How DeFi makes it smart to love smart Contracts, and 13 other top Fintech developments

Hi fellow futurists -- I wrote a little Processing program to make the abstract covers for the series. Hope you enjoy the weirdness and variety the algorithm delivers.

Below are this week's short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality. For a read on why I am interested in decentralized finance, and why I've been highlighting relevant news to the sector, check out the longer take below.

Short Takes

• N26 is second banking 'unicorn' to face regulator's questions (Yahoo Finance). The first European neobank in the spotlight was Revolt. And Metrobank. And in the US, SoFi, Zenefits, and Lending Club. And even Betterment. So, another way to put it is it is inevitable to bump into a regulator if you are in finance.
• Fintech Insurer Lemonade Valued At More Than $2 Billion After $300 Million Funding Deal (Forbes). There are not that many credible consumer B2C insurtech user aggregators out there, and any that have a good customer acquisition machines will get funded.
• FIS vows to help community banks set up digital units in 90 days (Finextra). What starts in B2C ends up as a platform for the long tail of small financial institutions. Commodity, but requirement.

• Waves Platform Raises $120 Million for Private Blockchain (Bloomberg). I missed this one before, and it boggles my mind. Tokenization driven top down in Russia. Another round being pushed through for enterprise tokenization.
• Crypto Lender Dharma Officially Launches on Ethereum Blockchain (Coindesk). Best of DeFi coming to an Internet near you! Another one to check out is Uniswap.
• Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in Decentralized Exchanges (Arxiv). This academic paper traces the emergence of arbitrage bots on what could be our future financial system.
• Blockchain Firm Digital Asset and ISDA Eye Smart Contract Use in Derivatives Trading (CoinTelegraph). This is a big and obvious deal if done right. Most such trading already uses what are essentially form contracts made by people. Have machines do it!

• QBE Announces TextQBE (Coverager) and Introducing New Alexa Healthcare Skills (Coverage). Insurance seeing voice and text conversational agents improve for claims processing, medicine, and other related uses.
• Online lender Upstart eyes expansion after latest funding round (American Banker). Just because you use machine learning, doesn't mean you're good at using it for digital lending and reducing default. Upstart is good at it, and raised $50 million more.
• Virgin Money uses Jaywing artificial intelligence to analyse customers (PR). Behind the noise is the simple finding that profiling your customers -- especially those about to leave -- is better done with machine learning than with unchanging models.

• Walmart is rolling out the robots (WSJ). You might think this isn't about augmented reality, but wait 5 years and see Alibaba staring back at you.
• HoloLens 2 Hits the Ground as the U.S. Army’s Own AR “combat multiplier” (Road to VR). Interesting discussion of how the HoloLens is being changed to fit the Army use case, and what new sensors are being added. Once designed, thousands to be deployed.
• Apple's New Ar Features Are Proof That Wearables Are Coming (Wired). The hardware maker isn't in a rush to force through AR/VR, but are building all the pieces and we will adopt them slowly. If you don't believe, read this by Kevin Kelly.

A Longer Take: Smart to Love Smart Contracts

I did a 90 minute session at the London Business School Fintech class today about the future of finance (go figure!). Because, as often happens, I was being verbose and short on time, we had to choose to cut one of three sections of the presentation: (1) Artificial Intelligence, (2) Blockchain and Crypto, and (3) Mixed Reality Commerce. Bad news for crypto. 90% of the audience wanted to keep AI, 70% of them stuck with AR/VR and barely 20% eked out a remaining interest in Crypto. Take that for your counter-indicator.

And yet to me, this is the most engaging, compelling and powerful theme in all of Finance today. To hit it big with AI, you need to be Amazon, Facebook or Google. Your data monopoly will power your hardware cloud oligopoly, which will filter down to your attentionopoly. Everything about AI screams centralization and top-down mathematical modeling, by robots no less. In AR/VR, a similar situation is true. Not only is that game reserved mostly for hardware makers, but it requires building up a two-sided market of content consumers and content creators in what is still essentially a wasteland. Niantic’s 150 million Pokemon Go users prove me wrong, but do they prove anyone else right? No bank today understands how mixed reality, and the commerce ecosystems it will empower in 5 years, will strip them of power.

This leaves the loved, hated, ridiculed and adored theme of crypto assets. As X-men taught us in cartoon form decades ago, people fear what they don’t understand! And after meeting with hundreds of operators and investors across the financial industry, I still think most of them don’t understand it. Further, the “it” keeps moving around. One day, we are talking about some asset (i.e., Bitcoin) you park 2% of your portfolio into in order to hedge against inflation. Another day, we sing the song of cost savings through enterprise blockchain. The ISDA automation linked above is an important example of this theme. Yet one day hence, we celebrate the global crowdfunding wave that was brought in through ICOs and then bemoan the capital losses incurred by novices and hucksters yelling through botnets on Twitter.

A big story of 2019 is the tokenization of securities into instruments that are regulated, custodied, and travel the blockchain rails. Finally, it goes, we can liquefy illiquid alternative investments with offerings platform. We can build an ad-hoc network of traders and bankers that want to own malls in Wyoming and hotels in the Arctic. Everyone will have a piece of the Empire State Building.

Ok! You got me convinced. It will be powerful to broaden the retail asset allocation and investment exposure to that which millionaires have had for decades. But remember. Mark-to-market also means that your papered value will see real losses if the next trade is going to be down. And the moment you have New York finance professionals model any early stage startup, they will mark it to $0.

This brings me to Decentralized Finance, the latest iteration of the latest buzzwords, and it is glorious. You may have an intuition, somewhere in there, that financial companies are just big old human machines. You may think that iPhones and WeChats have disintermediated the “stores”, i.e., the distribution channels, for traditional financial products. Goldman, for example, is captured with Apple’s credit card product. JP Morgan, similarly, has bowed its silver fox head beneath the weight of Amazon. But these tech platforms still peddle traditional financial products. When Lehman Brothers collapsed, or was forced to collapse depending on your appetite for conspiracies, it triggered a credit event that nobody expected. All structured (i.e., think tokenized) products built by Lehman melted into nothingness as the firm could not guarantee performance unless you were at the top of the capital stack. And being levered up 30x doesn’t help the bottom of that stack.

Decentralized Finance trades counterparty risk for cyber risk. It trades beehives made of humans for repositories made of software code. Yes, we can break DAOs, we can de-stabilize pegged algorithmic stablecoins, we can arbitrage mining and pocket the fees. Make sure to consider the links above about Dharma protocol (no longer a protocol, wants to charge originations) as well as the front-running paper. Consider also my longer piece on why it is so tempting to destroy fledgling artificial intelligences, before they grow into unassailable, machine Goldmans / Goldmen / Goldpeople.

But this shift – the shift from (1) manufacturing financial product through human work to (2) the creation of systems that deliver most of the financial primitives without human intervention – is the work of the next generation. Time to get cracking.

Looking for more?

• Subscribe to this series by clicking the button at the top of the article! It will deliver a weekly notification in your LinkedIn feed. Nothing more, nothing less.
• Find me on Twitter here for Fintech and here for Digital Art.
• Want to send me a note? Reach out here anytime.