Cryptofinance: chasing an AI dream

Hello and welcome to the FT Cryptofinance newsletter. This week we’re taking a look at a rare industry merger.

We’ve all heard of a merger between companies, but how about a merger of cryptocurrencies? Like its corporate cousin, such a deal comes with an attractive-sounding story about the potential benefits but carries plenty of risks.

The digital asset deal in question is an ambitious three-way combination of the tokens for app platform Fetch.ai, artificial intelligence model provider SingularityNet and data provider Ocean Protocol.

Together they will form the Artificial Superintelligence Alliance (ASI) token and its market capitalisation of $6bn would catapult it into the top 20 largest cryptocurrencies.

Behind it is an ambitious plan to create “the AI industry’s largest open-source, decentralised network”, or more simply a play on a convergence between AI and crypto technology.

This is a rather frothy corner of a frothy market. “The intersection of AI and crypto is going to be even bigger than people imagine,” wrote Juan Leon, an analyst at Bitwise. He predicted AI combined with crypto would add $20tn to global GDP by 2030.

But this merger shows how messy reality can be. The plan to go live on Thursday was pushed back a month. Fetch.ai, which is driving the initiative, said it was because exchanges and users needed more time to prepare.

The deal marks a reboot for Fetch.ai, which is run by Humayun Sheikh, a UK entrepreneur and founding investor of DeepMind, the AI lab owned by Google. At the end of last year Fetch.ai ran into financial difficulties and was sold to another Sheikh entity, Assembl.ai. It has since relocated to Dubai.

The thinking behind AI tokens is that blockchains are a way to challenge the handful of Silicon Valley companies already hoovering up resources such as employees, chips and storage, and dominating the market.

This touches on a key investment theme advanced by one of the biggest crypto venture capital firms, Andreessen Horowitz. The thesis is that blockchains can be the platforms to break the grip that big technology companies exert over our personal data (and even our emotions) as they monetise content. As a narrative, it has echoes of bitcoin’s creation as a counter to the financial industry.

Combining crypto and AI, the thinking goes, lets people pool unused processing power or cloud storage and earn a reward for lending it to others. A blockchain can validate AI data, its models and output and make it harder for one entity to wield control over programs.

Fetch.ai’s Sheikh said the deal would give it scale, raising its profile and clout. “If we need to raise funds, we need to get attention, we need to commercialise something, we become much stronger in terms of having that ability,” he said.

But this is a vision with pitfalls, and it is not easy to will a market into existence. Perhaps, as Lenin concluded, grassroots revolutions sometimes need to be led by a vanguard.

It “is a bit of a dilemma we have always been struggling with”, Sheikh admitted. “Once you get the momentum of the developers, it becomes easier to start pushing through.”

Another is that crypto technology may not be a superior offering. In terms of efficiency, the enormous computing power needed for AI can only come from big clusters of centralised data centres. Moreover, large cloud providers have a 20-year head start in developing their service. Decentralised services may not have the size of storage, quality of service or security that a large cloud provider offers users.

The hype may already be fading. A CCData benchmark of similar AI-related coins, including Bittensor, Render and Akash, has returned 65 per cent this year. Even so, that is well down from a return of as much as 226 per cent in March. Better than bitcoin (up 55 per cent) but not as good as Nvidia (171 per cent).

But the thorniest issue overhanging a large merger like this is regulation. Another reason for a delay, Sheikh said, was because ASI had also been seeking clarity from regulators in Singapore.

The merger will be led by the Artificial Superintelligence Foundation, whose main task is to manage and distribute the tokens to the market.

Foundations in IT are not-for-profit organisations that support projects and communities through education or organisation of conferences. For example, the Linux and Apache Foundations promote open source software.

In crypto, foundations usually support particular blockchains. But blockchains come with a native token, an asset of value that could be defined as a security.

ASI’s caution is a further indication that regulators are taking a closer look at the links between foundations and the blockchains they promote.

In March the Swiss-based Ethereum Foundation said it received a confidential inquiry from a state authority. Bloomberg reported that the agency making the request was the US Securities and Exchange Commission.

One executive, speaking anonymously, told me that a few crypto foundations genuinely supported their protocols, but others looked like artificial constructs to get around US definitions of a security.

But not even the regulators are sure and it remains a grey area, another corner of the crypto market that regulators are slowly working their way through.

What’s your take? Email me at philip.stafford@ft.com

Weekly highlights

• Terraform Labs, the company behind the $40bn collapse of the TerraUSD stablecoin in 2022, agreed to pay $4.47bn in a case brought by the SEC.

• Swiss regulators opened bankruptcy proceedings against FlowBank, the crypto-friendly Swiss bank.

• Final approval by the SEC for exchange traded funds that invest in Ether could come during the summer, Bloomberg reported, citing SEC chair Gary Gensler.

Soundbite of the week:

Donald Trump has been making a play in recent weeks of being the “pro crypto” election candidate, even accepting donations in some coins.

Wiley Nickel, a pro-crypto Democrat, told a conference in New York on Thursday he was having none of it. Via my colleague Nikou Asgari.

“He’s trying to politicise any issue he can that can get him votes . . . He didn’t care about the issue when he was President.”

And finally:

Friday marks the start of the European football championships in Germany. It’s one of my favourite tournaments because an unfancied team is frequently the winner, from the Netherlands (1988), Denmark (1992), Greece (2004) and Portugal (2016). The solid, sensible-as-a-German-footballer’s-haircut choice would be France, but I’m going for Portugal.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here.

Your comments are welcome.