China Dominates 90% of Critical Tech; AI, Stablecoins, and Embedded Finance Aim for Iconic Status

Artwork of the week: Squisito al seltz, 1926, Fortunato Depero

Fortunato Depero and Campari are connected through the world of art and design. Depero, an Italian futurist artist and designer, created the famous "Campari Soda", which radically changed the image of the Campari brand, making it one of the most iconic and recognizable in Italy and around the world.

The partnership between the two marked an important moment in the history of Italian art and advertising, giving life to a brand image that has stood the test of time and continues to represent the excellence of Made in Italy.

Depero used red and black as the dominant colors in his advertisements, along with color shape and typography, creating a strong visual impact and an iconic image for the Campari brand.

A big thank you to my regular subscribers! Thank you for sharing this newsletter with your friends and colleagues. Your "word of mouth" is the best advertising I could ask for.

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China Now Global Leader in 90% of Critical Tech

Over 20 years, China has traded places with the US, which once reigned supreme.

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China and the United States have traded places in the past 20 years with China now the leader in 57 of 64 (89%) critical technologies.

Showing the enormous transition over the past 20 years, from 2003 to 2007, the US led in 60 of 64 technologies.

The US and China are essentially "trading places," which should concern Washington as China has made great strides that the US cannot undo.

The study was conducted by the government-backed Australian Strategic Policy Institute (ASPI), which cannot be accused of being a shill for the Chinese government.

ASPI's "Critical Technology Tracker provides a leading indicator of a country's research performance, strategic intent, and potential future science and technology capability."

👉TAKEAWAYS

🔹There is a stunning shift in research leadership over the past two decades towards large economies in the Indo-Pacific, led by China’s exceptional gains.

🔹China led in just three of 64 technologies in 2003–2007 but is now the lead country in 57 of 64 technologies in 2019–2023, increasing its lead from our rankings last year (2018–2022), where it was leading in 52 technologies.

🔹The US led in 60 of 64 technologies in the five years from 2003 to 2007, but in the most recent five years (2019–2023) is leading in seven.

🔹India is also emerging as a key centre of global research innovation and excellence, establishing its position as an S&T power.

🔹The US, the UK and a range of countries from Europe, Northeast Asia and the Middle East have maintained hard-won strengths in high-impact research in some key technology areas, despite the accelerated efforts of emerging S&T powers.

👊STRAIGHT TALK👊

With China and India rising, the US can no longer be relied on to be the go-to nation for tech innovation. This is a huge shift in how we perceive the global role of the US and Asia.

The bigger question that ASPI cannot answer is, what will happen to this lead in the next twenty years? ASPI hints at an answer by showing how tech transitions require around two decades to bear fruit.

This means that even if the US started a national technology push of the magnitude of the 1960s space race, it would take 20 years to catch up.

Do you see this push coming?

China May Overtake The US's Early Lead In AI

The US's policy of containing China's AI is failing.

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“China’s relentless drive and strategic investments in AI suggest it is only a matter of time before it catches up—if not surpasses—the United States’ early lead in AI.”

The Information Technology and Innovation Foundation (ITIF) think tank in Washington is hardly a shill for China, and this is a riveting read.

Their warning that China’s AI program can’t be “contained” is likely too little too late, no matter who wins the coming election.

The US continues to underestimate China’s ability to innovate, which is why my favorite line in the report is:

🔥“And the narrative that China is merely a copier is false and outdated.”🔥

👉TAKEAWAYS

🔹 China is the global leader in AI research publications and is neck and neck with the United States on generative AI. However, China’s research publications have less impact than U.S. ones, with fewer citations and less private-sector involvement.

🔹 Tsinghua University in Beijing is the breeding ground for China's leading AI start-ups, including four of the country’s “AI tigers.”

🔹 Chinese large language models are closing the performance gap with U.S. models, with some Chinese models outperforming their U.S. counterparts.

🔹 China has less private AI investment than the United States, but foreign investment in China's generative AI sector is growing, with Saudi Arabia’s Aramco leading the way.

🔹 State-directed capital funds and financial aid are proving effective at supporting high-potential firms in regions of China the private sector typically underinvests in.

🔹 U.S. policymakers should not prioritize containing China, but rather craft and fund a comprehensive national AI strategy that addresses the twin goals of increased AI development and increased AI adoption to stay ahead.

👊STRAIGHT TALK👊

The US’s entire AI containment policy for China is based on the outdated notion that China can’t innovate when confronted with chip bans, sanctions, and technology blocks.

Rather than “shock and awe,” the bans and blocks are unsuccessful and self-injurious. They galvanized China’s AI programs while costing US companies billions in lost revenue, narrowing the US’s technological lead.

The only way for the US to succeed is through competition and a national AI strategy.

The ITIF has a four-part solution to out-competing China, which I fully support on page 23.

This is a big problem, and sadly, elections in November will likely not change the policy as neither side dares be seen as "soft on China."

Thoughts?

Bottom Line: 80% Of AI Projects Fail. But is That Bad?

Why the high failure rate isn't what you think.

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This fabulous read strives to find the “root causes of failure” for AI projects and surveys 65 AI/ML experts to find out what’s going wrong!

The results show a staggering reality: AI projects have an estimated 80% failure rate, twice that of IT projects overall!

The problem with this comparison is that AI projects cannot be equated to typical IT projects.

AI projects are better classified as innovation projects because they strive to use new technology to do things that have never been done before. You can’t compare this with updating servers!

With innovation, project failure rates of 80% are the norm! That’s why the 80% figure doesn’t bother me in the least!

My first book, “Innovation Lab Excellence,” focused on how to make innovation projects work, and many of the solutions for innovation problems are the same as with AI. Read how below.

👉TAKEAWAYS

Five leading root causes of the failure of AI projects

1️⃣ Industry stakeholders often misunderstand — or miscommunicate — what problem needs to be solved using AI.

2️⃣ The organization lacks the necessary data to train an effective AI model adequately.

3️⃣ The organization focuses more on using the latest and greatest technology than on solving real problems for their intended users.

4️⃣ Organizations might not have adequate infrastructure to manage their data and deploy completed AI models, which increases the likelihood of project failure.

5️⃣ AI projects fail because the technology is applied to problems that are too difficult for AI to solve.

👊STRAIGHT TALK👊

Now, to prove that AI projects are, in fact, Innovation projects in disguise, I want to use my book “Innovation Lab Excellence.”

The diagram in the comments below shows my “innovation best practices,” and I will show how these best practices map almost perfectly onto the report’s recommendations for successful AI projects!

➤Industry leaders should ensure that technical staff understand the project purpose and domain context.

🔹Best Practice: “No Carte Blanche” meaning the project must be focused.

➤Industry leaders should choose enduring problems: AI projects require time and patience to complete.

🔹Best Practice: Transform, not Disrupt Innovators should focus on incremental betterment, not a sudden disruption.

➤Industry leaders should focus on the problem, not the technology: Successful projects are laser-focused on the problem to be solved, not the technology used to solve it.

🔹Best Practice: Focus on People. The technology is secondary to how people use the technology!

Thoughts?

Embedded Finance's Remarkable Revenue Boom For US Banks

Banks were reluctant to embed, but those who did are now reaping the rewards.

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Embedded finance is a money maker and sponsor US banks are raking in some 51% of revenue and deposits from their embedded partnerships.

Alloy Labs presents shocking numbers about how much money embedded finance is making for sponsoring banks in a survey that raised my eyebrows and will most definitely raise yours.

Of course, making money with embedded finance isn’t without peril. Compliance isn’t as easy as banks thought, with 75% of banks losing over $100k to compliance violations!

Who’d have guessed that fintechs would be lax in compliance? So, it’s no wonder 80% of respondents report that meeting embedded finance compliance requirements is challenging!

The numbers are impressive, particularly as banks were reluctant to start embedding their services.

👉TAKEAWAYS

🔹 51% of sponsor banks’ revenue and deposits, on average, are driven by embedded finance partnerships

🔹 80% agree that meeting sponsor bank compliance requirements is challenging

🔹 🔥39% of sponsor banks lost at least $250K to compliance violations in their embedded finance partnerships🔥

🔹 92% of sponsor banks believe that there is a need for more adaptable embedded finance partnerships between banks and fintechs

🔹 Sponsor banks top motivators for embedded finance partnerships: 41% Innovation and acceleration, 39% Customer acquisition, 37% Cost reduction and efficiency

🔹 Most sponsor banks report 6 to 10 embedded finance partnerships

🔹 88% of sponsor banks agree that recent regulatory scrutiny has turned up the heat on embedded finance partnerships

👊STRAIGHT TALK👊

Embedded finance partnerships work and offer banks who use them a way to increase deposits without increasing customer acquisition costs.

The idea that fintech partners can handle customer acquisition for them is compelling.

That said, the compliance part of this relationship is fraught with danger, and the reality is that fintechs will often do “whatever it takes” to bring in the money regardless of compliance.

This leaves banks increasingly clamping down on fintech and, in the most severe model, actually controlling their fintech partners' risk management processes and handling compliance themselves.

Can you blame them? What is interesting is that embedded finance isn’t just about deposit growth. Banks can also engage in fee-based partnership models, showing how they have more than one way to monetize fintech partnerships.

It’s good to see that fintech works!

Thoughts?

CBDCs: Breaking Free from Bank's Hypnotic Spell and Stockholm Syndrome

Our money transfer system is broken though banks will never admit it.

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This is a great overview of the state of CBDCs, including a solid overview of the digital yuan, rupee, and euro programs, notwithstanding the unenthusiastic title.

Opponents of CBDC love to state that CBDCs are a “solution looking for a problem.”

This opinion doesn’t surprise me, and my retort is to say that most of those who say this suffer from “Stockholm Syndrome,” where they empathize and support their captors.

That’s why, unsurprisingly, many CBDC opponents come from within or around the banking industry. They’ve developed a good relationship with their captor and can’t give it up!

So, I ask fair-minded readers one simple question:

👉Does the US paying banks 2.3% of its GDP in payment fees and the EU 1.4% represent a real and significant problem to solve?👈

The answer is clear: society could do much more with these countless billions than hand them to banks.

So why are the report authors under banks' hypnotic trance and can’t see the problem? Is it Stockholm syndrome?

👉TAKEAWAYS

CBDC Value Proposition For Banks

🔹 Enhancing interbank payments:

CBDCs can streamline the underlying processes and scale the effectiveness of interbank payments.

🔹 Facilitating cross-border payments:

Enabling direct, secure, and cost-effective transfers between different currencies.

🔹 Supporting secondary markets for government securities:

Offering real-time settlements, increasing market efficiency and reducing counterparty risks.

👊STRAIGHT TALK👊

The concept that CBDCs are a “solution looking for a problem” shows an incredibly callous attitude to the billions paid to banks in payment fees.

And for those who say cards are good enough, card fees are roughly 1.1% of US GDP and .6% of the EUs! Let that sink in.

Card fees represent a direct tax on all citizens as merchants increase their prices to offset the cost of merchant fees whether you use a card or not.

Stockholm syndrome has some rather distinct signs many of which seem to fit within our relationship with banks:

-Feel emotionally connected to bank credit cards.

-Share the bank’s values when they tell us that the fees are low.

-Refuse to escape a hostile situation.

-Refuse to convict the abusing bank.

Those who state that CBDCs are searching for a problem seem unable to acknowledge and confront banks for their outsized costs to society.

The next time you listen to an anti-CBDC argument, look for Stockholm Syndrome.

Thoughts?

Stablecoins: Separating Facts From Hype, and Dirty Money

I like stablecoins, but not their dark side.

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Stablecoins to the rescue with new economic efficiency? Don’t count on it.

This report is a great read, but I warn you that it has a mix of great research, hype, and hopium. I’ll do my best to separate them out below!

First, kudos to the report for adjusting stablecoin volumes. The big $7 tn volume number touted by many is misleading, and I credit the report for adjusting it down to $2.5 tn.

However, this paper's most egregious omission is that it ignores stablecoins’ dark side, their role in organized crime.

This omission is despite reports by the UN that Tether on the Tron network is rife with use by pig butchering scams, drug dealing, and illegal gambling.

👉TAKEAWAYS, DEBUNKING, AND STRAIGHT TALK ALL IN ONE

🔹Stablecoins' adjusted volume of $2.5 tn is significant in the context of other major payment networks.

✅ I agree! I credit stablecoins for helping transform payments, and the numbers, while likely still inflated, are significant.

🔹Mitigating the costs of currency volatility: Residents inTurkey, Thailand, and Brazil frequently use stablecoins to preserve their savings when the local currency loses value.”

❌ True, but the report ignores that capital flight largely through illegal stablecoin transfers puts further downward pressure on fragile economies. They also create further financial inequality as the rich, using USD stablecoins, abandon the poor.

🔹Bridging the dollar gap: As a digital substitute for the US dollar, stablecoins fulfil global demand for a stable currency with limited access.

❌ Pushing dollarization when the Global South is doing everything possible to dedollarize is absurd! Developing economies strive to dedollarize because converting weak currencies to USD is far more expensive than trading in local currencies.

🔹Releasing capital trapped in payment systems: At any given moment, $11.6 billion of working capital is trapped in nostro-vostro accounts.

❌ Stablecoins have a lot of competition in this sector! Banks are well aware of this, with JP Morgan and Citibank already using internal stablecoins to solve it! Banks and central banks are also working on tokenized deposits and CBDCs. Who needs stablecoins for this?

🔹The stablecoin premium: Businesses and consumers in 17 emerging markets studied pay an average premium of 4.7% for access to stablecoins.

❌ Paying a premium of 4.7% to buy a USD stablecoin is a very bad deal. How is this efficient? Why should developing nations pay billions to access dollar instruments? How is this a good deal for them? What am I missing?

Thoughts?

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