Fintech Digest from Autonomous ?NEXT -- Bitcoin Larger than Goldman Sachs; BlackRock Digital Wealth; Alibaba $15 Billion

Hi fellow futurists -- here are our top 3 favorite thoughts.

Bitcoin Larger than Goldman Sachs   

The cryptocurrency that started it all has been shrugging off the bad regulatory news from China, Russia and South Korea and reaching a price over $5,800, with a market capitalization of nearly $100 billion. If you're not a true believer in the crypto future, you are probably asking why, and shaking your head along with Jamie Dimon. But a market is a market, and there are things to learn here. One direction to explore is hard forks, as noted by Coindesk. Back in August, Bitcoin Cash forked/split out of the main Bitcoin blockchain. The market is now anticipating two new forks: Bitcoin Gold (scam?) in October and Segwit2x in November. 

Many people, including us, thought the Bitcoin Cash (BCH) fork to be a destructive development for the community. As a comparison at the time, Ethereum Classic constituted 6% of the market cap of Ethereum. How could an alt-coin that pulls value from an original cryptocurrency add anything other than confusion. Won't it hurt the network, its speed, and trust in the community? In one of the best posts on the topic, Nic Carter argued that by Metcalfe's Law (value of a network is proportional to the square of the number of nodes on the network) BCH would lead to a destruction of 25% of Bitcoin's value. Instead, the value of Bitcoin doubled, and BCH is worth about $5 billion. Like Ethereum Classic, that's about 6% of the market cap of Bitcoin. 

How can something divide, and both parts become greater than the whole, especially when network effects are in play? Shouldn't all non-Bitcoin altcoins that compete for the same use case go to zero? We struggle with this, but here's one hypothesis. Corporate spin-offs can create win-win situations for both the seller, who can now better focus on their core strategy, and the spun-out company, which is free to pursue its own direction and use case. So if the use-cases are sufficiently distinct, and the customer bases, developers and miners are sufficiently separate, growth in both projects is possible. From a biological or evolutionary perspective, splitting an organism and reseeding it elsewhere allows each branch / ecosystem to grow within different niches, and evolve along separate paths. So ask yourself -- are these paths sufficiently separate? 

The last quick point on this is Coinbase. The exchange stood against the Bitcoin Cash fork by refusing to include the BCH its users were due proportional to their Bitcoin holdings. But it then faced large withdrawals, legal questions about fiduciary duty,  and quickly reversed course to include BCH by January 1, 2018 in client accounts. Coinbase has a much more supportive tone on the matter for future forks. The exchange may be more inclined to adhere to sovereign laws, rather than influence the path of the ecosystem.

Source: CoinMarketCap, Autonomous NEXT analysis

BlackRock All Chips on Digital Wealth

Are asset managers on the way to being technology companies? Financial Planning reports BlackRock is launching a dedicated Digital Wealth division, and Bloomberg reported it is looking to expand the technology portfolio to include risk assessment firm Capital Preferences. The asset manager previously purchased FutureAdvisor, invested in European robo Scalable Capital, funded iCapital Network, and delivers enterprise risk and portfolio management software Aladdin to investment managers. The firm is moving closer to becoming a technology enabler of its distributors -- broker/dealers, wealth managers, financial advisors -- which is a strategic play to be closer to the end customer and enable the selection of underlying investment products. Additionally, the firm has been building out its "quantamental" investment product, which combines big data and associated machine learning tools with fundamental security selection.

The first angle is the top-down industry view. There is no such thing anymore as "non-digital" wealth. All wealth management is technology powered, and some is powered by better and faster technology than others. Consider the Envestnet/Folio deal and the wealth tech powerhouse that created. Or the assets that Schwab and Vanguard have gathered under their branded umbrella. All wealth services, bar none, face greater automation, better consumer interfaces, and an increasing reliance on third party software. So in that sense, even though BlackRock had been fast in buying FutureAdvisor, it had not been fast in getting to market like Schwab and Vanguard. As other asset managers, like Fidelity, and traditional wealth managers, like BAML and UBS, offer their own roboadvice, the writing is on the wall. You either have the digital asset and are able to use it to compete for the distribution of future wealth, or your firm becomes a utility.

The second angle is around building out the full wealth tech platform. It is not enough to own a Millennial-focused roboadvisor (FutureAdvisor) or an enterprise-grade risk engine (Aladdin). The firm also needs to have trading, performance reporting, financial planning, client portal, automated billing, online account opening, and many other emerging features. BlackRock has been investing or purchasing some of these firms, but it is a long way to being Envestnet, or fostering the ecosystem of a Pershing or TD Ameritrade. So it makes sense to build a concerted effort around this if they believe in a tech-forward future. The third angle is that this is an overdue clarification of the digital strategy. Prior and through the FutureAdvisor acquisition, BlackRock had opened its doors to partners to support channels they were not ready to pursue. Their enterprise focus meant starting conversation wth $50B firms, not $50mm RIAs. But it's impossible to be open and closed at the same time -- meaning you either have an ecosystem of partners, or you focus on pushing proprietary solutions. This announcement shows their interest in leaning into owning the asset, and using tech as a growth vector.

Source: Capital Preferences

Alibaba $15 Billion for AI, IoT and Fintech Research

Banks have sticky customers and large competitive moats, right? How long will that last in an artificial intelligence first world? Here are 3 data points. First, Alibaba is spending $15 billion to build a research and development program that they see as the future of financial services. It will have hubs in Beijing, Hangzhou, San Mateo, Bellevue, Moscow, Tel Aviv and Singapore. This will give the company access to a diverse talent pool and build a path out of China to the global market. The areas of research are artificial intelligence, Internet of Things (IoT), Fintech, quantum computing, and human-machine interaction. Sound familiar? Putting that into context, JP Morgan spends $7 to $9.5 billion on IT per year (depending on how you cut the data), with a fraction for Fintech and not mere maintenance. That's as good as it gets for what American financial firms can do.

Is it a big deal if an attention economy firm like Alibaba builds AI and Fintech capability? Here's a narrow example in Korea. KakaoBank is a mobile-first bank that was championed by messaging platform KakatoTalk, which has 42 million users. The bank opened 300,000 accounts in 24 hours of launch this past July, and reportedly has 45% share of all new opened bank accounts in the country since then. That's better neobank traction than Monzo, Tandem, Simple and Revolut combined. Similarly, Ant Financial and Tencent are using their chat platforms to scale some of the world's largest money market funds. What happens after putting $15 billion and AI-powered virtual assistants behind this strategy?

Here is the other boundary of this strategic vector. Numerai, the crowd-sourced machine learning hedge fund / competition / crypto-currency company has shared its strategic plan and traction to date. There are delicious bits -- 30,000 data scientists have contributed predictions and including the value of the fund's native crypto-tokens, rewards to participants have been in the $USD millions. Predictions are pooled together using a staking tournament, where the data scientists express confidence in their algorithms by committing financial resources. A meta model aggregates and combines algorithms into a trading strategy implemented by the fund. The next step is to move away from human data scientists accessing the Numerai website to APIs that are accessed by Artificial Intelligences on demand. What does this mean? It means a black hole is developing in the capital markets, and is in the open for all to see. Numerai has the ambition to monopolize intelligence and capital, and then decentralize the monopoly. Will a global conglomerate that is committing $15 billion to building the world's most powerful AI be as altruistic?

Source: Kakaobank, Counterpoint Research

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