Crypto Liquidity aggregators in need for institutional trading

liquidity

Liquidity is one of the main attributes of an asset class that deserves an allocation in a retail or institutional portfolio. Clashing indicators that measure liquidity especially for over-the-counter financial assets, are nothing new. Corporate bonds or stock options, for example, are largely traded over the counter; liquidity fluctuates and measures are more than one (e,g, issue size, bid-ask spread, trading block size, price impact from trade, etc).

Naturally, the emerging crypto asset class cannot escape the liquidity conundrum. With this year’s increase in the overall market capitalization and with more than 5,000 tokens now issued on the blockchain ecosystem; we start paying attention. We have already witnessed the first flash crashes on exchanges, like GDAX run by Coinbase, simply because a large order came in that resulted in wild price swings.

On June 21st, 2017 around noon EST: “Within seconds the price of ETH crashed from ~$320 to as low as $0.10. While the price recovered quickly, the rapid price movement caused many traders to experience margin calls or stop loss orders, resulting in potentially severe losses.” Source; Coinbase is reimbursing losses caused by the Ethereum flash crash

 This recent flash crash was caused by a multimillion dollar sell order ETH/USD. Given the crowded pipeline of crypto-hedge funds (see more details in Shapes and colors of the booming US crypto hedge fund space) we expect an increased need for liquidity providers in the crypto asset class. Add on to this, the additional emerging appetite from asset managers (fund managers, family offices, pension funds, governments etc) there is a pressing need to create liquidity pools for institutional trading of cryptos.

I see a significant risk for the crypto asset class because there are too many startups building software and apps to facilitate the evolution of the crypto market, but there won’t be enough liquidity to accommodate the users of these technologies (especially for institutional appetite) once they grow out of the MVP-beta phase. I am worried even more because this pipeline of technology is also congested and we will be flooded with such tech-tools in the next 3-4 quarters.

Crypto Liquidity aggregators in need. The race is on!

Who’s who in the crypto liquidity aggregation space at the institutional level

 To trade large quantities of crypto assets, there are few established businesses:

Cumberland is a US mining company offering two-way markets for institutional size transactions (probably the largest). Genesis Trading and Itbit is based out of NY; Circle Financial, out of Boston (the money transfer company); and Gemini Exchange (the Winklevoss Brothers). Bitcoin Suisse from CryptoValley Switzerland.

The biggest problem institutional clients face is that each exchange operates in isolation and has its own cumbersome agreement requirements.

There is a pipeline to address the problems around the liquidity for crypto-assets, that really needs to be filled up. I have identified the upcoming platform, code-named “Project Omni,” that is being designed to serve as “the first large-scale institutional infrastructure specifically targeted towards crypto assets” from an ex-State Street executive.  The B2Broker who is building liquidity and brokerage software for the crypto space; a broker and a B2B liquidity enabler with a business focus towards the East (from the Arab world all the way to Japan).

Who else did I miss, operating in the crypto institutional space?

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

Fidor, Starling, and Revolut add Fintech credit and investment products

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Digital transformation projects in banking come in all shapes and colors. To grasp the evolving space, I like to think of service providers focused on consumer banking transformation projects and those focused on SME digital projects. In consumer banking, those involved are incumbents or startup digital banks (challenger or neo or other acronyms depending on the region). For SME banking, there are digital spinoffs of banks realizing that technology now allows them to profitably serve small businesses and also standalone startups.

For both of these types, I like to think of service providers that offer Banking as a Service and those offering Cloud based Core banking. Banking as a Service goes with a white label banking license that usually includes KYC, AML, and back office needs; leaving the marketing and customization to the “client” (Solaris and Fidor are two examples). Cloud based core banking service providers don’t offer KYC, AML or a banking license; they are focused on the back-office infrastructure (Mambu and Temenos are two examples).

In this space, most service providers and B2B clients are focused on the deposit part of the banking business. The credit and investment aspect is taking off now.

For me what is more interesting in this space is that it is ideal for all sorts of partnerships.

Re-bundling is happening;

Marketplaces are being launched;

API connectors are being used to integrate deposits, credit, investments!

 

Growth, convergence, innovation!

 

Digital banks integrating credit and investment Fintech products

There are more than one noticeable moves in this direction out of the UK.

FinanceBay is the new marketplace that Fidor Bank in the UK has just launched. I like to think of it as a banking app store or a marketplace that curates relevant fintech partners. The first two fintech partners are Seedrs and NutmegSeedrs will be the first and only equity-crowdfunding “app” on FinanceBay that gives access to such investment opportunities (i.e. equity funding of UK SMEs). To date through Seedrs accredited investors have allocated 200 mil pounds through 500 deals. A touch of Nutmeg will be added soon so that Fidor Bank customers can open fully managed investment portfolios on Nutmeg. According to Business Insider, Nutmeg is the largest UK robo-advisor with £600 million AUM which is more than its competitors, Moneyfarm and Scalable Capital.

In April, UK bank Starling announced an integration with savings and investment app Moneybox, after its earlier partnership with Transferwise.

The foreign exchange app Revolut has launched a partnership with property investment platform Bricklane to offer its clients a tax-efficient way to invest in property, and with Lending Works to offer its clients consumer P2P credit up to 5,000 pounds.

Watch the Fintech startup world, blurring the lines between digital consumer banking and WealthTech, much faster than the established incumbents can. The race is on!

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

Shapes and colors of the booming US crypto hedge fund space

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At the end of March, I covered Polychain Capital which caught my attention since Andreessen Horowitz and Union Square Ventures funded them with $10million. In Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0, I started with the motto: “Today is the slowest day of the rest of our lives”, and just 4 months later Polychain Capital is proof of accelerated growth. They have already accumulated already $200mil in assets under management.

Over the past year, despite the stricter regulatory pre-positioning towards the crypto world (digital “currencies” or “assets” and tokens) in the US, the growth of dedicated hedge funds aiming to capture the boom is stunning. In early July Forbes reported Crypto Boom: 15 New Hedge Funds Want In On 84,000% Returns

“43 projects raised $1.2 billion in initial coin offerings since May 1, according to Nick Tomaino’s The Control, and with stratospheric returns for so many ICOs — 82,000% for Ethereum, 56,000% for IOTA, 44,000% for Stratis, 21,000% for Spectrecoin” excerpt from Forbes.

There is clearly a summer boom in investment vehicles that are only suitable for accredited investors in the US and are deployed a variety of strategies to gain exposure in the booming space.

“From July 1, 2016, the value of bitcoin rallied from $680 inch-close to the $3,000 mark in mid-June and is now trading around the $2,650 mark. This impressive 12-month rally caught the attention of institutional investors who want their piece of the pie in this new high-performing asset class.” excerpt from “How Big Money Investors Will Boost the Price of Bitcoin

There are some investment vehciles taking the buy-and-hold Buffet style approach, that end up in retirement accounts. There are others that are closer to the approach of futures and commodities trading, and could end up in the “alternative” allocation of HNW portfolios, since the 90s alternatives can’t promise anything close to the spectacular returns of the crypto asset class.

There is a mesh of digital currencies of sorts of capitalizations and of tokens of all kinds (utility, or equity or hybrid). And more recently, there are investment companies that are issuing or plan to issue their own token (ICO) that gives exposure and liquidity to various of their fund vehicles.

This is my categorization of the US crypto hedge fund space right now. If I have missed any hedge fund and if the strategy changes in the future, please let us know in the commentary below.

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US crypto hedge fund space – more details

Mestable Capital was founded by Lucas Ryan, Josh Seims and Naval Ravikant, the chief executive officer and cofounder of Angel List, in late 2014 and has $45 million in assets under management.

Crypto Assets Fund (CAF) invests in bitcoinetherzcash, ripple, litecoin and dash. It is the first fund focused on Latin American family offices and is co-founded by former senior manager at Bain, Roberto Ponce Romay. The first tranche has raised $10mil and aims to grow to $50m.

The BKCM Digital Asset Fund is an investment fund for institutional clients that so far has invested in bitcoin, ethereum, litecoin, ripple and Zcash, among others. It strategy is hybrid: Buy-and-hold for about 50% of the tokens, ICOs for 20% and actively managed for the remaining. Investments consist of foundational protocol tokens such as Bitcoin and Ethereum, currencies such as Litecoin, XRP, Zcash and Stellar, plus tokens such as Golem Network Tokens (GNT), Augur’s REP and Siacoin.

Alphabit is a Cayman Islands-based fund with $13 million AUM aiming to raise $300 million and also offer an ICO. Its uses a mix of manual trading, algorithmic trading, and ICO investing. It has so far invested in Ethereum, Ark, Ethereum Classic and PeerCoin, as well as ICOs MetalPay, Blocktix, Matchpool, Aeternity, and Skycoin.

Blockchain Capital is a unique case because it is the first VC that in 2013 started investing on blockchain companies, like Bitnet (sold to Rakuten) and Coinsetter (sold to Kraken). This spring, they raised a third round ($50mil) to invest not only in blockchain startups but also tokens. Then they tokenized $10 mil of this fund, selling BCAP tokens to the public (but only accredited investors in the U.S.).

Auryn Capital will launch this month with a $12.5 million. It will be the holding company for a crypto hedge fund that is actively managed with a mix of technical and fundamental strategies. It will also launch a decentralized exchange, and ICO incubator, and token called Karma (to launch this September).

SuperBloom launched in July with both a $10 million hedge/venture fund as well as an accelerator/investment bank. SuperBloom plans to hold a $30 million pre-ICO crowdsale for the Seed token this month for both accredited and non-accredited investors to fund its accelerator companies. Seed holders can exchange the token for an individual company’s pre-sale token for a 20% discount.

The BlockTower Capital fund, will also launch this month with about $50 million, and uses a mix of strategies: Event trading; new coin listings; “activist” investing in smaller cryptocurrencies and helping them gain traction with developers and on exchanges; and invest in themes such as decentralized file storage.

Coinshares 1 LP is the 2nd fund that Masters’ Global Advisors launched in June with $5 mil. In AUM. It is a Jersey-based fund investing in protocol tokens like Ether, Tezos and EOS. Its first company investment will be in decentralized ticketing platform, Aventus.

Pollinate Capital is a new hedge fund with more than $100mil committed for actively trading digital assets with strategies similar to Long/Short quantitative trading of futures and commodities trading.

Pantera Capital is launching a new hedge fund, Pantera ICO fund, focused on investments solely in tokens that power public blockchain protocols. Pantera was the first US Bitcoin investment firm in 2013.

The founders of Koalah, a mobile app in which players can bet on the outcome of games using bitcoin, launched in July Grasshopper Capital an actively managed cryptofund with $25mil. They are using a mix of fundamentals, event-driven arbitrage trading and algorithmic trading. The fund has so far invested in Ether, Civic, Bitcoin, Singles and Storj.

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

Fintech and Art – platforms and tokens

Just three months ago I started covering how technology (Who’s Who in Fintech and Art) is transforming the illiquid and non-standardized asset class of Art. The post was inspired by Spiros Margaris the Artist.

I had identified five startups offering more transparency, platforms for provenance or exchanging value; using machine learning or Blockchain technology.

  • Arthena: A machine learning platform that allows us to become a co-owner of a genuine Picasso
  • Artelry: A mobile art discovery platform.
  • MutualArt: a global leading source of art market information and manager of the APT (Artist Pension Trust) collection.
  • Ascribe with a focus on empowering artists.
  • Weifund a blockchain-based equity crowdfunding platform developed by ConsenSys.

A Fintech entrepreneur who is an Artist

Today I am inspired by another Swiss Fintech personality that has also a less known artistic side. Marc Berneggger, is a serial entrepreneur, who wears gracefully and successfully more than one Fintech hat. Before I dive in that part of his activities, I share with you Marc’s Pixel based art which started as he was playing around with his Commodore 64 to create pixel prints. Since then he has designed 3D sculptures of pixel art in square, rectangular and sphere shapes. He has exhibited and evolved as an artist.

Marc is involved in the venture studio Finleap with 12 ventures currently and with a recent fundraising of $21million (bringing to a $121million valuation). He recently joined the board of Falcon Private Bank, a Swiss private bank, who just announced that through their partnership with Bitcoin Suisse their wealthy clients will be able to store and trade bitcoins via their cash holdings with the bank. He is also on the board of the newly announced venture of The CryptoFund, which will be the first FINMA approved diversified investment vehicle for institutional investors to gain exposure in the cryptocurrency space in a simple and compliant way.

Fintech and Art startups

The startups already covered in April using blockchain technology were Ascribe and WeiFund. In June, WeiFund supported the funding of the Braid movie, a psychological thriller, that raised $1.7 million through a token sale that promises to distribute 30% of revenues to the token holders. The shooting of the movie has already started and distribution is planned for the end of 2017.

The progress of this symbolic crowdsale will be watched, as it is the first of its kind. A use case of the decentralized principles for artists tapping into investors directly and in a way (partly) making them into producers. Will this idealistic way of producing movies, where the audience can invest and share profits in movies they care about and want to see, scale? Will the trading, flipping ICO frenzy allow any room for such experiments?

Ascribe has invested in Verisart, a startup that is using the blockchain technology and focusing on authentication of art.

To the list of blockchain based startups, I am adding ArtByte, the digital currency supporting the arts. The cryptocurrency is aiming to monetize artistic content, similar to how Steemit is focused on monetizing broader content.

To the list of decentralized ecosystems creating the future Internet of Value, I am adding SingularDTV who is also building the infrastructure for monetizing the entertainment industry.

“As a tokenized ecosystem within the CODE structure, SingularDTV will be able to operate as a blockchain entertainment studio that is a producer, acquirer, and distributor of content. Its universal and non-regionalized rights, revenue and royalty platform is laying the foundation for a decentralized entertainment industry.” Source: Anatomy of SingularDTV’s CODE (Centrally Organized Distributed Entity) A Decentralization Generator for the Tokenized Ecosystem

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 To the list of platforms focused on transparency and match making, I add Wealth-initiative, a Swiss startup that has launched a platform for wealthy clients to trade 4 asset classes: real estate, art, passion investments and direct equity. For now the platform is a secure marketplace for P2P trading of private clients within institutions. Later the plan is to offer the capabilities across institutions.

We will be watching the competition between the platformification and the tokenization of value exchange in Art.

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

 

 

Digital Wallets: accessories or innovation

Wallets, purses, and handbags, have been female accessories and there is no sign of change on the horizon. Physical procession of IDs, credit cards, and cash, has been centralized in these accessories for ages. Men have been resisting the wrappers and filling front, back pockets of trousers or inside pockets of jackets. There is no adult that hasn’t been tormented by a misplaced, forgotten, or stolen “pack of personal” stuff (IDs, plastic, cash). Being able to take care of these possessions is a sign of maturity that any parent trains their teenager and delegates when it seems kind of safe.

The 24/7 mobile world seems to have moved part of the “pack of personal” stuff (IDs, plastic, cash) onto our smartphones. Digital wallets from Google, Apple, M-Pesa, and the likes are gaining traction and offering consumer banking kind of conveniences instead of cash and/or plastic. This is no shortage of mobile digital wallets even though end-users don’t seem to be spreading the word. I have yet to meet someone that looks at me in the eye and says “You cannot not have a mobile digital wallet! How can you live without that kind of accessory?”.

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Some are counting on the fact that they are centralizing the multiple credit cards or store cards for us. Others are marketing loyalty programs either from our banking service providers or credit card providers or e-commerce stores. More recently, mobile digital wallets that aggregate and exchange value across various loyalty programs market themselves as creating more value with such interoperability.

All these kinds of Digital wallets are simply a digital interface to access centrally managed accounts through a mobile phone. There is no genuine innovation in these kinds of services since security issues inherent to centrally managed accounts remain and the cyber vulnerability of such third-party trust mechanism is not mitigated. The costs that these third-parties incur in order to handle the promises of maintaining deposits and accounts, keep increasing.

True wallets are those that enable each of us to hold bearer assets (like cash or cryptoassets) without needing a central third party to hold and possess these assets, and at the same time be able to transact with these. The true innovation here is removing institutional risk.

The finance future that is being built right now is offering the ability to hold any digital bearer instrument directly.

A user’s wallet will be able to hold a variety of financial instruments; cash, equity in a company, commodities, or even non-monetary instruments such as identification documents, school records, and driver’s licenses.

This world is the one that Monetas, Lykke, Jaxx, Shapeshift are shaping up. Their wallets aren’t just an interface to a bank. Their wallets are not just another account with an institutional provider. They aim to offer control directly to us and we can choose to trust our smartphone, our hardware wallets (Trezor, Ledger etc), or our hard copies etc.

Once they manage to scale, they will become the darlings of the regulators because who doesn’t dream of a world with reduced cyber institutional risk. The world of this next decade, will get rid of the need for reconciliation between financial service providers, a complex, and expensive process.

Fintech innovation started as a war between start-ups and financial institutions. This culture is clearly not the flavor of the day anymore.

Today we are seeing the emergence of another type of race. Will it be some branch of AI that solves the complex problems around legacy financial processes (like reconciliation between financial providers or vulnerabilities of accounts etc)? Or will it be cryptography that replaces centrally managed processes all the way from central banks to financial service providers?

We will be watching the number of genuine Digital wallets (not the interfaces to centralized accounts) as it rises. The size and the activity in these wallets are the basic indicators to monitor at this stage of innovation.

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

China and India – bright spots in Corporate Venture Capital recovery

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Corporate Venture Capital (CVC) has seen a steady rise for the last few years. Between 2011 and 2016 the number of large corporates establishing their own Venture Capital capability nearly tripled. Last year CVCs participated in about 40% of VC deals that happened in Asia. With major global events such as Brexit and Trump dampening investor appetite in VC funds, CVC deal volumes saw a global dip of 2% last year. However, there are data points indicating its likely to take off in a big way this year.

The CVC world has had challenges due to the compensation structure for the Partners and lack of nimble decision making capabilities. Partners at CVCs have traditionally not been compensated as well as a Partner in an independent VC fund. Also, if the VC arm of a Corporate cannot make independent decisions in quick time, it affects both the startups and the corporates. Sometimes CVCs lose good deals due to their lack of agility, but often they hurt startups by making them wait for investment decisions, and turn them down after a few months of due diligence.

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The brighter side of the deal is that, once the deal has gone through, the Corporate can be a massive launchpad for the startup. And for this very reason, Startups seem to be more forgiving of the red tape and the bureaucracy that they have to go through to get the deal closed.

That said, there is no denying that CVCs have evolved their models over the last few years, and are here to stay. In Asia, Softbank announced the launch of their $100 Billion fund, with $25 Billion of their skin in the game and Apple contributing $1 Billion, the fund has seen good traction since launch. The other big announcements were Baidu’s $3 Billion fund and Samsung’s $1 Billion fund.

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CVCs in India had a good year 2016, until Q4, where only 4 deals were closed. However the general trend last year was that the deal count went up, but the size of the deals came down compared to 2015. This is in contrast to most other top VC ecosystems in US, China and Europe where capital was moving towards more matured (growth stage) firms. VCs in India preferred smaller sized deals in early stage firms, resulting in a higher deal count. The only other region that had had CVC investments go up in the first half of last year was UK, but there was a slow down in H2 2016 post Brexit.

China on the other hand, had a slowdown in CVC investments last year after a strong 2015. This trend is expected to change because, between China and the US there were about 53 new CVCs that were launched last year. They are expected to get more active this year. Also, many VCs and CVCs are eyeing China for Fintech deals in a big way since the start of 2017.

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If CVCs in India perform anywhere close to what they did in Q1 and Q2 2016 and if the new CVCs in China start deploying, we are likely to see a CVC recovery. With VC investments shrinking globally over the last eight years, and CVC’s slice of the VC pie at an all time high (17%), the recovery of CVC might just be what the VC industry needs.


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.


 

 

 

 

Best interests, Transparency, low commissions – the Riskalyze stack

The uncertainty around how the Trump administration will handle the DOL fiduciary role remains as we speak. But what is becoming clear is that one way or another the era of “Acting in the best interest of customers” and “Transparency” will only move forward. The cultural shift is happening and regulatory bodies are taking into account this crowdsourced sentiment despite confusions due to delays and objections from large institutional players.

The fiduciary role definition has been expanded as of the end of June and now it not only includes advisors handling retirement accounts but anyone giving ongoing advice even without charging a fee. This may push the industry to eliminate certain commission layers and certainly requires advisors working on commission to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). Read more details: DOL Fiduciary Rule Explained as of June 9th, 2017 | Investopedia

Riskalyze, a fintech that created the dynamic Risk Number metric, reports that the expansion of the fiduciary role has resulted in a spike in the demand for fintech solutions that can handle these issues. Advisors in the US have been relatively slow in embracing the new technologies for all sorts of reasons but mainly because fintech solutions have been scattered. Advisors need to be able to handle efficiently all the stack of the process, from onboarding, profiling, customizing strategies, dynamically adjusting, custody, execution, reporting.

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This remains a huge challenge because integration in this space is in the early stages. The industry catering to the needs of advisors is evolving as we speak. It consists of three main groups: (a) the large institutional players like TD America, Blackrock, Fidelity etc, who are developing fintech micro-services and integrating them or acquiring fintech startups and keeping then independent, (b) the independent Fintech startups that growing and integrating more services, like Betterment, Wealthfront, or Riskalyze, (c) the broad software providers, like Salesforce, Oracle etc.

Riskalyze is a great example of a Fintech that is growing into a full stack serving the complex needs of advisors. They started with their patented technology, Risk Number, that is a dynamic objective risk tolerance measure based on a quantitative framework rather than biased qualitative answers. They have added the capability to construct all sorts of portfolios based on this risk metric and have empowered advisors to clearly quantify the risk-adjusted outperformance with this method.

Riskalyze: “Our patented Risk Number® technology objectively calculates an investor’s true risk tolerance utilizing a scientific framework that won the Nobel Prize for Economics.”

Their most recent addition to the Riskalyze fintech stack is the Autopilot capability and the One-Click Fiduciary™ technology. These offer first multi-custodial capability to the advisors and direct execution. So, Riskalyze has built an invisible bridge directly into custody and execution. Autopilot takes model portfolios and implements them, handles the dynamic rebalancing as dictated from any change in the Risk Number. One-Click Fiduciary™ technology keeps accounts on track after that and surfaces the right decisions for advisors to handle an risk number drift, changes in the model, or putting new dollars at work.  Strategists and research firms such as BlackRock, Cambria, CLS Investments, First Trust, LikeFolio, Longboard Asset Management, Morningstar Managed Portfolios, SEI Investments, and Swan Global Investments have become a part of Riskalyze’s multi-custodial automated account platform.

Riskalyze’s offer to advisors has two pricing options:

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Hello to “Transparency, Best interests, and low commissions!”

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