ICOs: Two birds One stone

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The digitization of financial services means that we are at the very early stages of tackling two significant social impact topics (Jason Bates says “Digital Banking is only 1% done”):

Financial inclusion – mainly in the “Rest”

Tokenization of the economy – on a global basis

Since the tokenization of our economies is really nascent, we are at risk of thinking of different aspects when we hear the term. We are even at risk of dismissal altogether of this emerging reality, from those that see this as fraud, exuberance, a fad. Jamie Dimon, a Greek immigrant that made it on the billionaire list, being one of them. Others, look at the thousands of tokens that have been issued (over 6,000 and growing as we speak) and the ever-increasing ICO rounds (over $250mil lately) and are naturally, worried about this young market.

There is room for all these concerns but the market will grow and advance with or without our opinions, thoughts, and concerns. The reality (including stumbles and crashes) will be exactly as Richard Olsen, co-founder and CEO of Lykke describes it and as David Siegel, CEO of 20|30 and the Pillar Project, quotes in the opening of his in-progress e-book The Token Handbook:

There won’t be millions of tokens. There will be millions of kinds of tokens. Richard Olsen

Today we are mostly focused on the thousands of fundraising tokens with a just a few functionalities, like tokens that represent ownership, or some rights, or rewards, or incentives.

Tokens are not only alternative fundraising (crowdfunding) weapons that make VCs stay up at night because of fear of extinction; as some like to believe.

Tokens will enable network effects and the creation of ecosystems, we cant imagine with the current business processes. These are the “other kind” of tokens that Richard Olsen is referring to, I believe. So, stay tuned.

The Zurich ICO summit organized by Smart Valor

For now, we mostly see crowdfunding kind of tokens and most of them can’t answer the question “Why this token?” without admitting that it is a quick, techie way to crowdfund and “acquire users” or it is an existing app that is tokenizing its self. Actually, in many cases, ICOs look more like Initial User Acquisition Events – IUAs. In some cases, like Civic which already had an app, the ICO was a cheaper way to KYC and onboard users and at the same time finance their growth (Civic can answer clearly the Why question).

What is important to keep in mind is that the technology of ERC20 tokens that has clearly facilitated the explosion of ICOs, isn’t going to help in building a community (be it developers or users) and therefore, there is no magic way in building “Network effects”.

A token sale can be a financing tool and a user acquisition tool! But it is not panacea for network effects.

Smart Valor, founded by Olga Feldmeier (ex-Xapo), organized the first ICO summit in Zurich with an amazing lineup of speakers from around the world. I was able to watch part of the conference which was streamed live. From the opening speech of William Mougayar and then some of the topics and angles during a few panel sessions.

Smart Valor is a blockchain venture that is focused on the tokenization of all kinds of alternative investments (real estate, funds, private equity etc.) on a decentralized platform that can make them accessible to Emerging markets. In other words, private banking kind of financial services for EM. You can hear more about the value proposition in this interview.

William Mougayar, the keynote speaker, reminded us that June 2017 was the first month that ICO funding ($600) surpassed the total seed-angel fundraising ($500mil). He shared his insight that on Sep 1. the market cap of cryptos was around $172billion and the amount from ICO crowdfunding was $1.7bil. This shows that ICOs were 1% of the total market cap. So clearly, there was simply a shift (diversification maybe) of 1% from cryptos into ICOs.

He reminded us that Ethereum ICO’d in the summer of 2014 and Ether started trading only one year later (summer 2015) when the network went live. Will this be one aspect of the self-regulatory standards that ICOs adopt going forward?

Here is my collection of self-regulatory standards to be considered. A few inspired from the panel discussions and a few additions of my own.

  • No more white papers, unless they are exceptional highly computational academic breakthroughs
  • No more token trading before the protocol or the app is live
  • More Smart tokens that release funds as milestones are achieved
  • Allocation of tokens with the whitelist technique (i.e. KYC users-signup and guarantee a minimum token allocation) so that communities are built and whales don’t dominate.
  • Avoid Slack and Telegram for pre-ICO community building because they are vulnerable to phishing (Chainalaysis reports $250mil have been hacked to date).
  • Ventures that can answer the “Why the token?” question with a vengeance, join the IGF.

Miko Matsamura from Pantera Capital (a San Fran. $100M ICO-only fund) highlighted a new self-regulatory effort the ICO Governance Foundation (IGF) which is an international organization and Swiss Foundation whose mission is to protect global ICO investors and facilitate capital formation for ICOs. It aims to create something like S-1 filling for ICOs. The Crypto Valley Association (CVA) also issued recently a code of conduct around ICOs.

Panel participants here. Source of original image

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.

Tokenized Capital markets with reserve ratios & no exchanges: Bancor Network, Kickico,…

Bancor’s token sale (BNT) held the ICO record in June, with $153million raise in just one hour. Back then (it feels already like ages) it was the first one to launch a “One-hour uncapped” sale! Needless to say, that the record has been broken every month and we are now at a $257million for Filecoin just a few days ago who beat Tezos with $232million.

Bancor token sale was not a white paper fundraiser. A team of 10 developers was already working for a whole year and had a beta product delivered about 1.5 months before the ICO!

I first heard about their value proposition, it was late May when they contacted DailyFintech to share content. At first sight, it was solving liquidity in the token emerging market and resembled the mission of Lykke exchange whose global trading platform is open source on the one hand but uses a proprietary match-making mechanism on their exchange that will be able to handle (eventually) any kind of digital asset.

I had the pleasure to speak to Eyal Herzog from the Bancor foundation, recently and got to the heart of their core value proposition. Bancor is focused on adding liquidity to digital currencies or any token without the need of an exchange that depends on market-makers or any algorithmic match-making. Bancor is not automating the match-making mechanism that clears trades. Bancor is automating the conversion of tokens (I.e. buy one, sell another) through a programmable smart mechanism. So liquidity is offered outside of exchanges – I like to think of this as off-road liquidity. Eyal likes to think of the analogy of transportation via cars, trucks, planes, ships etc but with no driver, pilot, captain etc.

This way the Smart contracts will be facilitating the issuance of tokens which of course are ERC20 compatible but offer more than just transferability. You can convert the tokens without having to go to an exchange.

Liquidity is measurable. For Bancor it is determined by the CRR – Constant reserve ratio. For example, the BNT token has a 10% Ether reserve ratio. The higher the CRR of a token, the more liquidity; the lower the CRR of a token, the less liquid. 100 CRR would be pegging it to Ether. BNT is not a derivative of ETH but you could say it is denominated in ETH. When you buy a BNT, there is an issuance of the token/and adding ETH to the reserve (on the smart contract) and when you sell BNT, the smart BNTs are destroyed.

Bancor wants small cap tokens to have liquidity. Their upcoming release will be the first step in that direction by offering the ability to integrate any third party ethereum wallet (like Metamask, Parity, Imtoken, etc) and enable on-chain conversion between any two tokens (without having to go to an exchange).

Second major step is Bancor’s recent announcement of a strategic partnership with Kickico, a kind of decentralized Kickstarter or rather a 3-in-1 platform for ICO’s, crowd funding and crowd-investing. The KickCoin has launched its sale since Aug 29 and is ongoing until Sep 16.

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KICKICO aims to become a platform for small to medium size fundraising ventures through Initial tokens offering. However, since most of them will not have enough capitalization to be listed and traded on crypto-exchanges, the integration with the Bancor network will make their tokens really “Smart”.

Through this partnership, the Bancor network is scaling with the onboarding of the Kickico ventures. Kickico offers liquidity to its clients that choose to issue a “Smart token” which would mean that it can be exchanged with any of ERC-20 tokens. The way it will work for Kickico and Bancor, is that every KickCoin will have a 5% reserve currency of BNTs.

A very different world

I can see the fear in many eyes these days around ICOs, ethereum etc. We are still very human and so we overreact to all the sweeping changes that are happening. And of course, it won’t be a straight line to the direction we are heading to.

Let’s switch to think of the change that is happening. ICOs are not only about funding a company. “ICOs are more about an ecosystem on which for profit companies will be built on; more like a country. We are in a unique time that protocols are built on which the next generation of the Web will operate” echoing words from an excited Eyal Herzog.

Bancor wants to remove the barriers to liquidity for the issuance of all sorts of tokens: from community, to loyalty, to business etc.

Anyone today can issue a currency against any asset. The cost of failure is so low and we have all the technologies needed:

  • 24/7 internet
  • secure and decentralized = blockchain tech
  • connecting all blockchains = liquidity

For those that still think that Smart contracts and Smart tokens are just a programmable module on the blockchain, much like an Excel or a Google sheet cell with a Macro; there is a wake-up call that they can’t continue ignoring.

Smart contracts and Smart tokens can hold Assets on-chain and off-chain; can transfer Value on-chain and off-chain; can create Liquidity on-chain and off-chain. Centralized checks, audits etc. are not needed.

Doesn’t Bancor network feel like the decentralized tokenized version of future Central Banks and a few other Capital markets crucial institutions (SWIFT, exchanges etc), with reserve ratios determined in a decentralized way? Very exciting times of new decentralized monetary tools to consider. So stay tuned.

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.



Why the KIK ICO is the one to watch


NagarjunaSagarDamThe Filecoin ICO is chewing up a lot of bandwidth this week, but I think that KIK is the one to watch.

Starting with Filecoin, there is lots to like – great team, ambitious tech goal, key protocol for decentralised Internet, but I would not bet on it for these reasons:

  • lower cost digital storage is not high on most people’s worry list.
  • Jeff Bezos (AWS) is a fierce competitor who wins price wars and takes on Walmart and China. He coined the line – “your fat margin is my opportunity” – and he has not left any fat margin to exploit.
  • the Filecoin tech is unproven and the marketing challenge (needing to scale to billions to be meaningful) is horrible
  • there are other viable vendors in the beat AWS by going P2P game such as Storj.

I hope Filecoin make it but the odds look lousy.

KIK is interesting because it has nothing to do with blockchain or decentralisation. It is one of many viable companies that would like IPO as an alternative to trade sale, but that are dammed up in front of a wall that excludes all but the most massive companies. KIK did a Pre ICO round that looks a lot like a Pre IPO round in ye olden days. This is a sign of ICO transitioning to mainstream – real securities sold to real investors in a legal framework. Whether it is a good deal and a great business is another matter. The key is that ICO is replacing IPO as a viable exit and competing with M&A and PE. That is a mega trend shift. Traditional exchanges and all who work in that ecosystem are facing disruption.

Will be watching this one with keen interest.

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

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






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

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

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

Shapes and colors of the booming US crypto hedge fund space

hedge fund

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. 

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Aigang brings ICO gold rush to Insurtech with a plausible blockchain concept


Call it double disruption. Real time claim to cash using blockchain could disrupt Insurance. That is disruption number one. ICOs could replace large parts of the traditional innovation capital business – early stage VC and IPOs.  That is disruption number two.

That makes Aigang an interesting concept to study. The fact that it is only concept – not a product, let alone a profitable business – is part of the second disruption story.

Tigger is all excited about how all this innovation will create a better world. Eeyore says this will all end in tears. ICO speculators shovel in cash to make a quick buck while retweeting  Tigger. Eeyore sits on the sidelines waiting to be able to say “I told you so” and buy later for pennies on the dollar.

Who is right here?

To help initiate a conversation, this post looks at the:

  • Concept
  • Technology
  • Team
  • Jurisdiction
  • The deal for “investors”

The concept – real time claim to cash for small claims

Conceptually this makes sense. This post explains why claim to cash time is so critical and why blockchain based smart contracts is the enabler. The post was written in May 2016 and Aigang was formed in 2017 so they may have read it or simply tuned into the same innovation radio waves. This bit explains the basics:

“Auto Payout Based on a Trustless Smart Contract

This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:

Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.

Elimination of claims processing cost. This is a consequence of elimination of fraud.

For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.

One example of where we see that binary result is flight insurance. The flight was either cancelled or it was not. Blockchain systems use external data sources (e.g via the Oraclize service ) to get this proof of what happened. A Proof Of Concept for this flight insurance use case was coded during a weekend at a hackathon using Ethereum – proving that technical risk is not the prime concern.

We expect to see lots of use cases where this binary rule applies where really low cost insurance can be offered (thanks to elimination of fraud and claims processing). This is classic disruption at the edge – where disruption usually gets traction. For example, there are lots of use cases within the sharing economy. These are on demand or just-in-time insurance use cases.”

Aigang is going after a sensible early market in the “really low cost insurance” segment – mobile phone batteries. It is small enough to enable real time settlement and” human real time” (less than a few seconds) changes user behaviour.

It looks like Aigang can get the battery data automatically from your mobile device. Yes this is also an IOT play. Eeyore was heard muttering about random buzzword generators – ICO, Blockchain, IOT, Insurtech, but Tigger responded by saying that the concept makes sense.

The investors will be P2P. The crowd will be the new Lloyds Names. Hmm, how does that fit with Solvency 2? Will the crowd take unlimited liability like Lloyds Names? This can only work outside the regulatory framework.

The technology

Ethereum – brilliant plaform, still with bleeding edge risk. As Aigang put it:

“Built on Ethereum testnet, the application is not fully functional yet, and there are chances that the users attempting to send funds from their Ethereum wallet could lose their funds.”

On the plus side, they do have a fairly active GitHub as per Token Market.

What is your risk appetite? This has technology risk at the platform level and at the application level. If you don’t really understand Ethereum or trust somebody who does, this is not for you.

The team

They look good on pixel. But they have not got a product in the market, so that is all one can say. One assumes they are all getting paid in equity and tokens. If the ICO succeeds they will become a real team.

They also offer “bounties” to contributors. No, I did not ask for or want a bounty for writing this post.  This is like 1999 when landlords would take equity for rent.

The jurisdiction

Singapore. One assumes Aigang will block IP addresses from America and make big bold signs saying “no Americans please” in order to stay out of SEC clutches.

This is far outside the regulated world. This is not a sandbox experiment. Aigang  plan to offer a product outside the regulated world. This post by a VC in 2014 explains why this strategy makes sense drawing on lessons from Skype.

The deal

This is not being revealed yet. In ye olde innovation capital game, a concept stage venture with  MVP still in development like Aigamg would raise $50k to $500k. $50k would be for a first time entrepreneur. $500k would a proven entrepreneur wired to top Angels and VCs. Two years later, 10%  of these would do a $5m Series A and a year later about 50% during loose money times would do a a $50m Series B. Aigang will probably raise $50m out of the gate.

Will it be a great deal for token  investors? I doubt it. Maybe for equity investors who have a lot of appetite for risk and if the price is right.

Will it change the world and unleash a new wave of Insurance claim to cash innovation using Blockchain? I think so.

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

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ICOs After The Gold Rush

After the gold rush

I love Neil Young’s After The Gold Rush. It encapsulated an era in a similar way to John Wesley Harding by Dylan. Yes, I know, I carbon dated myself there. That was time of getting real after wild excesses – which is what the ICO market is now going through.

In this post I try to peer through the fog to see what we might transition to after the ICO gold rush.

First, lets look past all the scams and market manipulation that seems like an even weirder version of Wolf Of Wall Street.  Lets look at the good part of the ICO phase, at the good ventures that would never have got funded the old way.

Bless those Bubbles

Whatever you call this phase – bubble, craze, hot market, irrational exuberance, gold rush – these frenzied deals enable innovation while burning through truck loads of investor cash. They are bad for (most) investors, but good for innovation and progress in society. This has been true for every wave of innovation from rail to Internet.

I categorise ICOs into:

  1. Total Scam.
  2. Hopeless but honest venture.
  3. Could be a great venture, but the value is in the equity more than the coin. When I see VC buying equity but selling coins to Jo Q Public, it is not hard to figure out who is the sucker at the table.
  4. Could be a real currency like BTC or ETH. This is about 1 in 1,000 – 999 failures but 1000x return on one or two winners. One candidate is Trutheum (see thread on Fintech Genome on Trutheum). Also possibly Civic and Filecoin (but I need to dig more into them).

The intent between 1 & 2 is different, but the net result is the same (burning through truck loads of investor cash). You can use simple filters for these.

Category 4 is an interesting game. You could invest in all Altcoins at ICO in the hope that you catch the one that makes it. This is not easy in practice. Murphy’s law says that the one in 1,000 venture that makes it all work does it’s initial raise in some different form and your basket won’t catch it and you are left with 999 duds and no 1,000x winner. Or you could do fundamental analysis to find that one in 1,000 winner; but this is really, really hard. The reality is that there are very few protocols. People often reference TCP/IP but there is only one TCP/IP and it is not used for speculation. I called this a mirage as long ago as December 2014. After 8 years, Bitcoin is maybe a really valuable protocol (I think it is, but risk is still there). I love IPFS and Filecoin, but it is unclear what problem it is solving. It is hard to see AWS storage price as one of the big problems of our time. Nor  do I buy that current Internet protocols are fundamentally flawed. For example, content addressing is better than location addressing but content addressing is possible today. Compare that to the scale of problem that Bitcoin and Ethereum set out to solve.

In short, Category 4 is “good luck, you will need it”.

Category 3 is where there is lots of opportunity and “only” 100x risk/return profile. That is what we explore next.

Regulated IEOs

Our thesis is that the next phase of the market will move to Equity or what might be termed IEOs (Initial Equity Offerings). Once they become legal, entrepreneurs will be able to offer equity in ventures that have liquidity without waiting 10+ years to get on NYSE or NASDAQ. That is fixing a big, big problem. The Innovation Capital business today is fundamentally broken.

Regulation may or may not catch scams; I would bet on the ingenuity of scammers more than the diligence of regulators. Do your own diligence even on a regulated platform.

IEOs will enable honest entrepreneurs to raise capital more easily. This will be a big breakthrough. Today the fundraising process is totally broken for entrepreneurs. As the VC business grew big and professional, entrepreneurs kept on being told the bar had been raised:

“Come back when you have an MVP.

Ok, here it is.

Come back when you have PMF.

Ok, here is evidence from our early adopters

Come back when you have Revenue.

Ok, here are our metrics showing our Revenue

Come back when you have Profits

Ok, here are our metrics showing our Profits

Come back when your Profits are growing at faster rate.

Ok, here are our metrics showing our Q-Q profit growth rate

Ok, we are ready to invest.

No thanks. we don’t need you now.”

The sort of ventures getting funded through ICOs would never have got through that gauntlet. So we would not have Ethereum for example. Sure 90% will fail, but so what because the 10% that make it will change the world and make you rich. It is the old fashioned VC mantra but in the last decade so much money went into VC that it was no longer VC, it had become Wall Street West.

In the traditional funding model, these are ventures that would have either not got funding the traditional Angel/VC route or would have got $100k Seed and then fallen into the Series A Chasm due to lack of capital to execute properly. In ye olde Dot Com bubble they would have raised $25m to $200m in a regulated IPO. Now they are raising $25m to $200m in an unregulated ICO. “Plus ça change, plus c’est la même chose”. Just under 20 years, one letter is different.

Which ones to invest in in category 3 is the big question. Personally I am happy to wait and not get hustled by FOMO. I don’t usually buy at IPO. I prefer to wait until there is blood in the streets (for example when Lending Club crashed). Just a market crash is not enough. The fact that the price was once $1,000 does not make it a bargain at $100. The best time to buy the good ventures from the Dot Com era was around summer 2002 and into early 2003 (when Apple and some other great companies were trading at cash value). I missed Bitcoin totally in 2009 because I was not hanging out on crypto forums. I was deep into Ethereum in 2014 but did not pull the trigger to buy a life changing amount. Maybe there is something like that offering a 1000x return today, but I don’t see it yet.

Raising money from Angels and VCs, unless you live in Silicon Valley and are wired to the big money guys, has been a lousy process. It is worse still if you are a woman or a minority. So the ICO is the entrepreneur’s revenge. But the ICO has overshot the runway and entrepreneurs are now giving investors a lousy deal and they can use SEC as cover to offer this lousy deal. Good ventures should be able to offer equity as well as coins and not just to “accredited investors”. The ability to give early adopters a financial stake in the future is a game-changer. Today only cash capital is rewarded. What if cash capital and social capital and intellectual capital were all aligned? Imagine Mark Zuckerberg’s next door neighbour at Harvard with the same simple brilliant idea offering the first 1,000 users a big % of the equity. He or she would be vastly wealthy and 1,000 people who made it happen would have had their lives changed. And Mark Zuckerberg and Peter Thiel would just be ordinarily wealthy folks not celebrity billionaires.

The regulatory rollout to enable IEOs will grind along slowly and be painful for the platforms going through the process, but the platforms that make it through the process will be very valuable. It will take time but we will get there. That will unleash a whole new wave of innovation. Ventures that are too risky for traditional VC because they have technology risk may get funded through IEOs. Imagine a high risk Biotech venture. If scientists could invest they can evaluate risk better than a bunch of finance guys on Sand Hill Road. Ditto for clean energy and other things that really matter to us. The earliest investors in Bitcoin and Ethereum were totally naive on finance but could evaluate technology risk.

After the Neil Young’s Gold Rush, popular pressure did finally end the war in Vietnam. After the ICO Gold Rush, we may get more funding for life-changing innovation.

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

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