We recently talked to Lex Sokolin, the Global Fintech Co-Head and CMO at ConsenSys, a leading Ethereum (ETH) development studio based in New York. Before joining ConsenSys, Sokolin was the Global Director of Fintech Strategy at Autonomous Research, a firm that was eventually acquired by AllianceBernstein. While at Autonomous Research, Sokolin provided equity research on artificial intelligence, blockchain, online lending, digital banking – pretty much the full stack of the Fintech ecosystem.
Recently, Crowdfund Insider reached out to Sokolin to hear about his perspective on the digitization of finance. He also spoke about the controversial Facebook-led Libra project. Our discussion is below.
Crowdfund Insider: I definitely agree with your argument, that Fintech and Crypto / Blockchain can coexist. Many new Fintech lenders are providing access to lending solutions. Please comment on how the financial technology and digital asset ecosystems can help provide improved access to funding for SMEs.
Lex Sokolin: SME funding spans several functional areas, from the user interface, to the workflows connecting the applicant to the accounts and the funds, to the underwriting decisions, to portfolio management. Fintech has been very good at making the onboarding and user experience digital and more efficient.
Modern interfaces are much better intermediators than traditional incumbents ones, but lack the capital or licenses to delivery funds at scale. Seeing COVID-19 push on this gating narrative has been very constructive.
Underwriting can also be automated in a centralized way, or with machine learning, and accelerate time to distribution and improve portfolio returns. Digital assets, on the other hand, can improve the money and lending assets themselves. Issuance, clearing, settlement, compliance, identity, collateralization, provenance — those are all baked into chains like Ethereum and software platforms like ConsenSys Codefi. If you issue assets on blockchain and deliver them through Fintech interfaces, you can have a 100x improvement on traditional workflows.
Crowdfund Insider: There’s been a lot of talk about the Facebook-led Libra initiative. Given that the project now seems to be a type of payment and stablecoin system, instead of an actual currency, due to regulatory pressure, how much of an impact do you think it could have on the existing global financial system?
Lex Sokolin: I think Libra will be very impactful, no matter what form it takes. If it just takes the form of a payment rail for CBDCs, that already is massively important. The existence of such a regulated blockchain rail, being private and closely regulated, will by definition take market share away from other types of permissionless open blockchain rails.
It may train a lot of users to rely on crypto assets, and be a gateway to the Bitcoins and Ethers of the world. But more likely, the underlying tech will just be abstracted away and the paradigm will not shift, other than to divert resources from open projects to more closed ones.
Crowdfund Insider: Regulations and comprehensive guidelines for offering cryptocurrency-related services has been a huge challenge for regulators across the globe, for many years now. What’s required before, and if, we ever see mass adoption of digital currencies? What are some key things that need to take place or be implemented worldwide, before we can see meaningful adoption of crypto assets for practical purpose (not speculative trading)?
Lex Sokolin: There are many dimensions to answer this question, though several are red herrings. People like to bring up user interfaces, custody, ETF wrappers, and institutional investment. Those are needed, but they also already have solutions. The water is boiling, it has just not boiled over because there was no urgency for change. I think the geopolitical situation will be a larger catalyst than the incremental improvements people describe.
Second, one of the things we are really focused on ConsenSys is Ethereum 2. Having a more performant protocol that extends the enormous success seen by Ethereum and leverages that developer community will lead to there being even more decentralized software.
More performant decentralized software, and the growth of DeFi, will continue to prove our novel use-cases that capture people’s imaginations. Economic activity then forms between these apps, and there is already native currency that allows for on-chain transactions. On top of that, nearly $7 billion in tokenized USD travels the Ethereum network. This is the main path I see to adoption — not more trading of alternative protocol tokens.
Crowdfund Insider: According to the latest report from CB Insights, Fintech funding has, understandably, taken a hit during Q1 2020 due to economic uncertainty created by the deadly COVID-19 outbreak. Then there are also Fintechs out there doing quite well because of the rise in digital payments, globally. What can the financial world do, including small businesses, to survive these challenging times?
Lex Sokolin: The best advice is always — mark to market. If you thought you were worth $5 billion and now you are worth $500 million, mark to market! If you thought you’d have $10 million of revenue and have $500,000 of revenue, mark to market.
So that means very quickly understanding the truth about your particular financial situation, taking appropriate measures based on your risk capacity, and fighting the uphill battle. We will see many Fintech startup models that were trendy — like digital lenders that generate cash upfront but have losses on the back — struggle in a recession.
Stickier models, like deposits or assets under management, will have a smaller slowdown but are still indexed to the economic cycle. Payments, I think, will continue to perform strongly to the extent they touch the digital economy. Proximity payments and wallets are reliant on the physical footprint, and hold more risk as a result.
Crowdfund Insider: Digital banking has become quite popular with innovative Fintechs like Revolut, Monzo, Starling Bank offering streamlined financial services. It has also become necessary for incumbents to upgrade their legacy systems. Do you see a future where crypto, Fintech, and more tradtitional institutions like Fidelity and JPMorgan co-existing in a meaningful manner?
Lex Sokolin: We are going to see even more convergence between the Fintechs and the incumbents within the next decade. Lots of things are going to be up for sale in this down cycle, and cash-rich traditional finance firms will be able to go on a shopping spree for discounted front-ends with million user footprints.
In the long run, there shouldn’t be much of a difference between a Goldman Sachs and a SoFi, or a Schwab and a Coinbase. Fintechs are not the thread or the disruptor — they are a repackaging of bank accounts, broker/dealer accounts, and payment rails that already exist. It is the large tech companies and crypto asset networks that I think will have lasting and potentially pivotal impact on the industry.
This is why the main themes I am interested in are blockchain, artificial intelligence, and augmented / virtual reality. The rest of the progress is incremental and largely about generational market share.