Weekly Briefing №91 | ICO Growing Pains, Biblical Doom or Frictionless Doritos Buying? Too Big to Fintech?

Next week, please be on the lookout for our recommendations on the best books to read, podcasts to hear and videos to watch about fintech. This week, please see our (highly opinionated) round-up of recent events in financial innovation.

• The SEC’s ICO crackdown: a good thing
• Is RFID tech a sign of the “end times”?
• Goldman’s lending push continues; Old and new ways to catch market cheats
• AI trash-talking; Payments investments and M&A sizzles
• Comings and Goings: Scott Blumstein and Jimmy Levin
• Company of Note: SixThirty

IN DEPTH

“‘A sad day for the American financial system… It represents a significant blow to New York City’s economy and marks the end of an era in American finance.’’ That’s a 1990 quote from then-Rep. Charles Schumer discussing the demise of Drexel Burnham, a firm that pioneered junk bonds. Today, we can see that the volatility of the asset class’s early days was an important part of its maturation. Sure, pain happened, but each time the rebranded “high yield” market came back, it returned bigger. This history should be kept in mind in the wake of the SEC’s expected ruling this week that some ICO tokens are securities. Unsurprisingly, there have been the usual moans about uncertainty, the warnings about the deadening impact of regulation on innovation and the threats that the ICO business will head offshore. But unless your plan was to make a quick billion in ICOs in time to ring in 2018 with Sir Richard on Necker Island, the SEC news is constructive. Regardless of how valuable some tokens may become, there’s no reason that a six-month-old unproven idea deserves a $250-million valuation. Period. However, for those who believe in the long-term potential of decentralized and tokenized business models, the SEC’s move is likely to set the stage for more capital to pour in ─ just like the high-yield market, which saw more than $150 billion of new issuance in the first half of 2017. Not bad for a once “doomed” asset class.

“And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or on their foreheads. And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.” That passage from the Book of Revelations describes the mark that everyone will need to have in or on their bodies during the “end times.” Some feel that the beginning of the end has arrived in the form of a Wisconsin company that will follow the lead of European companies and allow its employees to have RFID chips inserted into their bodies. These chips will create a frictionless shopping experience in the company’s internal kiosk and make other basic tasks, such as entering secure facilities, easier. In our view, there are other things that pose a greater threat to our world than RFID chips, but there’s no denying this “innovation” is fraught with slippery slope potential. Besides, is buying an afternoon snack from a vending machine with change, cash or credit such a horrible drag on American productivity? And if it is, wouldn’t a non-invasive wearable solution suffice?

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Looking back, it’s hard to believe the skepticism in the online lending sector that greeted the arrival of Marcus, Goldman Sachs’ online retail lending arm. After a few growing pains, Marcus has hit its stride, benefiting greatly from a parental balance sheet that has no legacy credit card business or branch network to constrain lending. That has freed Marcus to provide flexible terms to borrowers, and in an appealing, old-fashioned twist, Marcus actually makes it easy for borrowers to speak to a human being when they have a question. Amazing, right? We have no doubt that this combination of brawn, brand and basic common sense will help Goldman in its just-announced initiative: lending money to the high-net-worth clients of RIAs and small broker-dealers on Fidelity’s Custody & Clearing Solutions platform.

Guy Gentile is a scrappy entrepreneur who had been involved in a number of risky financial adventures before he was arrested by the FBI. According to this fascinating podcast, though, the real reason the FBI arrested Gentile was to use him to get to someone else they were trying to nab. In fact, the FBI proceeded to use Gentile to pinch 25 bad actors who were involved in all sorts of trading schemes. But things got messy along the way, and now the SEC is trying to bar Gentile from the securities industry. To avoid these nasty and dramatic dealings, the private sector is turning to cognitive computing to detect market abuse. A case in point: this week, Nasdaq acquired regtech surveillance start-up Sybenetix to bolster its market surveillance offering to asset managers. And while the tech approach may not make for entertaining podcasts, it’s likely to be a far cheaper and more effective method in catching bad guys than the way wired-up FBI informants do it.

From academics to AI gurus, it seems like everyone has a view on the Zuckerberg-Musk trashtalkathon over AI regulation. For us, recent discussions with finance pros with AI chops have fueled our Muskian perspective. Here’s our theory on Zuckerberg’s position: he believes that even if it’s hard to do, you can actually put the AI toothpaste back into the tube if something goes wrong. Perhaps he saw that after Bloomberg initially reported that Facebook missed Q2 earnings, it corrected itself a few moments later. Or maybe he’s optimistic that despite Facebook’s so-far unsuccessful efforts to smite fake news, it will fix the issue before Kenya’s upcoming election is compromised. But most pros who dealt with the financial crisis will tell you that in a largely unregulated environment, where people don’t understand complex innovation, unintended things happen. And oftentimes, they aren’t easy to undo.

PayPal has partnered with Baidu to let Baidu Wallet users send payments to Paypal’s 17 million-strong merchants worldwide. Also in payments land, Stripe paid an undisclosed amount for Payable to bolster its tax reporting and contractor payments offerings; and Visa has made an investment in Marqeta, an existing Visa partner that has built a full-stack open API issuer processor platform.

Although Scott Blumstein and Jimmy Levin look like bar mitzvah boys, each just received far more than a $100 check from Grandma. In 25-year-old Blumstein’s case, it was the $8.15 million he received last week as the winner of the World Series of Poker. Said the new millionaire, “I definitely feel like I’m in this position because I’m from New Jersey.” Meanwhile, Jimmy Levin, a 34-year-old star credit trader, was appointed co-CIO of Och-Ziff and handed a $280-million incentive package. Are both men just lucky? Who knows. But one thing is for sure: performance, not age or years of experience, is becoming today’s mantra, even beyond start-up land.

Greater St. Louis is the 19th largest metropolitan area in the US. But somehow, throughout its history and today, the city has managed to punch above its weight in the worlds of business and finance. We were reminded of that theme recently when we connected with SixThirty’s managing partner, Atul Kamra, who discussed the St. Louis-based fintech venture fund and business development program that gets its name from the height and width of the St. Louis Arch (630 feet). Founded in 2013, SixThirty invests up to $100,000 in eight to ten fintech start-ups from around the globe every year and participates in follow-on capital raises as well. The ideal fit for the 10–12 week program is a B2B start-up in its “late seed stage” that has a working product, market traction and early revenue but could use added business development and go-to-market guidance. That support is assisted by the input and network of SixThirty general partners, including Kamra and Brian Matthews. It’s also nurtured through partnerships with firms including Edward Jones, Ernst & Young, State Farm, Reinsurance Group of America (RGA), Twain Financial Partners and UMB, as well as through collaboration with Washington University’s Olin Business School. “Founders don’t come to SixThirty for a general purpose start-up program,” said Kamra. “If you are hungry for capital, go to San Francisco. If you are hungry for revenue, come to St. Louis.”

Quote of the Week

“I believe the road to hell is paved with adverbs.”

~ Stephen King

Originally published at www.thefinancialrevolutionist.com.