FinTech Ecosystem Insights by Bussmann Advisory is our weekly newsletter, summarizing relevant news and reports related to ecosystems around disruptive technologies, highlighting key updates from the industry as well as our portfolio companies:
The latest edition of the FinTech Ecosystem Newsletter is here:
This blog post first appeared in Financial News.
There should be no doubt by now that initial coin offerings – token sale fundraisings by startups – have established themselves as new and very compelling forms of capital raising.
Startups, primarily in the blockchain world, raised $4.6bn in various forms of token launches in 2017, a quantum leap from the $0.2 billion raised the year before. While this may not seem like much compared to the $188.8bn raised in traditional IPOs in 2017, five of the largest ICOs in history took place in October and November so there is clearly strong momentum.
This has begun to disrupt above all the traditional venture capital model by providing a compelling alternative fundraising mechanism for startups. An ICO lets a startup take its idea directly to investors for near-instant validation through the crowd, and relieves founders of the often significant time commitment needed to pursue fundraising through traditional means. This in turn gives them more time for their real job: innovation. With a successful ICO, startups can also potentially meet all their capital needs in a single raise rather than needing to constantly raise fresh venture funding.
So it is no surprise people are beginning to ask if ICOs will make venture capital obsolete. I think the new model will almost certainly disrupt the way VC firms do business. But it won‘t mean the end for them.
VC firms still offer founders a lot. Their participation in a project is a strong validation of the idea and they can offer valuable advice in terms of refining concepts and developing business plans. While a single, all-encompassing funding round through an ICO can be tempting, windfalls can lead to excesses. Venture capitalists, which traditionally provide funding in series of smaller rounds, can help ensure founders remain prudent spenders and push them to meet deadlines and achieve milestones.
There are also parts of the ICO market that need to mature before it can attempt to replace venture capital.
The biggest area that requires attention remains regulatory uncertainty. While regulators around the world have generally been attentive to the rise of ICOs, and have worked hard to understand them, there are still a number of thorny legal and regulatory issues to be addressed. There is disparity between jurisdictions and most countries have yet to address cryptocurrency tax questions in a meaningful way.
ICOs also continue to face a serious threat that traditional forms of fundraising do not: that of hacking. We have seen money stolen from token launches through fraud, for example through phishing schemes or fake websites, as well as security flaws in cryptocurrency wallets. If the ICO community cannot address such cyber security issues, it will have a hard time catching on with mainstream investors.
None of which is to say ICOs will be unable to deal with these issues. Various initiatives are underway to improve regulation, security and investor protection.
These include efforts by the industry to regulate itself, for example through codes of conduct like the one we recently developed at the Crypto Valley Association. Increased focus on cyber security is likely to see more structures designed to protect investors, such as lock-up periods forcing investors to more carefully evaluate projects and discouraging ‘pump-and-dump’ schemes, and pre-registration requirements.
In the future we are likely to see more structured funding rounds as well, with caps, increased transparency regarding the need for funds, and innovative ways to govern the use of funds – from voting by investors to smart contracts to ensure that pre-agreed capital expenditure plans are adhered to.
But for the time being, although ICOs are clearly a disruptive development in the world of startup funding, they do not stand to replace traditional venture funding – certainly not yet.
And even as the ICO industry matures there is every reason to think venture capital will remain an important part of the startup process. Venture capitalists could work alongside ICOs by providing funding and advice to refine an idea and develop a business plan before attempting a public funding round.
In fact, combining the benefits of both VC funding and ICOs may turn out to be the best choice for venture capitalists, founders and the broader investor community alike.
For startups, it means access to important expertise at perhaps the most critical moment for the whole venture: its inception. And for VC firms it means still having the chance of getting in early on projects, either with an equity share, early participation in the eventual ICO, or both.
Oliver Bussmann is founder and managing partner of Bussmann Advisory; ex-chief information officer at UBS and SAP; and President of Crypto Valley Association, a Swiss blockchain network.
This blog post first appeared in Coindesk.
2017 was a year of tremendous growth for blockchain, though not in the expected ways.
At the beginning of this year, I and others predicted that 2017 would be the year that blockchain moved from proof-of-concepts into production. We did see some notable successes in this regard.
Ripple became a fully operational platform with over 100 members and payment volumes in the billions, and industries began to form blockchain business networks, for example, the Digital Trade Chain consortium (DTC) in trade finance.
But overall, I expected to see more “go lives” than we did. On the other hand, I don’t think anyone expected the unprecedented growth in the market capitalization of cryptocurrencies or the related ICO boom.
So, what will the new year bring? Despite the obvious perils in making predictions, I feel confident that, among other things, we will see the following:
Now, let’s unpack the details.
Although it was quieter than expected this year, I believe we will continue to see blockchain solutions come into production as enterprises address the “low-hanging fruit” by digitizing businesses and use cases where blockchain can make the most impact.
In fintech, the two most promising use cases remain payments (where there are $50–60 billion of potential savings to be had) and trade finance (which stands to save some $15 billion).
As we saw payments do in 2017, I expect we will see trade finance begin to go live on blockchain in 2018. In payments, momentum will pick up and volumes will increase as larger banks, including correspondent banks, get into the act. These players will be tempted by the advantages blockchain brings in terms of real-time processing, lower risk profiles, lower costs and transparency.
Blockchain can serve as a stick as well as a carrot, simply by proving that there are better alternatives to the status quo in many industries. We can imagine, as an example, that blockchain has had a hand to play in the European Banking Authority’s EU-wide transparency exercises.
We were all somewhat surprised – if pleasantly so – by how well cryptocurrencies did in 2017 as a speculative asset. Indeed, growth was spectacular, with the asset class rising from $14 billion in December 2016 to over $450 billion in December 2017 in terms of market capitalization.
I think this growth will continue to be fueled by traditional asset management approaches, including bitcoin futures, crypto hedge funds and the like, all of which will increase the demand for cryptocurrencies and tokens.
As blockchain continues to change market structures, companies will increasingly focus on changing business models.
In a world where middlemen are becoming obsolete, companies will have to learn to stop thinking in silos and be more open to becoming partners in ecosystems or on broader platforms. That, in turn, means deciding what kinds of business models they want – whether it’s platform plays, product plays, omni-channel strategies, and so on.
These discussions will become multi-dimensional, encompassing both existing services and, increasingly, the new kinds of services that blockchain enables – particularly as blockchain combines with IoT and AI to create new kinds of marketplaces where industry silos come down in favor of broad, horizontal structures.
One of the most satisfying parts of 2017 for me was being able to see this start to happen close-hand among some of the companies I have the privilege to work with. (See disclosures below.)
Deon Digital has partnered with Mercedes Benz to develop a new operating system that will help break down silos in the mobility space. Skycell is a good example of IoT and blockchain opening up the pharmaceutical supply chain to embrace payments, invoicing and insurance. TEND is rethinking investment management by creating a Sharing Economy 2.0 for high-value assets.
One space I think we should keep a particular eye on in 2018 is the fund industry, where firms like Melonport are using blockchain to rethink asset management. I think we will see more of this, and that the fund industry will start to be significantly disrupted next year.
This will start with the management of crypto assets, but over time we will see traditional assets increasingly being tokenized, migrated onto blockchains and managed on-chain.
With startups raising over $3.5 billion in ICOs, 2017 was clearly the year of the token launch.
To me, though, the ICO boom is significant, not necessarily because of the amounts raised, but because we are seeing the beginnings of the democratization of venture capital. And though the concept had a great 2017, change will come to the world of ICOs in 2018 as more traditional players get involved.
Over the next 12-18 months, I expect people with experience and expertise in the IPO world will embrace tokenization as a technical platform, and the whole business will be professionalized, with book building, pricing, startup evaluation and so on happening more along traditional lines.
As we’ve already begun to see, it will be harder to get funding simply on the back of a white paper. Investors will demand sound business plans and high levels of transparency, with all that entails.
One of the key challenges of existing blockchain technology is scale and performance. I predict that next year we will see alternatives to current blockchain technologies that will be more scalable, faster and minimize energy consumption.
IOTA, which has gained a lot of traction lately, is, I think, a project to watch in this regard.
I also believe people will increasingly find that local blockchain ecosystems, where critical services are co-located in one geographical area, are critical success factors for blockchain projects.
This is certainly what we see in the “Crypto Valley” in Switzerland. As the President of the Crypto Valley Association, I hope readers will forgive me for predicting – or at the least, pitching for – the continued success of Switzerland as a blockchain ecosystem.
Crypto Valley has a high concentration of all the services blockchain projects will need to raise money and set up shop, including legal, advisory, tax, accounting, smart contract platforms, KYC/AML utilities and marketing expertise.
This coupled with Switzerland’s other advantages, from its state-of-the-art infrastructure to its highly skilled workforce, will, in my opinion, mean it should remain a great draw for blockchain companies – in the new year and hopefully for many years to come.
Disclosure: Oliver Bussmann is a strategic advisor to IOTA, Deon Digital and Tend, mentioned in this article.
These days I speak and write quite a lot about my conviction that, thanks to blockchain and other emerging technologies, businesses will increasingly move to decentralized models. These new models will be based on large-scale, public platforms that will enable greater integration of value chains, blurring silos between industries and replacing business verticals with horizontal, cross-industry ecosystems.
In my work as an advisor I have the privilege not only of exploring such concepts and sharing ideas with other thought leaders, but also of working with people who are starting to put these ideas into practice.
The TEND project, which I advise, is one of these I think worth noting.
TEND’s vision is to use blockchain and smart contracts to enable people to explore their passions co-investment and co-enjoyment of high-value, meaningful assets – like art, classic cars, luxury watches, fine wine – while offering them a chance to earn a financial return.
I believe it serves as an excellent early example of how the new blockchain-based ecosystems will likely look, as well as illustrative of the kinds of new business models that blockchain-based platforms will make possible.
Here’s why.
As mentioned, the core function of TEND is to provide a platform for users to co-own, enjoy and trade high-value assets. Blockchain and smart contracts allow TEND to do this in a highly efficient, digital way.
These technologies, for instance, make it easy to create co-ownership arrangements tailored to the specific asset and experience in question, and to store these agreements on a decentralized, independently verifiable and tamper-proof public ledger.
As a result, TEND users have full transparency on the terms of their agreements and, more importantly – since smart contracts are self-executing computer code – can be sure that they will be carried out as written. That makes the platform both highly efficient and trustworthy.
Blockchain also gives TEND users a high degree of confidence in the assets themselves. Vetted and verified when they are onboarded, all pertinent information about each asset is indelibly recorded on the public ledger and constantly updated.
That means TEND users can view, and trust, the entire asset history up to the present moment. This level of transparency and trust is particularly important for high-value assets like the ones on TEND, but is hard to achieve in non-blockchain settings.
Blockchain’s trust-creating properties also provide peace of mind on a platform level. Because all transactions are immutably recorded on the blockchain, users can have complete trust in the transaction history. Because they can be sure this data cannot be manipulated in any way, users and partners can place the same faith in the TEND platform as a whole – despite it being a completely new business. This too is important in a platform dealing with high-value assets.
Finally, by running on Ethereum, TEND leverages an already existing, robust market infrastructure. That makes it extremely efficient to run, and hence very cost-effective for users. Ethereum makes TEND highly scalable as well, supporting its longer-term ambition of building a global platform.
TEND is predicated on the belief, which I share, that the blockchain has a crucial role to play in helping to create a hyper-connected, decentralized, and transparent world.
In the case of TEND, these qualities are being used to enable what we might call the Sharing Economy 2.0: a token-based economy with no intermediaries in which technology helps to democratize, in a secure and trustworthy fashion, access to assets and financial solutions that before were available only to the wealthiest few.
This is a different world in many respects.
In the Sharing Economy 1.0 we have today, the platforms in the middle still take the largest slice of the pie. In the new sharing economy, blockchain and smart contracts eliminate these middlemen by enabling direct one-to-one relationships between the parties of a transaction. That allows the participants to capture most if not all of the value created by their arrangement.
In this new sharing economy tokenization also makes it easier, and provides new incentives, for parties to work together directly. That drives adoption of these platforms, making them broader and ever more useful.
In a blockchain-based platform users enjoy a balance of privacy and connectivity that is not available in the centralized systems we have today. That’s because blockchains can give users complete control over their data, allowing them to share only the information they deem necessary and to control its use. That’s an extremely strong value proposition that will lead to new, and more powerful, kinds of network effects.
It may have been possible to integrate investment, experience, risk mitigation and the various stakeholders in a single platform like TEND before blockchain, but it certainly would not have been as easy or quick – or, for that matter, as secure.
I am convinced that such ecosystems are the wave of the future, and that projects like TEND can serve as an excellent indication of how that future may look. Please note that I am a Strategic Advisor to Tend Technologies.
By Falk Rieker and Oliver Bussmann
In a previous post we pointed out that corporate banks were in danger of falling behind the technology curve. We also said that banks needed to respond through full-scale digitalization.
In this post we’d like to take a deeper look at the principles we think should guide this transformation.
We strongly believe the future will be one of platforms and ecosystems in which large networks of providers contribute to the collective value chain. Banks, however, have traditionally taken the opposite approach, serving most if not all of their value chain themselves.
This will not be sustainable in the coming world of regulatory mandated open banking, nor in a technology environment where banks but also third-party providers and clients can already easily consume financial services on broad-based platforms (think SAP Cloud, AWS, Google Cloud or Microsoft Azure).
We’ve seen other industries, like manufacturing, successfully implement multi-provider value chains. We think banks must focus on putting the infrastructure in place to build such value chains in financial services too – for example, by taking advantage of the burgeoning third-party Fintech offering.
In doing so, they must be careful to position themselves as platform owners. This is very important. Today banks own the customer relationship. If they don’t take the initiative to secure their place as the central players in the new ecosystems, they run the risk of losing that ownership, which would be disastrous.
One way we think banks can keep customers close is by extending their offering.
This can be within financial services, for example by providing insurance, accounting and tax services, or data analytics. Or, it can be by moving beyond financial services: banks offering supply chain finance, for example, could collaborate with partners to offer warehousing and logistics support too.
In this way banks can become a one-stop shop for corporate clients in the same way platforms like Amazon have become for consumers. This may sound farfetched. But with today’s technology, it is hardly impossible. We see no reason why banks shouldn’t explore broadening their business model beyond traditional banking.
The good news is, when it comes to building such ecosystems, incumbent banks have a significant advantage: their reams of customer data. To capitalize they will need to up their game when it comes to exploiting it for useful insight.
We have often asked ourselves why it is that in the enterprise world we can’t ask a question and get an immediate answer the same way we do every day in our private lives with Google?
The secret is being proactive – and predictive. Companies like Facebook and Google don’t just have data on their customers; they have real-time intelligence on what they are asking about. This lets them provide answers more quickly and precisely, and keeps them on the pulse of user needs. Banks must develop the capabilities to do the same.
All of this calls for relentless innovation. Banks must digitalize, build the open infrastructures we have alluded to above, and master the new technologies like blockchain, machine learning, and artificial intelligence that will allow them to put the pieces together into a meaningful whole.
The need is all the more urgent considering that many other industries have already completed this process.
As a result, not only will corporate customers increasingly ask for the type of real-time, on-demand banking services that retail customers receive – they will also have the systems in place to consume them. Those banks that can meet this demand, for example by integrating their offerings directly into their customers’ ERP systems, will have a distinct advantage.
Last but not least, banks must be able to adjust to new business models as market dynamics change.
Take the sharing economy. In the past, people bought their own cars, motorbikes or boats. In the future, people will prefer not to own but to pay per use. We will see similar developments in the enterprise.
Banks as service providers could do well in such a world, but they will need things like advanced analytics to predict usage patterns and so be ready with the right products at the right time.
By mastering platform and ecosystem thinking, we think banks will be able to maintain their positions and even grow their businesses.
For its part, SAP has already reacted to these realities – building both an infrastructure layer (the SAP Cloud Platform) and a digital innovation system, (SAP Leonardo), both of which provide the foundations upon which to grow ecosystems.
We are convinced that the future belongs to platforms and network-based ecosystems. If they can seize the day, corporate banks have an opportunity to play a leading role in them.
If you are interested in learning more about the future of corporate banking, please join the discuss and meet Oliver Bussmann and Falk Rieker at the Sibos in Toronto on October 16th.
Bussmann Advisory helps C-suite executives, entrepreneurs and decision makers stay ahead of the digital disruption curve. With a client base covering top-tier banks, leading blockchain startups, global consultancies and other firms facing disruption, as well as strong connections in the global FinTech community, the Bussmann Advisory team is close to the pulse of the rapid changes facing industry. It provides thought leadership and advisory services above all in digital transformation, innovation orchestration, and business model re-creation.
By Falk Rieker and Oliver Bussmann
A great wave of change has been breaking over the financial services industry for some time now. When it finally recedes, we can expect a fundamentally transformed market infrastructure to be left behind in its wake.
Driven by unprecedented speed and adoption of new technologies and business models, and accelerated by game-changing regulatory directives like PSD2 and GDPR, this new world of banking will be one of open architectures and broad, integrated ecosystems.
Banks need to act now to be ready for these changes, or risk being caught in the swell. Unfortunately, while some areas of banking are adjusting, others have not been keeping pace with the new currents of digital transformation.
This is certainly the case with corporate banking.
Many corporate banks are saddled with outdated legacy technology that is expensive to maintain, limiting what they can offer. Services tend to be splintered across multiple channels, making for a disjointed customer experience. Wildly different technologies and formats stand in the way of convenience and interoperability.
Under these conditions, it is understandable if corporate banking clients feel underserved, especially compared with what is available in other industries – or even in retail banking.
This is bad for the clients. It is also dangerous for the banks.
We see two main areas of concern.
To avoid this fate, we strongly believe corporate banks must pursue full-scale digital transformation.
Among other things, we believe they should:
This brave new world will open any number of possibilities for those banks that can adapt.
In a world of trillions of nanosecond micropayments and smart contracts, we think banks will increasingly be seen as trusted providers and fraud risk managers, for instance. This could generate new service opportunities and revenue streams, particularly for banks that have developed industry-specific capabilities.
We think digitalization will also allow banks to move from a one-to-one model based on traditional products to a one-to-many approach featuring new digital products and services. That’s good for clients but also banks – as many of these new digital services can be offered at scale while still being easily customized.
There are a host of other possibilities we might name.
While corporate banks may have been hiding their heads in the sand up to now, we think they can no longer avoid the wave of digital disruption.
Those that dive into the water now should be able to ride this wave to new heights. Those that don’t may very well sink.
Attending the Sibos conference in Toronto? Join Falk and Oliver for a discussion on the Next Generation of Corporate Banking on Monday, October 16 @11:30 AM
Bussmann Advisory helps C-suite executives and decision makers in global enterprises stay ahead of the digital disruption curve. With a client base covering top-tier banks, global consultancies and other firms facing disruption, as well as strong connections in the global Fintech community, the Bussmann Advisory team is close to the pulse of the rapid changes facing industry. It provides thought leadership and advisory services above all in digital transformation, innovation orchestration, and business model re-creation.