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?

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PwC’s Digital Services

Who of you believes in the future of cryptocurrencies?

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PwC’s Digital Services

What is money?

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Exchange (absolute liquidity)

Cost estimate

Accumulationof funds

…or just a large «Ledger»?

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What are cryptocurrencies?

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Financial

instruments?

Units of

account?Electronic money? Commodities?

PwC’s Digital Services

Definitions for digital money, virtual currencies and cryptocurrencies

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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

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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

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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

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Not only Bitcoin wants to win the race for being the only cryptocurrency

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However, Bitcoin surpassed the value of an ounce of gold for a short time in January 2017

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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

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Google Trends: Demand for Bitcoin is exploding

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PwC’s Digital Services

The paradox of value of physical cash

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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

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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

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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?

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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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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

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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