Goldman Sachs & economic instability on Crypto, BBVA furthers Uber's expansion, Quant Funds seek alpha in Crypto markets -- Autonomous ?NEXT #151

Hello and welcome to Fintech Focus --

The crypto rollercoaster continues to ascend into some rather dangerous territory, whilst the centralization of Fintech permeates enterprises of all shapes and sizes. This week we had some fun to crystallize these subjects. We hope you enjoy reading them. As always, we would like to remind you that should you ever wish to refer back to previous newsletter entries, you can find them on our website HERE.

If you have any questions, comments, or suggestions regarding the content and/or structure of the newsletter, feel free to reach out to me directly on LinkedIn, Twitter, or via my email. I look forward to hearing from you.

Our top 3 thoughts for this week are:

1. CRYPTOCURRENCY & BLOCKCHAIN: Goldman furthers the institutionalization of crypto whilst global economic instability furthers its benefits
2. FINTECH & PAYMENTS: BBVA launches a product that will 'live' within a third party's platform & Uber's new move looks to restaurants-as-a-service
3. ROBOADVISORS & DIGITAL WEALTH: Artificial intelligence battles in financial markets but conquers in cryptocurrencies

Our artist of the week is Paul Jenkins and his Phenomena Wanderland Express. Poised as a great metaphor for finding structure in chaos, which is one of the themes in this week's edition.

CRYPTOCURRENCY & BLOCKCHAIN: Goldman furthers the institutionalization of Crypto whilst global economic instability furthers its benefits

The Cypto-universe is experiencing what can only be described as a storm of epic proportions. Fueled primarily by warm positively-charged air coming from the launch of the Libra project, and cool negatively-charged air from the dramatic price volatility and speculation in the market. Contrary to some testaments, the likelihood of the former impacting the latter is about as much as the correlation between the price's of Bitcoin and avocados (see here). However, the coincidence of these two developments does speak to how they both capture elements of a massive, worldwide financial transformation, all happening at a time of rising global economic instability and uncertainty.

Let’s start with the mainstream global money movements over the next decade being channeled through a mix of Blockchain-era stable-money services that operate along a centralization-to-decentralization spectrum — from JPMorgan’s JPM Coin and the new Swift Blockchain project at one end, to Facebook's Libra project and more open-standard Crypto stablecoin projects such as CENTRE’s USDC at the other. And it would be safe to assume that as these projects grow in usage and adoption, so too will the demand for Bitcoin as the digital asset hedge of choice. Emphasizing this point was the recent news that the US banking giant Goldman Sachs reportedly wants in on Blockchain now more than ever, with in-depth research going into the concept of tokenization. For the Blockchain community this is Good, for the Crypto community is this Great? According to David Solomon, Goldman Sachs will be using the Blockchain to reduce its transaction costs, and improve access to and overall efficiency of services to clients. More specifically, providing greater transparency, speed of settlement, and more resilient compliance procedures. Such a move will put Goldman in line with JP Morgan, Fidelity, and Citi who have all made huge strides in the space. This is not to discount the fact that the incumbent bank has already backed stablecoin startup Circle, and toyed with the idea of launching its own over-the-counter Crypto trading desk. Yet, Goldman has failed to reveal what exactly they’re working on, and very few are waiting on baited breath. Progress in Blockchain and decentralized ledger technology has recently been so rapid to the point where news of a major financial incumbent signing on is treated as a non-event. 

The wider point merges the above with significant global economic uncertainty stemming from US-China trade tensions and the significant capital flight out of China and Hong Kong. This new round of global economic uncertainty is occurring at the same time that Cryptocurrency and Blockchains are establishing themselves as key elements of the emerging financial architecture of the world. Shortly following the financial crisis of 2008, Satoshi Nakamoto posted his/her/their white paper to a select number of online cryptography experts, also known as cypherpunks. Little did they know that such an alternative model for global finance would shift the direction of large institutions and regulators alike -- with projects like Libra playing a critical role in elevating the profile of this new model. As the global economic and political stages continue to experience massive shifts caused by the vested interests of the few, so the instability independent benefits of digital assets and Blockchain are realized. As proven by the chart below indicating a strong negative correlation between Bitcoin and the S&P500.

Source: SFOX (Crypto Market Volatility Report: May 2019)

FINTECH & PAYMENTS: BBVA launches a product that will ‘live’ within a third party’s platform & Uber’s new move looks to restaurants-as-a-service

Three weeks ago, we wrote a story on how Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Additionally, ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems. See here for a refresher.

Turns out we could have been closer to the truth. As a new alliance between car-hailing giant Uber and digital bank BBVA seeks to leverage the potential of open banking to enhance financial service provision to Uber's Mexico-based drivers and delivery partners and their families. Essentially, the Uber application becomes the interface through which the aforementioned users can open a BBVA digital account linked to Uber's worldwide 'Driver Partner Debit Card,' allowing family members to receive instant access to earnings made by the driver, without the need of costly international money transfers. Additionally, the benefits of offering a centralized and aggregated platform to drivers and their families means the collected data can be used to offer financial benefits such as loans and insurance, as well as, non-financial benefits such as loyalty rewards, discounts, and subsidized purchases. A smart move if you ask us, especially knowing that Uber is currently incurring card processing fees of around $749 million (2017) to get paid and pay its drivers. 

On another note, this last week Uber announced the launch of a dine-in option to its UberEats app – this feature lets users order food ahead of time, go to the restaurant, and then sit down inside to eat. Adding Dine-In lets Uber Eats insert itself into more food transactions, expand to restaurants that care about presentation and don’t do delivery and avoid paying drivers while earning low-overhead revenue. And now that Uber Eats does delivery, take-out and dine-in, it’d make perfect sense to offer traditional restaurant reservations through the app as well. This move pits the on-demand food app directly against OpenTable, Resy and Yelp. Similarly, instead of focusing on a single use-case of on-demand food delivery -- exposing the company to the risk of heavy competition -- appealing to a niche demographic requiring such services, Uber Eats’ strategy is to own the digital service aligned to the impatient and hungry customer. 

By changing gears to offer its drivers more perks and job security through the BBVA partnership, as well as, embedding functionalities that promote customer, user, and employee experiences, it’s only a matter of time before Uber launches a fully functional financial suite allowing for users to make payments, customers to maximise profits, drivers to maximise earning potential, and the incentives across the application to cater to a wider demographic as its competitors. It's always better to be a product than a feature.

Source: El Sol De Mexico (website), Techcrunch (Uber dine-in)

ROBOADVISORS & DIGITAL WEALTH: Artificial intelligence battles in financial markets but conquers in Cryptocurrencies

It has become commonplace for users of online platforms to expect that their attention i.e. time spent using the platform, converts to loyalty -- in the form of an artificial intelligence algorithm that knows them better over time e.g. auto-populating search fields, recommending preferred clothes to wear, books to read, or food to eat. Yet, when it comes to applying such sophisticated algorithms to financial markets, why aren't such quant funds always outperforming the market?

Artificial Intelligence is most useful where the problem set is narrowly defined, i.e., it is well known what is being optimized and how, and where the fuzzy data needs the structuring at scale that AI provides. A narrowly defined problem may be – given this particular set of personal characteristics about a person, should they be allowed to borrow this particular amount of money based on prior examples. A poorly defined problem may be – predict the price of a stock tomorrow given thousands of inter-correlated data points and their price history. It all boils down to the reliance of quant investment strategies reliance on pattern recognition: models look to correlate past periods of superior returns with specific factors including value, size, volatility, yield, quality and momentum. Such approaches have several fundamental weaknesses: (1) hindsight bias — the belief that understanding the past allows the future to be predicted, (2) ergodicity -- the lack of a truly representative data sample used in the model, and (3) overfitting -- when a model tries to predict a trend in data that is too noisy i.e. too many parameters or factors. Logically, over time the anomalies that these quant strategies are relied upon to exploit should dissipate, given the swift pace at which technology, competitors, and data moves to correct such anomalies. This is not stopping the likes of augmented analyst platform Kensho (acquired by S&P Global for $550 million), crowdsourced machine learning hedge fund Numerai, and the industry-leading quantamental funds of BlackRock. There is an inherent contradiction in that the approach exploits inefficiencies, but requires market efficiency to realign prices to generate returns.

With Cryptocurrencies, the strategies are different. Native Cryptocurrencies i.e. Ether and Bitcoin, are considered unconstrained assets, with limited correlations to other assets. Additionally, the data sets and factors that need to be considered when trading Cryptocurrencies are far fewer — many of which are speculative and co-dependent, resulting in far more predictable patterns than in financial markets. Because most of Cryptocurrency trading is autonomously and algorithmically driven, patterns are more easily discernible and human trading behavior often sticks out in stark contrast to established market behavior.The issue of course is not the opportunity to profit — it’s the magnitude of such profits. Currently, Cryptocurrencies simply do not have the volume and liquidity necessary for autonomous trading strategies to be deployed in large quantums. Percentage returns for algorithmic Cryptocurrency trading may be significant, but beyond certain volumes, especially when assets under management start approaching the hundreds of millions of dollars, traders need to get far more creative and circumspect in deploying funds as the opportunities are far fewer at larger order sizes.

For now at least, AI and machine learning are still some ways away from consistently beating the financial markets, but with a bit of tweaking they may be a lot closer to beating the Cryptocurrency markets. Evidence of this is already beginning to show -- in 2018 Swiss asset manager GAM's Systematic Cantab quant fund lost 23.1 percent, as well as, Neuberger Berman is considering closing their factor investing quant fund over poor performance. All this whilst Cryptocurrency quant funds returned on average 8% over the same period. While the prospect of searching for phantom signals that eventually disappear could dissuade some people from working in finance or Cryptocurrency trading — the lure of solving tough problems coupled with the potential to dip into the $200 billion opportunity means that there will always be more than enough people who will try.

Source: Autonomous NEXT Keystone Deck (Augmented Commerce), PWC (2019 Crypto Hedge Fund Report)

Further Reading:

• Blockchain startups raised $822 million combined in H1 2019
• Brave web browser is really fast at blocking ads
• Brazilian Bank Plans to Use Tezos Blockchain for STOs Worth $1 Billion

• Bank for International Settlements Announces New Fintech Hub For Central Banks
• JPMorgan's Fintech Deal Shows Asia Cash Services Ambitions
• Swedish ‘neobank’ P.F.C. picks up €5M backing from Nordic banking giant Nordea

• Waymo is now allowed to transport passengers in its self-driving vehicles on California roads
• Chinese officials reportedly installed a surveillance app on tourists' phones
• Policy Makers Examine the Disparate Impact Risk of Artificial Intelligence and Underwriting

• Former Coutts, Credit Suisse adviser launches digital wealth manager
• WealthTech: A game changer for wealth management
• How are millennial investment habits different?

• BMW highlights application of virtual and augmented reality in production
• Microsoft patents live picture overlays for mixed reality systems
• Augmented Reality poised to help create instant real time experts

We put this together at Autonomous NEXT, where we love Fintech, Crypto and our community. Contact us with questions and ideas.

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Thanks for reading!  

Best,

Matt