4 months ago
Part II of the two-part interview: Lex Sokolin talks about DeFi, the digital disruption of banking, the recent boom and bust in cryptocurrency and what business can learn from art.
Read part I of the two-part interview here
Lex Sokolin is a futurist and entrepreneur working on the next generation of financial services. He is the Global FinTech Co-Head at ConsenSys, a blockchain technology company building the infrastructure, applications, and practices that enable a decentralized world. Lex focuses on emerging digital assets, public and private enterprise blockchain solutions, decentralized finance and autonomous organizations.
Previously, Lex was the Global Director of Fintech Strategy at Autonomous Research (acquired by AllianceBernstein), an equity research firm serving institutional investors, where he covered artificial intelligence, blockchain, neobanks, digital lenders, roboadvisors, payments, InsurTech, and mixed reality. Lex is a regular contributor to leading publications like the Wall Street Journal, the Economist, Bloomberg, FT, Reuters, American Banker, ThinkAdvisor and Investment News. He is also a sought-after speaker at key industry conferences. Blocks99 had the pleasure of speaking with Lex in October 2019.
One of the hardware developments we’re seeing is the rising preference of mobile devices. In fact, the vast majority of Asian users are mobile first and mobile only. What are the implications for DeFi applications?
I think the West is having the most trouble with adoption, because the solution set is pretty good. It might not be the best, but few people have a burning problem accessing financial products. Whereas, in the East, in South America, there is a much more real need for access to finance. And there, an open-source distributed solution can legitimately be better than what the economic system provides.
So being mobile-first and mobile-only definitely correlates with adoption. That said, in a lot of these geographies you also have a much more interested sovereign or regulator – interested in preventing the spread of the technology or controlling and aligning it with national goals. So you might not have a consumer adoption problem, but rather a regulatory problem that’s more difficult to get over.
On the one hand there’s this thinking, “Hey let’s get this out to as many people as possible.” But we’ve the negative effects of that thinking on bitcoin mining or the Chinese exchanges. I just think we need to be thoughtful about what it means to be decentralized and if you’re really helping people or putting them in a difficult position.
What role do you see for conventional banks in the DeFi space? What advice would you offer the banking industry?
This is a tough one. No industry wants to completely disintermediate itself. In the extreme, what the DeFi industry can do is drive down the cost of manufacturing financial products to as close to zero as possible. If you think of the analogy of Spotify and the music industry, the music labels’ answer in the early 2000s – imprisoning teenagers, spending millions of dollars on digital rights management to make consumer experience worse, DVDs that didn’t play depending on where you were physically – and none of it mattered. They still lost to Spotify.
You can’t build Spotify on CDs. You need to digitize the thing itself first. And so for financial services you can imagine DeFi as the digitization of financial instruments. So the question is, do the banks behave like the music industry? Putting up restrictions and fining or imprisoning teenagers only to lose 90 percent of revenue to a streaming service 20 years down the line? Or do they take more of a leadership role?
It’s very difficult for an operator to do that. Some banks have done well in attempting to keep pace. Generally speaking, I think they need to do better. Today there’s at least an emerging consensus that bitcoin as an asset class should be acceptable to institutional investors. But if I were a bank, I would think more deeply about how I could do what I do already, but in the DeFi context. Can I use the software? Can I think of my capital requirements as akin to staking positions in a network? Can I be running nodes to support these things? Can I be a founding institutional partner for fledgling companies building open software?
So it’s a difficult thing to navigate, but you can’t put the genie back in the bottle.
Adoption is key in the blockchain space, and nowhere more so than in DeFi and tokenization spaces. What lessons do you think the industry learned from the recent crypto boom and bust? What is required to win sufficient trust and confidence to drive large-scale adoption?
I think people overplay the learnings from the last two or three years. One easy answer is to say that we’re smarter about regulation – there’s more awareness of breaking the law in a particular jurisdiction and understanding of the implications of that. Being aware of what you’re asking potential customers to do, holding an unregistered security issued by an unlicensed broker. Thinking about how you should structure your own business in terms of whether it’s compliant or noncompliant – I would certainly recommend compliance, but that’s an active choice.
The real learning is, there’s a distinction between people who are authentically interested in building in this space and those who are interested in the speculative nature of investing in what people get excited or unexcited about. Broadly speaking, I think the token offerings of the past few years have been spectacularly productive for the ecosystem. They funded a ton of companies, pushed forward software development, incentivized people to think through new business models and challenge different versions of business models.
Even though there was large loss, it was a trial by fire. Hopefully, in the future, the frauds, scams, bad actors and lemons can be weeded out much earlier. Because not correcting that has really negative implications for everyone working in the space.
As ConsenSys FinTech Co-Head, you are located in London, one of the world’s most important finance industry hubs. How do you see the London financial community responding to blockchain developments including DeFi?
London is one of the world’s FinTech centers. You can think of New York, San Fran, London, Singapore, Hong Kong to some extent and of course China itself as the driving forces behind FinTech. London’s FinTech has been mostly around neobanks and open banking, digital banking, which is now being exported to the US. I’d say London and the rest of the West have been on the receiving end of what the East is doing, where the large tech companies have free rein with financial products in a way that Facebook, Apple and Amazon don’t have. So there’s a defensive reaction to that.
Blockchain is a topic that Europe has been more receptive to than the US. In the US it’s either big capital use cases for Wall Street or it’s the Libra conversation. It’s much harder to be a small player in blockchain in the US, whereas in the UK and Europe – and Eastern Europe especially – there’s a ton more nimble teams building blockchain-based products.
There’s going to be continuous competition for innovation, talent and financial markets. I can see that being fruitful for FinTech companies because they’ll be courted by the different jurisdiction in which they operate. I think London is a very healthy ecosystem for FinTech.
In a recent newsletter, you talked about developments in the area of InsurTech and mention the sale of the platform Assurance IQ to Prudential for US$ 3.5bn in total – staggering price for a 3-year-old company. Some InsurTechs, like Etherisc, are using blockchain technology to build new, decentralized business models. What is your vision for blockchain-based insurance of the future?
The reason things cost a lot of money when they’re acquired is usually because they have some operating metric that’s attractive to the acquirer. And most US InsurTechs with high valuation are good at distribution. They own the customer, they have the customer relationship, they have lead generation on a sufficiently large scale. Assurance had, I think, millions of people who would go to their site for insurance information. It’s a staggering number of people to be able to convert into insurance sales. That’s what you pay for. If you can say, “Whatever you’re doing, I can save you 20 percent on your processing,” you’re not going to see that kind of exit. You’ll see a 50 million maybe a 150 million-dollar exit. And it’s simply because as an enabling technology for a legacy tech stack, you’re a cost center, not a profit center. If you want to see that huge upside, you’ve got to figure out how to get really fast customer acquisition and get people to pay for what you’re selling.
Blockchain has a horrible problem in that regard: there are no customers and nobody’s paying. Insurance protocols can figure out how to grow from 1000 users to 10 million users and how to get people to pay currency that works under GAAP accounting for a public company. There is zero chance of that kind of value being created by a public blockchain solution.
I think that’s where people need to do a lot of work. There are some really cool insurance protocols that have been developed. I think of those more as infrastructure pieces for what a next-gen, fully composed financial instrument could look like. At the end of the day, you don’t want some insurer to purchase an open-source protocol and eventually shut it down. You want these things to be really innovative, to stay lean.
You are a rare combination of entrepreneur and artist. How is your artistic talent reflected in your approach to business? And the other way around?
Thanks for that question. I have a background in visual arts. I grew up drawing and painting, and that turned into design in the 90s. As a teenager, I built Websites and had clients for designs and identities. I did that all through college and increasingly got into the intersection between technology and the arts – whether it’s an interactive media project or in today’s world using neural networks and AI to create various styles of abstractions or using coding to generate parametric art. For me it’s always been very interesting to generate novelty and an emotional outcome, something beautiful using frontier tech. That’s very hard to monetize, unless maybe you’re a DJ making the visual background at a rave – that’s the only place people make money off that.
For me it’s about the philosophy of how you look at a blank piece of paper and create something new. You create both the visual language – a pencil drawing, a painting, a computer code – and you render it, you make it. I’ve taken that thinking to building companies and products in financial services. Thinking from the start about what set of tools to use in creating a company and a new permutation of finance and then thinking about how to actually go about it and build it. That allows me to be a lot less attached to, quote unquote, “how things should be.” Because in the arts, things should be a million different ways, depending on the human intention at the moment.
I’ve also tried to bring my visual practice to the design of the various companies I’ve been involved in – what the interfaces look like, what the brand looks like. I think it’s really important to communicate that well and have it resonate with people.
Is there anything you wish to add?
I think we’ve covered a lot! As you mentioned, I write a weekly newsletter on FinTech and AI frontier themes. It’s easy to access at lexsokolin.com – I invite your readers to check it out.
Artwork by Lex Sokolin, courtesy of the artist.
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