应用。Stephen认为区块链的分布式账单以及无法篡改特性可以为多方谈判提供很大的方便,大幅提升谈判效率。而智能合约的自动执行特性,则可以加速理赔处理,节约大量成本。

我们还讨论了德国的P2P保险创业公司ONE,该公司以Lemonade的发展为模板。

Stephen认为ONE利用物联网技术进行动态定价,的确是一大进步。但是他还提到,这一模式是否能够成功需要经历时间的考验,而且保险定价是一门很大的学问,理赔流程的细节很重要。

最后,我们从这条新闻谈到了自保保险行业。Stephen认为当某行业的数据足够充足时,自保或许是更好的选择。因为不同行业的风险是不同的,比如建筑业的风险和零售业的风险就是完全不同的。

Interview with Stephen Goldstein of Pivot Asia on InsurTech trends in Asia

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Stephen is a serial entrepreneur currently working with Pivot Ventures, a launchpad based out of Singapore to connect high impact Insurtech startups with insurers and reinsurers in the Asia Pacific region.

In this interview we get Stephen’s take on what makes InsurTech in Asia different from America or Europe.

Stephen made 3 points

  1. Insurance in Asia is still a  fairly young market compared to America or Europe. In Asia InsurTech evolved along with the nascent Insurance market.
  2. Most of the Insurtech in Asia comes out of Corporate Innovation Labs. This is often not as effective as it should be as the Innovation Labs usually lacks a P&L discipline to guide development and this also means the corporate powers that be may not always take the output from the Innovation Labs as seriously as they should.
  3. From the Insurance Carrier POV, penetration is still low. Asia is still more more of a greenfield/blue ocean market and lots of market education is needed. In America or Europe there is more emphasis on  optimising existing processes. In Asia the bigger play is usually distribution. Sometimes the distribution process in Asia is mandated by regulators, for example in relation to agent/broker commissions.

As I had such an expert on the phone, I also quizzed Stephen for his take on some currently hot subjects in Insurtech. 

For example, we talked about the use of Blockchain for Insurance settlement. Stephen’s take is that using Blockchain for stored contracts makes a lot of sense as a shared immutable single version of that contract makes it much quicker to get to consensus among multiple parties. A smart contract can then execute automatically, speeding up settlement time and reducing settlement cost. 

We also talked about the PR that ONE, a German P2P Insurance venture is putting out where they specifically go after the Lemonade, the high profile US P2P Insurance venture.

Stephen’s take was that ONE does look like a step forward towards dynamic pricing using telematics and IOT. But he also cautioned that  experiments like this will take time to play out and that pricing is a difficult science with a lot of devil in the claims process detail.

Finally we went on to talk about the Captive insurance industry based on this news out of  Malaysia. Stephen agreed that captives make sense where there is a data play based on the domain of the captive; for example Insurance for Construction would be different to Retail.

We look forward to staying in touch with Stephen and getting his insights in future.

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

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Social disruption and the gig economy will drive true fintech disruption

The World Economic Forum (WEF) recently released its latest ‘State of the Nation’ report on fintech globally, in collaboration with Deloitte.

The paper builds on four years of work, and is an output of the Disruptive Innovation in Financial Services project that had its genesis at the World Economic Forum Meeting in Davos, back in 2014.

The overarching conclusion of the report was that while fintech businesses have materially changed the basis of competition in financial services, they have not yet materially changed the competitive landscape.

The report argues that the continued reluctance of customers to move away from incumbents has prevented any player from dominating a market vertical. Innovations are clearly not being seen by potential customers as ‘significantly better than’ banks and incumbent FIs in order to overcome severe switching inertia. Establishing new financial infrastructure has also been a barrier.

While the report cites 8 disruptive forces as having the ability to shift the financial landscape going forward, in my opinion they have missed one critical theme – the changing nature of how we live our lives.

Banks and traditional FIs have been building products for decades that have catered to a market with a fairly universal idea of what employment is and expected social behaviour.

Having one or two jobs in one’s lifetime, marrying once, buying a house and retiring at 65 have been the bread and butter on which financial services have built product offerings.

But with the rise of the gig-economy, delayed home purchases and the increasing number of women in the workforce delaying marriage, then maybe it is this seismic social shift or disruptive force that will empower fintech to take hold.

To give you some idea of what this looks like, here are some statistics and trends worth looking into.

In my opinion Fintech that sees and understands this changing landscape and can piggyback on socially disruptive change will be successful. Just last week I met a financial advisor who had done exactly that, by building an online tax return platform that specifically catered to the side-hustler community. He’s formed a partnership with Uber locally and said he was amazed at the ecosystem of services that have sprung up off the back of these tech giants.

It really should be no different for fintech.

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.

Thematic investment returns of 30%-40% in Digital Payments

VeroPay App

Fintech investment opportunities for our portfolios are growing. In this post, I won’t dive into investment opportunities in private markets, like those through crowdfunding platforms, or through lending marketplaces, and won’t touch upon the emerging asset class of cryptos. Even though the number of articles around these investment opportunities on Seeking Alpha has skyrocketed over the past year, today I want to look only into the public markets and specifically in the Digital payments subsector which is the largest area not only in terms of number of Fintechs but most importantly in terms of adaptation rate from incumbents and end-user penetration. This is the reason that there are a few thematic investment vehicles already offered from the universal and private banks and Fintechs, focused on capturing the huge investment opportunity through trackers, certificates, and motifs. The second batch would be around themes of lending, crowdfunding, and lastly robo-advisory.

Digital payments subspace growth and potential, comes from growing e-commerce, high cash usage implying lots of room for electronic payment adaptation, omnichannel adaptation, growth in value-add services like loyalty programs, and increased security needs.

Three kinds of investment instruments

 7yr certificate with dynamic rebalancing of basket

UBS and Credit Suisse offer a performance linked equity certificate. It is a 7yr certificate that was issued in late 2014 and expires in 2021. It is linked to the AtonRâ Digital payments basket that is rebalanced on a monthly basis. AtonRâ is a Geneva independent research firm with an innovative thematic focus (e.g. biotech, AI and robotics, digital payments, global defense and security etc).

These certificates have had a decent cumulative performance for the first 3 calendar years (part of 2014, 2105, 2016) of around 10%. The explosive growth has been reflected in the returns year-to-date. 2017 has spiked up over 40%!

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UBS certifcate in USD

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Credit Suisse certificate in EUR

The holdings of the underlying portfolio aren’t transparent. They are published in the conventional monthly performance report. From one of the recent ones, the top holdings and best performers, offer us some insights in understanding the returns and the exposure.

Alibaba ADR (BABA) and Qiwi ADR are both top holdings and top performers for the month of June. No need for an intro to Alibaba and the only public way to invest in Alipay. Qiwi is a Russian payment service provider focused on serving primarily Russia, Ukraine, Kazakhstan, Moldova, Belarus, Romania, the United States, and the United Arab Emirates. It is publicly listed on the Nasdaq and of course, the Moscow Exchange (ticker: QIWI).

Celio, the largest Brazilian credit and debit card operator player in Latin America by revenue and market value, is the another top performer this past month. Listed only on the Bovespa BVMF: CIEL3.

Square and Global payments, a Fintech and an incumbent, are the other two top holdings of the AtonRâ Digital payments basket. Square is already 8 yrs and is one the significant Fintech players both in hardware and software for merchants and small businesses
(NYSE
SQ). The other US is nearly 50yrs old with a truly global footprint (GPN (NYSE)).

1yr certificate with a fixed basket

Julius Baer’s 1yr tracker certificate on a digital payment basket is soon expiring (Sep 6, 2017). It was a transparent structure with 12 equally weighted holdings that were mostly incumbents rather than pure Fintechs; and procuded over 30% returns.

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Source

The above holdings (in the left column) have been revised for an upcoming new tracker with the same number of equally weighted holdings and 4 revisions (in blue):

Maturing Sep 2017 To be issued in Sep 2017
Apple Inc Total System Services
Worldline SA Worldline SA
Mastercard Inc Mastercard Inc
Alphabet Inc Tencent
Global Payments Inc Global Payments Inc
Alibaba Group Holding Ltd Alibaba Group Holding Ltd
NXP Semiconductors NV Square
PayPal Holdings Inc PayPal Holdings Inc
Worldpay Group PLC Wirecard
Vantiv Inc Vantiv Inc
Ingenico Group SA Ingenico Group SA
Visa Inc Visa Inc

This basket is only composed of ADRs (no other currency exposure) and more incumbents. The rebalancing is effectively annually reinvestment decision is left to the investor.

Motif

For US retail investors only, Motif offers for $9.95 the “Digital Dollars” motif-basket that is fully transparent and dynamic. It is rebalanced quarterly and its holdings are market-cap weighted with only US listed companies. Currently it has 20 holdings with a heavy focus on the card network segment. The current segment breakdown is:

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The one year return is over 30%. The holdings, weights, and returns are:

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What is more important is that Motif offers an optimization algo that allows users to take stocks that can be considered players in the mobile payments space (which are 26 US listed stocks) and optimize (holdings and weights). This is a great tool for DIY thematic investing.

Our take

Global exposure in the digital payments space by including companies that are not listed in the US, has paid off. Rebalancing is necessary as the space is crowded and evolving with new value-add services. Frequency of rebalancing is not a no-brainer.

Lets watch whether Amazon sneaks into these baskets. In any case, the Amazon effect is lingering as AtonRâ research points out:

Looking further out, Amazon’s announced entry in the physical retail space through the acquisition of brick-and-mortar retailer Whole Foods Market is likely to have a major impact on the traditional checkout experience in most stores and to foster mobile payments. Indeed, it’s likely that Amazon will bring its Amazon Go concept (which uses notably computer vision and sensors to skip the checkout line and automatically debit the shopper’s Amazon account) to Whole Foods in the future, putting pressure on traditional retailers to follow suit with a seamless, mobile-based checkout experience.”

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 28th August 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.

For the intro to this weekly series, please go here.

News Item 1: Bitcoin’s Lightning Network Moves Closer to Compatibility

Decrypted: The SegWit soft fork was activated on the Bitcoin network. This is Bitcoin’s biggest upgrade to date, rearranging how data is stored in Bitcoin blocks. Nodes that upgraded will use a whole new data structure, while the nodes that didn’t upgrade will still continue to function normally.

Bitcoin blocks now have a weight limit instead of a size limit, which allows for blocks up to 4 megabytes. Additionally, SegWit also solves the malleability bug, that’s been a major problem for Bitcoin, but most importantly opens up the road for advanced protocols like the Lightning Network that are necessary to push Bitcoin into mainstream.

Our take: Lightning Network is a technology that leverages off-chain scaling. Its sets the stage for a decentralized option and extends Bitcoin with some nice properties for asset transfers.

The basic idea is to switch from a model where all transactions are stored on the blockchain, which creates a bottleneck, to a model where users can employ private payment channels to transfer value. Payment channels are a way to do secure Bitcoin payments, without broadcasting each transaction to the blockchain. The Lightning Network effectively improves upon this idea by creating a network of these payments on top of Bitcoin.

The Lightning Network allows for rapid payments, no third-party trust to control the transfer of funds between two entities, reduced blockchain load as transactions are not stored on the blockchain, additional multi-signature security and atomic cross-chain swaps.

One of the major benefits of the Lightning Network is cross-chain transactions, also known as atomic cross-chain transactions or atomic swaps, where users can trade different cryptocurrencies instantaneously, without risk. Payments can be routed across more than one blockchain, including altcoins. With Lightning transactions we’ll be able to stream money to pay anyone in the currency they want to be paid in, with whatever money we have in our digital wallet. For example, with atomic swaps a user would be able to pay a merchant in Bitcoin, even if they only had Litecoin, as long as both blockchains are using the Lightning Network.

On May 10, Segwit was activated on Litecoin, allowing Lightning Network transactions from various software clients to settle on the cryptocurrency’s network. The creator of Litecoin, Charlie Lee, described the two competing networks as two highways:

“Think of it being two highways: Today, Bitcoin is packed full of cars and Litecoin is empty. Even with Bitcoin packed, the cars are not coming to use the Litecoin highway today because it’s not connected and it’s inconvenient (centralized exchanges and slow on-chain transfers) to go across. LN will build bridges over the highways. But a side benefit is that these bridges will connect both highways together. Maybe the bridges on Bitcoin are enough such that cars will still stay on the Bitcoin highway. My bet is that the convenience and the cheaper tolls on Litecoin highway will convince cars to cross over and use Litecoin. But we won’t know until both are built.”

Including Litecoin, at least another six cryptocurrencies are running the SegWit upgrade, and most have tested Lightning transactions on their main network successfully: Groestlecoin, Syscoin, Digibyte, Viacoin, Vertcoin and NAV coin.  All of these cryptocurrencies have seen price spikes, that many attribute to the Segwit integration.

In the future, there could be dozens or even hundreds of cryptocurrencies using the Lightning Network. Each network simply needs to implement SegWit on their blockchain. While not every cryptocurrency is compatible with SegWit, Lightning can make it possible to interconnect different blockchains, allowing smaller altcoins to benefit from the advantages of established cryptocurrencies.

The Lightning Network is still under development, and there are still several steps before before Lightning transactions are available on Bitcoin’s blockchain. When it ready, this technology has the potential to significantly improve scalability and privacy and help Bitcoin achieve mainstream adoption by individuals and institutional users.

News Item 2: The Bitcoin Sovereign Wealth Fund

Decrypted: Estonia is one of the most digitized countries in the world. The small Baltic state has been one of the most technologically advanced nations, since the dawn of the Internet. It was the first to offer its citizens free, public wifi and was the birthplace of Skype over 13 years ago. Often labeled “Europe’s Silicon Valley”, Estonia is now considering its own Initial Coin Offering (ICO) for a token called Estcoin.

Estonia’s proposed ICO, described in a Medium post by Kaspar Korjus, the managing director for country’s e-Residency program, is not national policy yet. If there’s enough demand, the government plans to launch its own token. The Estcoin would allow Estonia’s many e-Residents, who don’t actually live in the country, to invest in the country’s future.

Our take: Estonia is not the first country to consider launching its own digital currency to rival to cryptocurrencies, like Bitcoin and Ethereum. Many countries around the world are exploring the idea of issuing their own national digital currency. China’s is testing the idea of a new national cryptocurrency, and so is Russia.

Usually, this involves a central bank issuing digital money using distributed ledger technology, but for Estcoin this is not the case. The proposed currency will not be issued in the traditional way. Instead, an official government-backed ICO will issue these coins and offer them to the public. The proposed currency would effectively serve as a national digital currency for Estonia.

Estonia may have an advantage over others that are considering the same idea. Over the last three years, with its e-residency program, Estonia has offered foreign entrepreneurs the freedom to easily start and run a global business in the country. Estonia is the first country to give foreigners an Estonian government digital ID, the ability to register an EU company, access to banking and payments services and tools that allow entrepreneurs to digitally sign documents. So far, over 23,000 people from 138 countries have signed up to the program.

The Estcoin holds a lot of promise for Estonia. It would allow people from around the world to directly invest in the country’s digital future. The goal of the Estcoin is to raise funds to help expand the country’s economy and increase its global presence. The proposed idea would result in the creation of a major digital investment fund, raised through the world’s first government-supported ICO. It would give people a stake in the future of the country, not just as an investment, but also providing expertise and ideas to help propel the country and grow exponentially.

Keep in mind that all holders of Estcoins will have a say in how the overall fund is used, which could mean that digital residents could have greater power than the actual citizens of Estonia. It’s expected that the Estonian ICO would add 10 million digital residents, which would outnumber the country’s 1.3 million current population.

The tokens could be used to pay for government services or even taxes. However, the Estcoin is meant to be an investment. Korjus explained that the funds could be managed through a Public Private Partnership (PPP). This would enable Estonia to invest in new technologies and innovations for the public sector, from smart contracts to Artificial Intelligence, as well as make it technically scalable to benefit more people around the world. Estonia would then serve a model for how societies of the future can be served in the digital era.

If token is successful and rises in value after the ICO, this could be a major boost for the Estonian economy. But it could also be a major boost for ICOs overall. Launching a government-supported ICO would solidify Estonia’s laws around cryptocurrencies. While US has only only begun to address ICOs, with the recent investigative report by the SEC, Estonia would allow companies to launch ICOs with no gray areas.

Vitalik Buterin, one of the advisors for the proposal, said: “An ICO within the e-Residency ecosystem would create a strong incentive alignment between e-residents and this fund, and beyond the economic aspect makes the e-residents feel like more of a community since there are more things they can do together”.

This kind of project has the potential to blur the boundaries between nation states. If Estonia is successful, it will show the world a new borderless digital nation, where opportunities are not just offered to a country’s residents, but can be potentially offered online to anyone, anywhere.

To track the progress of the Estcoin sign up  here.

News Item 3: SEC and CFTC Take Opposing Views on Whether Bitcoin is Ready for Mainstream Investors

Decrypted: The U.S. Securities and Exchange Commission (SEC) has rejected Bitcoin ETF requests in the past. In March, it rejected the Winklevoss Bitcoin Trust, a Bitcoin-based ETF. It also rejected a Bitcoin ETF listing on NYSE Arca by SolidX.

With these rejections the SEC does not allow securities with Bitcoin as the underlying asset to be traded on a national securities exchange, because of its concern that Bitcoin markets are unregulated and susceptible to manipulation.

But recent developments have changed that picture and Bitcoin derivatives are likely to be available to investors much sooner. In July, LedgerX, a cryptocurrency trading platform, was granted permission from the U.S. Commodity Futures Trading Commission (CFTC) to act as a clearing house for cryptocurrency-based derivatives contracts.

Regulatory conflict is not unique to digital currencies. Whether the SEC, the CFTC or both try to claim power over trading in the digital currency markets, potentially there could be a battle for regulatory dominance.

Our take: While the Winklevoss and SolidX Bitcoin ETFs have faced tough times with the SEC, the recent CFTC approval of LedgerX practically allowed it to offer options on Bitcoin to institutional investors this fall, making it the first federally regulated Bitcoin options exchange.

Also, some competition may already be on the horizon for LedgerX. On August 2, the Chicago Board Options Exchange (CBOE) announced it was planning to launch cash-settled Bitcoin futures in the coming months. The futures, which are pending regulatory review by the CFTC, could begin trading in Q4 of this year or early 2018, and would be supported by market data from the Gemini digital asset exchange.

But it looks like the winds are changing, as the SEC rejections were made prior to the LedgerX approval. LedgerX’s stamp of approval by the CFTC is unique and groundbreaking. Bitcoin derivatives will generate significant volume, and this will potentially pave the way to an ETF approval, The debut of Bitcoin options coupled with a recent change in SEC leadership, could signal approvals for Bitcoin EFTs. And if one gets approved, it’s likely that several others will not be far behind.

Other Bitcoin ETF are already positioning themselves for a more favorable shift in the SEC’s view of Bitcoin. On Aug. 11, VanEck filed a proposal with the SEC for an exchange-traded fund called the VanEck Vectors Bitcoin Strategy ETF. The VanEck Bitcoin ETF would be backed by the new Bitcoin derivatives. If approved, the Vaneck Vectors Bitcoin Strategy ETF will be listed on the Nasdaq Stock Market. It will be an actively-managed ETF which does not seek to replicate the performance of any index. VanEck is not the only one, REX also plans a new fund that will invest in Bitcoin-based derivatives. REX has filed two products, specifically REX Bitcoin Strategy ETF and REX Short Bitcoin Strategy ETF.

The CFTC’s stance to Bitcoin differs from that of the SEC. A U.S. federally regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base. The SEC and the CFTC may end up sharing power in the digital currency trading space, but the LedgerX approval gives the SEC the precedent it needs to approve future Bitcoin ETF proposals.

OpinionIs It Too Late To Invest In Bitcoin?

It’s been an incredible year for Bitcoin, with its value quadrupling in the past six months, surpassing the value of an ounce of gold for the first time in March. Over the last three weeks Bitcoin’s price has remained around the $4,000 mark, and various analysts and traders have tried to guess the price of Bitcoin in the future, with some saying it might even reach $15,000 in the near term.

Personally, I think there is never a bad time to buy Bitcoin, but it really depends on your strategy.  If you’re looking for short-term gains, currently with the price soaring, your upside will be much more limited. Everyone would love to buy Bitcoin at the cheapest price possible, for example at $0.01 the price when Bitcoin was first released. But if you are investing for the long term, then it doesn’t really matter when you buy, as the future of Bitcoin is a bright one.

Scarcity makes Bitcoin valuable to a lot of people. Since Bitcoin has a fixed supply of coins, its value will continue to rise until it hits its 21 million supply cap. Even when the supply cap is reached, if the demand continues, its price will maintain an upward trend.

Considering everything that going, we are seeing major economies around the world embrace it, more institutional investors coming on-board, scaling issues being resolved, and the fact that most people in the world have not even heard of Bitcoin, tells me that it will continue to grow and the price will rise even more in the coming years.

For now, after SegWit’s activation last week, the price remains bullish and people are optimistic about the future. Undoubtedly, with the debate about the Segwit2x roadmap there will be a lot going on over the next few weeks with can impact the price of Bitcoin and create volatility in the short-term.

Despite the gains Bitcoin has made over the past few years, there is no reason to think the price has peaked already.  Opportunities will come and go with Bitcoin. If you think the price right now is too high for a single Bitcoin, you don’t need to buy a full BTC. You can always buy a fractional amount of Bitcoin.

Bitcoin has enormous potential to grow and evolve, so its a smart idea to buy, even if you buy small amounts, and hold on to it for the long-term.

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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Wrap of Week #33: Bitcoin cash, ICOs, Airbux, Warp Speed Capital, Cumberland, Genesis Trading,…, Mergims, Stokfella

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After the ICO gold rush, it is time for Innovation Capital to change the world through Digital Cooperatives

cooperatives

During the August holidays I spent some time in a lake house in the Rocky Mountains where the history of Native Americans, Homesteaders, Miners and Moonshiners was much in evidence. It seems quaint in hindsight because we know what came after (big cities, mechanised farming, massive wealth creation). It was not quaint at the time. It was rough and tough, just like the ICO gold rush of 2017.

The Ethereum releases of Frontier, Homestead, Metropolis and Serenity track this same trajectory. Ethereum is currently somewhere between Homestead and Metropolis. Ditto the disruption to Innovation Capital that the ICO gold rush of 2017 is signalling. We are in the homestead/gold rush/moonshine era and will be moving into the big city/mechanised farming era.

That trajectory implies a few big company winners.Our thesis is that the disruption to the Innovation Capital business that the ICO gold rush of 2017 is signalling heralds something much more interesting, which is a more sustainable version of capitalism that will benefit the many not just the few. This mega trend shift is what we call Digital Cooperatives.

The ICO disruption to the Innovation Capital business. 

Disruption has winners and losers. The winners in this case is everybody – the 99% if you like. The losers will be the few firms who currently control the spigots of the Innovation Capital business.

I don’t use the term Venture Capital because that term now denotes one business model for Innovation Capital – the 2 and 20 compensation model for VC firms, mostly clustered around Sand Hill Road in Silicon Valley. I refer to that now as Wall Street West, which works closely with the firms across the country in Wall Street East that do the big money transactions (IPOs, big M&A, Bond Markets). In the founding days of VC and Silicon Valley, it was utterly different from Wall Street. As VC grew in economic importance, the bonds between the two tightened, with talent and deals moving easily between the two worlds. This wealth creation mostly bye-passed Main Street. The future of Digital Cooperatives will be about the Main Street real economy. It will be exciting for the 99% and boring or even disturbing for the 1%.

Software is eating the world. Software drives the economy and is disrupting every market. This means that software is now too important to be left to a few firms on Sand Hill Road and Wall Street.

The job of Innovation Capital is to fund innovation that changes the world. The VC to IPO model did that brilliantly for a long time, but it is increasingly broken (see this post for more) and has been ripe for disruption for some time. The ICO is the first step in that direction. Like all disruptive innovation it arrives first with a lot of sketchy characters. The ICO gold rush of 2017 makes The Wolf Of Wall Street seem tame and that is hard bar to vault over!

Like all disruption, the ICO appears wild and chaotic and filled with sketchy characters, with ventures that are totally unregulated and often skirting the law. In short, we are in the Napster era. What comes after will be more like iTunes and Spotify, not free but much cheaper and more convenient and totally legal. When was the last time you saw a retail store selling CDs? Who mentions Napster other than as a historical footnote?

I see three fundamental drivers of change from the ICO disruption:

  • A better way to manage early stage technical and market risk.

  • A shorter path from garage to liquidity.

  • The enabling innovation coming from the protocol layer.

These three fundamental drivers of change will enable a more sustainable version of capitalism via Digital Cooperatives. First lets look more closely at those three fundamental drivers of change.

A better way to manage technical and market risk

VC Funds manage risk. Like any investor, they like the upside potential and want to minimise downside risk. VC want to invest when as much of the risk as possible has been eliminated. This is what the LPs pay the GPs to do.

VCs have to time that entry carefully. As one VC put it to me “we want to come in just before an entrepreneur can get a bank loan”. The boom in mega PE/VC funds is partly explained by bankers reluctance to lend post GFC. If you have to wait longer for a bank loan, that mega equity round may look more attractive – even if the preferential equity terms give founders some agita.

Preferential/Convertible Equity is a hybrid Debt/Equity instrument for a good reason. Debt makes risk management easier for passive investors (even if it wipes out common equity owned by founders and management in the process).

Risk management is what LPs expect from GPs. They want the massive upside without the massive risk. That makes sense as long as entrepreneurs have no other option. Thanks to ICO,  entrepreneurs do now have another option.

This focus on risk management means VC GPs work hard to avoid two types of risk. You can look at the ICO market through the prism of these two types of risk: Technical Risk & Market Risk.

Technical Risk.

If you invent a cure for cancer (or longer lasting/cheaper/safer batteries or other change-the-world technology), the market is huge and ready. There is lots of technical risk, but there is no market risk.

Professional investors have had a “run, don’t walk” attitude to technical risk. Imagine Vitalik Buterin pitching a Sand Hill Road VC for Ethereum in 2014. Would they have seen a future Bill Gates? Probably not; the first filter of technical risk would have killed the deal. Bill Gates did not raise money until Microsoft was already profitable. In contrast look at the individuals who bet early on Ether in 2014; they had some ability to assess the technical risk of building a decentralised computer, because they were developers first and investors second.

Now imagine a Biotech or Cleantech venture with a massive market but lots of technical risk. Biotech or Cleantech scientists who can assess that technical risk can use ICO mechanisms to vote with their wallets by buying in early. Those scientists will be the technical smart money voting on Technical Risk. Professional investors will follow that technical smart money.

Market Risk.

Most ventures funded by VC have zero technical risk. Look at ventures such as Facebook, Twitter, Uber and AirBnB; the early technology was trivial.

When it comes to market risk, that risk gets taken by founders, friends and families and the occasional Angel; they have to get the venture to Product Market Fit before VC will invest. If you build an app and find a market, VC cash will help you scale; VC today is growth equity after market risk has been eliminated. The problem occurs when everybody wants to fund after market risk has been eliminated; that will cause the innovation funnel to dry up.

Fortunately the ICO model also helps manage market risk, because the early visionary users are also the investors.

Again Ethereum is a useful case study. Ethereum’s early visionary users/investors also built the early DAPPs; they had the tech chops to do so, as well as the financial motivation because they owned some ETH. In contrast, in some 2017 ICOs, the early investors are speculators who don’t use the product. They speculate based on some hype in a YouTube video; these ventures will probably fail. A promising sign is when, like Ethereum, the early investors also build stuff with the new technology coming from the ICO; that is when passion, expertise and capital are aligned.

The progression from the Napster era to the iTunes/Spotify era means coming to terms with the complex legal, technical, tax, organisational and marketing issues related to launching something like an ICO that includes a beneficial interest in the venture that means that a) it is a better deal for investors b) it is definitely a security and will be regulated as such. The companies that lead this next wave of innovation will not shy away from securities regulation; they will embrace it. This won’t be easy but the prize is a big one.

Although the legal, technical, tax, organisational and marketing issues related to an ICO that is legally a security are complex, they will be fixed because the prize is so big. The reason is that the next phase of the ICO market does not simply change the early stage. More critically also the next phase of the ICO market also changes the late stage. In the late stage one word matters most – liquidity.

A shorter path from garage to liquidity

The future of ICO is more than crowdfunding.

The simple reason is liquidity. If you invest in a private company via crowdfunding, you are locked in until there is an exit or until you do some complex bilateral negotiation where you will tend to be at an informational disadvantage. There have been some opaque grey markets in private shares but they are nothing like public equities in terms of transparency, price discovery and liquidity. In contrast, you can trade ICOs almost like you can trade public equities; you have to learn a few new techniques, but it is possible. The ICO market has price discovery, shorting and all the other market mechanisms that enable liquidity.

Liquidity is a game-changer. It is why the O in ICO is like the O in IPO. The difference is time and statistical probability. The journey from garage to IPO is at least 10 years vs instant liquidity for an ICO. The statistical probability of an early stage venture getting to liquidity is less than  1% in IPO vs 100% for ICO. Ventures can languish in small cap hell on both markets but that means below $2bn in IPO world and below $200m in ICO world.

Liquidity has measurable value as shown by the liquidity discount given by the tax man.

Liquidity is a game-changer because it makes early stage so much more accessible to Josephine Q Public. A Fund or a Professional Angel can live with illiquid investments. Everybody else wants something like the stock market where they can check price and sell if needed without getting anybody’s permission; whether they choose to be active traders or buy and hold investors is a choice they can make.

Sorry, I would like to make you rich but the SEC won’t allow me to do that

The ICO market of 2017 has been like the Casablanca scene – “I am shocked, shocked, to learn that investing has been going on here”. The ICO issuer has to pretend that a Coin has no beneficial interest that makes it even remotely like a security. That pretence makes it totally legal, indeed sensible and respectable, to offer worthless Coins to unaccredited investors (Josephine Q Public) while offering equity and other security like beneficial interest to accredited insiders (aka Funds and Professional Angels).

The SEC has been fighting the last war. Rather then bemoan that fact and call for the SEC to change (and grow old waiting), entrepreneurs will figure out how to legally offer security like beneficial interest with all the low cost/convenience of the ICO model. Steve Jobs did not tell consumers to stop downloading free music or tell music labels to stop suing customers; Jobs offered a cheap/convenient and legal service called iTunes.

Some commercial ventures simply need a better funding model. Some ventures also need a different operating model, which brings us to impact investing and digital cooperatives.

First, lets look at the last of the three big drivers of change – the enabling innovation coming from the protocol layer.

The enabling innovation coming from the protocol layer.

The current phase of the ICO phase of is based on one picture (which comes from Fred Wilson of Union Square Ventures):

fat app layer

fat protocol layer

There are two possibilities here:

One: this theory is wrong. The big value creation in the Decentralised Internet will be at the App level of the stack, just like it was in the Centralised Internet era.

Two: this theory is correct and there is some massive opportunity at the protocol layer.

My thesis is that there is no value capture at the bottom of the stack, but a lot in the middle and that the value creation at the top of the stack will be done through Digital Cooperatives (which we will come onto later in this post).

First, why do I believe there will be no value creation at the bottom of the stack? This is what I call the commercial TCP/IP layer mirage.

The commercial TCP/IP layer mirage.

TCP/IP is often used as an example to describe the protocol layer opportunity in the ICO market. What if you could invest in a commercial equivalent to TCP/IP for the decentralised Internet?

TCP/IP obviously enabled massive value creation – at the app layer. You could say “value creation was at the protocol layer but value capture was at the app layer”.

The reason that the commercial TCP/IP layer investment thesis is a mirage is simple. Internet protocols such as TCP/IP, SMTP or HTTP would not have got the same traction if some commercial entity controlled them and was extracting a fee.

Ethereum is the closest thing we have to a protocol layer for decentralised Internet. The Ethereum founders debated vigorously what model to follow. They opted for a non-profit Foundation model. I doubt it would have got the same traction if it had been a commercial venture at its core.

Wintel was a different era that won’t be repeated. Nobody will ever repeat the level of dominance that Microsoft and Intel had at the bottom of the stack. Chasing that dream is a recipe for burning  capital.

However, just up a notch from the bottom of the stack is the middleware layer. This is where a lot of enabling innovation is happening.

The middleware layer of the Decentralised Internet

During similarly early days of the Centralised Internet, in the mid to late 1990s, we had a market that generically was called middleware (between the app layer at the top and the OS/DB at the bottom). If you can remember things like Web Application Servers you have carbon-dated yourself.

The Decentralised Internet era has a similar middleware layer emerging. This time the services relate to things such as Identity, Provenance, Data Validation, Exchange and Payment that a) all apps need and b) will be done quite differently in the Decentralised Internet era.

The App Layer benefits massively from using these middleware services. The mantra is “write less code”.

The App Layer will be great for the world, less so for VCs, because so much of it will be non-profit or owned by cooperatives. For the kind of value capture that VCs like, the middleware stack will be great. The App Layer will have a bigger impact but will not primarily be funded by VC. The App Layer will have a lot of what we associate today with  Impact Investing, but even this will be changed by Blockchain.

Impact Investing

Family Offices (Single and Multi) usually have a big Impact Investing focus. The idea is to “do well by doing good”, by investing in ventures that will generate a reasonable economic return while also changing the world for the better. Impact investing makes sense for them because Family Offices are investing for multiple generations and they want to leave their future generations with a better world, not just with money.

Whatever the social mission (saving the environment or financial inclusion or reducing inequality through economic empowerment or better health or eduction or…), impact investing is about getting the balance right between profit and social good. Impact ventures are for profit in the sense that they generate profits by selling goods and services for more than they cost; they are not dependant on philanthropy to sustain themselves. They pay employees and contractors through this profit. They may also distribute some profits to shareholders who funded the early stage, but this is not the shareholder primacy world of the past. That is why impact ventures are often and incorrectly labelled non-profit. They are for profit; it is just that producers (employees and contractors) and customers are as important as investors.

Technology and ICOs are impacting this by bringing the idea of Digital Cooperatives into focus as a way to a more sustainable version of capitalism.

Capitalism in Crisis

Capitalism as we know it today is in crisis. Communism failed visibly after the collapse of the Soviet Union. It is clearly a failed system/ideology. Sadly, when Capitalism lost it’s natural enemy, after the collapse of the Soviet Union, Capitalism also started to fail. During the Cold War, the West had to convince people in both the developed and developing world that their system was better for the people by spreading wealth broadly. After the Berlin Wall collapsed, wealth went to a smaller and smaller group of people. Without a stake in the capitalist system, people moved to populism of both the left and the right and this came to a head in 2016 with Brexit and then the resurgence of the left wing of the Labor Party in the UK and the election of Donald Trump in America. Populism of left and right could destroy capitalism, which will be a disaster because the alternative (communism) has already been proven to fail.

The best hope for a revised and sustainable version of Capitalism comes from the concept of a digital cooperative where producers, customers and owners are aligned. We can see the early signs of this in some of the best ICOs. The ICO model is ideally suited as the funding and governance mechanism for Digital Cooperatives.

Digital Cooperatives

The idea of Cooperatives is not new. It works in many markets; think of Community Banks and Coop grocery stores for example. These are Customer Cooperatives; the shareholders are customers.

One example of a Customer Cooperative is Vanguard. The customer in this case is a shareholder of the funds. There are no outside investors. This structure allows Vanguard to charge very low expenses and this is what Efi Pylarinou on Daily Fintech dubbed the Vanguard effect. It makes Vanguard the real disrupter in the Wealthtech segment of Fintech. When they started in 1975, their average expense ratio was 0.89%. By 2014 this had dropped to 0.18%. Given their scale, network effects and customer ownership structure, nobody can undercut Vanguard on price and in a commodity such as ETF, price is the deciding factor. The growth numbers (tell the story:

  • 32 years to reach $1 trillion in assets
  • 8 years to get to $2 trillion
  • 3 years to get to $3 trillion.

At the top of the WealthTech stack are the Single (SFO) and Multi Family Offices (MFO) where the shareholders are the owners. Intermediaries to SFO and MFO still get paid if these intermediaries deliver value, but they do not control the game in the same way that intermediaries serving the less wealthy control the game.

In short, ownership matters.

In the analog era there were many Worker Cooperative experiments. They mostly failed due to a simple alignment of interest issue. If employees are owners it is too simple to get employees to vote for a pay increase that will make the business unprofitable; it is a tragedy of the commons. The resurgence of left wing populism is bringing back these ideas, but they are likely to fail for the same reasons.

A Producer Cooperative aligns better with the reality of the Gig Economy (which is the norm in the Rest of the world). The Producer Cooperative is based on free agents such as doctors or drivers. We have profiled some examples on Daily Fintech (such as a Dentist Cooperative). The idea of a Producer Cooperative is simply that the ownership of these gig economy networks remains primarily with those who provide the services in those networks. These free agent entrepreneurs will be much more thoughtful about when and how to raise prices than a salaried employee might.

There are also User Cooperatives.

Imagine if Mark Zuckerberg’s next door neighbour at Harvard had the same simple brilliant idea for a social network and built a good enough product, but decided to offer the first few thousand users a big % of the equity. He or she would be very wealthy (albeit not as wealthy as Mark Zuckerberg) and few thousand people who made it happen would have had their lives changed.

In the case of social networks, the User is also the Producer; they produce for free in return for getting a free service. They are also the Product being sold to advertisers. So a User Cooperative is slightly different from a Producer Cooperative.

A Digital Cooperative (whether Customer or Producer owned or some combo) applies digital efficiency to the simple idea that ownership should be shared among those who create the value.

A well designed ICO enables a Digital Cooperative. Again the Ethereum ICO is an example. The early Ethereum investors were also the  early producers and the early customers building the DAPPS. Through this simple alignment of interest, Ethereum overcame both technical and market risk.

In many cooperatives, the ownership is incidental. You care about the good prices at a Community Bank/Vanguard/Coop Grocery; your ownership stake is incidental. The ICO with its liquidity makes that ownership more valuable but it is still not the primary consideration. The ICO with its liquidity will enable many more Digital Cooperatives to thrive. It may become the primary form of company in the future.

The ICO disruption took everybody by surprise.

That is why they call it disruption. If a lot of people forecast a trend, it is less likely to be disruptive.

Many people wrote about how the VC to IPO innovation capital business was broken; but although the problem was obvious, no real change happened for decades and the status quo seemed locked in forever. Many people wrote about how Ethereum would enable new crypto economic markets and governance structures, but that seemed highly theoretical and geeky. Many people wrote about how real time settlement using blockchain would change how the capital markets operated, but that seemed limited to the B2B realm. Nobody connected all three dots to show how a completely new permissionless network would emerge so rapidly in 2017 offering:

  • A better way to manage technical and market risk for investing in early stage ventures.
  • A shorter path from garage to liquidity to enable ventures, both for profit and non-profit, that would never have seen the light of day in the old model.
  • The enabling innovation from the middleware layer of the protocol stack that reduced the time/cost to create the world-changing applications of the Decentralised.
  • A new form of impact venture, the Digital Cooperative, that promises an inclusive, sustainable model for the future of capitalism.

Image Source.

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

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