What the rise and fall of Basis Stablecoin tells us about the future of corporate Stablecoins such as Facebook GlobalCoin

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TLDR The brief history of the Basis Stablecoin is that it was founded in Brooklyn in August 2017, announced a $133m round from top tier investors 8 months later in April 2018 and then shut their doors just 7 months later in December 2018. All the news was announced on the Basis site. The ambition was huge – to be the global algorithmic central bank. Despite plenty of cash & brains, Basis failed. Now in the days when we wait for the launch of Facebook’s Stablecoin on 18 June 2019 and witness the stunning growth of Tencent/WeChat in China, we piece together the story of what happened and what it means for the Blockchain Economy. 

This update to The Blockchain Economy digital book covers:

  • Escrow type funding with Regulatory approval trigger
  • Tough borderless SEC
  • Algorithmic Central Bank vs legacy Central Banks
  • $133m is a drop in the bucket if you need to defend a peg
  • Context & References

Escrow funding with Regulatory approval trigger.

This funding strategy is key to understanding the Basis Stablecoin. This is similar to what we saw with Seba bank. Money is wired and held in an escrow type account until regulators give the green light. We may see more of this type of funding. It makes sense because a) there is no chance of getting regulatory approval without a lot of capital b) the prize is big if the venture gets the nod from regulators c) nobody will invest a lot of capital in the hope of getting regulatory approval.

This funding style means the demise of Basis is not a classic venture failure story. The scenario of non-approval by regulators is planned for at time of capital raising. Some capital is burned from funding to non-approval, but only a relatively small % of total capital invested. 

The investors were top tier (such as Bain Capital Ventures, Google Ventures, Stanley Druckenmiller, Kevin Warsh, Lightspeed, Foundation Capital, Andreessen Horowitz, Wing VC, NFX, Valor Capital, Zhenfund, INBlockchain, Ceyuan Ventures, Sky9 Capital) so this structure is hardly a surprise. We can expect this structure as the norm for ventures that plan to be regulated. However as the next section describes, a non-regulated approach of seeking forgiveness not permission might be the takeaway from the Basis story. 

Tough borderless SEC.

The SEC loves cracking down on tokens that they deem to be securities – which is pretty well every token (except ETH, Bitcoin and utility tokens that have zero resemblance to securities).  There is regulatory overlap in America by State and by asset type and the SEC has firmly planted its flag in the camp that says they regulate everything that is crypto. This scares investors and entrepreneurs. The SEC is also not afraid to take action cross border, so a venture anywhere that does any business in America needs to be wary of the SEC.

As Basis CEO Al Naji put it in a Forbes interview: “The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification.”

There are thee possible takeaways from this:

  • Be Regulated. If you want to be a regulated entity, have a big budget for lawyers and lobbyists and plenty of capital and play within the rules laid down by legacy Finance.
  • Be Unregulated. That means offering a tech service, not a finance service. In an earlier wave of disruption for example, Skype positioned as an unregulated tech service, not a regulated Telecom service.
  • Be Chinese. That is obviously not a real strategy unless you are Chinese, but it is interesting to see how Chinese tech companies such as Tencent and Alibaba have been able to launch and scale financial services.

It will be interesting to see what strategy Facebook unveils on 18 June. Obviously  Be Chinese is not an option for Facebook. They have probably chosen Be Regulated. Given that Facebook has announced a date, they must have already got regulatory approval. It will be interesting to see how this plays out as we are in uncharted territory.

Algorithmic Central Bank vs legacy Central Banks

The Basis white paper, published in June 2017, described Basis as an “algorithmic central bank”.

The Legacy Central Banks won’t give up their power without a fight. 

Like Legacy Central banks, the algorithmic central bank strategy was simple:

  • buy back Basis tokens when the price dropped below the benchmark peg

 

  • Create new tokens when the price went above the benchmark peg

The difference from Legacy Central Banks was:

  • Transactions were done on-chain.

 

  • Transactions were automated and baked into code ie could not be subject to political change.

Despite these two differences, the core strategy was exactly like Legacy Central Banks.

$133m is a drop in the bucket if you need to defend a peg.

Central Banks need a lot of capital to defend a benchmark peg. Just ask the Bank of England after they lost the battle defending the peg of GBP to the European Exchange Rate Mechanism (ERM) to George Soros.

In a history rhyming footnote, Stanley Druckenmiller (who worked with Soros) was an investor in Basis.

Facebook has a big capital base. Whether investors will be happy letting  Facebook use this capital to defend a benchmark peg is another matter.

Grab your popcorn for an epic rumble in the jungle (image source).

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Context & References

Investing in Payment Tokens and Stablecoins (aka new currencies).

Why StableCoins are so important (but also so hard to get right)

Facebook Ambitions in Fintech (note, from October 2014)

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

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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 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).

Neobanks – Game changers, but do they really care about their customers?

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Image Source

Neobanks, digital banks, challenger banks – I don’t want to get into the exact specification of how and why we classify Fintechs across this complicated taxonomy. Neobanks have gone from strength to strength in the last three years. Especially in Europe, progress has been phenomenal.

Revolut, Starling, Monzo, N26, Tide and the list goes on. But apart from a cool customer journey at onboarding, better digital banking experience, do they offer anything meaningful? Do they really care more about their customers than the traditional high street banks?

Based on the news release yesterday about Revolut launching in Australia, their customer base was set to surpass the 5 Million mark. Monzo hit 2 Million users and are growing at about 150,000 customer per month. Starling have a relatively modest customer base of 600000, and also have a reputation that their services were as good as Monzo if not better.

I think atleast some of them have grown to a scale where they can be considered as operational banks. Let us therefore quickly go through how they are doing across different aspects of digital banking.

Onboarding: This is perhaps what digital banks have all been amazing at. A few months ago, when I moved from an iPhone to an Android phone, it took me about a minute or two to move my Revolut account to the new phone. My Barclays app is still not completely set up on my new phone.

This is true if you looked at business banking accounts as well. I had to wait for weeks to get a Barclays or a HSBC business bank account, whereas opening a Tide business banking account was a breeze. This is nothing new about Neobanks – we always knew they were champions at the onboarding customer journey.

Product Offering: I have found Neobanks good at their core proposition. Revolut for example, had a phenomenal uptake for the FX card and the app they have with it. However, they have taken a narrow and a deep approach to their product offering. That’s a very startupish way of developing a proposition.

I think, it’s high time Neobanks started to cross-sell products to their clients. Their product suite has been shallow in comparison to mainstream banks. Interest rates on accounts have been lower, business bank account balances have been lower, and some of the more advanced multi-user functionalities a business bank account needs are still work in progress – and those are just a few examples in already existing products.

They have all been focusing on growth and it’s understandable why they haven’t got the breadth of product offerings. However, the execution of their core offering has been excellent. For example, the user experience on tagging and managing transactions is good on these platforms. However, integration with ATMs or services like Paypal have been missed out by some of these Neobanks.

Customer Service: This is perhaps one area that decides if Neobanks are really providing the service quality they claim. Revolut have been making headlines for several wrong reasons recently and have almost got the “Spoilt Child” tag amongst Neobanks. Monzo recently had a breakdown of systems and that caused some noise on social media. Complaints data give us a bit of a perspective of what customers feel.

With 5 Million customers Revolut had 171 FOS complaints registered

With 2 Million customers Monzo had 82 complaints registered

With 600,000 customers Starling bank had 51 complaints registered

I have seen some illogical comparisons between them and the high street banks based on the number of complaints. Some high street banks have 100,000s complaints registered with the Financial Ombudsman Service (FOS). But they also provide so many different product lines which the Neobanks don’t.

Therefore, it can’t be a like for like comparison. Comparisons could be at a product line level between a high street bank and a Neobank, however, I am not sure if that data is available.

With a simple AUM like calculation, Barclays at £1.13 Trillion AUM is 23 times bigger than Revolut that is £50+ Billion. Revolut’s 171 complaints feels pretty low even in that sense as 171*23 is ~4000 complaints. Although Revolut took some negative PR for its recent misadventures, the number of complaints per customer is not too different between them and the other top Neobanks.

Financial Inclusion: Let us look at some of the steps towards inclusion that the Neobanks have taken. 50% of UK bank branches have shut down in the past 30 years. However, Neobanks are creating new on the ground contacts to allow for more inclusion in a seamless way. Starling bank have partnered with Royal mail to accept cash from their customers. Monzo used paypoint in a similar manner creating over 30,000 points for customers to deposit cash.

They are also looking to be more inclusive from an age perspective. Less than 5% of Monzo’s customer base are over 60 years old, and that data can improve. Monzo, Revolut and Starling bank are all ramping up efforts to reach out to people of all age groups. This also makes commercial sense as people in their 60s generally are richer than people in their 20s.

As we can clearly see that, based on the data, Neobanks have just arrived. They have a long way to go before data can categorically drive conclusions on how well they have done (or not). With China’s Techfins piling money into the Neobanks of the west, may be it will not be long before we see Neobanks punching above their weight against high street competition.

Whether they compete with the mainstream banks is one question, but whether they will keep their culture of innovation and customer centred approach intact as they grow is yet another question.


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.

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Is InsurTech missing a $2 trillion opportunity?

Here’s an interesting contradiction- the insurance industry is heavily focusing on innovation, but letting others take the lead in cyber issues.  And those ‘others’ are not always the good guys.

TLDR   This column typically focuses on insurance innovation/InsurTech, and all the whiz-bang artificial intelligence, algorithms, pain points, data analysis, blockchain, and innovation integration points that accompany that pursuit.  Of course those of you who have read much of what this author has written over the past year realize that there is a clear contention carried forth, that insurance and InsurTech is comprised of many parts, all of which comprise the Insurance Elephant- serving the insurance customer.

What does that have to do with the point of the opening paragraph?  A thought that while the industry chases disruption of legacy/incumbent methods there are many who are truly disrupting business (including insurance businesses) through cyber gambits, and that the risk posed by cyber disruptors makes the potential outcome of ‘traditional’ InsurTech efforts (can innovation be traditional?) tiny in comparison.  $2 trillion is the estimated 2019 global cost of cybercrime per Juniper Research (see bullet point 7 of 14 Most Alarming Cyber Security Statistics in 2019.)   Let’s see, global insurance business is just over $5 trillion, so $2 trillion in a relatively new risk is- a lot!  That amount makes the valuation of all the InsurTech unicorns seem like a relatively small school of InsurTech seahorses in a vast cyber ocean.

What brings the focus to cyber cover and cyber crime is a recent occurrence of cyber crime suffered by an upstate NY manufacturer.  A good company, 50+ hard working employees, steady business growth, well run and until a few weeks ago, not concerned with cybercrime.  Then came the digital wolf at the door- a ransomware gambit that adversely encrypted the firm’s entire set of digital books and operations, making the firm virtually blind, deaf, and dumb.  The management of the company was simply unaware of what the next steps should be, who to contact, how to act, and unknowing of the immediate or long-term effects the attack would pose to the firm.  And no real insurance coverage in place for the event or ensuing damage- typical CGL coverage hardly touches on the risk other than to mostly exclude the effects from coverage.  First party property coverage doesn’t apply unless there is some ensuing physical damage caused by loss of computer operating capability.

Huh, I thought.  How is this not an insurance and InsurTech opportunity that is front burner stuff?  There are tens of millions of SMEs (small or medium enterprises) in North America alone, millions in Europe, more millions spread across the globe.  Talk about pain points!  But then, relative to many other business concerns few talk about it.

The cyber cover issue can be seen from multiple perspectives, but I considered three points:

  • Sales/agency knowledge
  • Customer awareness/preparation
  • Protection and response

 

Sales/agency knowledge

My colleague and all around great agent, Michael Porpora, was one of the cyber insurance gang with whom I discussed the sales end of cyber risk (thanks also to Brett Fulmer, Ben Guttman, and Joe Hollier).  Michael summarized the SME cyber insurance market in this fashion:

  • There is limited technical acuity (read as cyber product knowledge) within agencies that serve SMEs
  • The risk is poorly understood
  • The language of the risk is not understandable by customers or agents
  • The product is as well known as something at the bottom of the vast depths of the ocean.

 

Well that’s comforting for a $2 trillion problem.

As we continued the discussion it was clear that typical policies afford little or no cyber cover, and the number of options for specialty coverage are not great.  However, the opportunities for agents to educate their clients are many.  As Michael said, “I use cyber insurance as a wedge,” or an entrée into a client’s office.  Right now it’s an each time, every time offering for his clients.  Seems an easy offering to businesspersons if the product knowledge is there- so why isn’t it?  Seemingly an easy product to underwrite as the coverage limits are currently finite, so why isn’t the cover more commonly discussed?  Is the risk the virtual asbestos of our era?

I considered that there may be an underground problem that simply hasn’t hit the mainstream press, i.e., there are many cyber occurrences that are resolved through payment of ransom, or are simply an added expense to the firms that experience the events.  No one wants the public to know of an attack because there may be cascading liability concerns.  Of course not acknowledging the problem doesn’t make it disappear.  In the instance of the NY manufacturing firm, the approach was to address the issue in house, with the in-house IT staff wrestling the demon.  Until the attack went from inconvenient to disastrous, and the perpetrators went from hackers to extortionists.  It was coincidence alone that caused the firm to realize their CPA firm had resources to help the company deal with the layers of issues.  Have they contacted the FBI?  Not yet.  Wonder how many ‘not yet’s exist such as the authorities remain unaware of the specific extent of the attacks.  These instances are not all ‘Wannacrys’ so cyber issues remain akin to a thousand virtual paper cuts.

 

Customer awareness and response

What can companies do to identify exposures?  Few SMEs can afford large IT staff, and the attack environment is continuously changing.  Is there an InsurTech ‘wing’ that is focusing on the unique challenges of a business that is comprised of information/data and money?  Not so much, but there are information security specialists whose primary business is to anticipate and identify cyber problems, to the point where they conduct ‘ethical hacking’ of client firms to detect digital weakness.

John Strand of Black Hills Information Security (BHIS) was kind enough to spend some time with me explaining how many Fortune 500 firms engage companies like BHIS to conduct (among other services) penetration tests in order to confirm the relative security of an organization’s tech superstructure.  He mentioned that many cyber policies require ‘pen’ tests as part of the underwriting and renewal process, not unlike a building needing a risk assessment before cover can be bound.  But even with a good cyber policy in place, ongoing diligence is needed because risks are changing and financial exposures are increasing.  John mentioned this reality- most insureds that suffer an attack have more challenges at the initial stage- because there is a need for immediate resources and assistance that an indemnity only policy may not afford.  Consider companies operating in GDPR environments- sure the fines can be extensive, but the need for immediate action requires resources.  There are some parametric programs available that have as triggers identified GDPR violations, and as such a need for immediate operational changes to prevent ongoing problems.  Other concerns John mentioned- not many carriers have specialized cyber claims departments, or tech programs that are commonly used or are becoming ubiquitous, e.g., payment programs, HIPPA, PCI, ISO, etc., that may be exposed to attack but not considered by users that way (their use is becoming a focus of required pen testing.)  An optimistic note- the ethical hacking community is mutually cooperative because at this time there is plenty of business for all.  John compared the business with the child’s game ‘Hungry Hungry Hippo- plenty of marbles on the playing surface, one simply reaches out and grabs.

 

Protection and response

Sales and customer knowledge concerns and needing technical expertise to identify issues up front.  Is there a reasonable blending of the two?  Seems there is, if the discussion I had with Andrea Holmes of Boxx Insurance is an indicator.

While not in a lot of jurisdictions- yet- Boxx Insurance is introducing a hybrid cyber product, one that not only provides cyber cover through brokers, but also educates customers, focuses on preparation for cyber issues, and provides monitoring service for clients.  The four ‘legs’ of the firm’s approach could easily be an industry mantra- Predict, Prevent, Respond, Recover.  The service is focused on SMEs, and the full suite of membership services places the participating firms somewhat on par with the bad guys who work at cyber 24/7, even affording cover for ‘rogue’ employees’ actions, or infections that may have been in place prior to signing on with Boxx.  One might even consider services such as that provided by Boxx as being the virtual model of insurance IoT- the service potentially senses issues prior to damage occurring and advises the client to take action.  Kind of like the water heater sensor that shuts off the main valve when a failure is imminent.  How about that IoT, Matteo Carbone ?  Customers in Ontario, Canada are enjoying the service, and it’s soon to be available in Chile and Singapore (and perhaps Quebec).  The firm has some solid leadership (thanks for the intro, Hilario Intriago ), solid tech, government certifications, and proprietary processes, but it seems the approach is solid enough to encourage other InsurTech entrants.

Cyber risk cover- it has uses for every level of customer, because the effects never stay within the bounds of the customer that has the direct exposure.  It is a risk that is a virtual Insurance Elephant, many unique parts but in the end it’s the whole beast.  A $2 trillion beast that should be attracting a variety of entrepreneurs in any place on the globe.  I wonder what a $ trillion valuation company is referred as?  Unicorn’s unicorn?

 

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).

Prospa proves fintech is a prosperous investment, skyrocketing in IPO debut

This week the fintech community in Australia celebrated a new SME success story – the long awaited float of SME online lender Prospa.

After stalling at the IPO finish line last year, the venture backed startup came back with a roar, with shares debuting at $4.50, a significant uplift on the $3.78 IPO price, with a market cap in the $720 million region.

Since launching around 7 years ago, the business has originated an impressive $1 billion in loans to the local SME community. Through a strong sales and partnership model, they have done the unthinkable in business banking – made lending to SMEs work.

Not content with just originating loans, and plugging what it believes is a $20 billion lending shortfall to the sector, the company is also innovating. It recently launched a buy-now, pay-later service, Prospa Pay, for equipment and stock. It’s a savvy move, especially given the shift in personal borrowing behavior amongst millennials, thanks to Australia’s fintech success story Afterpay. More and more of these consumers will become business owners over the next decade, and will be hunting for products that look and feel similar to what they have been initiated in.

Prospa joins a growing group of Australian fintechs in the lending space who have found success listing their businesses, albeit at far earlier stages than Prospa. This group includes Afterpay, which has built a sizeable $6 billion market cap. The company now has its sights set firmly on US expansion. Zip has also cracked the $1B market cap mark, and is making significant inroads into the buy-now, pay-later space.

These are huge milestones for the fledgling industry, and a great reward for early stage investors, who have backed founders and businesses in the face of stiff competition from a well-funded oligopoly.

Zip, Afterpay and Prospa are proof it can be done, and should give other early stage investors’ confidence in taking bigger, bolder bets.

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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Saas offerings, re-bundling and the pot of gold

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Source

Jessica Ellerm wrote about `Something as a service`, the new fintech paradigm while looking at Raisin`s offering. This prompted a discussion with Richard Turrin and Aki Ranin around Saas models for banking. Richard is a proponent of `Buy versus build` which allows for rapid deployment. Aki is a proponent of shared infrastructure because it allows for economies of scale and expansion in additional markets.

Increased Saas model adoption and APIs, make it difficult to predict whether incumbent banks or Fintechs are becoming the plumbing of financial services. For me, we actually need to reconsider whether this should be a question at all.

Two or three years ago, the `dump pipe` debate was hot and terms like Big banks becoming Dumb Pipes or Dumb pots, were trending as discussion topics in articles, conferences and debates[1].

`The “dumb pipe” debate originated from the telecom industry and there is a lot of literature on the subject. The grandfather of the debate is David Isenberg who in 1997 published the seminal paper The Rise of the Stupid Network.` Excerpt from Andra Sonea`s post On banking “dumb pipes” and “stupid networks”

We have been using the `dumb pipe` term because it works in the attention economy which is dominated with trendy jargon. But we each map the term to a different concept.

We are actually even biased. When we look at a Fintechs with a B2B Saas offering like Mambu, then we may think that it if Mambu powers an incumbent bank to offer lending, then maybe the bank is at risk of becoming a dumb pipe. On the other hand, when we realize (if we do at all), that Mambu is powering N26, we don’t classify N26 as a bank with a high risk to become a dumb pipe.

Mambu is a great example of a Fintech specialized in a Saas core banking offering. It powers up Oak North bank, which is the No.1 UK challenger bank. It is the heart and brain of the ABN Amro`s digital banking spinoff, New10, that focuses on SME lending; and more.  Mambu does not offer the banking license (a different approach to Solaris Bank). Just by looking at these two examples – Mambu and Solaris Bank – that have unbundled financial services in different ways; we have to pose the question `Where is the value being creating?`

  • Powered by Mambu means: Go to market fast with a Saas cloud-native solution – Client has the banking license; Fintech has the tech – Who is the dumb pipe?
  • Powered by Solaris Bank means: Get into banking with a Saas cloud-native solution – Client can offer banking services without a banking license of its own – Baas – Fintech has the license and the tech – Who is the dumb pipe?

The `dumb pipe` threat was native to the digitalization phase of unbundling as the disruptive force that was going to dominate. Now we are in a re-bundling phase and fintechs are growing their stack of offerings, incumbent financial institutions are transforming their offerings, and tech companies are also stepping in. From Sofi moving from lending into wealth management and Habito powering the mortgage offering of Starling bank; to Kabbage powering Santander`s business loan offering, to Motif launching structured products for Goldman Sachs; to Goldman powering the Apple card and Solaris bank powering Alipay`s acceptance in Europe.

I hope you are convinced that we can’t spot easily dumb pipes in this kind of world. If business expansion is powered through a Saas cloud offering, then the next question to ask is whether this powers your ability to offer advice by analyzing what is processed in the pipes and whether it enhances your brand through strengthening your trusted relationship. As the re-bundling continues and the commoditization of transactional banking services also continues, the

Last man standing will be Brand and Advice[2].

If you use Saas offerings towards offering advice and enhancing your brand, then there is no reason to fear becoming a dumb pipe.

Last minute footnote – As I am finished posting this article, a Linkedin post from Richard Turrin grabbed my attention about Tencent`s investment in a UK startup, Truelayer which is tech company leveraging APIs within the PSD2 and Open banking progressive European regulatory frameworks, to give access to financial services.  TrueLayer powers neo bank Monzo.

[1] Are Banks Destined To Become The Next “Dumb Pipes”? via Tech crunch

Banks May Be Turning Into Dumb Pots Of Money via Forbes

The Big Banks Are Becoming `Dumb Pipes`; As Fintech Takes Over via CBinsights

[2] Inspired, copied and stolen from Gary V`s tips from his the recent at The Financial Brand Forum’s. See 9 Priceless Tips For Financial Marketers From Gary Vaynerchuk

 

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).

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

Scenarios.001.jpeg

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.

AFRICAEcommerce

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.

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