Blockchain Bitcoin & Crypto Weekly CXO Briefing

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 offer one expert opinion.

This is week two. For week one and the intro, please go here.

News Item 1: Bitcoin Pool ViaBTC says no to Segwit

News Decrypted: Last week we reported that a major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit. For explanations/glossary please go to last week’s post. Our take on last week’s news was that this signaled the last bloody battle in the Bitcoin Civil War and that Bitcoin Core was winning.

The news this week is that another Bitcoin miner is saying no to Segwit.

Our Take: This week’s news seems to indicate the opposite of what we reported last week, but we hold to our conviction. Our take this week is that there are always skirmishes after a war is over. You could also say “it ain’t over till the fat lady sings” and that there is always some risk, but that does not invalidate that there is more upside than downside. If you read this week’s news item below the headline, it is more “not yet” than a no, despite the headline. You often get “headline negotiations” ie making a tough public statement followed by private negotiations.

News Item 2: Billionaire investor holds 10 percent of his life savings in bitcoin predicts price to hit 2000

News: Billionaire hedge fund investor Mike Novogratz, who made it into the Forbes billionaire list in 2008, revealed that he holds 10 percent of his net worth in Bitcoin and Ethereum.

Decrypted: Bitcoin price continues to rise and so we get forecasts that it will continue to rise. There are many more stories like this that are along the lines of “follow the brilliant investor leader”. Novogratz also invested in Ether. Another high profile investor making bullish statements is Tim Draper.

Our take: These investors are talking their book and they bought when the price was much lower, but that does not invalidate what they are saying. With the Bitcoin Civil War nearly over, there is more upside than downside, but nothing goes up in a straight line. A major Bitcoin hacking story is likely in 2017 and that will be a buying opportunity. It depends on your time horizon. If you view buying Bitcoin like a 10 year bet on a startup, these fluctuations are irrelevant.

News Item 3: Criminals who deal in bitcoins in Florida could soon be busted for money laundering.

News: Just because you use bitcoin to do something illegal, does not give you a defense.

Decrypted: This is only relevant as it drives mainstream sentiment and regulation. If the headline was “Criminals who deal in dollar bills in Florida could soon be busted for money laundering” it would not be significant.

Our Take: Regulators are in a quandary. On the one hand, bitcoin should be like cash – it is irrelevant as a defense for illegal activity. That is what this week’s news is about. On the other hand, banks and governments want to have control over cash and so don’t want bitcoin to be a legal currency and tax authorities prefer to see it like a commodity and to tax based on capital gains. The last sentence in the news article is interesting “But critics say the law could deliver a chilling effect on the bitcoin, which can be valuable in promoting commerce between Florida and countries such as Venezuela, where traditional banking systems have gone awry.” In short, money laundering out is bad, but money laundering in is good.

Opinion: Bitcoin continues to struggle ethereum looks strong

Why it is worth listening to: Ethereum is the only crypto currency with a market cap even comparable to Bitcoin and Ethereum is building the world’s first decentralized operating system.

Our take: Ether, like all Altcoins, have done well price-wise during the Bitcoin Civil War. If that is over, bitcoin price will rise and much of that will come from people converting Altcoins to Bitcoin. Ethereum could be the one exception to that. However, as a reality check it worth noting that few mainstream people have heard of Ethereum – this is reserved for crypto true believers . Also, the news last week was more about traction for Sidechains, which takes away some of the programmability benefits of Ethereum and to have a major differentiator, Ethereum needs to prove Proof Of Stake as an alternative to Proof Of Work and there is still real technical risk in that. If you love the idea of the world’s first decentralized operating system (I do), you may want to buy the Ether currency. As an investor, Ether at current price has a lot more risk than Bitcoin.

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.

 

 

China Face-Off America – Battle of Global Payments between Tech Titans

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Earlier this year Daily Fintech did a China week, and there were several interesting topics and key insights discussed. We analysed how the three Chinese Tech giants (Baidu, Alibaba and Tencent) have led the Fintech boom in China and what the favourable factors that helped were. However, over the past few weeks, we have had some developments with WeChat expanding into Europe, and almost as a reaction (perhaps not), Facebook ramping up group payments on messenger, Android pay collaborating with Paypal and more. We have Ant Financial’s bid for Moneygram and there is also a rumour that Whatsapp was ramping up to launch payments in India. That feels like a heated battle between Tech giants of the east and the west (really Chinese vs Americans, such a cliche) for Global Payments Glory. 

While we immerse ourselves in Fin and tech in the west, we often tend to forget that there is a whole new world out there in Asia that completely dwarfs what we have achieved in the west with regards to Fintech. FinTech financing in Asia-Pacific was almost US$10 billion in the first half of 2016, eclipsing the aggregate of North America’s (US$4.6b billion) and Europe’s (US$1.85 billion). WeChat sent 32 billion digital red envelopes over Chinese New Year in 2016 and 46 Billion in 2017. Paypal did 4.9 billion transactions in the whole of 2015 and 6.1 billion in 2016. This list could go on, but you get the point. The dragon really dwarfs the west!!

China Fintech

Stats aside, Chinese tech giants have had tremendous success in their local Fintech market. In comparison, Apple, Facebook, Google and Amazon (the Fantastic Four) have had mixed results in the west.

I am fascinated by what Alipay(from Alibaba) and Wechat (from Tencent) have managed to achieve in China. A good story about the growth of these firms is how WeChat created a highly localised product to compete with Alipay. WeChat had been lagging Alipay upto the launch of “Lucky Money” during the Chinese New Year of 2014. It combined the Chinese tradition of “Red Pocket” with conventional peer-to-peer transaction, and achieved huge success by adding a fun flavor of luck into its payment function. During the New Year holiday of 2014, approximately 10 million users engaged and bundled their bank cards, and 40 million red pockets were dispatched. In 2016 these numbers on WeChat further increased to 420 million, and reached a massive 8 billion that same year. Jack Ma called this strategy by WeChat the “Pearl Harbour Attack” on Alipay.

WeChatVSAli

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Now, lets take a look at what the Fantastic Four have achieved in Payments.

Facebook, apart from hiring David Marcus (from Paypal) haven’t really had much joy with its payments business. Its payments revenue (for 2016) of $753 Million is tiny when compared to ads revenue of about $28 Billion. And the payments revenues were down 11% from 2015.

Google’s Wallet project didn’t go anywhere at all, however it had a much better uptake with its Android Pay. By end of 2017, Android pay is projected to have about 27 Million users. Android Pay have just agreed to integrate Paypal to it, which would mean customers can use Paypal through Android Pay.

Amazon’s “Pay by Amazon” has been a good story from the time it was launched. It has now 33 Million users which is almost a 50% annual growth from 23 Million users last year. Amazon managed to get its Wallet License in India last week (watch this space).

Apple pay has been the leader of the pack in the payments world. With about 84 Million users projected by end of 2017, Apple have so far done well in this space, however still lags behind Paypal.

All these numbers from the Fantastic Four are tiny when compared to the numbers achieved by WeChat and AliPay.

Alibaba have been quite active in expanding through acquisitions. Investment into PayTM in India, provides them a hold into PayTM’s 200 Million user base in India. However the most recent news on Moneygram is an ambitious step into the remittance market, and if the deal did happen (post all the drama), it would provide Alibaba a 5% share of the 600 Billion pound remittance market.

'The Americans aren't objecting in principal to a merger down the line as long as we build a Chinese wall to keep a couple of things secret from the Chinese.'

WeChat have more recently started global expansion into South Africa, set up its European offices in Italy and planning a London launch soon. While they are behind Alipay with their global expansion, their customer acquisition strategy has worked better (than Alipay’s) so far.

When I talk to innovators in India, I often tell them to create a simple solution to an existing problem without overengineering it. That’s generally true for most developing nations. There are ample problems to solve and a half decent solution can see massive growth if executed well.  In the case of China a few hundred million users went from Cash to Mobile Payments and it was a classic leapfrog moment. Most likely Alipay and WeChat wouldn’t see this again in their Global expansion adventures.

I believe they would have better success through acquisitions, investments and partnerships with key payment players in their target markets, rather than trying to lift and shift their business model in China elsewhere. I also think that the winner of the East vs West payments war would be decided by key battlegrounds in India, LATAM and Africa. If Alipay and WeChat could expand into these regions quickly, then the Fantastic Four would struggle to gain ground. However, you don’t write off the likes of Apple, Amazon, Google and Facebook that easily. Watch this space!!

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

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.

ClearBank: a MSFT Azure B2B Fintech

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A well kept secret of the UK B2B banking sector, is now public. Clear Bank, a clearing Bank in the UK, is ready to compete with the four UK clearing banks,

  • Barclays
  • HSBC
  • Lloyds
  • Royal Bank of Scotland (RBS).

Clear Bank is the fifth UK clearing bank and the only one that is pure B2B since it does not offer services direct to the consumer.

Don’t confuse Clear Bank in the UK, with Clear in the US an early stage startup offering banking services to startups. Or Bank Clearly, a digital banking start-up in the Middle East similar to Moven (i.e. no banking license but offering banking services to startups by partnering with CBW Bank).

Back in the 60s there were 16 clearing banks in the UK. Consolidation in this part of transactional banking has left the UK currently with 4 clearing banks that process over 80 Trillion pounds annually worth of payments in the UK. This is a fee business for settling payments between institutions and individuals.

Clear Bank has no plans to offer services directly to consumers. Clear Bank’s value proposition is to make processing payments in the UK via systems like Bacs, Chaps etc, Faster & Cheaper.

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Who cares?

Clear Bank will be helping Challenger banks to access the payment system at the Bank of England level, at the same level as incumbents.

Clear Bank will help the 44 UK Building societies offer current account services in a cost effective way. Right now, only 2 out of the 44 offer such capabilities to their members due to prohibitive costs.

Clear Bank will boost indirectly retail banking by reducing the substantially processing costs, which will facilitate competition for incumbents in the UK.

Clear Bank will help Fintechs by providing Banking as a service through the Cloud at a very low cost. Clear Bank will be offering an API so that Fintechs can interconnect to the ClearBank Fabric.

Who is behind this innovation?

Clear Bank has been built on the Microsoft Azure Cloud. I spoke to Richard Peers, Director of Financial services at MSFT in the UK, last week and he clarified the hybrid approach: “The application and business logic of Clear Bank is in the public cloud; connectivity to payment schemes and customer data is local in the private cloud.”

Clear Bank is built on the Azure public cloud and the Azure Service Fabric (hybrid approach). No need to understand the technical details here. What is important to know is that Clear Bank’s business model is in the category known as PaaS (Platform as a service). Most of us are mainly familiar with Saas. Microsoft has been working with financial services providers on various projects whose value proposition is delivered via Paas or Iaas. The infographic below captures the main differences. This is where we start understanding how the technology has lowered the cost and also how the Banking As a service offering is secure.

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Clear Bank’s platform includes authentication of the parties involved using a combination of voice, biometrics and face recognition. As Richard pointed out “The Iaas is a technical model that delivers a business model that allows a different scale, agility, security, cost model.”

He also explained in clear business language about Azure Service Fabric, the micro services “kitchen” of MSFT:

“The current world has been operating with applications that are still client/server many tiered and typically needing significant engineering and testing across the full stack before they can be deployed, with huge dependencies between layers. So think about having to get everyone in a company as complex as Microsoft on board with a decision before you can act. In the microservices world, you can focus on a component, get it right and deploy without total dependency on everything else.”

 My last question to Richard, was about the nature of the True innovation in Clear Bank’s case? I always thought of MSFT as a cloud computing player focused more on the Blockchain tech potential and now I realize that is has been instrumental in launching a clearing bank (we all expected blockchain to be the tech disrupting this part of the stack) that is NOT Blockchain powered?

The true innovation is in the fundamentals of the business model and the scalability of the cloud when applied at its highest potential.   Banks need to operate at real-time, based on an API model with the ability to reason over data at low cost, resiliently and securely.  Their use of the cloud allows this, delivering a faster and more cost efficient model with the agility to add new services as the market moves. ClearBank provides a Banking as a Service (BaaS) model to other Financial institutions and Fintechs, allowing them to focus on their own products and core businesses. ClearBank provides the underlying banking infrastructure and software all as a service.”

 On our radar screen

We will be watching Clear Bank’s role in the digitization of financial services. What microservices will be built on it, how much will the UK payment system save, how much will the global system interact through Clear Bank? Which of the multiple banking services that ClearBank offers, will prove to be the key by impacting the payment ecosystem?

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.

Introducing The Blockchain Bitcoin & Crypto Weekly CXO Briefing

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.

Start your week with The Blockchain Bitcoin & Crypto Weekly CXO Briefing in your email by 7am CET. It should take you 5-10 minutes to read properly (and a minute or less to skim if it is one of those crazy Mondays).

You owe it to yourself to invest 5-10 minutes a week to learn about the technology that will change your company, your career and your world. Don’t get blindsided by important news from the Blockchain Bitcoin & Crypto world. Be in the know and in the flow – without getting stuck in the weeds.

Each week we select 3 news items that matter. We keep it to 3 because we know that you are busy. If it is a big news week, it is our job to find the 3 news stories that matter so that you get a high signal to noise ratio. We give you the news in one sentence and link to the announcement.

For each news item we offer News Decrypted,  which explains why investors, bankers and entrepreneurs should take notice. We include a Glossary if we have to mention some critical jargon (which will be marked in red like this). Finally we offer Our Take on the underlying trends represented by this news and “where the puck is headed”.

In addition to 3 news items, we select one analysis/opinion/insight piece each week that we think is excellent or a controversial subject that is being debated in some forum.

Our point of view is that all three are important – Blockchain Bitcoin & Crypto. There can be private, permissioned Blockchains without any Bitcoin or any other Cryptocurrency. There can also be Cryptocurrencies other than Bitcoin (Altcoins) and distributed ledgers that use some form of Crypto other than Blockchain. We cover them all.

In this first post, we are tracking news for a bit longer than a week as we are in catch up mode:

News Item 1: Is a Mining Manufacturer Blocking SegWit to Benefit from ASICBOOST?

News Decrypted: This could be the last bloody battle in the Bitcoin Civil War. A major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit.

Glossary. SegWit is shorthand for Segregated Witness. It enables signatures to be kept outside the Bitcoin block (which matters if you don’t want to increase the block size and that is the technical issue at the heart of what is referred to as the Bitcoin Civil War). Think of this like keeping signatures on a check outside the core banking system (which only records that a signature was received and points to the system where evidence of that signature is stored). This becomes more important now that MultiSig means more signatures.

Glossary.  MultiSig is shorthand for Multiple Signatures. This is critical to fraud prevention. It means that more than one person is needed to release a transaction (payment or other value exchange), just like in old-fashioned banking/payments systems.

Our Take. The ASICBOOST patent is filed in China (which raises doubts about its enforceability). More importantly it raises doubt about the intellectual credibility of those opposing Segwit and other Bitcoin Core approaches to scaling (for our decrypted take on Bitcoin scaling challenges please read this).

This could be the last bloody battle in the Bitcoin Civil War. The war has to end for Bitcoin to move forward. A hard fork would be “game over” for Bitcoin, Blockchain and Crypto. Obviously this news can be interpreted in different ways. The Bitcoin price action in the weeks and months to come will be the wisdom of the crowd that will tell us who is winning this argument. I am putting my belief on the line by launching The Blockchain Bitcoin & Crypto Weekly CXO Briefing this week. If I thought that a hard fork was likely and that everything Blockchain Bitcoin & Crypto would be relegated to the dustbin of history, I would be foolish to do this.

News Item 2: Blockstream Launches New Confidential Assets Feature for Enterprise Blockchain Customers

News DecryptedMany Bitcoin enthusiasts love the transparency that is enabled by every transaction being publicly visible on the Blockchain. That transparency does not work for enterprises that thrive on proprietary data, secrecy and control. Nor does it work for those individuals who, for whatever reason, don’t want anybody being able to see their transaction. Blockstream, a VC funded venture, offers “cryptographically-enforced confidentiality” (translation = hard to hack). Blocksteam is a driving force behind the idea of Sidechains, which is an alternative to a Turing Complete Blockchain platform such as Ethereum. Blockstream, via Confidential Assets, aims to offer the benefits of transparency – that transactions can be publicly verified to be accurate – without losing the benefits of privacy, by  giving control to individuals who can selectively disclose the hidden asset values and types.

Glossary. Sidechains is the idea of taking a Bitcoin transaction and sending it off to anther system where some additional processing can be done. The idea is to keep the core Bitcoin transaction processing simple (which tends to mean cheap, fast and reliable) while enabling each transaction to be programmable.

Glossary. Turing Complete means you can run application code on a platform.  That is why Ethereum is such an ambitious project; it is a decentralised operating system.

Our Take

  • This could be a blow to Z Cash, Monero and other Altcoins selling anonymity.
  • This could be a blow to Ethereum as it will boost the idea of Sidechains as an alternative way to have programmable transactions.
  • This could be a boost for Bitcoin as it will overcome one of the perceived weaknesses (lack of privacy).
  • This signals a more commercial Bitcoin, with VC funded companies like Blockstream making the big moves. The price for this commercialisation is greater centralization and less control by individuals (unless they invest time and money to get that control), but the commercialisation is probably needed for Bitcoin to go mainstream.

News Item 3: Japan Officially Recognises Bitcoin as Currency Starting April 2017

News DecryptedLegality is essential to any move to the mainstream. The issues are complex and this has been debated a lot in many countries. It is natural for politicians to fear the lack of control, but there is also the increasing recognition that being bitcoin friendly can drive innovation, productivity, jobs and a higher standard of living. So when one of the biggest economies in the world does this, it is a seriously big deal.

Our Take: This is another sign of something that took most people by surprise, which is that Bitcoin adoption is happening first in countries with strong currencies and fairly good governance. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

We spotted the trend towards wealthy countries adopting bitcoin first in Switzerland and now the news from Japan indicates that exactly the opposite of what pundits expected is coming to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency. Here is our review of Bitcoin in Japan.

Opinion of the week

VC Fred Wilson Thinks Coinbase Is the Goldman Sachs of Bitcoin

Why pay attention: because Fred Wilson is a VC with a great track record, who is very thoughtful and who has made many bets in Bitcoin ventures, including Coinbase.  Cynical counterpoint: he is just talking his book

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.

 

AI will hurt banking without a ground-up approach

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The last twelve months have seen AI fever reach new peaks. Every technology giant we could name have got a huge AI story to tell. Starting with IBM Watson, Google Allo, Facebook AI Research, Amazon Echo have all had major traction. This is also reflected in investments being made into the AI industry. Industry leaders magazine predict 2017 would be the year of AI investments. It is predicted that about $37 Billion would be invested into AI by 2025. There have been similar “This time it is different” stories on AI for almost 50 year. Well, I believe it is definitely different this time, mainly because AI was preceded by the Big Data revolution this time. I believe it is different for firms and industries with access to quality data to leverage for AI. I believe that the technology firms mentioned above have got their data right. And I believe banks are a joke when it comes to quality data. AI will hurt banks without quality data.

 

Internal legacy tech challenges and data quality problems aside, new regulation in the form of PSD2 is going to have massive impact on a bank’s strategy to customer facing AI use cases. With PSD2, customers will be more in control of their transaction data. Third party providers (TPP) will now have access to customers’ transaction data, in the process becoming an abstraction layer between banks and customers. So, unless banks completely rethink their customer interfacing model, nimble players who can create clever AI applications on customer’s financial information, will make banks just a utility provider, hence hurting their margins.

Banks have two challenges to resolve at the same time, internal data quality issues to make AI work for operational intelligence, and external data ownership issues to make AI work for dealing with customers.race_for_ai_new_1-featured.png

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Data is the 21st Century Oil

There have been some success stories with Fintech firms doing AI and there are new ones emerging every day. The world is moving to a place where there will be an AI app (and an app store) for most activities. When we were evaluating IBM Watson at PwC, one phrase the IBM team used was “Watson going to school”. This effectively meant training IBM Watson on a particular topic. Let’s assume IBM Watson had to be trained in MIFID 2 regulations, it involved loading the regulation text into Watson and then an SME spending a few weeks with Watson asking questions on MIFID 2. The SME would then provide feedback on Watson’s answers, and Watson would use this data to provide better answers next time. This needed to be done until Watson became an expert in MIFID 2 before the capability could be launched commercially. We also learnt from the exercise, how understanding legal/regulatory language was different from natural language. That exercise showed how critical data, data structures and the taxonomy of data was for AI applications to work. On that note, news is that IBM just acquired a Promontory Financial Group to help improve Watson capabilities for banks’ back office functions.

'And then Dmitri noticed something that would have a profound effect on the human/robot wars.'

Regulations for data have failed?

Most successful AI platforms have access to high quality data, and in huge volumes. They also get to see regular transactions across different streams of data that they can then learn from. This is the case with Fintech firms that use AI at the heart of their proposition. What about our dear banks? Banks do have data, but the quality, integrity and accuracy of data stored digitally is generally appalling. A few years ago BCBS 239 emerged as a regulation focused on fixing data in banks, however compliance to that is mostly being treated as a check box exercise costing the banks millions. The point being, banks are years away from processes and infrastructure that provides quality data. If AI is introduced into this landscape, it would be more detrimental to existing processes, as there would be more hands involved in confirming results suggested by AI, and the costs of using AI would outweigh its benefits. Is there hope?

Banks need to get back to the drawing board to make the most of AI. Here is a simple approach I can think of,

  1. Banks need to have a function to deliver Intelligence capability.
  2. This function needs its own budgets and operating model.
  3. Very similar to data governance models, the Intelligence organisation needs to be federated across the firm.
  4. This federated model needs to cover parts of the bank that benefits most from AI, but also where data and processes are more matured
  5. Implementation of AI in these parts of the bank could spark viral uptakes across the firm
  6. There needs to be standardised ways for AI applications within banks to interface with each other. Without this, there will be AI applications developed across the bank for every single process and there wouldn’t be any integration possible. This is where governance will help.

Well, in order for the above to work, data still needs to be of good quality. Top down models are not always lean in their approach. However, it is possible to achieve a top down model that can be lean, if the priorities are based on benefit realization rather than empire building to get to an MD promotion.

Now, what about external challenges?

PSD2 could be a great opportunity for banks, and of course a huge challenge too. Let’s focus on the opportunity first. Say a customer banks with Barclays for his salaried account, has a mortgage from Halifax, and a credit card from HSBC. If Barclays was willing to be an Account Information Service Provider (AISP), it can effectively source the customer’s transaction (with their permission) from Halifax and HSBC and could offer Personal Finance Management (PFM) services. Imagine having access to transaction data across all products that your customers have. Barclays with access to mortgage transactions from Halifax could create a credit product for the customer for home renovation. While this is just one example, PSD2 could create new revenues streams for banks if they were willing to target other points in the payments value chain. That is a whole topic for discussion by itself though.

AISP in action

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While this sounds good from the banks’ perspective, the more likely outcome would be Fintech firms, and possibly tech giants (Google, IBM, Microsoft, Amazon) making clever use of customer transaction data as they are light years ahead of banks in their AI capabilities. While we have already discussed Tink in DailyFintech, Qapital and more recently Klarna are also jumping on the PSD2 bandwagon.

How can AI-Fintech firms chip into the story above? Well, they don’t have much to lose (unlike banks). AI firms focused on banking use cases, should focus on small problems and solve them really well. And the AI industry focused on Banking will need to identify the importance of standardisation of interfaces for data interactions across banking applications. While this exercise will be made easier for customer facing use cases (thanks to the PSD2 wave), operational AI internal to banks will be a much harder nut to crack. If achieved, it will allow for multiple processes and activities within banks to be replaced by AI in one go. I wouldn’t be surprised if banks, warmed up by Blockchain revolution, form consortiums to drive AI revolution. And if this happens, I believe AI penetration within banks could be faster and deeper than Blockchain managed.

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

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.

2017 is the year bitcoin starts to move from Darknet niche to Clearnet mainstream

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One of our 10 Fintech predictions for 2017 (in December) was:

Bitcoin moves from its Darknet phase (illegal) to the early adopter Clearnet phase. This is when legitimate people charge in bitcoin for legal transactions. This will start with cross border digital products. Because this brings new bitcoins into “circulation” with owners who also then want to pay in bitcoin, this starts a sustainable move to mainstream use which supports the price.”

This post expands on that thesis. But first we have to look at an ugly backdrop which is the Bitcoin civil war. If we get a hard fork, all bets are off. Spoiler alert, I think the probability of that is now low (around 10%) so planning for the future makes sense. The bad news if you hold bitcoin – a 10% chance of total loss. The good news if you hold bitcoin – a 90% chance of a big appreciation.

Talking about a glorious future during a civil war is strange

We have about a 10% chance of apocalypse now in Bitcoin.

Nobody can say exactly when the Bitcoin Civil War will be over, but it will be over soon one way or another. It is a % game as I write. I rate the chance of a hard fork relatively low, around 10%. Assigning a % smacks of false certainty. All I mean is that the probability is low and investing is all about assessing probability (anybody selling a “sure thing” probably also has a bridge to sell you).

My reasons for saying this are based on my reading of the Bitcoin scaling challenges and solutions (see here). I think that Segwit makes sense technically and a move to a more commercial Bitcoin via Lightning network is just the way the world works, whether you like it or not. The pure P2P vision, where everybody runs their own node, will turn into a more commercial reality. Today we could all run a server in our closet, but most of us choose to trade control for convenience by using some cloud services for things we like to do like email, social media and blogging. The same thing is likely to happen in Bitcoin, with some centralized services within a free permissionless network. This will still be a free market, where anybody can connect and offer a new service. The permissionless genie will never go back into the bottle of control.

There is lot at stake in this civil war. If there is a hard fork, Bitcoin may not recover. I do not see this as just another Mt Gox. The damage to reputation among mainstream people will be too severe.

If Bitcoin dies, it will also drag Altcoins into the same shallow grave. Sorry to strike a morbid note, but I don’t buy the idea that a better Crypto Coin will arise like a phoenix from the ashes from the death of bitcoin. Yes this may happen in the really long term, but “in the long run we are all dead”. Try telling your average Joe/Josephine who is already skeptical of bitcoin “I know that bitcoin failed, but this one is better, really I promise”.

We will know when bitcoin is forked; there will be a lot of sound and fury. What is harder to know is when we can declare the civil war over; that event may be accompanied by silence. I asked @tonevays on Twitter and he responded with:

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Hopefully peace will soon be declared.

Bitcoin’s Darknet phase was critical and will remain

To see how big the Darknet is, go to DeepDotWeb. The Darknet is a perfect early adopter market for bitcoin. The market may be a niche, but it is a big enough niche to prove the technology. There are plenty of people who do things that are illegal in some jurisdiction or another. They may live in a dictatorship or believe that what they want to do (such as use drugs) should be none of their government’s business. Crooks and good people co-exist in these markets.

Bitcoin needed Darknet users because they are motivated. Traditional payment methods don’t work for them, so they use bitcoin even if it takes a bit more effort.

Reality check in one chart – bitcoin is a tiny, tiny part of the world economy. That is why bitcoin needs to move to the Clearnet phase.

I am not suggesting that the Darknet will disappear. It will coexist with the Clarinet. It serves a real purpose.

Why Bitcoin will move to Clearnet phase

Clearnet does not mean that some big retailer adds bitcoin as a payment option. We had lots of Press Releases about that and it is not much more significant than adding some obscure Fiat currency.

The Clearnet phase will be when thousands or even millions of free agent knowledge workers charge for their digital products (code, writing, designs, movies, music, etc) primarily or entirely using bitcoin. They will price in bitcoin (or in Satoshi, depending on the price point) and offer conversion to Fiat and an option to pay using legacy payment rails (maybe for an additional fee). This is the bitcoin-first option.

The more radical is bitcoin-only. You are invited to pay in bitcoin and those who do not already have a bitcoin wallet are given links to help them get into the bitcoin economy. That network effect will drive adoption.

This will happen first in free agent, digital knowledge workers offering products/services cross border. Let me break that down:

  • Free agent. This means an individual or micro business, which accounts for an increasingly large share of global GDP.
  • Digital knowledge workers. The bitcoin Clearnet will happen first in digital products, because the no return irrevocability of bitcoin is easier in digital products where delivery and payment can be concurrent.
  • Cross Border. If somebody in Swaziland wants to pay somebody in Sweden (very close in the country pick list), what currency do they choose and what payment rail? Bitcoin is simply the easiest option, particularly if you get a more complex transaction such as Swaziland Bob pays 1 bitcoin to Sweden Alice with 20% automatically going to Ted in Tokyo who then buys something from Carol in Copenhagen.

Three reasons why this will happen in 2017.

  • Price move. The correlation of searches for “bitcoin” and a rising price are clear. When the price goes up, the mainstream notices.
  • Increasing Respectability. This varies by country. Switzerland is one where you can buy bitcoin at any train station, pay your taxes and speeding fines and it is all totally legal and normal. Japan is another country where bitcoin is legal and increasingly mainstream.
  • Real need. The highly educated knowledge worker gig economy is real. In Fintech that market is becoming bigger as managers leave incumbents (voluntarily or involuntarily) to set up shop as consultants. The bitcoin Clearnet means that highly educated knowledge workers  don’t have to trade their expensive education for a “career” driving a car for Uber.

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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.

Interview with Soul Htite of Dianrong to understand the intersection  of Supply Chain Finance and Blockchain

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Both subjects, Supply Chain Finance and Blockchain, get a lot of attention on Daily Fintech. So when we saw a solution combining them (called Chained Finance) we were intrigued. When we saw that the venture behind this initiative (Dianrong) is in China and that the Founder & CEO (Soul Htite) was a co-founder of Lending Club, we reached out to him to understand more.

I asked the questions that occurred to me. What questions should we have asked Soul? (tell us in comments).

 Soul please tell us about your professional journey and what Dianrong does?

As a technologist and entrepreneur, I’m constantly looking out for new opportunities to harness the potential of fintech to solve every day financial challenges.  This is what led me to co-found, firstly, Lending Club in the US and, more recently, Dianrong in China.

Dianrong has quickly grown into a leader in online marketplace lending in China, originating more than $300 million in monthly assets for 3.7 million retail lenders. We offer individuals and small and medium sized enterprises a comprehensive, one-stop financial platform supported by industry-leading technology, compliance and transparency.

We developed a sophisticated and flexible infrastructure that enables us to design and customize lending and borrowing products and services, based on industry-specific data and insights, all supported by online risk-management and operation tools.  Dianrong’s specific offerings include loan originations, investment products and marketplace lending solutions.

 As I understand it, Chained Finance is designed to provide financing to the vendors who are further down the supply chain. Supply Chain Finance works well today for the vendors who supply to the corporates who are investment grade. As I understand it, Chained Finance will get financing to the vendors who sell to that vendor. Can you give us an illustration about how this will work?

The complexity and scale of supply chain finance has posed major challenges in ensuring adequate funding and efficient operations.  Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility of their suppliers and the many layers of finance embedded in the process.

 Is it only one link in the chain (i.e. vendor to vendor of investment grade corporate borrower) or multiple links in the chain?

Chained Finance’s ecosystem provides a better link between supply chain operators and their vast network of suppliers.  Additionally, new loan assets generated by Chained Finance will be available to Dianrong’s 3.7 million investors, expanding the company’s portfolio of diversified investment options.

How is the credit priced? Is it based on the buyer’s credit rating (as in traditional Supply Chain Finance)? Or is it based on the seller’s credit rating as in Factoring, Receivables Financing and other SME lending?

The Chained Finance pricing model is proprietary.

 What stage is Chained Finance? Have transactions already been completed. Can you share what sort of APR % the SME companies are getting and how this compares with other SME lending?

 Chained Finance successfully completed a successful six-month pilot with FnConn, which originated US$6.5 million (RMB45 million) in high-quality loans for supply chain operators, many of whom were unable to secure needed financing in the past.

The pilot was only recently completed, so it is premature to disclose representative APR data.

Please tell us why you use blockchain technology as opposed to some other distributed database technology and a bit about the technology?

 Blockchain technology allows both lenders and borrowers to gain unprecedented control and transparency of their records.

Lenders gain greater transparency of the financial history of borrowers, enabling them to make better lending decisions. This capability enables financial institutions to lower the risk of potential bad debts and problematic financial sources.

For borrowers, the technology provides a comprehensive track record of their financial history, which increases their creditability when applying for a loan. Borrowers also have greater control over who has access to their records, because borrower data can only be obtained with their approval.  That efficiently avoids borrowers’ personal information being abused by third parties, e.g. lead generation companies.

The primary benefit of blockchain is the transparency, and thus security, of the data transacted within the system.  At Dianrong, compliance and transparency are part of our DNA. This is why we are integrating blockchain technology across our entire platform.

Is this a permissioned or permissionless system?

Permissioned.

What blockchain technology do you use (e.g. Ethereum, Hyperledger). Please tell us why you chose this technology

Chained Finance was designed to be technologically (and geographically) agnostic.  That said, Dianrong is an active participant in the Hyperledger project.

 Soul, please give us your vision of where Chained Finance could go in the future.

By harnessing the power of blockchain, the Chained Finance platform is geographically agnostic. So, while Dianrong’s initial focus is on China, where 85% of SMEs have no effective access to funding, the potential for the platform goes far beyond China’s borders.

Blockchain for supply chain finance extends to any large company that has a complex supply chain and, as such, is enormous.  The electronics, garment and auto industries are a natural fit.

Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems.

Thank you, Soul

What questions should we have asked Soul? (please tell us in comments).

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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.