Post on 01-Jun-2020
Challenging World’s Economics withCryptocurrencies
Frederik Gregaard
April 2017
Strategy& | PwC
3 megatrends for financial services: digitalization/ FinTech, changing customer behaviour and increased regulatory complexity
Megatrends in financial services
2Source: Strategy& analysis
Digitalization and FinTech
Changing customer behaviour
Increasing regulatory complexity
Digital fundamentally transforms business models in financial services
FinTechs aggressively target selected areas of the value chain
Incumbent banks react with innovation and tactical initiatives
Digital giants (Google, Apple) are entering markets or standing “at the gates”
Customer expectations and behaviour are evolving at a faster pace than ever
before
User experience and convenience in focus, e.g. social media, Non-FS and e-
commerce areas increasingly drive expectations towards financial services
Tightening rules (MiFID, Basel IV etc.) increase cost base and capital
requirements
PSD2 and FinTech-related regulation will further disrupt traditional value
creation in financial services
Strategy& | PwC
Steady increase in investments, cryptocurrencies on the rise – FinTechpoised to become “the new normal”
Key FinTech market data
3Sources: CB Insights, Swiss Finance Equity & Corporate Finance Association, Bloomberg, Coinmarketcap.com
FinTech investments
APAC
63% North America
21% 16%
Europe
Global FinTech investments Emergence of cryptocurrencies
Investment target regions
Market cap (USDbn)
2013 2014 2015 2016
6.41.6
1.5
5.8
7.03.1
3.6
8.5
t/of Bitcoin
Total
market cap
Number of cryptocurrencies in circulation
565545
237
7
2013 2014 2015 2016
Deal value
(USDbn)
# of deals
871772
610459
2011
4.6
2012 2013
2.5 3.2
2015
1,108
22.3
2014
12.7
Switzerland
investment volume
approx. CHF 470m
2013 first year of
significant cryptocurrency
market activity
Strategy& | PwC
New technologies are driving innovation in financial services end-to-end
Emerging technologies
4
Artificial intelligence
Crypto-currencies
P2P & crowd activities
Big data
Blockchain
Investment strategies, portfolio structuring,
automated advice, process robotics, etc.FinTech
InsureTech
RegTech
PropTech
…
Go-to-market strategy, customer insights, risk &
compliance solutions, etc.
Investment/ diversification opportunities, new
payment solutions, efficiency increase, etc.
Efficiency gains, data security, data complexity
reduction, etc.
Investment strategies, financing solutions,
disintermediation/ new business models, etc.
Potential application areas
£
…
Source: Strategy& analysis
PwC’s Digital Services
Who of you owns Bitcoins or a Bitcoin Wallet?
Confidential information for the sole benefit and use of PwC’s client.
5
PwC’s Digital Services
Who of you believes in the future of cryptocurrencies?
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6
PwC’s Digital Services
What is money?
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Exchange (absolute liquidity)
Cost estimate
Accumulationof funds
…or just a large «Ledger»?
PwC’s Digital Services
What are cryptocurrencies?
Confidential information for the sole benefit and use of PwC’s client.
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Financial
instruments?
Units of
account?Electronic money? Commodities?
PwC’s Digital Services
Definitions for digital money, virtual currencies and cryptocurrencies
Confidential information for the sole benefit and use of PwC’s client.
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«Digital money, electronic money» = fiat money stored electronically
«Virtual currencies» defined by the European Central Bank:• unregulated, digital money,• controlled by its developers,• accepted among the members of a specific virtual community.
«Virtual currencies» defined by the EU Commission:• digital representation of a value,• not issued by a public authority, not attached to a fiat currency,• accepted as means of exchange,• transferred, stored or traded electronically.
«Crypto currencies» = special case of virtual currencies:• usually decentralized,• based on cryptographic functions.
PwC’s Digital Services
Introducing Bitcoin
Confidential information for the sole benefit and use of PwC’s client.
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PwC’s Digital Services
What are the characteristics of Bitcoin?
Decentralised
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Easy to onboard Partly anonymous…
…but completely transparent
Minimal costs Irreversible
•No central authority
•Each system interacts with each other
•System outage impossible
•Bitcoin Wallet can be set-up in seconds
•No set-up costs
•No names or addresses
•No KYC (but possible)
•Several accounts possible
•Details of each transaction saved in Blockchain
•Full transparency over amount of Bitcoins saved in transaction
•Banks request high transaction costs for international remittance
•Bitcoin requests almost nothing
•Transactions are not reversible
•A payment is paid
PwC’s Digital Services
However, stormy days are coming: «To Fork or not to Fork»
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Key considerations of Bitcoin
• Performance and latency issues with Bitcoin Blockchain
• Lead developers in doubt with future of Bitcoin architecture
• Bitcoin Unlimited as a fork to increase block sizes Fork due to
performance?
Fork due toDAO hack.
PwC’s Digital Services
But Bitcoin is not Blockchain
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Traditional database versus Blockchain based database Benefits of Distributed Ledger Technology
• System of a central authority
• Centralised, editable database
• Third party/ rule basedverification
• Peer-to-Peer-Network
• Decentralised, immutable ledger
• Independent verifiedtransactions
Secure
Trusted
Automated
Shared publicly
Decentralised
Confidential information for the sole benefit and use of PwC’s client.
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Not only Bitcoin wants to win the race for being the only cryptocurrency
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PwC’s Digital Services
However, Bitcoin surpassed the value of an ounce of gold for a short time in January 2017
Confidential information for the sole benefit and use of PwC’s client.
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Strategy& | PwC
Cryptocurrencies have over-performed in the last 2 years – e.g., Bitcoin
Example: Bitcoin and major currencies vs. USD
16Source: Bloomberg
150%
200%
50%
100%
Jul
2015
Jan
2016
Jul
2016
Jan
2015
Bitcoin
CHF
GBP
EUR
CNY
USD cross rates
(indexed per Nov 2014)
Time
1 Bitcoin ≈ 743 USD
+97% value increase of Bitcoin
against USD in 2 years
1 Bitcoin ≈ 378 USD
1 Bitcoin ≈ 230 USD
PwC’s Digital Services
Google Trends: Demand for Bitcoin is exploding
Confidential information for the sole benefit and use of PwC’s client.
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PwC’s Digital Services
The paradox of value of physical cash
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PwC’s Digital Services
Defining asset classes: Politico-Economic Profile of Gold versus Bitcoin
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Gold Bitcoin
Basis of value• Unique physical properties• Scarcity• Gold retains value even in the absence of an
underlying legal structureGovernance• Supply is governed by economic factors• Little regulatory governance affects the
provisioning of gold isUse cases• Capital assets• Consumable/ transformable assets• Store of value assets
Basis of value• Publicly verified claim on an open but limited
resource (21mln btc)• Bitcoin’s «vast potential» Governance• Verification of transactions through
decentralisation and open network of PCs• Open source code and subject to change by
communityUse cases• Platform for auto-executing contracts• Bitcoin as host of assets
PwC’s Digital Services
The benefits of Bitcoin compared to other assets
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Precious metals Fiat currencies Bitcoin
Storage 0.15% -1% per year Subsidised Free and 100% reserve
Transportation Expensive Inconvenient Free & Easy
Security Physical Institutional Cryptographic
Fiduciary media Inevitable Inherent Impossible
Recordkeeping Manual Manual Automatic
Counterfeiting Impossible Inevitable Impossible
Issuance Mining Politics Algorithm
Payment clearing Expensive Centralized Cheap & Distributed
Scarcity High Arbitrary 21 million btc
Authentication Expensive assay Trust counterparty Built-in
PwC’s Digital Services
What makes a currency move?
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or demand increases
or demand decreases
Price will tend to go up
Price will tendto go down
FX PRICE
FX PRICE
• Interest rate decisions• Inflation announcement• GDP reports• Production figures• Market sentiment
• Interest rate decisions• Inflation announcement• GDP reports• Production figures• Market sentiment
If the circulation of a currency decreases
If the circulation of a currency increases (QE)
QE: Quantitative Easing
PwC’s Digital Services
What makes a Bitcoin move?
Confidential information for the sole benefit and use of PwC’s client.
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XX
or demand increases
or demand decreases
Price will tend to go up
Price will tendto go down
BTC PRICE
BTC PRICE
• Payment infrastructure• Legal & compliance• Trust in digital asset• Industry wide adoption
• Lacking support of BTC community
• Other cryptocurrenciesgain trust in the market
• Lack of adoption
If the circulation of a Bitcoin decreases
If the circulation of a Bitcoin increases
PwC’s Digital Services
Correlation of Returns: Bitcoin is the only asset that maintains consistentlylow correlations with every other asset
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PwC’s Digital Services
Risk-Reward profile: Decreasing volatility of Bitcoin
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PwC’s Digital Services
Sharp Ratio: Bitcoin has outperformed for almost every period
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PwC’s Digital Services
Hype or reality: Are cryptocurrencies the future?
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PwC’s Digital Services
• Reductions in real interest rates
• Reductions in distortionary tax rates
• Reductions in monetary transaction costs
Bank of England study 2016: Central bank issued digital currencies(CBDC) offer significant benefits for the global economy
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Increase in steady-state level of GDP of3%
Stabilisation ofbusiness cycles
• Policy instrument that controls either the quantity or the price of digital currencies in a countercyclical fashion
• Improve in financial stability
Issuance of CBDC againstgovernment debt
PwC’s Digital Services
Who of you still believes in the future of cryptocurrencies?
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PwC’s Digital Services
More information
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Fintech Incubator & Accelerator:
- Link
- www.f10.ch
Could Digital Pave a way for a new client centric model:
- Link
PwC BlockChain
- PwC Vulcan Link
- PwC BlockChain event Link
- PwC BlockChain experienc lab Link
Frederik GregaardPwC Digital Services
Head of Digital Financial Services
Tel: +41 78 913 0935 https://www.linkedin.com/in/gregaard
frederik.gregaard@ch.pwc.com https://twitter.com/F_Gregaard