S3T Apr 19, 2024 - UaC, NII, Underwriting 2030, Flip the Script, AI energy, AI Pilots, Uni vs SEC, Stablecoin Bill
Welcome to S3T, the essential newsletter, podcast, and learning platform for change leaders. Every week we review the top developments and insights you need to stay ahead of the curve, build your ethics & leadership skills, and drive intentional beneficial innovation.
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In this edition of S3T:
- 🏦 Banking Shifts: This week, bank stocks took a hit as customers move from low-yield deposits to higher-yielding alternatives, pressuring banks' net interest income.
- 📉 Tech Turbulence: Tech stocks also faced declines due to ongoing concerns about persistent high interest rates, as indicated by recent remarks from Powell on uncontrolled inflation.
- ✈️ Autonomous Aerial Advances: AI autonomously piloted a fighter jet in a mock dogfight against a human, suggesting precision and reliability. The Pentagon is also building AI "wingman" drones to fly alongside human-piloted fighter jets.
- 🌐 Crypto Legislation Update: Senators Lummis and Gillibrand propose new legislation to regulate stablecoins and ban algorithmic versions.
- ⚡ AI's Energy Challenge: AI technology could consume a quarter of the US's power supply by 2030, highlighting the escalating impact of AI on global resources.
- 📜 Rethink the Routine: Scripts—our default thinking patterns and reactions—play a crucial role in shaping our personal and professional decisions. Recognizing and adapting these internal narratives can significantly reduce inefficiencies and missteps. Learning to challenge and alter these "scripts" not only mitigates potential risks but also enhances decision-making, both individually and across industries.
Opinions expressed are those of the individuals and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial, investment or legal advice. Authors or guests may hold assets discussed.
Alarm Bells for Bank Financials
Bank stocks slid this week after banks announced deteriorating outlooks, as customers migrate to higher yielding deposit products. US Banking customers are sick of 0.01 yeilds and are shifting to higher yield options, driving a decline in bank's "net interest income" - one of the key sources of revenue for community banks (Technical description here).
The optics: Banks have long been notoriously stingy with their payouts to depositors. Crypto based options by contrast have offered significantly higher rates. Some sample posted rates this week:
- USDC 5.10% APY
- Ethereum 2.73% APY
- Solana 4.68% APY
- Polkadot 9.27% APY
Caveat: Check reputable crypto exchanges for latest rates, Crypto is risky, may not be FDIC insured. Consult with a qualified advisor.
Tech Stocks and Interest Rates
Tech Stocks slide this week as investors mulled the implications of "higher for longer" interest rates after Powell signals inflation still isn't under control.
Bitcoin Halving
As of the middle of the week the halving estimated date was 4/19 and the BTC price had moved into the low 60s. Some expect a muted or delayed price response, or even a possible drop in price of Bitcoin given the sharp rise in price earlier this year as funds flowed into newly approved Bitcoin ETFs.
💺Airborne AI
DARPA reveals autonomous AI flew a fighter jet in a mock dogfight against a human pilot in 2023. The dueling aircraft came within 2000 feet of each other at 1,200mph (That’s 1760 feet per second - very little margin for error). The onboard human pilots never felt the need to take control during the flight - suggesting that these were intended precision maneuvers.
The Pentagon is funding a Collaborative Combat Aircraft project, developing AI piloted "wingman" drones that fly alongside fighter jets flown by human pilots, and play a number of supporting roles including protecting the human & AI squadron from enemy fire, or conducting coordinated attacks together.
Related: Brookings Institution's AI warfare catalog of future nightmares.
Crypto Governance Updates
The respected bi-partisan duo Senator Cynthia Lummis (R-Wyoming) and Kirsten Gillibrand (D-NY) team up once again to introduce legislation to clarify the rules of the road for the crypto industry. This time the focus is on stable coins. Highlights:
- Defines payment stablecoins as dollar-pegged digital assets used for payments (this is calculated to help persist the dollar's status as the dominant global reserve currency).
- The digital asset is not a security, and issuers would have two paths for complying with the law either as a depository institution or a non-depository institution registered with the Federal Reserve.
- Algorithmic stablecoins would be banned by the bill. Not an unexpected development given the high profile collapse of Luna and TerraUSD back in 2022.
Meanwhile the SEC is apparently preparing to sue Uniswap, a decentralized trading platform. It's alleged crime is unclear - other than the fact that the Uniswap protocol has handled billions of dollars in trades without the help (and fees) of traditional banking institutions. Industry commentary:
- "It’s been clear for a while that rather than working to create clear, informed rules, the SEC has decided to focus on attacking long-time good actors like Uniswap and Coinbase. All while letting bad actors like FTX slip by." - Hayden Adams, Inventor of the Uniswap Protocol.
- "In this case, it’s for the best that the matter will be litigated against Uniswap. They are a well-funded defendant, a virtuous actor, and involve a sincerely decentralized product..." J.W Verret, Assoc. Prof George Mason University Law School
Realtime Image Generation comes to What'sApp
Meta has released an AI image generator in What's App. In a prompt, just type "/imagine" followed by some text describing whatever picture you'd like to see generated.
The above screenshot is an example I tried. Today's cover image was also generated by the Meta generator in WhatsApp - from the prompt “/imagine a group of Hudsonian Godwits feeding along a sea shore at sunset.” The picture does not show a fully accurate rendering of Hudsonian Godwits. Visit CornellLab All About Birds for comparison and Life History information about Hudsonian Godwits.
⚡Forget Crypto's Energy Footprint...
AI could use 1/4 of the US power supply by 2030 per a statement from Arm, an NVIDIA supplier and chip designer, commenting on the ravenous growth of AI power consumption. Arm says it has plans for lowering Data-Center Power Consumption. Related: Microsoft is tripling its datacenter capacity.
🔎 Closer Look: Insurance Underwriting 2030
We are now several years into a cycle where insurance underwriting is being optimized by digital and AI technologies. Expected outcome: by 2030 underwriting as we know it will no longer exist.
Current example: Sixfold is disrupting insurance underwriting by giving underwriters faster access to deeper context for pricing risk. Sixfold leverages Pinecone, a vector database with enhanced search and similarity matching.
AI technologies could add up to $1Trillion in annual value for global insurance per McKinsey, as new innovations remove waste from the processes. But streamlining the process isn’t the only innovation on the horizon.
DeFi & the Future of Insurance: Underwriting as Code (UaC)
One possible glimpse of the future is the Netherlands based crypto platform and protocol known as Opium. For several years now a service running on the Opium platform has offered insurance for crypto traders. The specific exchange running this service - opium.finance - is unavailable in the US. However the parent site opium.network is accessible and has thorough documentation on how the platform works. (Financial engineering fans will enjoy digging into the section of documentation titled "Complex Description.")
What makes this documentation worth reading - even for non-Quants- is its detailed description of the Opium Protocol, a programmable smart escrow designed to allow financial services companies to quickly build and trade financial products using recipes that encode the product specifications and lifecycle, including the real world data sources and events that will govern how the product is settled.
In other words, Opium’s approach suggests a new class of entrants that will leapfrog the 2018 AI-as-process-improvement thesis dominating insurtech today. Opium is bought into the vision of Decentralized Finance as an alternative to the "too big to fail" centralized financial services model that is putting our entire system at risk. But they also represent the deconstruction of classic underwriting down into programmable chunks.
The original DeFi theory of the future as summarized in this 2020 Hackernoon piece has been dented and dragged through the mud by the crashes and scandals of the past 2 years, but still seems directionally correct. Blockchain based architectures deployed in a decentralized zero trust manner offer a new set of financial building blocks for a more robust and equitable economy.
It will be fascinating to see how these architectures can be used to drive benefits for all those who depend on the various forms of insurance.
📜 Flip the Script: Understanding and Changing Internal & Macro Narratives
Scripts - default thinking and reactions - have a heavy influence on our daily decisions at both personal and macro levels.
Our minds are adept at creating "scripts" - internal narratives and automatic responses that dictate what we think, say, or do in specific conversations, decision points, or opportunities. These scripts often form our immediate reactions and impulses in conversations and decisions.
We curate these scripts - both at individual and industry levels. You personally have a set of scripts that guide your snap judgments and reactions. Your industry also has scripts that guide conventional wisdom and status quo thinking in that industry.
When we follow these scripts without question we put ourselves, our companies and our communities at risk of negative outcomes. It's not easy to change internal or industry narratives. But a few minutes learning this skill can save months of churn and friction.
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