Identity Startup Netki to Launch SSL Certificate for Blockchain
#Netki has announced the #launch of its #identity #certificate pilot, allowing all parties in a transaction to be trusted and verifiable under regulation.
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The Top 5 Takeaways from CoinDesk’s State of Blockchain Q1 2016
CoinDesk highlights five of the biggest trends #from its most recent Q1 #2016 #State of #Blockchain report.
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Return of the FinServ Jedi
Roberto Ferrari recently tweeted this:
From roboadvisory to p2p lending to crowdlending, to PFM, to mobile wallet concepts focused on payments, to the early days of #bitcoin, there is a long list of #fintech d2c business models which have not reached the escape velocity investors had hoped for since 2008. I would be hard pressed to find one fintech startup out of this list that reached escape velocity without any help from a #finserv incumbent – partnership, commercial agreement, warehouse facility, distribution access, white label deal, acquisition you name it. To be clear, I am speaking of real traction, not gravitation-free valuation. This factual observation has led many fintech pundits to state that, although the financial services industry will be disrupted and is in need of innovation, a direct and material challenge from fintech startups is unlikely.
Bringing this factual observation in historical context I wanted to order the immediate waves of fintech we have experienced and attempt to forecast the industry’s immediate future. This immediately led me to seek out the past. A much trickier proposition than I initially thought when studying financial services and #technology.
I came up with the following non-scientific historical narrative:
– Ancient Financial Technology Period &8211; 3200 BC to 500 AD: Little is known about financial technology in this period marked by the beginning of mathematics and what astute observers can only assume was archaic credit provisioning and proto-fraud.
– Financial Technology Middle Ages Period &8211; 500 AD to 1499 AD: Arguably the greatest advance in financial technology during this period was the invention of double entry accounting by Italian merchants.
– Classical Financial Technology Period &8211; 1500 AD to 1900 AD: Much like the two prior periods, little is known about classical financial technology. We note the invention of the pantelegraph in 1865 in France (could not resist mentioning that), to verify banking signatures, and the laying of the first transatlantic cable in 1866 which was a crucial starting point for the globalization of financial communications
– Modern Financial Technology Period &8211; 1901 AD to 1980 AD: As with every other human endeavor, this period sees an acceleration of innovation. We note the invention of the ATM, the credit card, the telex. The creation of FedWire, SWIFT, NASDAQ. The deployment of consumer credit on a massive scale, mortgages, securitization.
– Postmodern Financial Technology History &8211; 1980 AD to 2008 AD: The rise of the internet permeates this period. Few people realize that Etrade was founded in 1982, online banking started in the mid 80s, that Intuit started in 1985 with Quicken, that by the mid 90s all major #banks had been pushed kicking and screaming into internet banking. Lest we forget, Paypal was founded in December 1998. The bulk of financial technology action centered around financial technology service providers selling decidedly “unsexy” technology to incumbents.
– Contemporary Fintech History &8211; 2008 AD to present: The rise of a new term and a new activity by 2008, &8220;FinTech&8221;. The first FinTech wave, from 2008 til 2014, focused on d2c models (mainly) + payments (mostly retail) + roboadvisory + p2p lending + digitizing distribution channels of banking and asset management. Competition and disruption were the central buzzwords. VC investors the main providers of capital. The second FinTech wave, from 2014 to 2016, saw a shift to b2b and b2b2c models and a widening to other areas of financial services such as insurance + capital markets + specialized lending. Collaboration between startups and incumbents became the central buzzword. VC investors saw the rise of Corporate VC investors (CVCs owned by banks, insurers). I believe we are witnessing the last moments of this second wave. Indeed, I believe we are witnessing the beginning of a third &8220;FinTech&8221; wave, starting with 2016. One which will still focus on b2b or b2b2c models. One where CVCs will play a more dominant role, relatively speaking, compared to their VC brethren. One where more startups will focus on becoming the new service providers to the industry and where the industry will acquire enabling technologies (Artificial Intelligence (AI), Augmented Reality (AR), Internet of Things (IoT), Quantum Computing (QC), #Blockchain/Consensus Ledgers) to upgrade itself in all manners and across its business/tech stack. I call this third wave the TechFin wave, to differentiate it from the origins of financial technology and the first two waves of fintech.
As you can see from the above historical timeline, financial technology ruled prior to 2008. Most innovations were either b2b or b2b2c in nature. Direct to consumer was the exception (Intuit, Etrade, maybe Paypal to a certain degree). I chose 2008 as a pivot away from financial technology and towards fintech because startups such as Wealthfront and Betterment were founded that year and because, the 2007-2008 global financial crisis finally broke the dam so to speak with systemic and systematic innovation being enabled. Might the period from 2008 to 2015 be an anomaly where d2c became more prevalent than b2b and where for the first time there was a hope, a promise and an intent for startups to directly dislodge incumbents? If true, is the new TechFin wave of the Contemporary period borne out of a natural consolidation stemming from the breathless pace of investments since 2008? Or will it become the new normal for a long period? Food for thought assuredly.
Let us focus on why this new TechFin wave makes sense.
Think about how vulnerable most incumbent service providers are to innovation as they have mostly aborted any meaningful internal R&D efforts and resorted to M&A activities to stay relevant over the years. Think about how some independent VCs may reduce their exposure due to either losses from early investments or less than expected returns. Think about how CVCs will expand to include not only banks or insurers, but also consultancy firms, systems integrators, other third parties that live off of selling/implementing/integrating technology for finserv incumbents. Many of these top firms will want to make sure they stay relevant to their clients and will start investing in promising startups. (Whether firms that do not have a strong culture of venture investing will make good venture investors is another topic entirely.). Think about the wealth of subject matter expertise, capital, brand (even if eroded) and the advantage of being regulated (even if it comes at a cost) finserv incumbents&8217; CVCs can leverage.
This third wave has the potential to help finserv incumbents close the technology gap. I wrote about this gap in one of my previous posts, see here: a dual gap where basic infrastructure will be upgraded (a necessary step but not a sufficient one on its own) AND where cutting edge technology will be embedded throughout an incumbent&8217;s business stack &8211; for a sense of what that means, see this post on the &8220;plasma&8221; approach to technology/business.
I do mean &8220;potential&8221;. Incumbents will have to operate a cultural evolution in order to learn several skills necessary to actualize this potential.
These are in no particular order and non-exhaustively:
&8211; Master a platform strategy (think of the comprehensive platform strategies tech giants have deployed)
&8211; Redefine their core businesses/services
&8211; Develop new ways to deliver their core businesses/services (API, marketplaces, Banking/Insurance/Asset Management as a Service, or as a Platform)
&8211; Learn how to collaborate (it is not enough to sing commercial agreements and partnerships)
&8211; Upgrade and retain knowledge experts across a variety of subject matters
&8211; Master and execute intrapreneurship (corporate entrepreneurship)
&8211; Architect the right innovation &8220;engine&8221; to translate, digest and disseminate innovation, new technologies, new business models coming from the outside world.
I am sure I am missing a few salient vectors here. The purpose of this exercise is to hint at the possibilities incumbents could create with the right approach.
With capital, brand and knowledge expertise it is not far fetched to imagine a future where a finserv incumbent would be adept at: 1) building businesses from within, 2) spinning off said businesses, 3) invest and partner with young startups, 4) reinvent their core businesses. The end result would make for mean, lean fighting machines.
I believe we are in the first innings of this potential transformation. We can witness most large banks and insurance companies as well as asset managers tinkering with venture investments, with both internal and external innovation groups, with participation in accelerators, incubators. Baby steps all, but important first steps nonetheless.
Setting aside outside stimuli such as regulatory overview, interest rate environment, political interference, the central question is &8220;How should incumbents architect themselves to successfully operate such a transformation and ride the third TechFin wave?&8221; This I believe, is the issue finserv incumbents are in control of and which will define their future. Innovating from within when one is a large organization is also one of the most difficult if not the most difficult exercise in the corporate world, for reasons most know &8211; not flexible, not nimble, natural barriers to change, smartest minds focused on keeping main business afloat. Many corporations have tried in the past and failed. Indeed, some voices firmly believe genuine innovation can only come from outside of a finserv incumbent. Further, finserv incumbents face formidable competitors in the likes of GAFAA (Google, Amazon, Facebook, Apple, Alibaba)
I am firming up my thinking around that central question and would be interested in your thoughts. In the meantime, are we observing the #return of finserv Jedis and the rise of TechFin service providers? Is TechFin here to stay?
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Blockchain and the Race Towards Irrelevance
Are financial incumbents in denial about the true impact of #blockchain tech? Blockchain specialist Matthew Spoke argues the answer might be yes.
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Is FinTech Jumping Into Bed With The Wrong Partner?
Recently there has been a spate of articles describing the symbiotic relationship between the established financial services sector and the #FinTech challengers. For those looking to take on the #banks around the fringes, it’s a different story. For them, it’s keeping one step ahead and offering new services before the lumbering giants’ catch-up – or more likely – eat them up. But for those looking to add and sell services to existing banks, maybe the direct approach isn’t necessarily the best one.
There’s no doubt that the recent proliferation of FinTech offerings has created some fantastic innovation that will shape and possibly redefine the banking industry. However, there’s also a large majority that will inevitably fail. With $90B of investment into the FinTech bubble last year, how does a bank pick the few winners from the inescapable majority that won’t be around when their VC funding dries up?
So it’s no surprise that banks aren’t stopping what they’re doing and falling over themselves to partner with these new FinTechs. Banks don’t act impulsively and budgets are worked out a year or more in advance. Of these budgets, a large majority will be spent on regulatory change and keeping the show on the road (KSOR). Discretionary spending will be squeezed and haircuts to approved budgets are inevitable.
People are waking up to the fact that gaining confidence and selling to the financial services is no easy feat, no matter how good your recently recruited sales team is. The usual financial incentives don’t wash; the banks won’t be rushed into anyone else’s timetable but their own, which is subject to frequent change and reprioritisation.
Banks are keen on trying things out, proof on concepts, small user pilots – very few of these undertakings are paid for but with the potential carrot so large, the new-to-market FinTech, looking for their breakthrough sale, can’t turn them away. Some will be able to ride out the storm or will have such a great product it will succeed but the majority won’t and not through the fault of their offering.
Also the banking IT landscape is complex. It is rare that you’ll be interfacing with just the bank’s staff. There’s likely to be a myriad of different vendors, system integrators, and contract staff all with their own agendas not necessarily in step with the bank’s needs. The procurement and change process of each bank requires a small team of specialised staff to navigate effectively, with each bank’s systems and processes being different. How does a small outfit with less than 50 staff in San Jose and a few international sales people navigate all this?
That’s why I believe that FinTech should be looking for a new partner instead of going straight to the banks themselves. FinTech might live in the Agile world but it needs the assistance of traditional system integrators to help with the mundane and project-based work. Too many start-ups end up over stretching themselves trying to be the project manager, business consultant, technical integrator, documentation producers, change managers, etc., etc., etc.
And while you might have a great solution running on AWS, what if the bank wants four 9s reliability, is concerned about General Data Protection Regulation 2017, has other concerns such as FINMA, or the need for 24/7 – 365 global support?
This is where partnering with a SI like Fujitsu with a global presence, a network of data centres, and first class delivery teams can free up FinTechs to carry-on innovating and letting the bank work under an existing master services framework and support package.
Fujitsu is actively creating an ecosystem of partners not only within FinTech but in all sectors and areas of expertise to help banks and other customers access the latest innovation without the hassle and complications of dealing with hundreds of SMEs that would not traditionally make it past the first hurdle of any large corporation’s procurement process.
That’s why I believe FinTech should not only try to sell themselves to the Financial Services world but to the SI market. They should be looking for partnering opportunities not only to exploit the SI’s existing customer base but to add confidence and certainty to the question “Which FinTech should I back?”
This post represent the opinion of the author [linkedinbadge URL=”https://uk.linkedin.com/in/fegan” connections=”off” mode=”icon” liname=”Gary Fegan”] .
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What startups are saying about raising cash in Latin America
You don’t have to look hard to see why the startup community in #Latin #America has long faced a lack of capital and resources to fuel significant growth. Many Latin American entrepreneurs have endured decades of political and economic hardships that left the investment landscape in a less than desirable state — especially for emerging #startups. Read More -
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Blockchain is a disruption we simply have to embrace
By Alex Tapscott with Don Tapscott, co-authors, #Blockchain Revolution
The #technology likely to have the greatest impact on the financial services industry and the world of business has arrived. Not peer-to-peer lending, artificial intelligence, big data, #robo-advisers or Apple Pay – I’m talking about the blockchain, the technology behind digital currencies such as #bitcoin. Blockchain represents nothing less than the second generation of the Internet, and it holds the potential to profoundly transform the financial services industry.
Because the first generation of the Internet was built for moving and storing information, not value, it has done little to change how we do business or access financial services. When you send someone information, you’re really sending a copy, not the original. It’s okay to have a printing press for information – but not for money.
As a result, we rely on powerful intermediaries, such as #banks, to establish trust. Today’s financial intermediaries also perform eight important functions in business and society: authenticating identity and reputation, moving value, storing value, lending and borrowing, exchanging value, funding and investing, insurance and risk management, and audit and tax. We call these the “golden eight,” and they will all be transformed through blockchain.
Over all, these intermediaries do an okay job, but with limitations. They use centralized servers, which can be hacked. They take fees. They capture our data. They run on outmoded technology. Regulations are antiquated. These intermediaries also exclude two billion unbanked people who can’t prove identity or don’t have enough money to justify a bank account. In sum, intermediaries capture a lopsided share of the benefits of the digital economy, just as they did in the predigital economy.
Enter blockchain, a vast, global and distributed ledger running on millions of devices and open to anyone, where not just information but anything ofvalue – money, equities, bonds and other financial assets, titles, deeds, music, art, scientific discoveries, intellectual property, even votes – can be moved and stored securely and privately, and where trust is established not by powerful intermediaries but through mass collaboration and clever code.
If the Internet was the first native digital format for information, then blockchain is the first native digital format for value – a new medium for money. It acts as ledger of accounts, database, notary, sentry and clearing house, all by consensus. And it holds the potential to make financial markets radically more efficient, secure, inclusive and transparent.
Blockchain entrepreneurs and incumbents alike are working to devise new ways to perform the eight core functions of financial intermediaries through blockchain technology.
Authentication of identity and reputation
Today, we rely on rating agencies, analytics firms and banks to establish trust, verify identity in transactions and decide who merits access to the system. In contrast, reputation accrues on the blockchain itself. Blockchain technology lowers or eliminates the need for trust altogether.
Moving and storing value
Blockchain startups such as Circle, Abra and Paycase want to make retail banking a global free commodity, like Google, and can do so because their back end, supported by blockchain, is secure and inexpensive to run. “When was the last time you sent a ‘cross-border e-mail’?” asked Jeremy Allaire, CEO of Circle, rhetorically. He bets hundreds of millions of millennials globally will find this prospect appealing.
Lending
Retail, commercial and mercantile banks, along with credit scoring and rating firms, facilitate the issuance of credit card debt, mortgages, corporate and municipal bonds, T-bills and asset-backed securities. On the blockchain, anyone could check creditworthiness before issuing, trading and settling traditional debt instruments directly, reducing friction and increasing transparency. The unbanked and entrepreneurs everywhere could access loans from peers.
Exchanging value
Market-making will change profoundly as financial assets move from a paper-based format to a native digital format based on blockchain. Settlement times on transactions can be reduced from days or weeks to minutes or seconds. This is a huge opportunity for incumbents to reduce cost, but it also poses risks.
Venture capital, IPOs and project finance
The halcyon days of entrepreneurship may be upon us. Ethereum, a blockchain platform supported by Microsoft, Manulife, Deloitte and others, got its start as a “blockchain IPO” – issuing native tokens for bitcoins. No need for bankers, lawyers, auditors and stock exchanges. Today, it’s worth $1-billion (U.S.). Blockchain also automates the matchmaking, enabling more efficient, transparent, secure models for peer-to-peer financing, recording dividends and paying coupons.
Insurance and risk management
Using reputation systems based on a person’s economic and social capital, insurers will be able to make better-informed decisions, which explains why Manulife just announced a flagship agreement with blockchain developer Consensus Systems. The over-the-counter derivatives market, with a notional value of $600-trillion, is paper-based and opaque and relies too heavily on centralized clearinghouses. Moving all derivatives to blockchain would reduce counterparty and systemic risk in the financial system.
Accounting
Traditional accounting practices are not keeping pace with the velocity and complexity of modern finance. The blockchain’s distributed ledger will make auditing transparent through time-stamped third entries on a blockchain, enabling regulators to more easily scrutinize financial actions within a corporation in real time. Deloitte, PWC and others are investigating these “triple-entry” accounting schemes for their audit practices.
Given the promise and peril, Wall Street has woken up in a big way. More than 45 leading banks, including Royal Bank of Canada , have joined the R3CEV Consortium to develop blockchain infrastructure for banking. IBM launched the Hyperledger project, which counts Deutsche Bank, the London Stock Exchange Group and Wells Fargo as members. Microsoft is in the game, as are Visa, Cisco, Intel and many other leading tech companies.
Venture capitalists are piling in, too. In 2014 and 2015 alone, more than $1-billion of venture capital flooded into the emerging ecosystem, and the rate of investment is doubling annually.
“We’re quite confident,” said Marc Andreessen, an Internet icon and venture capitalist, “that when we’re sitting here in 20 years, we’ll be talking about blockchain the way we talk about the Internet today.”
Governments believe blockchain could simplify and improve the delivery of services and empower regulators and central bankers to do their jobs more effectively.
So is this the death knell for financial services or a new platform for reinvention? For sure, blockchain will create winners and losers. Banks can thrive if they can steer clear of the innovator’s dilemma and disrupt from within. Leaders of the old rarely embrace the new, but we remain hopeful.
The greatest opportunity for Canada is to use blockchain to kick-start our innovation economy by embracing the entrepreneurs who are instigating change.
Canadian entrepreneurs have been on the leading edge of blockchain innovation from the beginning. Ethereum, mentioned earlier, was founded by a group of Canadian developers, led by Vitalik Buterin. It recently became the first crowd-funded blockchain “unicorn.” Consensus Systems, run by Canadian CEO Joseph Lubin, is a blockchain juggernaut, building applications to reinvent a dozen industries. And a growing constellation of entrepreneurs and technologists are trying to build the future at companies such as Ledger Labs, Paycase, Unocoin and Blockstream.
Can we nurture an environment where entrepreneurs and their ideas can flourish? There is a critical mass of talent in Canada right now. What’s needed is bold, multistakeholder leadership. The unstoppable force of blockchain technology is barrelling down on the immovable infrastructure of modern finance. We would like this collision to transform the old money machine into a prosperity platform for all.
[linkedinbadge URL=”https://www.linkedin.com/in/dontapscott” connections=”off” mode=”icon” liname=”Alex Tapscott”] is CEO and founder of Northwest Passage Ventures, an advisory firm building industry-leading blockchain businesses.This piece is adapted from his book, with co-author Don Tapscott, Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business and the World. A version of this article originally appeared on TheGlobeandMail.com.
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Major trends in global financial technology (fintech)
I am honored to have been invited to speak at a panel during Innovfest unBound in Singapore regarding trends in #fintech globally. On top of this Kuchi and our coming product HiHedge has been granted exhibition space at Marina Bay Sands for the duration of the conference! This is pretty awesome, and I like the topic so here will deal in greater detail with the speech topics I’ll bring up at Innovfest! Let’s dig in!
The state of, and differences between fintech in the US, Europe and Asia?
Fintech is booming, and Asia is powering up a sprint on the leader, the US. With US$4.5 billion raised in 2015 in Asian investments, out of US$19.1 billion globally, Asia is betting hard on this. Especially when comparing the growth rates – near tripling in Asia – it is aggressive even in a market growing at 60% globally from 2014.
The United States is leading the game – not just in terms of size of funding. They have an advantage in the maturity of the sector, and also in terms of their diversity and type of business/consumer problems that they are solving. The US has over the last few decades had a much stronger financial sector (Hello Wall St.!) and consulting-, legal-, and operational service sectors of which the financial sector has been one of the top clients. There is simply such a strong breath of talent, people with enough money to be able to bootstrap (go without external funding), and entrepreneurial culture in the US that enables a strong fintech startup ecosystem to grow. On top of this the size of the ecosystem does two things: 1) it allows people to specialize, which makes it more likely that you can start a company and run it successfully in a niche, and 2) it creates a breadth of connections and clients which are all available immediately to the new firm.
In terms of the specifics of the market, you simply have a stronger B2B story in US fintech. This is mostly because the entrepreneurs there can draw on actual experience of working inside a financial institution or a company servicing them. #Blockchain / distributed ledger innovation is being driven by the same forces. Blythe Masters’s Digital Asset Holdings is one of the best examples of the nexus of payment #technology going all the way to operations in the back office of #banks and stock exchanges! Several other companies are attacking all B2B offerings between and on the side.
Europe is much, much narrower in terms of fintech. Largely, one can say that fintech in Europe is very, very focused on payments and payments-related issues (authentication, processing, management and aggregation). Germany does however have an added focus on banking (lending, digital banking access) and London is starting to see an asset management sector slowly pop up.
To a large extent, the payments focus I think is due to having a single market with in some ways different banking and payment systems, and less of a deep and wide pool financial industry talent to feed off of. Although sounding sad, it does bring Europe a focus and solutions that I can foresee will be very important in building broad financial inclusion.
Broad financial inclusion however, is Asia’s Tour de Force. Giving access to the unbanked. Finding out how to score credit for thin-file clients. Offering SMEs free B2B tools to run their businesses more effectively. And that’s just in the accelerator I am in! (Shoutout to Cefy and Banhji.) Huge new demographics will be coming into the financial system and will need services that banks are not operationally set to deal with. This is most likely to play out in the B2C space where Asian entrepreneurs have deep experience of the actual end-user problem.
Couple this with Asia’s affinity for- and success with platform companies and you have an incredible mixture. Investment services on your chat app? Tencent’s WeChat does that at a time when Facebook is asking itself if chat-based commerce makes sense! Immediate payments in-app? Welcome to… well pretty much every Asian chat app. You’re a business and need financing? Were you using Alibaba in the last few years? Chances are that their big investment in Ant Financial gives them an opportunity to offer you a loan based on your Alibaba activity!
If you’re innovating on a platform, the world can be yours! That applies to fintech and elsewhere, but fintech is simply so hot now.
So where is the global fintech space going?
I think the market will play out differently in different parts of the world because it’s being led by vastly different players!
The US and Europe is led by the specialists, all essentially trying to do the services that financial institutions need (or some of their internal functions) but better. Better in this case means more efficient. Better in this case means lower cost. It’s good enough to make everyone happy.
In Asia, financial entrepreneurship is largely about doing things differently. Use different solutions altogether and run them on a platform / app instead of jacking in to a chain of financial operations that is inefficient. But Asia is also largely in that stage of growth where large conglomerates can exist, and – by power of brute force, market recognition, management experience and money – are able to simply bring in talent in any field and have a competitive advantage. (This happened in the US with GM, Ford, Motorola, and large parts of Europe’s industrial titans too a few decades ago. Japan’s companies are largely still looking like this.) The execution of specialized tasks and need for deep niche understanding is simply not high enough in these new markets where there are few competitors.
Asian platforms have all the width and reach you’ll need as an innovator, and they will be your most logical partner. Platforms are also the biggest competitors for incumbents since they can incorporate both scale and speed. If you’re a financial institution you shouldn’t be afraid of opening your e27, TechinAsia, TechCrunch or Wired for fear of seeing the competition. You should be petrified by the Asian companies that Bloomberg and Reuters cover! These are companies like Snapdeal & Flipcart in India; Baidu, Alibaba & Tencent (BAT to China-watchers) in China; and Rakuten, DeNA and LINE Corp. from Japan. These players already have reach, payments, data analytics, and a plug-and-play style platform ecosystem. As a startup, why work to build any of that instead of putting 100% focus in innovative, problem solving products and services?
Musings on Machine Learning in finance:
Machine learning will probably make high-paid, routine work obsolete. Unless customization is of the essence, and public data is scarce, large swathes of the time-consuming parts of investment banking, consulting, and accounting will go out the window. Get ready to figure out how you survive in this world, either by building experience or scale. Imagine a machine-learning algorithm going through all of PwC’s consulting database? All their accounting audit documentation? All of Goldman Sachs’s primary market deals database? The end-job still requires strong sales and deep understanding of the client that a human will still need to perform, but all the man-days spent crawling through and filing documentation are numbered.
Will banks face an Uber Moment?
No. If that happens that will be named whatever the name of the company is that disrupts them! Let’s compare use cases:
- A guy hails a cab on the street. Problem: get from point A to B where B is close to A, in a short time. Possibly also that the person cannot drive or needs to do something else in the meantime. Possible to solve with drivers. The incentives (for the two-sided market place) and regulation are tricky, but providing the service is easy. Duplicate for the use-case being checking in at a hotel. (Person needs space for 1 night, figure out incentives for people with spare rooms, circumvent regulation, and go.)
- Someone posts a classified in a paper. Problem: Buyers and sellers, employers and employees, potential friends, romantic partners, etc. can’t find each other. Possible to solve with online bulletin boards that include profiles. A weekend of coding and problem solved. Add people wanting to advertise to those users and you have a business!
- A professional walks into a bank. Problem: Well you can’t make a simple problem statement. Which in a million of the problems a bank can solve is this client interested in? Solving any of the problems probably requires the integration and cooperation of several internal bank departments.
Innovation in banking will happen at the level of the B2B providers to the financial institutions, or potentially in individual bank units. It will be death by a thousand cuts if banks aren’t quick to buy up the innovators before they go to platforms. There will not be one Uber Moment, simply because banking is integrated and complex. Banks have a choice now of whether they want to be Android and provide a platform that works for both producers and end-users, or if they are content being like print newspapers and complaining about innovation being too fast for them.
Let’s see what some of the Asian financial centers, like Tokyo, Mumbai, Shanghai, Hong Kong and Singapore can cook up in terms of driving fintech innovation!
[linkedinbadge URL=”https://www.linkedin.com/in/tkalvner” connections=”off” mode=”icon” liname=”Tim Alvner”], the author of this article is CFO at Kuchi Inc. and Finance Consultant and this was originally published on linkedin
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The Coming Age of Machine Law
Given the ongoing global buzz about distributed ledger #technology (DLT), I thought that I would offer up a bit of a diversion from the current public discourse about #blockchain, including the non-stop blizzard of conversation about public versus private blockchains, scaling, use cases, interoperability, consortia, smart contracts and more. I thought that for today I would write about #law. More specifically, the practice of law in the distributed ledger age.
Let me preface this post by stating that I am not an attorney, although over the course of my career I’ve had many, many conversations with extremely capable lawyers across all disciplines. In addition, this article is the result of some thought exercises that occurred in the wake of several conversations with industry specialists, as well as the insightful commentary by CFTC Commissioner Giancarlo as part of his keynote at the May 10th, 2016 Markit Customer Conference in New York City[1]. Of particular interest to me was his commentary that “…DLT could be the biggest technological innovation in the financial services industry and financial market regulation in a generation or more…”. That statement and the follow on commentary raised an interesting question in my mind. What have we done or, more importantly what should we do, about the aspects of blockchain technology that impact how we live, exist and interact in a legal framework?
Let’s think about that for a moment. The entirety of legal canon that all of Western or Eastern civilization operate under, is generally predicated on the idea that human beings are the actual legal participants with which we engage in legal transactions. However, thanks to DLT (potentially coupled with enhanced processing power in the future ala artificial intelligence, quantum computing, et al … and the subject of a future post), we are rapidly approaching a reality wherein computers will be the legal participants. Smart contracts that auto-execute the covenants within any particular financial transaction for example. An Internet of Things (IoT) or Internet of Value (IoV) world, wherein money is exchanged at the speed in which information moves today, and done so with no human interaction whatsoever.
Perhaps it’s worth looking at some existing law to start. For example, let’s take the Uniform Commercial Code. Courtesy of Wikipedia, the UCC “…first published in 1952, is one of a number of uniform acts that have been promulgated with the goal of harmonizing the law of sales and other commercial transactions across the United States of America (U.S.) through UCC adoption by all 50 states, the District of Columbia, and the U.S. territories…”[2]. As we dive into the depths of UCC, it’s worth looking at Article 2, which deals with sales. Under UCC Article 2, “… Firm offers (offers by a merchant to buy or sell goods and promising to keep the offer open for a period of time) are valid without consideration if signed by the offeror, and are irrevocable for the time stated (but no longer than 3 months), or, if no time is stated, for a reasonable time”.
What does signing mean for example, in a DLT world replete with private keys, for example? What about “…keeping the offer open…”, when transactions are in theory instantaneous with the exchange of goods or service?
The act goes on: “…Offer to buy goods for ‘prompt shipment’ invites acceptance by either prompt shipment or a prompt promise to ship. Therefore, this offer is not strictly unilateral. However, this ‘acceptance by performance’ does not even have to be by conforming goods”.
Let’s pause here for a moment. In a DLT world, how do we define “prompt shipment”, when exchange of value is for all intents and purposes …instantaneous? In a technological environment, whereby the “trade” and the “exchange of value” are literally the same thing, how do we monitor the performance and structure “acceptance”, if those no longer functionally are relevant? Article 2 also speaks to “Contract repudiation and breach…”. Are we to operate under the assumption that in a future DLT world, there will never be a “non-conforming good”? Will there ever be a situation where contract repudiation is relevant?
How about Smart Contracts? Most people are operating under the understandable but slightly misleading perception that smart contracts are ultimately a simple “If-Then” logic statement in some computer code, that just so happens to sit within…you guessed it…a blockchain. But one could argue that smart contracts are much more. Wikipedia defines smart contracts as “…computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary…”. We’ve already seen the prototypes of smart contract capabilities in light of blockchain technology with the current industry Proofs-of-Concept.
Let’s look at another law that might have particular relevance in the soon to be world of “digital assets” and “smart contracts”: The Investment Company Act of 1940, known in industry as “The 40 Act”.[3] The 40 Act, along with the Securities Acts of 1933[4] and 1934[5], form much of the foundation for financial markets regulation in the United States. The 40 Act in particular was recently updated as part of the Dodd-Frank Act of 2010.[6] As one examines these laws, one of the items that are particularly striking is that all interaction references, even where the Acts define things like validity of contracts and liability, all refer to “… any person…”. It will be interesting to see how the world develops with smart contracts, decentralized autonomous organizations (“…a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that…”[7]) and the like, and how these will be reflected in current rules and regulations, almost all written at a time when the only interactions were with people.
But what does all of this mean for the legal industry? How do we define, manage and monitor contractual relationships that are carried out by computers? How do we even write laws and regulations in the distributed ledger age?
These questions are more than just interesting theoreticals. In my opinion, we are in the very early stages of a reinvention or evolution of what it means to be an attorney, a legislator and a judge, and what it means to write, enact and enforce laws. We are rapidly approaching what I call the “Age of Machine Law”. A future world in which national and international laws and regulations need to be “coded for”; where the actors, interpreters and possibly even the drafters of these laws…are not human, but machines. More accurately software that runs on machines.
How will this evolve? Should universities and law schools begin to meld together the computer science and technological training that I suspect future attorney’s will need to operate in the world? Will legislators and staffers need to do likewise? Science fiction fans may fondly remember Asimov’s “Three Laws of Robotics”, reprinted here for your enjoyment:
- “A robot may not injure a human being or, through inaction, allow a human being to come to harm.
- A robot must obey orders given it by human beings except where such orders would conflict with the First Law.
- A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.”[8]
Taken in context, Asimov’s fictionalized rules governing robotic behavior may in some way need to be adapted to a DLT future. What will be the rules governing DLT interactions and behavior, one may ask?
I believe that there will come a point when efforts across legal, business, technology and governmental organizations will need to intersect to properly define how people and businesses will be impacted by these significant changes. So for my friends in the legal profession and beyond, I would ask that this be considered a call to action, or at least the beginning of a reimagining of law and the legal profession.
The question is: Who will craft, and more importantly, how will we legislate and enforce, The Laws of the Machines?
I look forward to feedback from friends and colleagues in the legal profession and beyond. Please let me know if anything is missing from my analysis.
*****
Ron Quaranta possesses more than 25 years of experience in the financial services and technology sectors, and is an recognized expert in the area of blockchain innovation, particularly related to its impact on the world of financial markets. He currently serves as Chairman of the Wall Street Blockchain Alliance, a non-profit trade advocacy group whose mission is to guide and promote comprehensive adoption of blockchain technology across global financial markets.*****
[2] https://en.wikipedia.org/wiki/Uniform_Commercial_Code
[3] http://www.sec.gov/about/laws/ica40.pdf
[4] https://en.wikipedia.org/wiki/Securities_Act_of_1933
[5] https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934
[6] https://en.wikipedia.org/wiki/Dodd–Frank_Wall_Street_Reform_and_Consumer_Protection_Act
[7] http://www.fastcompany.com/3047462/the-humans-who-dream-of-companies-that-wont-need-them
[8] https://en.wikipedia.org/wiki/Three_Laws_of_Robotics
[linkedinbadge URL=”https://www.linkedin.com/in/ronquaranta” connections=”off” mode=”icon” liname=”Ron Quaranta”], the author of this post is Chairman of Wall Street Blockchain Alliance
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