Why Exchanges Like Binance Fail Institutional Crypto; Facebook's Propaganda Failure is Feature, not Bug; Next Gen Blockchains -- via Autonomous ↻NEXT

Hi fellow futurists -- here are our top 3 favorite thoughts. 

Institutional Crypto Trading & Custody vs Binance

Autonomous hosted 3 panel sessions with experts from the crypto world in London last week (Alex Baitlin of Trustology, Kevin Beardsley of B2C2, David Siegel of Pillar Project, John Pfeffer, and Alexander Shelkovnikov of Semantic Ventures). We talked about the development of infrastructure surrounding crypto, the institutionalization of ICOs, and approaches to valuation. Two key developments are needed for traditional finance and the crypto economy to meet -- and get us out of a place where the only tradeable product is a derivative settled in cash.

First, custody of traditional financial instruments is not the same as the custody of crypto - controlling someone's key to access a digital asset is fundamentally different from keeping books and records of stock ownership. Hot wallets (online storage) expose your private key to hacking, and cold wallets (printed note) expose it to the elements (weather, xrays etc.) where the wallet is based. Multisig solutions, where 2 or more sets of keys are required to sign transactions -- one owned by you and one by the service which operates the custody -- are an effective means to ensure custody security but are hard to operationalize. A crypto-custody smart account may match private banks on bespoke features when built. But it could take the large custodians (BNY Mellon, State Street) several years to get through a budget cycle, get a product planned, and put software in place. While this happens, firms like BitGo and Xapo have an open field.

The second layer that's needed for capital markets is effective institutional exchanges. Today's exchanges are lightly regulated, have no best-execution requirement, have widely different liquidity, and offer different prices. OTC brokers like B2C2 and Genesis have been building out software and capital solutions in the space, but we are still early. Decentralized exchanges, like Republic Protocol raising $34MM, are a potential solution in the future, but that infrastructure is not here yet either. A good example of the current state of play is Binance, which is getting chased out of Japan by regulators, and is now headed to Malta.

Binance has grown incredibly quickly (rumored to be running at an MRR of $10-100 million) to be one of the top retail crypto exchanges world-wide for several reasons. First is the rush into altcoins out of the large cap cryptocurrencies -- with retail investors chasing 100x returns, while the beta of the crypto space drags everything else down. You can imagine regulators being least comfortable with these types of assets. Second, Binance has a referral program that rewards people in a percentage of commissions from anyone they refer into the exchange. By paying users commissions on referred trading, they are essentially turning all their clients into unlicensed brokers of potential securities. 

And last, the Binance Coin ICO tokenized a coupon token that discounts trading on the Binance platform, a token with a market cap all-time-high of $2 billion. The company also promised buy-backs (burning) in order to influence the price. Mature companies do plenty of financial engineering through share buy-backs, but it is a highly sensitive and regulated area of the capital markets to avoid market manipulation and insider trading. So it feels like we are still 6-18 months away from an institutional chassis. The question is -- does that matter, and for whom?

Source: Coinhills, Xapo Custody

Facebook's Propaganda Failure is a Feature, not a Bug 

The best thing we've seen on Zuckerberg and Cambridge Analytica is this piece on Slate by Will Oremus. Cambridge Analytica and data scientist Alex Kogan did pull lots of Facebook data out the system and create "psychographic" profiles of users. This means that advertising could be targeted towards particular belief groups, surrounding them with different messages that would lead to behavior change at the margin. This is mass customized propaganda, and it had real impact on the 2016 elections.

But the real takeaways are that (1) Cambridge Analytica wasn't actually that good at its job nd was really pretending its software worked, (2) Facebook has always been in the business of monetizing user data, from Farmville to Tinder, and (3) Facebook's current third party data sharing policies no longer allow companies like Cambridge Analytica to grab the data to do AI-based advertising, because Facebook does the work of mass-targeting itself. There's no need for a malicious third party -- just use the native Facebook tools.

This is what happens when we put no value on human data and put it up for rent. Machines can use that data to manufacture preferences and behaviors at scale. This is not a surprise or a malfunction -- quantitative advertising technology has been a massive venture investment sector for years, seeing $3 billion in funding in 2011. Since then, GAFA has swallowed up the market. And the technology of this sector, in particular artificial intelligence for profiling customers through unstructured information, has spread everywhere, including financial services. See for example the $30 million investment into Digital Reasoning by BNP Paribas, Barclays, Goldman Sachs, with prior investors being Square Capital Nasdaq and others. The product processes audio, text and voice data overlayed on top of internal communications to prevent fraud or add customer insights.

What symptoms like this mean in the long run is that we don't even need a Facebook data leak to be trapped in the AI bubble. Our interactions with each other are now nearly all digital, which means they can be used to impute a personality and a profile that we may not have ever shared. And AI hooks live everywhere -- from media, to finance, to commerce. Mass customization of our products and information is inevitable, and Facebook is not special in empowering this trend. Rather, we need a new literacy to live in an AI-first world.

Source: TechCrunch & Kleiner Perkins, WSJ & Pitchbook, Facebook

Next Generation Blockchains - Interoperability, DAGs and the Enterprise.

How many developer hours are being spent on building the next generation Bitcoin or Ethereum? We attended an event held by Novum Insights, where Rajesh Gopi of Wanchain, Bob McDonall of Cardano, Gilbert Verdian of Quant Network , and Jeremy Miller of Consensys discussed what such a next generation can look like. The core of the discussion centered around (1) blockchain interoperability and (2) scalability. It's a fairly widely held view that we will have many functional blockchains running optimized use case software for their relevant industry, and so moving tokens and messages between these paradigms and doing so reasonably quickly is important.

Cardano is focusing on building regulation and standards into the architecture itself, and has been rewarded with a $5 billion market cap for its token despite not yet having launched a public product. Wanchain is a finance-focused inter-chain layer that has privacy as a feature. And Quant Network is working on Overledger, an infrastructure for cross-chain smart contracts. Of course, there are others in this space -- from Aion, to Cosmos to Polkadot. This brings us back to the concept of decentralized exchanges, and the idea of atomic swaps, which would allow tokens to move across chains. Consensys believes that these are all solvable challenges, and that the Ethereum community is well beyond the white board stage in building these features -- implying we don't need any new blockchains to do these things, because the largest smart contracts platform in the world will have them soon enough.

We could go even further into science fiction to say that next generation blockchains will instead be Decentralized Acrylic Graphs, like IOTA's Tangle (a controversial history) or the HashGraph (just raised $18 million), or something like the block-lattice from Raiblocks. For these to be successful, not only does the underlying technology have to work in a general sense, but there must be network adoption by both users and developers. We're certainly not there yet. Or we could down to Earth, closer to centralization, tech incumbents and sovereigns. For example, Google is looking at leveraging its cloud for a proprietary blockchain, Nobel-winner Myron Scholes (of Black-Sholes) is working on a version of a stable coin resembling the central bank logic of adjusting token supply based on economic activity, and JP Morgan is exploring spinning out its enterprise blockchain, Quorum.

Quorum was built for financial services (and integrated into Ethereum) with an eye towards the ability to know your trading counterparty and avoid AML issues. This makes it one of several potential options that have come out of enterprise blockchain efforts and industry consortia -- from Digital Asset's solution for ASX, to IBM Fabric deployed out of Hyperledger, to R3's Corda. While Quorum is custom tailored to financial companies, competitors have been slow to adopt it because it is owned JPM. Generally speaking, blockchains are meant to be open-sourced code shared by a community, and proprietary solutions built to take economic rents are very unlikely to be adopted. Thus building out a patent library for blockchain IP (hey there, BofA) seems like the wrong direction of travel.

So that clears it all up, right? Just holding Bitcoin while this fight takes over the next decade seems like a reasonable idea.

And in conclusion:

Source: CoinCentral and @n1clker; Wanchain, Cosmos, Start Trek Deep Space Nine

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