2nd Annual FinTech Symposium: A Look into the Future

November 5, 2018

Can Crypto be an Asset Class?  The Evolving Role of the Finance Function

Meltem Demirors, Chief Strategy Officer of Coinshares gave a presentation on the cryptocurrency (“crypto”) industry, the dynamics of cryptocurrency as a new asset class, and crypto’s impacts on financial services.

Cryptocurrencies are a new and disruptive asset class that has grown exponentially over the past few years.  Adoption of Bitcoin and cryptocurrencies is a result of general mistrust of established financial institutions since the financial crisis, and the oncoming generational wealth transfer, to more women and millennials whom possess different investment preferences.  Additionally, investors are seeking new sources of potential growth, as numerous asset classes appear overvalued.  The primary featues of cryptocurrencies include the liquidity, exchangeability, and efficiency for exchange.  Crypto has been adopted by many small investors across the world who haven’t been as involved with traditional investments.

Price volatility in cryptocurrencies has certainly been very high, but in recent months, crypto volatility has been more in line with equities volatility.  Trading volume in cryptocurrencies is dependent on capital raising interest and news on developments and regulations, so activity is mostly dictated by speculative trading.  Crypto currently remains uncorrelated with most asset classes, but as this market matures, positive and negative correlations should emerge.

Initial Coin Offerings (“ICOS”) were introduced a few years ago as an alternative to venture funding for crypto software developers and rapidly gained attention as a source of quick, liquid investment funds.  Although ICOs can accelerate the capital formation process, the coins do not possess the rights or obligations features available from equity and debt.  Although some private equity and hedge funds were involved, retail investors drove the majority of ICO proceeds and they likely did not perform significant due diligence on the crypto project teams, which proved to be disastrous in 2018 as many of these projects failed and faced legal actions.  ICOs still have potential as an asset class but investors and startups will have to see how regulations form the future of this fundraising process.

Most of the cryptocurrency networks and companies are only a few years old and the industry’s infrastructure is undefined, as project teams mostly consist of programmers and developers. Positions for traditional roles within finance, accounting, compliance, and risk management departments should start to appear as the industry evolves.  Financial professionals from both the sell-side and buy-side can be involved in the crypto industry, by using existing financial principles to build new models, evolve traditional theories into practice, and expand the investor community.  A mix of cryptocurrency firms, fintech startups, and legacy institutions are currently finding small ways to be involved, including Square developing a bitcoin exchange, CME Group providing bitcoin futures, and Fidelity providing a digital asset custody service.

The Innovators Panel for the evening included Danielle Kuchniskas, CFA, Accenture Banking and Capital Markets Strategy, Alessia Falsarone, FSA, Managing Director, Pine Bridge Investments, Katya Chupryna, Chief Strategy Officer, Thinknum and Beartrice O’Carroll, Head of Institutional Sales, Circle as panelists and Mee Warren, CFA, CAIA as a moderator.  The themes discussed included the following:

  • Investment professionals will eventually converge towards a “quantamental” style of investing, given the importance of data science and analysis skills. Although data science has become necessary for many industries, quantitative investment professionals already implement extensive data analysis models to identify patterns for alpha opportunities.  Data scientists should still be additive for small and large firms as resources for investment and strategy teams.
  • Traditional asset managers are likely to be slower in integrating data scientists into their investment processes as current hiring trends focus on tenure and security selection experience. Most data scientists are relatively young and work in technology and consumer firms, so their domain expertise is limited.  These investment firms will need to develop long-term development goals and formulate new businesses processes before hiring these data science professionals.
  • The skillsets of current investment professionals don’t match the analysis skills for unstructured datasets. Unstructured alternative data that occurs in-between earnings releases is very valuable. A large challenge will be to develop data processes to analyze unstructured and increasingly large datasets, as sources are maintained differently from traditional market information and will take time to integrate properly.
  • Automated investment advice, using Artificial Intelligence (“AI”), is enabling financial advisors to scale their customized solutions, provide more specific investment recommendations, and evolve from the standard balanced investment allocations.Firms that are implementing these technologies across their organization are having positive asset flows, while firms taking a “wait-and-see” approach have been laggards.  Firms attempting to build in-house AI solutions are likely to produce overly-complex and expensive programs, so outside providers might be better suited for these solutions.
  • The cryptocurrency industry is too new to use AI tools, given the lack of trustworthy pricing and volume data, a crucial component for effective AI solutions.The crypto startup firms don’t have traditional finance roles such as brokers, given trading and settlement has less intermediaries.  Crypto could have immediate opportunities in emerging markets that have less structured financial institutions, while private blockchains have several opportunities with trading operations and lending products.

The Investors Panel for the evening included Selena Singleton, Director, New York Life Ventures, Anna Garcia, CFA,  Co-Founder and Partner, Runway Venture Partners, Kristy Gilbert, Investment Partner, Sightway Capital as panelists and Irina Tanenbaum, COO, HomeoLux as a moderator.

The panelists discussed their respective firm approaches towards investing in FinTech companies. Although their approaches towards investing in financial services differed, there was a consensus that companies benefit when financial professionals are leaders of early stage firms and focus on “tech-enabled” solutions instead of “tech-lead” solutions. Personal financial applications, such as Acorns and OpenInvest, that provide low cost financial advice for underserved customers are interesting investment opportunities.  One example of a fintech that has struggled more recently is LendingClub. This firm had tremendous interest from technology VCs, but they didn’t properly evaluate the risks of peer to peer lending and the company faltered with a wave of defaults.

Companies are in the early stages of incorporating data science and AI methods into business processes. Unstructured data is becoming easier to convert into meaningful insights and increasing computing power can make businesses roles more efficient.  The panelists emphasized that AI tools are used for augmenting humans in their jobs, and will not necessarily replace their jobs, but there will be demand for modern, differentiated skillsets.  The hype around machines replacing human jobs will eventually occur, but we are several years away from this becoming a reality.