A Declaration of Innovation- Happy 4th of July

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“When in the Course of financial operations it becomes necessary for people to disrupt the legacy bonds which have connected them with insurance and to assume among the powers of the industry, the separate and equal station to which the technology and innovation entitle them, a decent respect to the opinions of mankind requires that they should declare the cause(s) which impel them to the separation.”

No, Thomas Jefferson and his peers did not declare insurance innovation as a cause in 1776, and his well-known version of the United States Declaration of Independence is far more articulate than the paraphrased paragraph noted above.  But it’s July 4th, the U.S. Independence Day, and it seemed fitting to have a topic that tips its tricorn hat to the day.

It’s easy to declare a need for separation from the bonds of a multi trillion-dollar legacy industry, but as with any long-standing governance or tradition the declaring is much easier to accomplish than the doing.

Insurance innovation is a heavy lift of a heavy industry.  Insurance is many things, many covers, many types of service, many jurisdictions, many carriers, and of course- billions of customers.  As the Insurance Elephant has previously noted in “The Blind Men and the Elephant, InsurTech and its Many Perspectives” , insurance innovation is comprised of many disparate parts that make the whole beast, yet each person who has motive to adopt a ‘separate and equal insurance station’ perceives the beast as the activity in which the respective ‘each’ is involved.

The industry functions and provides the foundation upon which ownership and finance can rely, yet in its entirety the industry is held captive by the tyranny of technical, organizational and process fealty.  Process inertia and associated data management are ingrained within every aspect of the insurance system with which all are required to comply, and innovation must expend valuable energy in convincing incumbent management hierarchies of its worth.

And there are plenty of data that need to be processed- one by one, by ten, by one hundred, by one thousand, million, billion, trillion forms.  The industry employs millions globally to handle the volume of paperwork/data/forms.  Customers (for the most part), vendors, providers, service persons, agencies, and regulators are accustomed to the paper chase- but will that ensure an enduring, effective industry going forward?

These truths are self-evident- insurance must free itself from the shackles of legacy complacency.

There are many ‘patriots’ resisting the tyranny- companies that have developed clever methods to structure data that exists in native unstructured form, e.g. ExB Labs whose Cognitive Workbench can “search texts and images for content,…also classify, interpret, summarize and evaluate” unstructured data.  Or RhinoDox, whose document management innovations make captured, unstructured data easier to find and use (yes, it’s clear that for now that firm’s focus is on manufacturing innovation, but their heart remains available for insurers).  And insurance process management platforms that have developed-  These are, however, just tools to mitigate the overburden of legacy systems, not the inertia-busting change that is suggested for the long-term health of the industry and its participants.

Consider- there are a whole lot of persons employed in the legacy insurance industry, persons who understand what customers need, how processes function (or don’t), how to workaround systems that are obsolete, ensure customers have the appropriate cover, adjust claims within a patchwork of old and new systems, are subject to operating priorities that vary by the quarter, and are witness to the loss of intellectual capital due to attrition and retirement of tenured colleagues.

Yet despite those self-evident factors these millions are not encouraged to participate in the active dialog of innovation and InsurTech.  Not only is that wealth of staff knowledge generally unavailable, outside of participation in conferences most of those who are putative industry leaders are reluctant to be or missing in the discourse.  The drum beat of innovation is heard in the town square but remains surprisingly mute in many parts of the industry.  In the absence of the light of discourse, the tyranny of legacy insurance prevails!

As with established global governance two hundred and forty some years ago and the onset of the nascent United States, there is optimism for change.  Perhaps it is time to examine if the current indemnity model that exists for many covers has been outpaced by data availability and alternate means of claim reimbursement, e.g., modified parametric plans.  There are plenty of vested interests holding indemnity contracts near, but is a rebellion in the offing?

There are markets that have avoided the need to innovate- those are the digital native markets such as China, or India, or South America, where insurance products have taken hold for hundreds of millions of customers by working from innovation backwards- what does the product need to be to serve the delivery channel the customers expect.  There are niche customer segments that have been found and are being served by new products and new players, but these unique markets are an insignificant (statistically speaking) part of the whole.

So let’s talk about the incumbent markets that have the technical, organizational, and process debt that innovation has yet figured out how to amortize, but that is fodder for a declaration of insurance innovation independence.  A need to cast off the yoke of what has been and find the what can be.

A very heavy lift, indeed.

A Happy Fourth of July to my U.S. colleagues.  And apologies to Thomas Jefferson, et al.

Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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Is Funding Circle the barometer for SME opinions on Brexit?

Listed SME fintech Funding Circle sent waves through their share price this week, with news the lender was halving its growth forecast for 2019.

Facing reduced credit demand from the sector, it now anticipates its 2019 revenue growth on 2018 will be 20%, rather than a previously forecast 40%.

Loans under management on the platform are up 37% for the first half of 2019 compared to the same period in 2018, currently sitting at £3.5 billion. Originations are up 14% on the prior corresponding period, at £1.2 billion. All healthy figures in their own right.

While the share price took a fall on the news growth was expected to slow, investors on the P2P lending platform are no doubt pleased with the forecasted increase in returns on a net basis. The full year 2019 outlook expects these to be in the range of 5.0 – 8.5%, up from 4.4 – 8.4% in 2018.

The company is blaming the ‘uncertain economic outlook’ as being behind the drop off in growth. With Brexit negotiations and outcomes still incredibly uncertain, it’s easy to empathise with the many UK based SMEs who must be struggling to read between the tea leaves of UK and EU policy, in order to decide whether to make capital investments in the next 12 months.

So just what do SMEs really think about Brexit?

Research released by payments provider WorldFirst in February of this year seemed to think they were smelling the Brexit roses, with the number of small businesses indicating they were broadly positive about the UK’s exit hitting 41% in the last quarter of 2017, up from 33% in the prior year.

A separate study by academics at St Andrew’s University found that in 2016, 25% of businesses viewed Brexit as a major obstacle to their success. This number had jumped from 16% in the year prior, when they were surveyed right after the referendum. Their survey canvassed 15,867 SMEs, using government data collated by the UK Department for Business, Energy and Industrial Strategy.

Research released by Co-operative Bank in January placed Brexit concerns as top of the list of worries for SMEs, followed by increase in operating costs and then competition. Access to funding was second to last on the list, which may be testament to companies like Funding Circle doing their job well.

SMEs, like most of us who are surveyed, probably say one thing and do another. My bet is that the pace at which businesses like Funding Circle are growing is probably one of the best barometers of the SME market’s true reaction to Brexit. And in line with a cliché that speaks to the human condition, they seem to be living out the phrase, ‘when in doubt, do nothing’.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

I have no commercial relationship with the companies or people mentioned. I am not receiving compensation for this post.

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Convergence or clash of non-natives & natives going Stable – #CVC19

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The 2019 Cryptovalley Conference remains true to its nature. Three days, three stages, and overweight technical and economics content. I attended for two days and became A cool kid on the Blockchain. 

The narrative has clearly changed. Lots of evidence around us. Yesterday the BIS, the umbrella organization, announced the launch of a global innovation hub in Basel,Hong Kong, and Singapore to help Central Banks to “identify relevant trends in technology, supporting these developments where this is consistent with their mandate, and keeping abreast of regulatory requirements with the objective of safeguarding financial stability”.

The EU is very serious about supporting Blockchain technology. Tom Lyons announced the Convergence conference this coming November sponsored by the European Commission, the EU blockchain observatory & Forum, Consensys, Alastria, and INATBA[1].

Several speakers and panelists participated at the Cryptovalley Conference from Central banks around the world. Of course, they repeatedly stated that they share personal opinions and not the CBs official position. Between the BOE, the Fed, the SNB, and the Bank of Italy, the conversations went deeper.

We were reminded that unconsciously we are going back to the 19th century when multiple entities issued money. I like to add to that observation that we are also going back to bearer instruments. Tomaso Atse, director of the UCL Center for Blockchain Technologies, pointed out that what is new in our era is programmable money and the creation of hybrid types of value (like combining digital identity with money or some other value) and the ability to exchange it).

Alexander Lipton, the EPFL visiting professor and founder of SILAmoney, poked and provoked and defended his point of view. In a nutshell, he is the godfather of the DLT version of Narrow Banking concept. This is a way for Central banks to deploy DLT technology by issuing a fiat-backed digital coin (FBDC). The idea is that the central bank will allow and work (indirectly) with a consortium of validators that manage the issuance of the FBDC. It is worthwhile reading about this concept `Narrow Banks and Fiat-backed digital coins` by Alexander Lipton, Alex Pentland, Thomas Hardjono (MIT). What jumps out of it is that right now, we are faced with Facebook intending to implement this kind of concept through the LIBRA association. While each Central bank is doing its in-house due diligence, concerned only with its local country monetary policy and reserves; there is a clear need for Central banks to get together. They should be designing a Central bank coordinated narrow bank consortium.

This is a wakeup call to nightmares of whether Central banks will be able to control reserves and rates on reserves if LIBRA scales. LIBRA`s adoption in countries with currency instability, is troublesome if it really scales. Can LIBRA create hyperinflation in Venezuela? Alexander Lipton, says yes.

The narrative has clearly changed, and we are shifting in a phase where understanding monetary economics is becoming important.

When I raised the question last week about the governance of the LIBRA association (see  here) and whether there could be collusion; I didn’t mean in the DAO technical sense (i.e. more 50% of validators collude and validate an invalid transaction). I meant collusion in terms of decisions about, for example, the management of the LIBRA reserve fund. Which currencies will be included, will the fund become a significant holder of US debt, how much government debt versus currencies, why share the interest of this cash cow by accepting new members, how to deploy the profits of the reserve?

Once the LIBRA reserve scales to $100billion (Ant Financial`s money market fund is currently $168billion down from a high of $250billion), the interest will be in the order of $1.5billion (assuming an average 1.5% interest rate). That is huge for an association with no reporting requirements.

We live in very interesting times.

Monetary policy issues need to be understood better.

Moral hazards are lurking everywhere.

Those that have been working on financial inclusion, self-sovereign identity, P2P protocols are feeling looted.

  • Why didn`t Facebook join the Decentralized Identity – DID- project (media report that they were invited and rebuffed an invitation)?
  • Why isn’t Facebook`s Calibra, the ID part of the LIBRA ecosystem, respectful of the open standards for verifiable credentials developed already by DID under the auspices of the World Wide Web Consortium (W3C)? Why do they want to design new ones?
  • Will this world domination-ish attitude, shoot them in the foot[2]?

Back to the native people, Lisa Nestor from the Stellar foundation, shared a great overview of the global P2P network that can be used by banks to work directly with each other, without the need for correspondent banks. Stellar is decentralized and open with 28 nodes currently. Their aim is to optimize cross-border payments and work with all currencies. They launched in 2014. In 2016 they had 9,000 accounts and today they have 3.2million. Their daily volume has reached $350k with a total cost of processing of $1.50! During the conference, they reported that the first Swiss node was launched.

Bitcoin Suisse announced that they are seeking a banking license and they will be expanding in Europe. Ficas, a Swiss crypto asset management group for HNW, was a platinum sponsor. They are based in Zug with presence in Turkey, Greece, Spain, and Australia.  Flovtec and Ovrium shared the award of the best Swiss Blockchain company at the SICTIC investor event during the conference. Orvium is a decentralized scientific collaboration platform for deploying blockchain and artificial intelligence technology. Flovtec is a liquidity provider for tokenized assets.

My opinion is that we will be seeing an explosion of stable coin issuance. CNNmoney Switzerland was at the Cryptovalley conference taking a pulse on  LIBRA (watch here).

The GOSCI  – Global Open Source Currency Index- is a novel independent volatility benchmark for Stablecoins. Launched by Bernard Lunn the same day the LIBRA white paper hit the market. Become part of it.

The Stablecoin.foundation was launched in October 2018 with 25 Stablecoin issuers from 16 countries. Its mission is to represent the collective interests of Stablecoin issuers to unify the industry.

Closing remarks

The narrative is now, about financial stability with privately issued coins. Several factors are forcing everyone to the table. These conversations are hard and consensus is not given.

Stable coins are creating a very collateral hungry market situation.

[1] INATBA is the new International Association for Trusted Blockchain Applications, offers developers and users of DLT a global forum to interact with regulators and policy makers and bring blockchain technology to the next stage.

[2] “That’s very world domination-ish of them,” said Kaliya Young, a co-author of “A Comprehensive Guide to Self Sovereign Identity” and co-founder of the Internet Identity Workshop. “Some of us have been working on that problem for a really long time. You already have a set of open standards for verifiable credentials that are basically done and working.” From the article `Buried in Facebook`s LIBRA paper, a Digital Identity Bombshell`

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have a commercial relationship with Flovtec. I have no positions or commercial relationships with any other company or the people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Prices continue to rise. Is Bitcoin going mainstream?

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Last week our theme was “Facebook’s Libra looks and smells like a cryptocurrency, but it really isn’t”. Our theme for this week is “Is Bitcoin a bubble? Why does it continue to rise?”

TLDR. Bitcoin’s trajectory has been eye-catching. Most of last year it hovered below $4,000, and earlier this week its price reached $14,000. While still very explosive and volatile, many predict that it will soon go past $20,000, the highest price it ever reached, at the end of 2017.

Bitcoin’s phenomenal rise has made it hard to ignore, with many debating the potential of Bitcoin and cryptocurrencies.

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Some have called Bitcoin a fraud and many have suggested that cryptocurrency prices are in a bubble, that will eventually burst. While claims like these have sidelined many investors from getting into the market, they are not the only reason. Volatility and lack of safeguards that other financial assets have also been critical for investors.

But, do bubble claims really hold any water?

Well, since it was launched in 2009, Bitcoin has had over 8,000% ROI, according to CoinMarketCap.

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If Bitcoin was a bubble, we do we see it keep coming back, rising from the dead?

Several factors are affecting Bitcoin’s price: Increased institutional involvement, Facebook’s Libra launch, Bakkt has been cleared to test it’s futures products in July, bringing us closer to a BTC ETF.

People are HODLing

The adoption of Bitcoin is increasing, but people are still not utilizing this coin to buy an asset. Research reveals that in the year 2019, above ninety percent (98.7%) Bitcoin transactions are contributed by exchanges and the remaining 1.3% from merchants. Its involvement in payment system around the globe is still negligible, and most people just hodl Bitcoin.

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Diar revealed a 26% increase in the number of Bitcoin addresses holding 1-10K BTC, specifically after the cryptocurrency established $3,200 as its bottom on December 15 last year.

Upcoming Halving

Bitcoin prices could be rising because of a “halving” next year. When Bitcoin started 10 years ago, the payout to Bitcoin miners for verifying new blocks was 50 Bitcoins and in May 2020 it will be 6.25 Bitcoins.

The halving is a very positive for Bitcoin. It increases the scarcity of Bitcoin, since the number of Bitcoins created is less. The more scarce it becomes, is the greater the demand will be, which will likely lead to a price increase.  This decrease in rate of supply growth, means less downward pressure on the price of Bitcoin over time.

Institutional Investors

Demand for Bitcoin by institutional investors appears to be increasing. Institutional investors are investing in cryptocurrencies like Bitcoin.

JP Morgan Chase has been leading the way, having announced JPM Coin earlier this year, the first cryptocurrency issued by a big international bank.

Grayscale Bitcoin Trust (GBTC), a $1.4 billion closed-end fund that invests exclusively in bitcoin, serves as perhaps the best indicator of institutional investment in Bitcoin. Data is showing an uptick in the institutional demand. By the end of April 2019, GBTC held 225,638 Bitcoins or just under 1.3% of bitcoin’s total circulating supply. Bitcoin inflows, or the amount of bitcoin added to GBTC’s holdings, have reached an all-time high in April signaling an increase in institutional demand. Nearly $58.2 million was added to GBTC’s holdings in April, which is almost as high as $60.8 million at the height of the bull market in December 2017. This shows a shift of the sentiment in the market.

Asset manager Fidelity has begun buying and selling Bitcoin for institutions, online broker TD Ameritrade rolled out trading of Bitcoin futures in December, and securities brokerage E*Trade is close to introducing cryptocurrency trading on its platform.

Libra

Facebook is one of the largest companies in the world, worth billions. Its recent launch of Project Libra has received the attention of digital and traditional media outlets. Everyone is talking about Facebook’s entrance into the cryptocurrency market. This is an amazing development for Bitcoin and other cryptocurrencies. On one hand it means that Bitcoin may face possible competition – and competition is always good because it moves things forward, it also means that huge numbers of retail investors through Facebook will get into the market. Facebook’s Libra Coin will introduce millions to the idea of cryptocurrencies. This lowers the chance of the crypto market vanishing, as some have predicted in the past.

US and China

The trade tensions between China and the United States have been good news for Bitcoin. The value of the cryptocurrency soared, as investors bought Bitcoinmto diversify their portfolios, as a hedge on investments.

A new study from Coinbase shows that 58% of Americans say they’ve heard of Bitcoin. The researchers point out key factors that indicate a rising interest in cryptocurrencies in the US, and an openness among more people to participate in a new global economy.

Well, Bitcoin didn’t die after the “last bubble.” Granted BTC fell over 80%, it has since recovered back to just 45% in the past few months. Since its bottom of $3,200 in mid-December, Bitcoin has made over 250% to current levels and it doesn’t look like it will stopping there. It has come back and with the market more mature, it’s stronger than it was before. IMHO the price of Bitcoin and cryptocurrencies are here to stay and prices will rise even more this year. The sky remains the limit.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.

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