WTF is The DAO?

wtf

Understanding the Dao isn’t easy, especially without a PhD in computer science. Even the New York Times called the DAO “difficult to describe”. Most articles written about it can give you a headache. But the organization behind the most successful crowdfunding campaign to date ($150 million raised) is worth explaining and understanding, using terminology that doesn’t make your brain explode.

Cool, so what’s the DAO?

Hold up…before you can understand the DAO, you need to understand the building blocks behind it.

Lets start with the basics; first, you need to know what digital assets are. Simply, a digital asset is an asset that has no physical form, but has a physical value. The best examples of digital assets are cryptocurrencies (like Bitcoin, Dogecoin, and Etherium), which can be purchased but don’t have a physical form — they exist only in the digital world.

The next concept is a blockchain. Super technical essays and articles explain blockchain in depth, but keeping it simple for our discussion: A blockchain is a public ledger of a digital asset’s transaction history. Each blockchain is made up of “blocks,” and each block contains a transaction record of the asset, tied together in sequential order. Since the ledger is public, there isn’t a single controller or bookkeeper tracking transactions. Instead, blockchains have miners, people who monitor transactions to look out for fraud, and are paid with the blockchain’s digital currency (i.e. Bitcoin miners get paid with bitcoins).

Last is a DAO, or a decentralized autonomous organization, one of the more confusing concepts to understand. Lets go word by word and simplify it:

  • Decentralized: DAOs don’t have officers or board members that control the organization’s decisions. Like a democracy, users that “buy into” a DAO have control over some decision-making processes of the company. Users only have “some” control because of the next word in the acronym, autonomous.
  • Autonomous: At its core, a DAO is a computer program that makes decisions based on its own rules, known as smart contracts. A simple example of a smart contract is a computer program used by universities that filters through applications, allowing only students with minimum GPA or SAT scores to reach an admissions committee. Although the committee makes final acceptance decisions, they don’t have full control of the process since they don’t see every application. Similarly, a DAO’s programing automates parts of the decision-making process — ranging from tasks as simple as filtering to complex contract negotiations.
  • Organization: A DAO needs to have a purpose, and to have a purpose, you need money. DAOs need some sort of capital, usually a cryptocurrency, to do anything of substance. DAO members exchange cryptocurrencies for shares, or tokens, in the organization. Just like shareholders in public corporations, more shares equal more influence on decisions.

Great, now can you tell me what the DAO is?

Yes…here we go:

The DAO in question is an investment entity, structured as a distributed organization on the Etherium blockchain. Using Etherium’s cryptocurrency, Ether, the DAO identifies companies for its members to invest in, and shareholders vote to either invest or pass on deals. The DAO crowdfunded $150 million from approximately 11,000 people, making it the largest crowdfunded project in history.

Why was the DAO created?

The DAO was created in response to a desire for more transparency in investment houses. The DAO is a fully transparent organization. There can be no mismanagement by officers because there are no officers — either the shareholders or the DAO itself makes all decisions. Furthermore, since the DAO is on the Etherium blockchain, flows of funds are on public records. Creative accounting can’t be used to disguise mismanagement of company funds.

Are there any problems with the DAO?

Yes…and lots of them. Because the DAO is so “open”, the organization is more susceptible to attacks. For the sake of our conversation, we’re going to focus strictly on the business issues, instead of getting bogged down with the legal, tax, and technological issues of the DAO.

The DAO has no leadership. Decisions need to be made by a quorum, slowing operations down to a speed that makes an oil tanker look like a speed boat. The second issue is the DAO’s code itself. It’s difficult for an investor to fully understand any investment — and trying to understand the computer code that comes with an autonomous program is a near impossible feat for a majority of investors.

Both of these issues came to fruition on June 17th, 2016, when an unknown “attacker” exploited the DAO’s computer code, siphoning off over $50 million worth of Ether in 40 seconds. Many commentators don’t view the attack as a hack, but as an individual taking advantage of a weakness in the logic of the DAO’s smart contracts.

 

Accounts_-_etherchain_org_-_The_ethereum_blockchain_explorer
Blockchain record of The DAO attack

Here is where the DAO’s issues of clarity and speed are brought to light. Investors didn’t understand that the DAO could have been taken advantage of so easily, since no intelligent investor would put money into a fund that isn’t secure from theft. Regarding speed, although the hack took under a minute, a “kill switch” could have been executed by a miner who saw something shady happening. However, since all decisions need to be made by the collective, the miner could only sit and watch as money bled out of the DAO. The lack of leadership is even more apparent with the DAO’s response to the attack: it’s nearly a week after the attack, and no decision from shareholders on what to do next has been made.

What does the DAO mean for the future?

We’re at the infant stage, dipping our toes into the pool of DAOs. The issues the company ran into are similar to a business set up without full knowledge of its market size and risks. There are going to be growing pains with DAOs, and the decision what to do with this DAO won’t stop another DAO starting soon. It will be interesting to see what the next iteration of the DAO looks like, and how coders respond to the issues of the DAO.

Regardless, the establishment of the first DAO fund gives the market a measuring stick for future investments, and shows investors how careful they need to be with the fine print.

The new virtual reality of shareholder communications

fintech comes to shareholder communications

Berkshire Hathaway is known for its lively annual shareholder meetings, featuring everything from a ping-pong match between chairman and CEO Warren Buffett and Microsoft cofounder Bill Gates to discount jewelry shopping.

This spring another aspect was added for the first time in the company’s history: an online live stream of the meeting in Omaha, Nebraska. Shareholders — and non-shareholders — were able to watch storied investor Buffett’s unscripted speech. This, along with Buffett’s investment in Apple in May, is perhaps another sign that America’s third-richest person is shrugging off his aversion to technology. But larger than that, it is also the latest high-profile example of how technology is changing companies’ communications with their shareholders. Shareholder communications remain a market ripe for growth and disruption.

The market for virtual meetings

Several players are making a push for expanding virtual meetings and better and more-secure online voting systems for shareholders. The main player in the space remains Broadridge Financial Solutions, which processes electronic voting for 90% of public companies, according to research by SWIFT. Broadridge has seen much growth in recent years, especially in services for virtual or hybrid meetings.

When it first launched its virtual shareholder meeting services in 2009, four companies held such meetings. This year, Broadridge is expecting to facilitate meetings for 200 public companies, 80% of them virtual-only and 20% hybrid, or a mix of in-person activities and an online broadcast, like Berkshire Hathaway did.

“We are getting more and more inquiries about it as companies see their peers using the technology,” Cathy Conlon, Broadridge vice president for strategy and business development, said in a phone interview. Those that have embraced virtual meetings include companies ranging from tech giant Intel to apparel-maker Lululemon Athletica.

“It’s not just tech companies, it’s really across all sorts of industries,” Conlon said. She attributed the increase to the general growth in popularity of online streaming and the advent of smartphones that give even more flexibility to those who want to participate in virtual meetings.

“It’s such a convenience for shareholders,” she said.

Currently, online-only meetings are allowed in 24 U.S. states, and Conlon said companies need to decide how to best accommodate their shareholders.

Not everyone approves

The online-only meetings have not been without controversy. The Council of Institutional Investors, a non-profit group advocating for effective corporate governance and protecting shareholders’ rights, has come out against online-only meetings, even though they may save money and enable more people to tune in.

“It also enables a company to manage troublesome shareholders and avoid uncomfortable questions,” said Amy Borrus, deputy director at the Council of Institutional Investors in Washington, D.C. “That is not a good thing.”

Borrus and others compare virtual-only meetings to the practice of holding shareholder meetings in far-flung places or at odd times. Research by New York University in 2014 showed that companies who held meetings in remote locations often experienced sub-par performance in the following year, indicating that they wanted their meetings to remain low-profile when they were harboring negative developments that hadn’t yet reached the public.

But David Yermack, one of the NYU professors who carried out the research, said it is still too early to tell what impact virtual-only shareholder meetings may have. Although the number of such meetings has grown, it is still a small minority of companies that hold them, he said.

“I think that, in fairness, we need to wait a few more years until enough data is generated to evaluate the pros and cons of online meetings,” Yermack said. He did say that companies’ motivations may be to keep a low profile, but he also pointed to the advent of virtual quarterly-earnings announcements, and said that replacing in-person conferences with phone and video conferences has actually boosted participation.

Alternatives to e-voting

Betting that the trend will keep moving forward, Broadridge recently invested in blockchain technology, which it says could be implemented to make voting at virtual meetings more secure.

At the same time, alternatives to Broadridge are in the works, although they haven’t yet emerged fully into the space.

Several local regulatory institutions around the world have developed their own local systems for shareholder e-voting and virtual meetings, including the Israel Securities Authority and Russia’s National Settlement Depository.

In another low-profile, but potentially significant development, Nasdaq is currently testing an e-voting system based on blockchain technology on its affiliate Tallinn Stock Exchange in Estonia.

While it remains skeptical of virtual-only meetings, the Council of Institutional Investors said it welcomes more secure and user-friendly voting systems, as well as adding virtual elements to in-person meetings, as Berkshire Hathaway did.  The council also stressed a need to refine regulations for how technology is used to facilitate shareholder communications.

“There are no real best practices for these uses of technology,” Borrus said. “There’s no real rules of the road yet.”

 

Photo credit: SarahPAC-USA via VisualHunt.com / CC BY-ND

Why fintech influencers don’t pay to play

fintech influencers don't pay to play

Bond issuers pay the ratings agencies that rate their credit. That relationship is fraught with problems and we all know how that’s played out.

This week, a UK-based site called Richtopia published a listicle entitled Top 100 Fintech Insiders: From Marc Andreessen to Vitalik Buterin, These Are the Most Influential People in the Blockchain Industry. Using social media data, the post ranked the 100 top fintech influencers when it comes to blockchain technology. It’s a pretty broad list and includes a wide range of people: from entrepreneur/investor Mark Andreesen to futurist Don Tapscott, who just published a book on blockchain, to the usual suspects of consultants, investors, professionals, and analysts in the space.

What happened next was the interesting part: influencers, of course, were happy to be included in such a list and took to Twitter to show their appreciation for being named a top insider.

Organic vs. pay-to-play

As they began to share the list, though, one by one, the influencers started reporting that they were being contacted by the list’s publisher to pay for their listing: essentially, they were requested to pay-to-play for inclusion in the top 100 list.

The backlash starts

Many of the same people who happily shared the original post moved to distance themselves from the list, vehemently denying having paid for inclusion. Some industry professionals even went so far as to declare that they’ve never paid for being named to any list. The pushback is understandable. But when you piss off influencers, it’s pretty clear what they’d do next: take to social media to voice their complaints. That’s exactly what they did.

Tweetstorm leads to a mea culpa

This ultimately led to a public apology by the staff that runs Richtopia:

The theme of democratization runs deep in fintech and a scheme like this makes people who make their livings in the fintech coal mines very uncomfortable.

We asked Devie Mohan, a fintech marketer, why the publisher’s practice set off a veritable tweetstorm:

The ethos of fintech is around collaboration, sharing information and working together in a very open way. Some media outlets have put together fintech influencer lists, but using measurable results – true influence comes from having the power to make a sustainable impact – and this cannot be bought or externally made. Trying to monetize this is against the basic ethos of fintech.

Yesterday’s twitter storm was a great example of how we all work together, have one another’s backs, and work towards the same goals within the fintech ecosystem. A few tweets from Duena, Jim Marous, Bill Sullivan, Diana Biggs, Andreas and myself made the firm overturn their decision to monetize lists – and that is an example of true influence (which cannot be bought). Fintech is disruptive because of its culture and mindset along with technological developments – and that is why everyone involved was affected deeply by this.

Another fintech influencer, Duena Blomstrom took particular umbrage at this gaming of the system. For her, the issue wasn’t just about monetization, but also the fact that a list like this blurs the line between expert and pretender:

When I got into FinTech many years ago it was a space filled with a knowledge vacuum so intense that no one (other than maybe [some] service providers with a successful track record) was a trusted advisor. Not consultancies, not analysts, not researchers. There were a handful of names in fintech — maybe 20-30  —  and most of them you can see in the FinTechMafia today who were around or listened to.

Over the past 2-3 years, that’s all changed with everyone and their dog proclaiming themselves a fintech expert. This “inflation of the connoisseur” does nothing to elevate the level of discourse and ultimately, harms consumers, so the few resources to show value — credible publications, genuine lists of thought leaders based on accomplishments, etc — are the only platforms to gauge authenticity and worth via impartial content.

Yesterday I wasn’t going to say much (to anyone other than our FinTechMafia group) about Richtopia’s ridiculous and simultaneous claim of impartiality and demand of payment, but a simple Twitter search revealed they had requested money from other influencers, too. This struck me like a stupendously bad business model. What it proved was that [Richtopia] doesn’t have a clue what either “fintech” or “influence” are, so that’s why I demanded an apology from them.

Bill Sullivan, the Head of Global Financial Services Market Intelligence at CapGemini, was one of the first to bubble up this story on his Twitter stream. Sullivan found three challenges with this practice, though he did respect Richtopia’s apology and reversal of its pay-to-pay policy.

First, the title and description of the list were misleading. There was no transparency that the list was pay-to-play.

Second, I personally don’t know a single influencer who would ever pay to be added to a Top Influencer list. It goes against the entire principle of what a top influencer list represents.

Last and more important, I think the big issue was the bad position this put existing members of the list (who didn’t pay to get on it). I know many influencers on the list who would NEVER pay to be on a Top List. However, they were now on a list where some members of the list were paying 500 GBP to get on. This was a disservice to those individuals, as people who did not know them well may have thought they had paid to get on the list.

Perhaps Mohan put this whole fiasco best in 140 characters:

 

Photo credit: jonesytheteacher via VisualHunt.com / CC BY-SA

High Five! The top 5 fintech stories we’re following today

5 trends we're tracking in finance

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

1. Competition in hot pursuit, Western Union continues to lead
Western Union may be 165 years old, but don’t make the mistake of thinking them old-fashioned. The cash transfer giant is staying competitive by

  • Maintaining its physical locations – this a big draw for the developing world, in which nearly 75% of all remittances transpire.
  • Embracing the digital shift in the remittance market by adopting do-it-yourself online transfers, developing mobile payments, and even enabling payments in bitcoin.

 

2. BofA targeted by top female banker in ‘bro’s club’ lawsuit
Equal pay for women has been getting a lot of coverage in the entertainment industry of late. Patricia Arquette’s rousing 2015 Oscar speech demanding equal pay and equal rights for women has allegedly already cost her acting jobs, but has also been linked to concrete change on the ground; specifically, with the passing of the California Fair Pay Act in January 2016.
Women are now bringing the equal pay fight to the finance industry. However, in lieu of a gala evening that affords actresses the chance to broadcast their message of equality to millions of viewers around the world, women in finance are turning to an equally effective, if less glamorous, awareness-raising tool: lawsuits.
Most recently, a senior female fixed-income banker at Bank of America Corp filed a lawsuit accusing the bank of underpaying women, and retaliating against her for complaining about illegal or unethical business practices by her colleagues.
In a complaint filed on Monday night, managing director Megan Messina said she is a victim of “egregious pay disparity” relative to male peers, and has been paid less than half the man who shares her title as co-head of global structured credit products. Should Messina win, this lawsuit could trigger similar lawsuits throughout the industry, forcing incumbents to rethink their payment models. Stay tuned.

3. Walmart Pay and the overcrowding of the mobile payment market
Walmart just launched its mobile payments platform, surprising not a few people in the industry. What are the benefits and dangers retailers can look forward to facing in a world in which every single retailer has its own mobile service?

Read more: RIP MCX, the retail industry consortium that was going to take on the credit card companies (Tom Noyes)

4. The impact of blockchain goes beyond financial services
In an article for HBR, futurist Don Tapscott and his son Alex Tapscott scout out the potential disruptive impact of blockchain on all industries as we know them:
“[Blockchain is] the first native digital medium for value, just as the internet was the first native digital medium for information. And this has big implications for business and the corporation.”
As blockchain is increasingly incorporated across industries, we’ll get a better idea of where blockchain is really a superhero, and where it’s merely Clark Kent.
For more on blockchain mania, read on about Thunder, an open source network that wants to make bitcoin a viable alternative to credit card networks like Visa.
5. How DailyWorth turned a newsletter into a roboadvisor for women

Competition in hot pursuit, Western Union continues to lead

165 year old Western Union stays ahead of competition

Dozens of startups have opened in the last several years touting faster and cheaper ways to send money abroad. These digital-native companies like U.K.-based Transferwise and WorldRemit, along with Paypal’s Xoom, say their goal is to disrupt the money transfer sector, long associated with high fees and waiting in lines at kiosks with a pile of cash.

But the industry’s grandfather, 165-year-old Western Union that started out sending telegrams, does not seem to be losing its foothold. Western Union’s share of the cross-border transfer market has hovered around 14% for the last five years, according to independent research and consulting firm Aite Group. And no startup has more than a 1% market share, according to Aite.

“It’s a lot harder to take them out than a lot of people think,” said Brett Horn, an analyst at Morningstar. covering the money transfer sector. “Western Union looks very outdated, but when you look below the surface, that’s not the reality of it.”

How a 165 year old financial services firm competes

This is partly because Western Union, unlike the upstarts, maintains a wide network of bricks-and-mortar locations that can send cash, which is still a staple in much of the developing world. The developing world accounts for $432 billion of the $582 billion global remittance market, according to the World Bank.

But it is also because Western Union has embraced the rapidly growing world of do-it-yourself online transfers, mobile payments, and even cryptocurrencies like Bitcoin, as it is well aware of the digital shift in the remittance market.

Only 7% of remittances in 2015 were digital, according to Aite Group.  This is because digital transfers, the bread and butter of startups, often require a credit card or bank account, something lacked by the 38% of the world’s residents who are considered unbanked, according to the World Bank. But the numbers of unbanked people continue to fall rapidly, with a recent report from the Global Forum on Remittances and Development estimating that cash-based remittances will only remain dominant for another five years.

Western Union is prepared for future cash trends

Western Union continues to prepare for this widening shift away from cash, offering online transfers to bank accounts in 33 countries, and the ability to send money to mobile phones in 13 developing countries, where consumers can use the funds in their mobile wallets to pay bills and buy goods without having a bank account. All of these efforts overlap with services offered by startups.

“Western Union is still a giant, but even giants like Western Union are changing their business model,” said Pedro De Vasconcelos, manager of the International Fund for Agricultural Development’s Financing Facility for Remittances, which aims to promote innovative and affordable ways for people to send remittances to poor, rural areas.

In another attempt to keep up with the rapidly changing financial world, in April Western Union invested an undisclosed sum in Digital Currency Group, an investment firm focusing on bitcoins and the technology underlying them, blockchain.

And last year it launched WU Connect, which allows money transfers through social media and messaging applications like Viber.

New technology just part of the formula

But because the fees are lower for the digital transactions that are likely to replace a growing number of in-person cash transfers, in order not to die a slow death, Western Union must maintain its market share rather than let it slip away to startups.

“For incumbents, like Western Union  there is an erosion of their margins and they are being forced to tighten up operations,” Talie Baker at Aite wrote in an email to Tradestreaming. “As prices continue to decline, incumbents will be challenged to migrate their existing customer base to digital forms of remittances as well as attract the millennial generation who may be attracted to some of the startups over Western Union.”

Analysts also pointed out that there are many lucrative niches and sub-sectors in the cross-border money transfer market, such as offering other financial services like savings accounts to unbanked customers, and that many startups are actually targeting these areas.

“There are many places for startups to go without bothering Western Union,” Horn said. “It’s not contradictory to say that Western Union is going to maintain its business and that there is also a lot of opportunity for upstarts.”

Photo credit: Eleaf via Visualhunt.com / CC BY

WTF is blockchain

wtf

This post is part a series of articles that explain, in plain English, new technology tools and platforms that are changing the face of finance. Check out other articles in this series here.

What is a blockchain?

A blockchain, or distributed ledger, is a list of transactions shared and updated by a network of unrelated computers. The information on blockchains is stored as blocks of information that are linked together by a chain of information (thus the name of the technology). In contrast to a traditional database that is stored and administered on a central server, every computer participating in the chain holds a complete copy of the ledger, and every copy of the ledger is updated automatically whenever a member of the network makes a transaction.

The technology streamlines transactions that previously required brokers or middle men to verify identities and information about parties to a transaction or exchange. In principle, the technology could eliminate the need for traditional finance institutions such as banks, insurance companies, stock exchanges and payment processors by allowing the public to streamline, validate and secure their financial transactions, often at a lower cost than traditional industry services.

The most well known existing example of blockchain technology is bitcoin, a cryptocurrency not issued by any state or bank.

What are the benefits of blockchain?

The biggest benefit of blockchains is transparency. All information and all transactions are visible and verifiable to all members of the network at all times.

In addition, the transparent nature of blockchain, combined with the highly-complicated technical demands of the system make it virtually fool-proof: A dishonest agent would need to deceive thousands of otherwise unrelated computers to verify a false piece of data at a given moment in time, and then to convince all other members of the chain that the fraudulent information was, in fact, legitimate.

What are blockchains used for?

Anything requiring a third-party to serve as a middle man to verify a transaction between two or more parties can use a blockchain. Today, the technology is mainly used to create, track and monitor bitcoins. Banks are also testing blockchain applications for securities lending, stock and bond trading, underwriting, and payments.

In the future, however, the technology can be used to ensure regulatory compliance, streamline consumer and bank payments, facilitate property transfers and escrow services, and validate legal contracts.

Why should finance professionals care about blockchain?

Because the technology stands to democratize finance in a way that few, if any, technologies, have done before. For example, take the stock market: Traditionally, stock trades required brokers to verify information on both sides of a trade and then three days to settle a transaction. Blockchain would enable buyers and sellers to trade between each other without a middleman. Blockchain will reorganize parts of capital markets as various intermediaries are rendered obsolete.

Are there any downsides to blockchain?

One of the best things about blockchain technology is also one of the biggest drawbacks: Anonymity. Blockchains allow internet and mobile transactions to remain nameless, and this also potentially makes the technology useful to criminals moving large amounts of money far from the eyes of governments and law enforcement agencies.

And there are jobs. As mentioned above, one of blockchain’s selling points is the ability to cut middlemen out of the industry. That means that a whole industry of bankers, brokers, notaries, lawyers and others could soon find themselves looking for work.

Lastly, speed: Because every transaction must be approved by the blockchain and recorded on every ledger on the chain, the approval process can be lengthy for a digital transaction. Some technology has improved upon this, but still, transaction speed is an issue the industry is working to solve.

Is blockchain secure?

In theory, yes. Blockchain data is stored on computers along the chain, meaning a computer crash or hack in one location will not affect data for the rest of the network.

In addition, experts say the decentralized, open nature of the system, as well as the complexity of updating the blockchain renders the technology fraud-proof because data blocks cannot be tampered with retroactively once they have been admitted to the blockchain. Dishonest agents trying to defraud the system would a) have to alter data at each location simultaneously in order to perpetrate a fraud, and b) convince other members of the chain that the amended data is accurate.

On the other hand, industry professionals are certainly maintaining a healthy dose of skepticism about the technology. It pays to remember, however, that almost by definition, technology is vulnerable to hackers. Industry professionals describe the system as “virtually impenetrable” or “nearly impossible to invert or undo.”

Can blockchain technology be regulated?

Ultimately, however, it would appear that the technology itself cannot be regulated, anymore than the internet or voiceover internet protocol can be regulated. In other words, federal regulators are likely to address applications of blockchain technology (like virtual currencies and bank transactions), but the technology itself cannot be regulated.

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

1. Is the marketplace lending industry in trouble? Here’s what we know. (Tradestreaming)

Trouble may be a bit strong but suffice it to saw, the business going forward looks a lot different than the fast-growth era we just emerged from. Here’s what’s going on.

See also:

  • Professional marketplace lending association aims for clarity, transparency (Tradestreaming)
  • Marketplace lender, Prosper ends Citi securitization pact (Nasdaq)
  • Online lenders dial back marketing in response to softer investor demand (WSJ)
  • Institutional investors taking leap into marketplace lending (BusinessWire)

2. Wall Street’s top bitcoin projects (Tradestreaming)
Less than 1% of internet users are currently using bitcoin, but incumbent financial institutions are busy testing blockchain technology.

3. Asset managers, prepare to have your business disrupted (Institutional Investor)
The combination of new tech, shifting demographics, and client needs is bringing a sea change to the asset management industry.

4. LendKey deploys $1 billion in capital to borrowers (Finextra)
LendKey, a tech company that helps incumbent FIs manage private label online lending offerings, announced it has powered more than $1 billion in lender capital to borrowers.

5. Selling Data: The emerging role of finance’s Chief Revenue Officer (Tradestreaming)
Selling financial data is sexy again and because of that, we’re seeing examples of a new role forming: the Chief Revenue Officer. As revenue production enters the C-suite, we take a closer look at 5 things that drive success.

Wall Street’s top 6 bitcoin projects

bitcoin projects on wall street

Less than 1% of internet users are currently using bitcoin as an active currency, but incumbent financial institutions around the world are busy testing the blockchain technology that supports the digital currency. Many of today’s top blockchain projects are being run via financial industry consortia, comprised of top financial firms, technology providers, and consultants.

Here are a handful of the most meaningful bitcoin projects to date:

Credit Default Swaps
Participants: JP Morgan, Citigroup, Bank of America Merrill Lynch, Credit Suisse
Technology/service provider: Axoni

A handful of major banks, including JP Morgan and Citigroup, are testing blockchain technology to help with record-keeping for credit default swaps (CDSs). As an over-the-counter product, it can be a challenge to keep track of CDS transactions. This new test, administered by Wall Street’s unofficial librarian, the Depository Trust Clearing Corporation, successfully showed that payments, amendments, novations and compressions for CDS can be run on blockchain.

Hyperledger Project
Participants: JP Morgan, Deutsche Borse Group, more
Technology/service providers: IBM, Intel, Digital Asset, more

The Linux Foundation helped promote the development and uptake of opensource software. Now, it’s doing the same for bitcoin and blockchain technology. Originally launched as the Open Ledger Project and recently rebranded as the Hyperledger Project, the foundation intends to evangelize the future of finance and to create industry-wide standards. The project is a collaborative, cross-industry open standard for distributed ledgers supported by major financial institutions including JP Morgan, Deutsche Borse Group, BNY Mellon, and ANZ. The organization wants to spur discussion and imagination around the future of supply chains, payments, contracts, and ownership of digital assets.

Commercial paper trading
Participants: R3CEV
Technology/service provider: Chain, IBM, Intel, and Eris

R3CEV is a blockchain startup that’s structured as a consortium of numerous financial institutions, including dozens of banks. In addition to a test using the Ethereum network, R3 recently ran a pilot focused on commercial paper trading. 40 banks participated in the test case. Participants needed to model a financial asset (in this case, commercial paper) and structure a variety of smart contracts for trading that asset — all using blockchain. According to The Wall Street Journal, the goal of the test was to give the banks an opportunity to compare and contrast 5 different blockchain offerings on the market today, including Eris Industries, Ethereum, IBM, Intel and Chain.

Private company capitalization tables
Participants: Nasdaq

In a market with few IPOs, Nasdaq has found other ways to court entrepreneurs and venture capital investors. By building tools and offering in-house and via acquisition of other providers, the stock market seems intent on finding other ways to do business with private companies via Nasdaq Private Market. The same division is experimenting with blockchain technologies. Its blockchain product, Linq, is the first public trial of blockchain technology by a major global stock exchange. One of the first applications of the technology set will help entrepreneurs and private companies manage their cap tables. Eventually, firms using Linq could use it to create, buy, and sell new shares in their companies.

Repurchase agreements
Participants: DTCC
Technology/service provider: Digital Asset

Repurchase agreements, better known as repos, are contracts that enable financial institutions to borrow from one another on a short-term basis by selling securities and buying them back at a set date. DTCC takes in around $2 trillion worth of these agreements daily in the form of thousands of transactions. Participants don’t see a marked difference in their businesses by switching over to blockchain technology, as trades generally settle daily anyway. What it should do, though, is allow financial institutions that are involved in multiple repos to net them out against each other on a given day.

Darrell Duffie, a professor at Stanford’s Graduate School of Business told Fast Company, “I think it’s a smart move,” he says. “It will allow intraday settlement and better netting efficiencies, so it’s a win-win for liquidity in the repo market.”

Japanese Stock Exchange
Participants: Tokyo Stock Exchange, Nomura Research Institute

The operator of the Tokyo Stock Exchange intends to “assess the usability as well as the challenges of blockchain technology when applied to securities markets”. The Japan Exchange group is conducting this project with IBM Japan. JPX plans to conduct proof-of-concept tests to evaluate blockchain technology in markets that have low transaction data volume.

WTF is bitcoin?

wtf

This post is part a series of articles that explain, in plain English, new technology tools and platforms that are changing the face of finance.Check out other articles in this series here.

What is Bitcoin?

Imagine the following happy scenario: You have just finished designing a cooking website for Dan. You live in Nevada, Dan lives in London. When Dan goes to his bank to send you your payment, he discovers that the transaction fees for sending a direct wire to your account will be very, very high. He is also told that it will take several days for the transfer to go through. When Dan goes to Western Union, it’s the same story. “Can I pay you in bitcoin?” Dan asks. “Maybe,” you say. “What’s bitcoin?”

Bitcoin is a peer-to-peer, digital currency. It’s a decentralized payment system, which means that all bitcoin transactions are almost instantaneous (up to ten minutes), have minimal or no transaction fees, and can be made anonymously.

How do you get bitcoin?

If you decide to let Dan pay you in bitcoins, you’ll have to have to open a digital wallet. A digital wallet is where you store your addresses, the files into which bitcoins can be uploaded or downloaded; to minimize the risk of theft, it’s safest to open a new address for each new bitcoin transaction.  Once you have the wallet, you can buy bitcoins on exchange sites or from another person, you can download them from special ATM machines, or you can get paid in bitcoin.

Another way to get bitcoins is to become a miner. Miners are the guardians of the bitcoin network – they confirm each new bitcoin transaction by creating bundles of bitcoin transaction records called blocks. Once a block is established, it is added to a chain of all the previous blocks (the blockchain), a ledger of all of the past transactions conducted with bitcoin. The miners have a real incentive to keep the bitcoin network secure; each time they create a new transaction block, they’re awarded 50 bitcoins.

Is it Safe?

Sure, bitcoin is safe – or at least as safe as any other type of currency. Hackers are mostly out to steal your private keys and to hack into third-party websites that store or exchange bitcoins for you. Luckily, there are steps you can take to keep your bitcoins secure, such as backing up and encrypting your wallet, or even keeping your wallet offline.

Can bitcoin change the financial services industry?

To a certain extent, bitcoin has already caused a paradigm shift in the way that the financial services industry relates to digital currency. Some large banks have already partnered with bitcoin-focused firms, and many are developing tools and technologies to test blockchain applications.. Though little has come to market, it’s clear that bitcoin will have a significant impact on the financial sector in the future.

So, has the bitcoin revolution begun?

From a user’s perspective, the answer is a firm no. Less than 0.1% of internet users use bitcoin, and there are indications that since 2013 there has actually been a decrease in the number of new users joining the bitcoin network. However, as far as the financial industry itself is concerned, the answer is less clear cut. Bitcoin, and especially its blockchain technology, certainly have the ability to radically transform the sector, not only by showing them how to become faster, safer, and lower-cost, but by introducing new marketplaces, encouraging micro transactions, and by enabling new brands to become major players in the industry.

The only question is whether incumbent financial institutions will be able to see past the immediate threat that bitcoin could pose to their profits and embrace the shared ledger technology that could eventually transform the financial services industry as we know it.

The Startups: Who’s shaking things up (Week ending March 6, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletters.[/alert]

Startups raising/Investors investing

European p2p lender, Auxmoney raises Series D from Seven Ventures (p2p banking)
Seven Ventures along with Index Ventures, Union Square Ventures and Foundation Capital invested a double digit million Euro amount. Seven Ventures is the investment arm of ProSiebenSat.1 Media SE, which operates large TV channels in Germany.
Auxmoney trippled loan volume in 2015 compared to 2014. As of January 31st, 2016, according to numbers on file with P2P-Banking.com, the company had originated 441 million EUR in loans since launch, with a monthly loan origination volume of 10.6M for the last month on file (January 2016).

Blockchain-powered loyalty and rewards co, Ribbit.me raises $1.5m (Finextra)
Ribbit.me has built the a universal platform for the loyalty and rewards industry using blockchain and smart contract technology. Currently, program operators such as airlines or hotels, are faced with high operational costs and outdated processes, resulting in a poor customer experience.

Fintech investor: Entrepreneurs need to “smell the weeds” (Fintech Junkie)
QED Investors Frank Rotman explains why certain innovations within finance need to come from people with a deep, deep understanding of the pain points in the industry.

At 50,000 feet you can’t spot a weed in a garden. At 500 feet you might be able to identify that there are weeds in the garden. When you’re on your hands and knees crawling in the garden you can identify every type of weed and one-by-one pick them, pull them or (gasp) even smell them.

The Startups: Who’s shaking things up

Designed for women, Spiff introduces its social savings service (Finovate)
Spiff is a “simple and fun” savings service designed with women in mind. Founder and CEO Carl Wessmann credits the women in his life for helping him understand the importance of savings, and he’s returned the favor with a new technology that “helps connect money with what it can accomplish” for users and their loved ones.

OnDeck Capital: Highly misunderstood company, stock (Seeking Alpha)
The general consensus following the Q4 earnings report was that OnDeck Capital (NYSE:ONDK) provided weak guidance for Q1. The market though appears highly confused regarding the shifting revenues from the marketplace.
The stock collapsed last week and still trades near all-time lows. The small business, online lender trades at only $6.80 after peaking above $28 right after the IPO at the end of 2014. With a market value below $500 million, is the market wildly mispricing this growth stock?

Checkbook lets you email anyone a digital check and deposit it free (TechCrunch)
The startup today launches its digital check service where you can send anyone a check with just their email address, and they can deposit it immediately online to get their money or even print it out. What’s old is new?

Singapore’s UOB partners with Israeli crowdfunding platform (Reuters)
Singapore’s United Overseas Bank said it would invest $10 million in Israel-headquartered crowdfunding platform OurCrowd as part of the companies’ collaboration to help Asian startups raise equity funds. UOB said the deal would allow accredited investors among its clients invest in OurCrowd’s portfolio companies.

Blockchain firm, Digital Asset Holdings names Sallie Krawcheck to board (American Banker)
The blockchain startup Digital Asset Holdings has added Sallie Krawcheck to its board. Krawcheck, former chief executive of Bank of America Wealth Management, is the latest financial industry veteran to join Digital Asset’s board. The New York company has also appointed Sanoke Viswanathan, chief administrative officer of JPMorgan Chase’s corporate and investment banking division, and Catherine Flax, head of commodity derivatives and foreign exchange with the BNP Paribas’ Americas division.