Are you buying BTC? How safe is your Bitcoin?

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Last week our theme was “Why is Bitcoin going up? HOLD on Bitcoin?”. Our theme for this week is “Are you buying BTC? How safe is your Bitcoin?”

TLDR. Digital currency needs to be safe, accessible and provide complete peace of mind to anyone holding cryptocurrency or to anyone that is considering getting in the market. Coinbase, North America’s largest cryptocurrency exchange, holds only 2 percent of its coins insured with Lloyd’s of London. Major insurance companies are starting to offer protection against cryptocurrency theft, rather than missing out on a volatile and loosely regulated, but rapidly growing market.

At the end of May, Bitcoin hit $9,000 and for the last week its been hovering around $7,700.  Many have been predicting that when Facebook launches it’s stable coin, Bitcoin will break $10,000. That’s a lot of money for a single coin and we can expect this value to go even higher, as Bitcoin use cases sprout. Even news stories like India’s proposed ban for crypto that could lead to a jail sentence for up to 10-years… crazy, will only cause citizens in the country to become increasingly interested in Bitcoin and other cryptocurrencies.

But, one thing that scares most people, when it comes to cryptocurrencies, is safety. The average user wants to buy and sell Bitcoin using their phone and be sure that their funds are safe.

Even though we’ve seen great improvements, the risk of cryptocurrency exchange hacks is always there. According to the Wall Street Journal, more than $1.7 billion in cryptocurrency has been stolen over the years, with 61% of the thefts in 2018 alone. Most of the hacked exchanges were based in Asia. Here are four major hacks in 2018:

Last month, when Binance got hacked for $40 million, it was great to hear that they were going to offer a full refund. Binance users didn’t lose money, thanks to its “Secure Asset Fund for Users (SAFU),” an emergency insurance fund created in July 2018.

On large US based exchanges, like Coinbase and Gemini, US dollars are FDIC insured, for up to $250,000. Currently, the U.S. government does not provide insurance for any digital assets, which means as soon as you convert any sum of money from fiat to crypto, it is no longer insured.

Most people assume that their cryptocurrencies are insured, but that is not always the case. Bitcoin and other cryptocurrencies stored on an exchange or a custodian service, most likely are not insured. Regulations for Bitcoin vary for each country. The crypto space is still highly unregulated and news of big hacks make many insurance companies hesitant to offer coverage to exchanges. While, some countries require exchanges to follow strict guidelines, some don’t require anything at all.

When an exchange claims to be insured, it’s difficult to know if it really is insured. Also an exchange that’s insured could suffer an incident, that’s not covered by insurance.  Even the few exchanges that have a concrete insurance policy, offer very limited cases to make a claim. Insurance is primarily for cases where an exchanges systems are hacked. A user with poor quality passwords or a user that doesn’t follow basic security measures, most likely will not be covered.

The volatility of crypto markets has sidelined many big insurance companies. Until recently, the crypto industry mainly consisted of volatile exchanges and startup companies, which posed high-risk without large enough revenues to encourage the major insurance companies to get involved.

But the situation is slowly changing and we’re starting to hear more and more from exchanges that are offering a safety net to their customers.

Last year, the Winklevoss twins announced that cryptocurrencies on their Gemini exchange and custody services were fully insured.

The Gibraltar Blockchain Exchange (GBX) announced an insurance policy to cover its digital assets, in partnership with Gibraltar-based Callaghan Insurance.

In February, BitGo announced it had secured the industry’s most comprehensive insurance protections for crypto currencies and digital assets will be insured for up to $100 million through Lloyds.

In April, Coinbase revealed the details of its insurance arrangements for cryptocurrency held for customers. In a blog post, the exchange confirmed that it is covered for up to $255 million for coins held in so-called hot wallets, in other words, assets which are essentially online and open to potential hacks.

In South Korea, four exchanges offer insurance: Upbit, Korbit, Bithumb, and Coinone. However the insurance limits on these exchanges are less than $5 million, with is barely enough to cover users in the case of a major hack. Hanwha Insurance, a South Korean insurance company, has introduced a cyber insurance product, that provides compensation for hacking damages to domestic crypto exchanges.

Insuring cryptocurrencies is very important, especially when you consider the valuation of Bitcoin and other cryptocurrencies. Protection against potential hacks could be an important source of revenue, with huge annual premiums for theft coverage. Annual premiums could be as high as 5 percent of coverage limits.

If you’re considering getting individual cryptocurrency insurance, some companies like Allianz, Chubb, XL Group and AIG are quietly offering protection for cryptocurrencies. Allianz offers individual insurance to cryptocurrency investors: “Insurance for cryptocurrency storage will be a big opportunity, Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area” said Christian Weishuber, a spokesman for Allianz.

Incidents of hacks and stolen funds can damage a market trying to build consumer confidence. As the crypto space is maturing, cryptocurrencies represent potential areas of growth for the insurance industry. Insurance adds a layer of security and ensures that users are properly compensated and reimbursed, in the case of a security breach. Binance has chosen to take on the costs of insurance by allocating 10% of their trading fees to SAFU. It remains to be seen how exchanges around the world approach this issue, and if they build their own coverage or work with insurance companies to guarantee customer funds. Either way, safety is important and needs to be addressed, if we will ever see the mass adoption of cryptocurrencies.

Image Source

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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Why BTC = USD1 million may be possible, but not desirable even for those with Bitcoin

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TLDR. Buying Bitcoin as a Store of Value is anti-fragile scenario planning aka tail risk insurance against something really bad happening in the Legacy Finance Economy. If a tiny % of global wealth makes that bet with a tiny % of their investable assets and one of the really bad scenarios happens, BTC = USD1 million is a feasible scenario. That scenario is not desirable even for those with Bitcoin if you also have a lot of Legacy Finance assets.

This update to The Blockchain Economy digital book covers:

  • Run the numbers on Bitcoin and Gold.
  • That $1m BTC price implies a cup of coffee costing $ thousands.
  • Now assume BTC is around $10,000. Are you too late?
  • There are four scenarios to play with.
  • This scenario planning is driving the Bitcoin price.
  • It is OK, nothing bad will ever happen in the Legacy Finance Economy.
  • I own Bitcoin but don’t want it to be worth $1 million
  • Context & References.

Run the numbers on Bitcoin and Gold

First run the numbers on 21m Bitcoin

(Even though it is more like 17m after accounting for lost Bitcoin)

  • 21m * $1,000 (long gone except in short dreams) is $21 billion.
  • 21m * $10,000 (credible soon) is  $210 billion.
  • 21m * $100,000 (wild forecast #1) is  $2,100billion (aka $2.1 trillion).
  • 21m * $1m (wild forecast #2) is  $21,000 billion (aka $21 trillion).

That is a lot of money. Now run the numbers on Gold Market Cap

The Gold Market Cap is the $ per ounce market price * total Gold

The $ per ounce market price is the easy part of the Gold Market Cap calc. As of time of putting key to pixel, the price is $1,338.50

This is where it gets a bit fuzzy. Gold does not have a mathematically precise hard upper limit like Bitcoin, but we can get to an “accurate enough” estimate. There are about 5.5 billion ounces of gold in the world. That makes Gold market cap at current prices about $7.4 trillion.

That means to get to to $21 trillion in Bitcoin market cap (ie BTC = $1m USD) is a major stretch in normal scenarios.

This is where the second part of the headline comes into play – ”but not desirable even for those with Bitcoin”

That $1m BTC price implies a cup of coffee costing $ thousands.

If USD hyperinflation kicks in, both Gold and Bitcoin price will rocket. You can already see this in countries with hyperinflation where even if you had bought Bitcoin at the peak price in last bull run of $20,000 you would have outperformed any asset priced in your hyperinflated Fiat currency.

It may seem inconceivable that USD will suffer hyperinflation but hyperinflation is always inconceivable until it happens. One of the jobs of wealth managers is protecting against long tail risk and hyperinflation is a classic long tail risk. That is why some legacy finance assets are moving into Bitcoin.   

Now assume BTC is around $10,000. Are you too late?

No asset moves up in a straight line. Bitcoin is more volatile than other assets in part because there are no Central Banks doing “plunge protection” by printing currency and buying financial assets in Quantitative Easing (QE) schemes.

So you will need to be comfortable with occasional down moves of more than 20%.

For those investing from big asset pools, putting a small % into Bitcoin is sensible. For example, assume a Family Office with $1 billion to invest, putting 1% into Bitcoin. That is $10m. Assume buying in at BTC = $10,000 to keep the numbers simple. Now run that through four scenarios.

There are four scenarios to play with

Wealth Managers and Family Offices look at both Bitcoin & Gold as a hedge against central bank money printing. There is no certainty in investing, only scenario planning and tail risk insurance.

  • Scenario 1. Legacy Finance assets behave normally and Bitcoin becomes a small part of the Gold market which remains about where it is today. In that scenario, 99% of $1 billion grows by 3% and Bitcoin moves sideways. All is fine in that Family Office.
  • Scenario 2. Legacy Finance assets behave normally and Bitcoin turns out to be less valuable than tulips. The Family Office loses $10m on Bitcoin but the rest of the portfolio (99%) performs normally. The 3% on $990 million is $29.7m, but there is a $10m loss on Bitcoin.
  • Scenario 3. Legacy Finance assets suffer a catastrophic decline (say 80%) and Bitcoin goes to the moon. This is where $10m goes up 100x and is worth $1 billion and the $1billion in Legacy Finance assets loses $800m (80%). I use 80% as example because some of the portfolio will already be in assets such as land that do not go to zero. Tail risk insurance mission accomplished.
  • Scenario 4. Legacy Finance assets suffer a catastrophic decline and Bitcoin goes to zero. In that awful scenario, shelter, food & physical safety become critical and financial assets become only a distant memory and it is the gold part of your tail risk insurance that you rely upon.

This scenario planning is driving the Bitcoin price.

First, 4 things that do NOT drive the Bitcoin price:

  • News: positive news made no difference in the bear market and now  negative news is just ignored. Bull markets climb a wall of worry, bear markets worry about good news.
  • Technical Analysis: all the TA pundits are forced to say “this should not be happening”. We are left with a simplistic version of  TA looking at big round numbers “we crossed 8k so 9k is next” or “we dropped below $8k so $7k is next”.
  • Retail Muppets and FOMO: retail investors don’t have enough capital, so big savvy institutional traders could easily drive price down with a few well timed shorts.
  • Crypto Whales: they already own so much crypto at low cost, why risk Fiat cash when prices are rising fast?

It is the Legacy Whales doing scenario planning which drives the Bitcoin price. Big money is making an anti fragile bet at the tail end of the Everything Bubble, leaving overpriced IPOs etc

Traders understand this and repeat the mantra to “not fight the tape”, understanding that real inflows will make shorting dangerous.

It is OK, nothing bad will ever happen in the Legacy Finance Economy.

That was of course an ironic section heading. 10 years after the Lehman crisis we solved a debt problem by piling on a lot more debt. Doc to patient “Your heart attack was from alcohol and junk food. Here is a bottle of whiskey and a double cheeseburger”. Deutsche Bank (DB) is one scenario flashpoint.

DB is one of many bad scenarios. There are also many good scenarios. The point of scenario planning is not to predict which scenario will happen – that is impossible. The point of scenario planning is to position portfolios for as many scenarios as possible – including unlikely ones (referred to as long tail risk). That scenario planning is a major factor in the current Bitcoin bull market.

We all hope that DB will turn their ship around. We all hope that central banks have figured out how to engineer a soft landing and a return to normal money. Even if you own Bitcoin, the bad scenarios are bad. However, as the old saying goes – hope is not a strategy.

I own Bitcoin but don’t want it to be worth $1 million

My hope for the future is that the Blockchain Economy will reduce inequality by making a more level playing field. My hope is that Bitcoin is worth a bit more than it is today (but a lot less than $1 million) and that price is supported by real use cases as a Medium Of Exchange. Yes, hope is not a strategy.

Context & References

Why bitcoin is surprisingly valuable and stable as a chair with only one leg – for now

What has changed a decade after the financial crisis?

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I own some Bitcoin, but I am not receiving compensation for this post.

Subscribe by email to join the  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).

Jumia – Africa’s Alibaba and its IPO roller coaster

Feels like a long time since I posted an article on Africa. Every time I research to write about the African Fintech segment, I invariably stumble upon a story that leaves me with one emotion – hope. The youngest continent of the world is all about hope.

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Africa is a “mobile-first” market, where consumers access the internet from their mobile first. Sub-Saharan Africa has the highest per-capita mobile money accounts in the world. Financial Inclusion has been achieved at scale, that the number of mobile money accounts have gone past bank accounts. Most of the numbers are humble when compared to the China Juggernaut. But the opportunity to scale is immense with over 1 Billion consumers gradually moving to cities by 2050.

One African firm that has captured headlines in recent times is Jumia. In short, Jumia is said to be Africa’s Amazon and is the first African firm to list on the NYSE. They listed on NYSE on the 12th April this year, and saw their share price close 75% higher at close of business. The shares rose from $14.50 at listing to $46.99 in early May and was one of the top 10 performers of IPO’d shares of 2019. So why is an e-commerce player relevant to Fintech?

That seems to be the trend in emerging markets, as firms use e-commerce and lifestyle business models for growth, and throw in Fintech services as value add. Fintech also helps the stickiness and improves margins.

Jumia have launched their marketplace for 14 African markets. As per their SEC filing, Jumia they talk about their payments platform JumiaPay.

“We have also developed our own payment service, JumiaPay, in order to offer our consumers a safe, fast and easy payment solution, whether they shop using a desktop computer or a mobile device. JumiaPay is currently available in four markets”

For this very reason, I am not sure if they should be instead tagged “Africa’s Alibaba”. They also are catering to customers who prefer cash with on-delivery transactions. They had 81 thousand active sellers as of December 31, 2018 and over 29.5 million product listings on the marketplace.

Considering ~450 Million internet users in the continent, there is a huge market to conquer. Jumia claim they are currently the largest marketplace platform in the continent.

They have a competitor in DHL, who have launched an e-commerce platform. DHL’s logistics business has served as a catalyst of growth. They have launched in 20 African countries and are seen as formidable competition to Jumia. Alibaba are also dipping their toes into the African market, but haven’t yet taken a plunge like DHL.

The Jumia IPO day wasn’t just a big day for the firm, but should be viewed as a breakthrough for the continent’s business community, as they join main stream markets.

However, the IPO was shortly followed by a claim by Citron Research that alleged that “the firm was Fraudulent”, and their “shares were worthless”.

Jumia’s shares hit $24 in early May following these allegations. Citron research have a reputation for reports claiming such frauds in the past. Their strategy was to short the stocks and make quick bucks from the price action post the report. This has got them (Citron) into trouble in the past too.

An analyst in Citi came to Jumia’s defence with a detailed analysis of Citron’s claims. The gist of the defence was that Citron’s claims were baseless, and Jumia just had to respond to a couple of several claims with a bit more detailed disclosure.

  • Citi highlighted that it was not uncommon for firms to update their usage statistics before a key financing round
  • Citi suggested that Jumia should highlight the details of their churn, with plans to address it.
  • Several allegations of Fraud by Citron were pushed back by Citi, citing that Jumia had disclosed fraudulent employee activities in its SEC filing. Citron chose to interpret these disclosed incidents as fraud that the entire company and its management were involved in.
  • Several other points on Citron’s report on the growth of the firm were not just baseless, but contradicting to data that showed healthy growth of the firm.

We are going through a period where several emerging markets businesses are growing in stature and an IPO grabbing the headlines every week. These firms need to understand the importance of market transparency and disclosures. As financial services firms advise them with their IPO, they should also provide enough advise on the right framework for disclosure.

I am hopeful that Jumia has sailed through the initial blips post IPO, and I genuinely hope they become Africa’s Alibaba. Good times ahead for Africa.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or 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).


 

The last will be first, and the first will be last:tension in the InsurTech entrant and incumbency environment

entrants and incumbents

 

 

Funny how things can change- one week riding the funding train, next week sitting in the startup exit car.  Skinny jeans, Vans and untucked shirts change into a wardrobe that has a descriptor- business casual.  Same idea in start-up accounting- paid in option value becomes the eagle flying twice a month and performance bonuses.  Evolving from a role that suggests you handle all tasks to the paint drying on the corner cubicle placard that reads, “Chief Marketing Officer.”  Startup to post-IPO organization, and in time-incumbency. Welcome to quarterly reports and silo culture.  All the same customers, however.

An unexpected tension exists between insurance start-up culture with the unicorn hunt, and the cash flush, ‘we are happy with a combined ratio under 100’ culture of the incumbents- the status of industry legitimacy is pursued but once gained is treated like being in the clique the other players deride.  It’s clear that much of insurance innovation is founded in the existing industry being seen as an unresponsive, callous, cash grabbing, seldom paying monolith.  A product that is sold, seldom bought, with businesses that hide behind clever spokespersons to craft a façade of ‘hip’.

And the legacy monolith?  Always comfortable riding a train of convention.  Think of it- incumbent carriers know the route they traverse, little option to change the route because the route is like a rail track.  Hook up the cars, open the throttle of written premiums, hope there aren’t unexpected steep grades that might depress the profitable results of the trip.  Not that incumbents don’t occasionally start a string of cars that take a new path, but seldom does the main string of cars slow to allow connection of the cars that tried the new path.

Consider the recent comments cited from the Financial Times attributed to UK-based insurer, Aviva’s former CEO, Mark Wilson:

“(Aviva) took space in an old garage in London’s Hoxton Square to house the digital projects that he believed would transform the insurance company. The idea was that, away from the actuaries and the bureaucrats at head office, trendy millennials with coding skills could let their creativity loose and turn Aviva into an insurer fit for the future.” 

Not waiting for that parallel-running train to catch speed, the current CEO for the firm, Maurice Tulloch, suggests the firm’s course remains upon the main track, “and (Aviva) is set to take a more hard-nosed look at the garage and the projects that are housed there.”  Seemingly not patient enough for results to take hold, and in probability a disconnect between the ‘garage’ and the existing culture.

Even the Street is discouraging alternate routs for the insurance incumbent. From the same article is found:

“Huge amounts of money were being invested (at Aviva) and it looks like it got out of control,” said Barrie Cornes, analyst at Panmure Gordon. “Reining it in is the right thing to do. They need to look at the costs and it wouldn’t surprise me if they looked to cut some of the expense,” he added.  Looks like?  Based on what?

It was controversial how much he talked about it. He said that pulling back some of the digital investments could add 5 percent a year to Aviva’s earnings per share. Few people expect the garage to close, at least in the short term. Aviva is not the only insurance company to sharpen the focus of its tech investments in recent years.  (thanks, Graham Spriggs for the share of the article)

Five percent per year additional profit by reining in the firm’s potential future.  Huh.   If “All the Insurance Players will be InsurTech”, by InsurTech influencer, Matteo Carbone voices the insurance industry’s future, a five percent savings to the bottom line might be better spent on maintaining competitive advantage by leveraging tech and process innovation.  It’s that tension between quarterly expectations and seeing down the road.

Along the same line, incumbents that take the path of innovation often stray from the InsurTech digital path when results aren’t immediate.  A key player in the US P&C market that touts itself as a data company has initiated many digital service changes; same company however reaches for the analog diagnosis methods when unexpected (read as not positive) results are experienced.  Digital/AI innovations should be addressed using the same AI if there’s to be an effective feedback loop, right?  Not if the quarterly results demon is waiting.   No naming names because all are guilty of the method- it’s too hard to change right away.

A recent announcement by Lemonade regarding the firm considering exercising an IPO, further exemplifies how a poster-child insurance start-up may migrate to insurance ‘legitimacy’, and potentially step aside from its game theory approach to serving customer needs.  The very basis of the firm’s leading principle supporting its charitable giving approach to claim handling/premiums, the Ulysses Contract, may be preempted post-IPO by the quarterly ratio chase and Daniel Schreiber’s hands will be tied no more, and will become available to take the cash or craft the next opportunity.  The firm has traveled far from the day where the first seventy renters’ policies were observed rolling in through the company website.

Not that there aren’t innovating companies/startups that have either migrated to conventional insurance forms through investment exit or by IPO- see German Family Insurance-Deutsche-Familienversicherung, the first European InsurTech IPO, or firms that have made effective partnerships with incumbent carriers, e.g., Lucep PTE that forged an effective working basis with MetLife Portugal .  Each of those firms found effective ways to bridge the perceived gap between innovation and incumbency.

It just doesn’t matter which insurance route your organization is following- incumbent or entrant, each customer is dear, all firms need to act with a sense of customer service urgency.  Today’s startup chasing seed money is next year’s IPO, and in quick time an incumbent that even newer entrants are focused on disrupting.  And there’s no reason skinny jeans can’t be worn at one’s corner cubicle while the wearer peruses the corporate 10-Q or ECOFIN dictates.

image source

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.

Subscribe by email to join the other 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).

EY releases first ever global SME Fintech Adoption Index

The EY FinTech Index, which has been going since 2015, is back for its 2019 edition.

The publication interviews more than 27,000 consumers in 27 markets to take the pulse on where fintech is at.

Unsurprisingly, the sector is thriving, or in EY’s words, innovation has now ‘become the new normal.’

2019 marks the first year the index has taken a deep dive into SME fintech, building out the first ever SME FinTech Adoption Index. It’s a survey of 1000 organisations across 5 markets – no mean feat indeed.

The SME index interviewed decision makers in the UK, US, South Africa, China and Mexico, via a digital survey. An important disclaimer, as digital enablement isn’t always a feature of SMEs everywhere, developed and non-developed nations included.

Here is a snapshot of the results that caught our eye.

China leads the way in SME Fintech adoption, with 61% of SMEs interviewed having used a banking and payments, financial management and financing and insurance service from fintechs in the past 6 months. The UK (18%) is not far in front of South Africa (16%), with Mexico at 11% and the US at 23%.

Global averages for fintech adoption sit at 25%, however China skews the data significantly, given the highly digitized and platform centric nature of the financial services economy. Skewed or not, it represents the future that the western world is lagging behind on.

SMEs that were considered adopters tended to be VC backed, global in outlook and with an online/mobile sales model.

In developed markets, like the UK and the US, the most widely used services are online bookkeeping, payroll management, online billing and online payment processors. In emerging markets SMEs are also frequent users of payments and billing services, but mobile point-of-sale devices and readers also feature.

Fintech isn’t always a panacea, however.

More than half (57%) of those surveyed who were classified as adopters said the services available from fintechs didn’t meet the needs of their company. It presents a distinct opportunity for a unifying force in SME fintech that can connect the dots in a fragmented system for time-poor business owners.

The gap in attitudes between the adopters and non-adopters when it comes to data sharing with fintechs is also interesting. 89% of adopters indicated they were willing to share banking data with a fintech, compared to only 50% of non-adopters. 69% of adopters were willing to share that data with a non-financial services company, which should present some interesting opportunities to those in tangential markets to fintech, where access to banking data could provide additional context and experience enhancement.

You can access the full report here.

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.

Subscribe by email to join the 25,000 other 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)

Numerai a small cap AI Blockchain gem

Blockchain and AI are the most trending technologies. Blockchain for Finance and AI for Finance ventures are also increasing. The combination is hoped to fuel the autonomous financial infrastructure that will host all kinds of intelligent applications in capital and financial markets.

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LiveTiles brought to my attention 20 AI Blockchain projects with a great infographic. As I have profiled a few of them in 2017 at the protocol layer and the data-finance verticals, I decided to catchup with Numerai. They had grabbed my attention 2 years ago in this primer I wrote: The Big Hairy Audacious Goal of Numerai: network effects in Quant trading

Screen Shot 2019-06-02 at 16.59.44Numerai is creating a meta-model from all the Machine Learning (ML) algorithms developed by “the crowd” with cryptographic data. Numerai aims to offer a platform that generates alpha in a novel way. It wants to structure a rewarding mechanism for its traders that not only eliminates the typical competitive and adversarial behavior between them but actually, penalizes them.                              Efi Pylarinou

Numerai was and is a bleeding edge venture. It remains the only hedge fund built on blockchain and using ML and data science in a novel way. The novelty lies in changing the incentive and compensation structure of the fund manager.

Numerai launched no ICO. The NMR token was awarded to the thousands of data scientists for creating successful machine-learning based predictive models.  Once the data scientists are confident of the predictive ability of their model, they can stake their NMR and earn additional NMR if they are correct.

Numerai involves a staking mechanism.

In March, Numerai reported that $10million had been rewarded up to date. NMR tokens were distributed via airdrops initially. At launch on 21st February 2017, 1 million Numeraire tokens (NMR) were distributed to 12,000 anonymous scientists.  Thereafter, NMR  tokens were awarded as rewards to users of its platform. Bear in mind, that if a participant stakes NMR and their model doesn’t perform, the staked tokens are burnt.

According to Numerai, the NMR token is one of the most used ERC20 tokens. By end of 2018 reporting 25,000 stakes of NMR.

Numerai II.pngSource

Almost 200,000 models submitted by data scientists around the world for a competition to crowdsourced the best prediction models.

Screen Shot 2019-06-02 at 18.52.49Source from Chris Burniske`s talk at Fluidity Summit in NYC.

Numerai in March raised $11mil from investors led by Paradigm and Placeholder VCs. Numerai is a very rare case because this fundraising is not for equity but for NMR tokens.

Numerai token is a utility token and investors just bought $11million of NMR tokens.

The funds raised will primarily be used to drive the development of Erasure, a decentralized predictions marketplace that Numerai launched.

What does this mean in plain worlds?

Numerai was not a protocol but rather an application  – a hedge fund. Erasure will transform it into a protocol. This has several significant implications.

  • NMR becomes a token on the protocol and can be used to build all sorts of applications on top of Erasure.
  • Numerai becomes decentralized. The NMR smart contract will no longer be controlled or upgraded by Numerai but by NMR token holders. So, NMR becomes a governance token.
  • Numerai will have no authority on the supply of NMR tokens.

A protocol is born out of the app Numerai – its name is Erasure. Erasure is much broader than a hedge fund, as all sorts of prediction and data markets can be built on the protocol. The vision is to always to be a token that is actually used. Which brings to the spotlight the lack of transparency around data measuring use of protocol and Dapp tokens.

 Footnote: Numerai at launch was backed by Fred Ehrsam, Joey Krug, Juan Benet, Olaf Carlson-Wee and Union Square Ventures.

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

I have no positions or commercial relationships with the companies or 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).

Why is Bitcoin going up? HODL on Bitcoin?

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Last week our theme was “Is it time to buy Bitcoin? Google’s data on Bitcoin searches“. Our theme for this week is “Why is Bitcoin going up? HOLD on Bitcoin?”

TLDR. Ten years ago, when Satoshi Nakamoto published Bitcoin’s whitepaper, he described a “peer-to-peer version of electronic cash.” The idea was for Bitcoin to be digital cash. To provide a borderless means for payments, without intermediates. Since then, while Bitcoin has become a household name, it has yet to realize its true potential. It’s primarily used for speculation, instead of an everyday means of exchange.

Major retailers have become very receptive to the idea of accepting Bitcoin as means of payment. Now you can pay your AT&T bills using Bitcoin. Satellite television and Internet service provider Dish Network accepts Bitcoin as a payment option. You can fund your Microsoft account with Bitcoin, to purchase games, movies, and apps in the Windows and Xbox stores. Who accepts Bitcoin? Here’s a list with a few of the major companies accepting Bitcoin.

Yet, research from Chainalysis shows that just 1% of Bitcoin transactions were payments to merchants. Almost no one is using Bitcoin to buy things. Speculation was the primary use for Bitcoin.

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In the first four months of 2019, the proportion of merchant related transactions remained low. Only 1.3% of Bitcoin (BTC) transactions were purchases from merchants. The most extensive use is speculation on exchanges. The increase in price has to do with what we are willing to pay for Bitcoin and cryptocurrencies, instead of what we can actually do with them.

Bitcoin’s volatile nature discourages people from using it to buy things. People prefer to HODL and make huge profits in the future, instead of using Bitcoin to pay for things.

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Five years ago, criminal activity was behind about 90 percent of cryptocurrency transactions. Now, illegal activity has shrunk to about 10 percent and speculation has become the dominant driver.

Speculation is important for new technologies. Whether you are dealing with emerging technology, a new business or idea, speculation is one of reasons that something will cross the chasm, to become widely adopted or a complete failure. But speculation can also be bad, when its not backed by growing usage.

Today, usage for Bitcoin and cryptocurrencies is still very low. About 85% of Bitcoin’s value is the result of speculation. Investors are heavily speculating on the future usage and adoption for cryptocurrencies and blockchain, but today utility is just a small component of the current price.

Use cases are what will drive Bitcoin’s growth, not speculation.

During a conference in Korea, Andreas Antonopoulos said “Crypto doesn’t have a use-case in the ‘developed’ world… yet“. The reality is that until scalable use cases are fully deployed, cryptocurrency markets will remain a highly speculative and volatile.

Many attribute this to block size, Lightning Network, or user experience.

We are starting to see some real use cases around the world. Projects like Facebook’s upcoming stablecoin, JPMorgan’s JPM Coin and Fidelity’s recent announcement that it will start buying and selling BTC for its clients. These are all important and constitute stepping stones in mass-adoption for cryptocurrency, but I am not sure if they are the Bitcoin’s killer app.

If we want to predict where it might go, we need to look beyond price and follow how its used and who is using it. Lack of real-world use is the biggest challenge for Bitcoin. Maybe Bitcoin will never become a payment currency and will only be a stored value just like gold. But it’s only by using Bitcoin we give it “real”, intrinsic value. Either way, with serious money now coming into the market, we are still at the beginning of everything.

Image Source

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.

Subscribe by email to join the other 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)

The Facebook GlobalCoin stablecoin won’t kill Bitcoin but many companies should be worried.

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TLDR. Facebook’s move into crypto enabled payments has led to hyperbolic reactions that Bitcoin will be roadkill in front of their thundering truck. This post argues that we are nearing the end of the Facebook era and that the Bitcoin honey badger is not scared of Facebook and that Facebook is moving into dangerous territory where they will be competing with other behemoths.

This update to The Blockchain Economy digital book covers:

  • What we know and don’t know about Facebook’s stablecoin
  • Bitcoin is the honey badger that is not scared of Facebook
  • Big players who will feel threatened by Facebook
  • The end of the Facebook era is coming
  • No, don’t short Facebook, yet.
  • Which companies should be most worried
  • Context & References

What we know and don’t know about Facebook’s stablecoin

The news outlets did a copy/paste on Facebook Press Release. Plus we get the salacious factoid that Mark Zuckerberg spoke to the Winkelvoss Twins.

PR also tells us that all doors are open to Facebook, telling us about conversations with:

  • Bank of England governor Mark Carney.
  • Officials at the US Treasury.
  • Western Union.

Facebook has the clout to talk to anybody on the planet, not matter how high and mighty, but talk is cheap.

What we don’t know:

  • what will be the the real name of Facebook’s stablecoin when it finally launches? PR says it is “internally dubbed” GlobalCoin but that is too close to GlobalistCoin and that does not play well in the cyperpunk/anarchist/libertarian crowd that loves Bitcoin. There is a cute sounding internal name which is Project Libra, which maybe more consumer friendly.

 

  • When Facebook will launch. PR says “first quarter of 2020”.

 

  • Where Facebook will launch. PR talks about “in a dozen countries”. Earlier PR in December 2018 talked about India as launch venue.

 

  • What Facebook will launch. It will be a cross border digital payments system aka a remittances system.

 

  • Which Fiat currencies they will peg to.

There is lots of negative sentiment. You can expect this from the privacy and crypto crowd. It must be more worrying when Bloomberg, which is hardly known for bleeding heart anti establishment ranting, has this headline:

Dr. Evil Would Love Facebook’s “GlobalCoin”. “More than 2 billion users spending one currency, controlled by one billionaire. What’s to worry about?”

Facebook’s strategy in the past with negative sentiment has been to take one step back, issue an apology, then proceed to do exactly as they had planned. However that may not work today, because Facebook’s Stablecoin is between a rock & a hard place. Bitcoin is the rock. The hard place is all the big players who will feel threatened by Facebook. 

First the rock…

Bitcoin is the honey badger that is not scared of Facebook

You cannot shut down Bitcoin. Facebook can lobby Governments all they like and Governments would love to shut down Bitcoin and do deals with Facebook, but you cannot shut down a decentralised permission less network. You need a CEO that you can pull onto the carpet and grill.

Next, the hard place….

Big players who will feel threatened by Facebook 

The hard place is all the big players who will feel threatened by Facebook.

This is a huge move by Facebook. They are moving well beyond their media comfort zone into currencies, payments, remittances and e-commerce. The big players in those markets, including Governments, will feel threatened by Facebook’s move into their territory.

The end of the Facebook era is coming

You can see trend from the chart at the top of this Chapter (based on research by Daily Fintech) – the dominance years are getting shorter. Our thesis is that decentralization won’t lead to one dominant company because dominance is a feature of centralization. In the decentralization era, dominance may go to a leaderless open source protocol (Bitcoin), with many companies thriving within the ecosystem created by that protocol.

I never got the Facebook habit. I am as addicted to social media as the next 21st century human, but my social drugs of choice tend to be blogs, Twitter, Whatsapp, YouTube, & LinkedIn. Occasionally I can only see something online if I have a Facebook account. So I set up a fake account and enjoy the recommendations I get from that fake account where I am a woman born in 1997 in Chiang Mai, who now lives in Mongolia and who studied Thermodynamics at The College of Hard Knocks. My bio says “FB algos do not deserve to know me”.

The usual way that big tech eras come to an end is a mix of:

  • Regulation. That is happening to Facebook in Europe and China and there is even political pressure in America
  • Disruptive Technology. In past eras, the regulators jump on board just when disruptive technology is doing a much more effective job. For example, IBM could manage regulators but could not control PCs, Microsoft got sideswiped by the Web, Google by Social. In the coming transition, centralized services will be replaced by decentralized services.

Facebook the service is no longer cool, even if Facebook the company controls the two biggest competitors – WhatsApp and Instagram. Soon Facebook the service will be a digital landfill populated by:

  • Institutions selling you stuff. Institutions, both political or corporate, use pinpoint personalised marketing to make sure you buy/vote what they want. My little messing with Facebook’s algos is not likely to do them much harm, but billions tuning out ads will damage them at some point.
  • People willing to view ads for a fee. Pay to view ads is desperate race to the bottom by sites with low quality content. Advertisers get the attention of the people with the least money or influence brought in by Mechanical Turk to compete with robot scam traffic.

No, don’t short Facebook yet.

Mark Zuckerberg is one is the greatest entrepreneurs of all time. He has navigated one big disruption before. When mobile threatened the Facebook franchise he solved the problem by buying into the game at great cost with the WhatsApp and Instagram deals.

So, don’t count him out. He could pull it off with GlobalCoin. The odds are against him because this disruption is different:

– mobile changed delivery front end but the core concepts of centralized data to sell advertising remained valid.

– Decentralized Blockchain networks challenge the core concepts of centralized data to sell advertising.

It is inconceivable that Facebook, which has a market cap of over 500 Unicorns (ie over $500 billion), could head into a deep decline. Look at past eras and the dominant company of the day looked equally invincible.

Although Facebook’s long term decline is inevitable, don’t try shorting Facebook stock yet as there is a big difference between inevitable and imminent. 

There are companies that should be worried by Facebook’s move into crypto-enabled payments. They could be accidental roadkill as Facebook searches for relevance in a game that they no longer control.

Which companies should be most worriedWhich companies should be most worried

A. Decentralized social media companies funding via Tokenomics such as Steem and Brave. Content creators will prefer to be paid in either Bitcoin or a reputable Stablecoin from a neutral player.

B. Remittances companies such as WorldRemit and Western Union. The latter may do OK as Facebook will need their off ramp into local Fiat, but that will be a hugely reduced role.

Context & References

Facebook Ambitions in Fintech. Note date (2014); over 4 years ago we were forecasting this move by Facebook.

The PewDiePie deal with Dlive is a big move forward for decentralized Blockchain media.

Why I am closing my Steemit account and why I am a bear on EOS.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

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

Subscribe by email to join the other 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).

IBM and BofA lead Blockchain patents tally – but do patents matter?

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I must credit the research behind this post to Keir Finlow Bates. Keir is an entrepreneur based out of Finland, where he runs a Blockchain research company. I recently came across his research report on the Blockchain patent market.

It was refreshing to see that the report was published on LinkedIn and free for everybody to access and benefit from. It had good coverage, understandable trends, a few obvious names at the top, and a few disappointing stats too. Keir had spent three days researching on Blockchain patent information on ‘google patents’ and compiled the statistics in his report.

Before we get into the findings of the report, I just wanted to discuss the question, “Do patents matter at all?”. I believe, the answer is “It depends”.  It depends on your willingness to defend them – if you are the patent holder.

With 97% of all patents, the costs are not justified. The inventor spends the money filing the patent, but do not reap any benefits. 50% of patents are expire as inventors do not pay the maintenance fees. So why file a patent at all?

Patents make sense if your product is extremely complex and hard to develop, and if the costs of defending the patent is affordable/justified. It also helps with perception (that you own the product IP), and posturing (that you will defend it).

However, defending a patent takes years, and costs millions of dollars. So it may not necessarily be an option for a startup with a differentiated product and shallow pockets. It may also not make sense if the invention’s life span is relatively shorter. By the time the patent battle is fought in courts, the life of the product would be over.

Patents are often very narrowly defined, and getting around them shouldn’t necessarily be hard work for a smart competitor/imitator. In a conversation with a startup CEO I met recently, she revealed that she wasn’t so fond of patenting her product. She reasoned that she had to give away a lot of information about her product during the patenting exercise, that it makes it easier for a competitor to create a close enough version of it.

In the case of Blockchain, I feel, patents are a KPI to mark industry and thought leadership than protecting IP. Apart from a handful of architectural improvisation in Blockchain, innovation has been largely incremental.

Another point to ponder is that, Blockchain is a technology that knows no boundaries. As there are several Blockchain friendly island jurisdictions, patenting within major jurisdictions like the US, Europe or China may be meaningless. However, the race for getting on top of the patent list is still on.

Patents

Source: Keir’s report

Coming back to Keir’s analysis, one key dimension I missed on it was China. It’s no news to us that China is racing ahead of the rest of the world in patenting its inventions with most emerging technologies like AI, Blockchain and Quantum Computing.

A research on patent databases Patentics and Incopat about a year ago, identified that Alibaba was leading the Blockchain tally, even ahead of IBM. Of the top 36 companies with at least 20 Blockchain patents, about 50% of them were Chinese firms including BAT.

Keir’s analysis was performed on Google patent, which supposedly includes China Patents – but the data in the report indicates otherwise. The key takeaway from the reports are that,

  • Bank of America leads the tally with 60 filed and 24 granted patents in the US.
  • IBM had over 200 filings and 16 granted patents, and continue their investments in Blockchain R&D.
  • Challenging the big names, Chainfrog really stole the thunder, with over 16 filed and 4 granted patents.
  • Apple, Google and Goldman Sachs disappointed with 0, 1 and 2 granted patents to their names respectively. However, it may be a calm before the storm for these leading brands.

One key point stands out for me. Is the system of patenting fundamentally broken? If I spent two years of my life creating a complex product, addressing a huge market, I should be able to patent it, and defend my patent. Cost shouldn’t be a barrier to defend my work.

Instead of raising the innovation bar for competitors/imitators, the patenting system has perhaps raised the cost bar for inventors to defend their IP.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or 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).


 

The Security Features And Vulnerabilities in Mobile Payments

its me david

Editor Note: Mobile is changing Payments, but you have to get security right, so we wanted a real expert to lay it out for us. David Smith is a cryptographer with 12 years of experience in both the public and private sectors. He is currently working on his second startup (currently in stealth mode) that will track and interpret the use of contactless payments. His expertise includes: system design and implementation with contact and contactless smart cards, smart card personalization, mobile payments, and general knowledge and experience with APAC market trends and consumer preferences.

Introduction

Mobile Payments refers to payments made over the mobile phone. This includes mobile proximity payments where a mobile phone is used to make purchases at the POS terminal through contactless technology like Near Field Communication (NFC) or mobile remote payments where it is used to purchase products or services online using mobile phones. Mobile wallets payments using software like Apple Pay or Google Wallet can also be categorized as mobile payments. Enhanced smart phone technology, better network speed and rise of ecommerce applications have all resulted in the growth of the mobile payment sector. McKinsey reports that, use of mobile wallets will reach $400 billion in annual flows by 2022, in the US alone. Due to its convenience, the use of mobile payment technology seems to be very popular amongst the millennial generation. However conventional wisdom dictates that we understand the security features and vulnerabilities of mobile payments thoroughly before we enable them in our businesses or start using them as consumers.

Security Features

Following are the security features which can potentially make mobile payment technology more secure than card or online payments.

  • Tokenisation: Square defines tokenization as “the process of protecting sensitive data by replacing it with an algorithmically generated number called a token”. It is used in mobile payment transactions to replace the customers primary account number with a series of randomly generated numbers. Thus the customers actual bank details are not sent over the network.
  • Device-specific Cryptograms: These are used to ensure that the payment originated from the card holders mobile device. If an hacker somehow obtains the transaction data, the cryptogram sent to the payment terminal with the token cannot be used on another mobile device. Thus the stolen data is useless.
  • Two-Factor Authentication: This is used as an additional layer of security when executing the transaction. The 2nd level of authentication could be a password that needs to be keyed in on the mobile device or biometric authentication using fingerprint recognition technology.
  • Protection against loss: Mobiles ensure data security as consumers can remotely erase their data on a smart phone, when a device containing a mobile wallet is lost or stolen. This can act as a safeguard against fraud and identity theft scenarios..

Vulnerabilities

  • mPOS devices: According to this article on ZDNet, vulnerabilities in the mobile Point of Sales (mPOS) machines, can allow merchants or personnel at the terminal to change the amount charged to the credit card. The vulnerabilities in the mPOS could also allow attackers to perform man in the middle attacks, by intercepting the Bluetooth communications between mobile and the reader.
  • Variety of mobile devices: There are multiple varieties of mobile phone hardware and software available in the market. People living in developing countries may not always find the latest technology affordable and accessible and may continue to use older versions of the phones and operating systems. Such devices may render mobile payments insecure even if they were done through a secure app.
  • Malicious apps: Users who do not have anti-malware tools on their phones may be targeted by using malicious app clones available outside the usual app-store/play-store framework. The best way to protect oneself from this is to only install apps published on Apple AppStore or Google Play Store on your iOS or Android devices.
  • User Habits: Some users prioritise convenience and fail to protect their devices using a PIN or biometric authentication. Keeping the phone locked at all times can protect the data on the phone in case it is stolen or lost. According to this article, most of the reasons causing mobile payments vulnerabilities are related to user habits.

Conclusion

Like any new technology, adoption of mobile payments overcomes the disadvantages of older technology and presents new challenges and vulnerabilities. It is essential to identify these vulnerabilities and secure the system end-to-end. While device and services providers are required to provide adequate security, each user needs do his part to keep his data and transactions secure.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

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

Subscribe by email to join the other 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).