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Disruptive business models are often powered by alternative financing. In Part 1 of this series, I discussed how mobile is redefining money and banking and shared some of the dramatic transformations in the global remittance infrastructure.
In this article, we’ll discuss:
AI financial advisors and robo traders
Let’s dive right back in…
Decentralized Lending = Democratized Access to Finances
Peer-to-peer (P2P) lending is an age-old practice, traditionally with high risk and extreme locality. Now, the P2P funding model is being digitized and delocalized, bringing lending online and across borders.
Zopa, the first official crowdlending platform, arrived in the United Kingdom in 2004. Since then, the consumer crowdlending platform has facilitated lending of over 3 billion euros ($3.5 billion USD) of loans.
Person-to-business crowdlending took off, again in the U.K., in 2005 with Funding Circle, now with over 5 billion euros (~5.8 billion USD) of capital loaned to small businesses around the world.
Crowdlending next took off in the US in 2006, with platforms like Prosper and Lending Club. The US crowdlending industry has boomed to $21 billion in loans, across 515,000 loans.
Let’s take a step back… to a time before banks, when lending took place between trusted neighbors in small villages across the globe. Lending started as peer-to-peer transactions.
As villages turned into towns, towns turned into cities, and cities turned into sprawling metropolises, neighborly trust and the ability to communicate across urban landscapes broke down. That’s where banks and other financial institutions came into play—to add trust back into the lending equation.
With crowdlending, we are evidently returning to this pre-centralized-banking model of loans, and moving away from cumbersome intermediaries (e.g. high fees, regulations, and extra complexity).
Fueled by the permeation of the internet, P2P lending took on a new form as ‘crowdlending’ in the early 2000s. Now, as blockchain and artificial intelligence arrive on the digital scene, P2P lending platforms are being overhauled with transparency, accountability, reliability, and immutability.
Artificial Intelligence Micro Lending & Credit Scores
We are beginning to augment our quantitative decision-making with neural networks processing borrowers’ financial data to determine their financial ‘fate’ (or, as some call it, your credit score). Companies like Smart Finance Group (backed by Kai Fu Lee and Sinovation Ventures) are using artificial intelligence to minimize default rates for tens of millions of microloans.
Smart Finance is fueled by users’ personal data, particularly smartphone data and usage behavior. Users are required to give Smart Finance access to their smartphone data, so that Smart Finance’s artificial intelligence engine can generate a credit score from the personal information.
The benefits of this AI-powered lending platform do not stop at increased loan payback rates; there’s a massive speed increase as well. Smart Finance loans are frequently approved in under eight seconds. As we’ve seen with other artificial intelligence disruptions, data is the new gold.
Digitizing access to P2P loans paves the way for billions of people currently without access to banking to leapfrog the centralized banking system, just as Africa bypassed landline phones and went straight to mobile. Leapfrogging centralized banking and the credit system is exactly what Smart Finance has done for hundreds of millions of people in China.
As artificial intelligence accesses even the most mundane mobile browsing data to assign credit scores, blockchain technologies, particularly immutable ledgers and smart contracts, are massive disruptors to the archaic banking system, building additional trust and transparency on top of current P2P lending models.
Immutable ledgers provide the necessary transparency for accurate credit and loan defaulting history. Smart contracts executed on these immutable ledgers bring the critical ability to digitally replace cumbersome, expensive third parties (like banks), allowing individual borrowers or businesses to directly connect with willing lenders.
Two of the leading blockchain platforms for P2P lending are ETHLend and SALT Lending.
ETHLend is an Ethereum-based decentralized application aiming to bring transparency and trust to P2P lending through Ethereum network smart contracts.
Secure Automated Lending Technology (SALT) allows cryptocurrency asset holders to use their digital assets as collateral for cash loans, without the need to liquidate their holdings, giving rise to a digital-asset-backed lending market.
While blockchain poses a threat to many of the large, centralized banking institutions, some are taking advantage of the new technology to optimize their internal lending, credit scoring, and collateral operations.
In March 2018, ING and Credit Suisse successfully exchanged 25 million euros using HQLA-X, a blockchain-based collateral lending platform.
HQLA-X runs on the R3 Corda blockchain, a platform designed specifically to help heritage financial and commerce institutions migrate away from their inefficient legacy financial infrastructure.
Blockchain and tokenization are going through their own fintech and regulation shakeup right now. In a future blog, I’ll discuss the various efforts to more readily assure smart contracts, and the disruptive business model of security tokens and the US Securities and Exchange Commission.
Parallels to the Global Abundance of Capital
The abundance of capital being created by the advent of P2P loans closely relates to the unprecedented global abundance of capital.
Initial coin offerings (ICOs) and crowdfunding are taking a strong stand in disrupting the $164 billion venture capital market. The total amount invested in ICOs has risen from $6.6 billion in 2017 to $7.15 billion USD in the first half of 2018. Crowdfunding helped projects raise more than $34 billion in 2017, with experts projecting that global crowdfunding investments will reach $300 billion by 2025.
In the last year alone, using ICOs, over a dozen projects have raised hundreds of millions of dollars in mere hours. Take Filecoin, for example, which raised $257 million in only 30 days; its first $135 million was raised in the first hour. Similarly, the Dragon Coin project (which itself is revolutionizing remittance in high-stakes casinos around the world) raised $320 million in its 30-day public ICO.
Some Important Takeaways…
Technology-backed fundraising and financial services are disrupting the world’s largest financial institutions. Anyone, anywhere, at anytime will be able to access the capital they need to pursue their idea.
The speed at which we can go from “I’ve got an idea” to “I run a billion-dollar company” is moving faster than ever.
Following Ray Kurzweil’s Law of Accelerating Returns, the rapid decrease in time to access capital is intimately linked (and greatly dependent on) a financial infrastructure (technology, institutions, platforms, and policies) that can adapt and evolve just as rapidly.
This new abundance of capital requires financial decision-making with ever-higher market prediction precision. That’s exactly where artificial intelligence is already playing a massive role.
Artificial Intelligence, Robo Traders, and Financial Advisors
On May 6, 2010, the Dow Jones Industrial Average suddenly collapsed by 998.5 points (equal to 8 percent, or $1 trillion). The crash lasted over 35 minutes and is now known as the ‘Flash Crash’. While no one knows the specific reason for this 2010 stock market anomaly, experts widely agree that the Flash Crash had to do with algorithmic trading.
With the ability to have instant, trillion-dollar market impacts, algorithmic trading and artificial intelligence are undoubtedly ingrained in how financial markets operate.
In 2017, CNBC.com estimated that 90 percent of daily trading volume in stock trading is done by machine algorithms, and only 10 percent is carried out directly by humans.
Artificial intelligence and financial management algorithms are not only available to top Wall Street players.
Robo-advisor financial management apps, like Wealthfront and Betterment, are rapidly permeating the global market. Wealthfront currently has $9.5 billion in assets under management, and Betterment has $10 billion.
Artificial intelligent financial agents are already helping financial institutions protect your money and fight fraud. A prime application for machine learning is in detecting anomalies in your spending and transaction habits, and flagging potentially fraudulent transactions.
As artificial intelligence continues to exponentially increase in power and capabilities, increasingly powerful trading and financial management bots will come online, finding massive new and previously lost streams of wealth.
How else are artificial intelligence and automation transforming finance?
Disruptive Remittance and Seamless Transactions
When was the last time you paid in cash at a toll booth? How about for a taxi ride?
EZ-Pass, the electronic tolling company implemented extensively on the East Coast, has done wonders to reduce traffic congestion and increase traffic flow.
Driving down I-95 on the East Coast of the United States, drivers rarely notice their financial transaction with the state’s tolling agencies. The transactions are seamless.
The Uber app enables me to travel without my wallet. I can forget about payment on my trip, free up my mental bandwidth and time for higher-priority tasks. The entire process is digitized and, by extension, automated and integrated into Uber’s platform (Note: This incredible convenience many times causes me to accidentally walk out of taxi cabs without paying!).
In January 2018, we saw the success of the first cutting-edge, AI-powered Amazon Go store open in Seattle, Washington. The store marked a new era in remittance and transactions. Gone are the days of carrying credit cards and cash, and gone are the cash registers. And now, on the heals of these early ‘beta-tests’, Amazon is considering opening as many as 3,000 of these cashierless stores by 2023.
Amazon Go stores use AI algorithms that watch various video feeds (from advanced cameras) throughout the store to identify who picks up groceries, exactly what products they select, and how much to charge that person when they walk out of the store. It’s a grab and go experience.
Let’s extrapolate the notion of seamless, integrated payment systems from Amazon Go and Uber’s removal of post-ride payment to the rest of our day-to-day experience.
Imagine this near future:
As you near the front door of your home, your AI assistant summons a self-driving Uber that takes you to the Hyperloop station (after all, you work in L.A. but live in San Francisco).
At the station, you board your pod, without noticing that your ticket purchase was settled via a wireless payment checkpoint.
After work, you stop at the Amazon Go and pick up dinner. Your virtual AI assistant passes your Amazon account information to the store’s payment checkpoint, as the store’s cameras and sensors track you, your cart and charge you auto-magically.
At home, unbeknownst to you, your AI has already restocked your fridge and pantry with whatever items you failed to pick up at the Amazon Go.
Once we remove the actively transacting aspect of finance, what else becomes possible?
Extraordinary transformations are happening in the finance world. We’ve only scratched the surface of the fintech revolution. All of these transformative financial technologies require high-fidelity assurance, robust insurance, and a mechanism for storing value.
I’ll dive into each of these other facets of financial services in future articles.
For now, thanks to coming global communication networks being deployed on 5G, Alphabet’s LUNE, SpaceX’s Starlink and OneWeb, by 2024, nearly all 8 billion people on Earth will be online.
Once connected, these new minds, entrepreneurs, and customers need access to money and financial services to meaningfully participate in the world economy.
By connecting lenders and borrowers around the globe, decentralized lending drives down global interest rates, increases global financial market participation, and enables economic opportunity to the billions of people who are about to come online.
We’re living in the most abundant time in human history, and fintech is just getting started.
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Some people are afraid that heavily armed artificially intelligent robots might take over the world, enslaving humanity—or perhaps exterminating us. These people, including tech-industry billionaire Elon Musk and eminent physicist Stephen Hawking, say artificial intelligence technology needs to be regulated to manage the risks. But Microsoft founder Bill Gates and Facebook’s Mark Zuckerberg disagree, saying the technology is not nearly advanced enough for those worries to be realistic.
As someone who researches how AI works in robotic decision-making, drones and self-driving vehicles, I’ve seen how beneficial it can be. I’ve developed AI software that lets robots working in teams make individual decisions as part of collective efforts to explore and solve problems. Researchers are already subject to existing rules, regulations and laws designed to protect public safety. Imposing further limitations risks reducing the potential for innovation with AI systems.
How is AI regulated now?
While the term “artificial intelligence” may conjure fantastical images of human-like robots, most people have encountered AI before. It helps us find similar products while shopping, offers movie and TV recommendations, and helps us search for websites. It grades student writing, provides personalized tutoring, and even recognizes objects carried through airport scanners.
In each case, the AI makes things easier for humans. For example, the AI software I developed could be used to plan and execute a search of a field for a plant or animal as part of a science experiment. But even as the AI frees people from doing this work, it is still basing its actions on human decisions and goals about where to search and what to look for.
In areas like these and many others, AI has the potential to do far more good than harm—if used properly. But I don’t believe additional regulations are currently needed. There are already laws on the books of nations, states, and towns governing civil and criminal liabilities for harmful actions. Our drones, for example, must obey FAA regulations, while the self-driving car AI must obey regular traffic laws to operate on public roadways.
Existing laws also cover what happens if a robot injures or kills a person, even if the injury is accidental and the robot’s programmer or operator isn’t criminally responsible. While lawmakers and regulators may need to refine responsibility for AI systems’ actions as technology advances, creating regulations beyond those that already exist could prohibit or slow the development of capabilities that would be overwhelmingly beneficial.
Potential risks from artificial intelligence
It may seem reasonable to worry about researchers developing very advanced artificial intelligence systems that can operate entirely outside human control. A common thought experiment deals with a self-driving car forced to make a decision about whether to run over a child who just stepped into the road or veer off into a guardrail, injuring the car’s occupants and perhaps even those in another vehicle.
Musk and Hawking, among others, worry that a hyper-capable AI system, no longer limited to a single set of tasks like controlling a self-driving car, might decide it doesn’t need humans anymore. It might even look at human stewardship of the planet, the interpersonal conflicts, theft, fraud, and frequent wars, and decide that the world would be better without people.
Science fiction author Isaac Asimov tried to address this potential by proposing three laws limiting robot decision-making: Robots cannot injure humans or allow them “to come to harm.” They must also obey humans—unless this would harm humans—and protect themselves, as long as this doesn’t harm humans or ignore an order.
But Asimov himself knew the three laws were not enough. And they don’t reflect the complexity of human values. What constitutes “harm” is an example: Should a robot protect humanity from suffering related to overpopulation, or should it protect individuals’ freedoms to make personal reproductive decisions?
We humans have already wrestled with these questions in our own, non-artificial intelligences. Researchers have proposed restrictions on human freedoms, including reducing reproduction, to control people’s behavior, population growth, and environmental damage. In general, society has decided against using those methods, even if their goals seem reasonable. Similarly, rather than regulating what AI systems can and can’t do, in my view it would be better to teach them human ethics and values—like parents do with human children.
Artificial intelligence benefits
People already benefit from AI every day—but this is just the beginning. AI-controlled robots could assist law enforcement in responding to human gunmen. Current police efforts must focus on preventing officers from being injured, but robots could step into harm’s way, potentially changing the outcomes of cases like the recent shooting of an armed college student at Georgia Tech and an unarmed high school student in Austin.
Intelligent robots can help humans in other ways, too. They can perform repetitive tasks, like processing sensor data, where human boredom may cause mistakes. They can limit human exposure to dangerous materials and dangerous situations, such as when decontaminating a nuclear reactor, working in areas humans can’t go. In general, AI robots can provide humans with more time to pursue whatever they define as happiness by freeing them from having to do other work.
Achieving most of these benefits will require a lot more research and development. Regulations that make it more expensive to develop AIs or prevent certain uses may delay or forestall those efforts. This is particularly true for small businesses and individuals—key drivers of new technologies—who are not as well equipped to deal with regulation compliance as larger companies. In fact, the biggest beneficiary of AI regulation may be large companies that are used to dealing with it, because startups will have a harder time competing in a regulated environment.
The need for innovation
Humanity faced a similar set of issues in the early days of the internet. But the United States actively avoided regulating the internet to avoid stunting its early growth. Musk’s PayPal and numerous other businesses helped build the modern online world while subject only to regular human-scale rules, like those preventing theft and fraud.
Artificial intelligence systems have the potential to change how humans do just about everything. Scientists, engineers, programmers, and entrepreneurs need time to develop the technologies—and deliver their benefits. Their work should be free from concern that some AIs might be banned, and from the delays and costs associated with new AI-specific regulations.
This article was originally published on The Conversation. Read the original article.
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