CRYPTOS, DIGITAL CURRENCIES AND THE FUTURE OF MONEY · Webvan goes bust eToys files for bankruptcy Kozmo.com closes Flooz.com closes AOL Time Warner drops AOL from name Boo.com goes

CRYPTOS, DIGITAL CURRENCIES AND THE

FUTURE OF MONEY

IMPLICATIONS FOR CENTRAL BANKS, COMMERCIAL BANKS

AND INDIVIDUALS

Periklis Thivaios CFA, FRM

11Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019

How many of you believe that blockchain is an opportunity for

your firm?

How many of you do not really understand blockchain?

How many of you lifted your hand twice?



Well, nothing we haven’t seen before…

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Amazon is

founded

GeoCities is

founded (as

Beverly Hills

Internet)

Yahoo is

founded

eBay is founded

eToys is

founded

Pets.com is

founded

Boo.com is

founded

Google is

founded

Interest rates

begin to fall NASDAQ opens

4% down

Pets.com goes

bust

Webvan goes

bust

eToys files for

bankruptcy

Kozmo.com

closes

Flooz.com

closesAOL Time

Warner drops

AOL from name

Boo.com goes

bust


Do cryptos have a future?

We need to answer a number of questions

Should Central Banks be worried about cryptos? And,

should they be interested in issuing digital currencies?

Are there opportunities for Commercial Banks? And,

should they be worried?

And what about the average person on the street?

Libertarian dream or Orwellian nightmare?

All images © of their respective owners


Do cryptos have a future?

Images © of their respective owners


What is the best way to predict the future?

Images may be subject to copyright


How many of you here are statisticians?

What is the best way to make predictions about the future?

Images may be subject to copyright


Bitcoin is hugely problematic, isn’t it?

Source: https://www.buybitcoinworldwide.com/volatility-index/ Source: https://digiconomist.net/bitcoin-energy-consumption


But Bitcoin is only one of 1,600


Will ALL of them dissipate?


My crystal ball says:

▪ Despite the criticisms and obituaries, cryptos are here to stay

▪ The most important question is not whether they will exist

– but who they are going to be useful to


Should Central Banks care?



▪ When Uber first launched, it didn’t seek

permission to operate

▪ People found its service is useful

▪ In most countries, regulators decided it is

better to reactively regulate a service that

has won popular support…

▪ ...even though they had the option to ban

it, as there was an identifiable legal entity

standing behind it



Remember this historical data point?

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Amazon is

founded

GeoCities is

founded (as

Beverly Hills

Internet)

Yahoo is

founded

eBay is founded

eToys is

founded

Pets.com is

founded

Boo.com is

founded

Google is

founded

Interest rates

begin to fall NASDAQ opens

4% down

Pets.com goes

bust

Webvan goes

bust

eToys files for

bankruptcy

Kozmo.com

closes

Flooz.com

closesAOL Time

Warner drops

AOL from name

Boo.com goes

bust

We only need one survivor to challenge the role of Central Banks

$1,000,000,000,000

1414Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019 14

Don’t focus on the deficiencies of Bitcoin

Original cartoon: Cartoonstock.com


Pre-empting is better than re-acting

‘Stablecoins’ ‘No’ or little value volatility (?)

Crypto-currency backed by USD

reserves to meet withdrawals

upon demand

▪ No external audit to verify the

reserves

▪ Unable to meet withdrawal

requests in 2017

▪ $31 million USDT tokens hacked in

November 2017

[The Dai], “while engineered to

be fixed to the US dollar at a rate

of one to one, it reached a low of

$0.72 just a few weeks after its

launch in late 2017”

BIS Annual Economic Report 2018

Fia

t collate

ralise

dCry

pto

collate

ralise

dN

on-

collate

ralise

d


Should Central Banks be

interested in issuing digital

currencies?



BIS – January 2019

“The survey shows that, although a

majority of central banks are

researching CBDCs, this work is

primarily conceptual and only a few

intend to issue a CBDC in the short to

medium term.”


Wholesale CB digital currencies Retail CB digital currencies

Progress is still conceptual (and DLT biased)


Initiatives (and opinions) vary…

“We are not planning to create a central

bank-issued digital currency. But we want

to understand better the implications of a

central bank issuing a digital currency”

BOE, April 2018

“No decisions have been taken to

issue an e-krona or not, but by

continuing to examine the scope for

doing so, the Riksbank is preparing a

possible way forward towards meeting

a new digital payment market”

Riksbank, October 2018

“This cryptocurrency is the future

of humanity. Venezuela has

entered the future”

Nicolas Maduro, January 2018

“The purpose of this Act is to

declare and issue a digital

decentralized currency based

on blockchain technology as

legal tender of the Republic of

Marshall Islands”

Marshall Islands, February 2018


“Everyone can create money; the problem is

to get it accepted”


Hyman Minsky, 1986


A note of warning (or common sense)

Digital currencies do not have to be based

on blockchain!

Pros Cons



When is blockchain (DLT) the right solution?

TNP White Paper, December 2018 ([email protected])

Conceptual funnel

Operational funnel

Execution optionsData structured in time

chain

Data distributed across

players

Data verification more

important than the data

itself

▪ Permissions

▪ With whom?

▪ What?

▪ Platform

▪ Standards

▪ First mover

▪ Fast follower

▪ Indifferent▪ Network design

▪ Automation design

No trust, but data inputs

are trusted

mailto:[email protected]


What should Central Banks do?

Act

Act fast

Or perish?

Central Banks need to pre-empt a potential shift of

population preferences from Central Bank currencies to

decentralised options and / or private payment systems

They should take the lead in developing venerable

competitors to other options, and offer all the

conveniences plus more

Alternatively, they may be left playing catch up in a

world of established precedents which are impossible

to control


Should Commercial Banks worry?



Funding is the primary consideration

“ ‘Central bank electronic

money for all’ would have a

disciplining effect on

commercial banks. To

attract deposits, they would

need to alter their business

model or to increase

interest rate payments on

deposits to compensate

users for the additional risk

they assume”

Berentsen & Schaer, 2018

Deposits with CB? Would CB deposits work?Deposits with commercial banks?

"An important question is whether the

Riksbank should issue e-krona directly to the

general public or go via the banks, as we do

now with banknotes and coins."


Blockchain based commercial payment systems?

&

Santander partners with Ripple to offer in

blockchain-based FX transactions for its

customers to increase customer retention and

increase transactional capabilities

▪ Launched in April 2018, available as

mobile app only

▪ Currently open to retail customers in

Spain, UK, Brazil and Poland only

Transaction volume limited

▪ Based on xCurrent and set up as a

closed ecosystem within and

between Santander entities

▪ No real-time but intra-day

processing and settlement

▪ Full transparency about transfer

fees and final FX amount (in target

currency) to be received previous to

trade execution by customer



Should anyone care about the

public?



Are we ready for a cash-less world?

39%33%

23%

15% 13%

0%

10%

20%

30%

40%

50%

Use of cash, Sweden

2010 2012 2014 2016 2018

0

200

400

600

800

1000

1200

1400

1600

1800

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Billions

USD notes and coins in circulation (value)

0%

20%

40%

60%

80%

100%

CY AT IE GR ES IT DE EUavg

PT NL FI BE FR

Payment preferences by country, EU

Cash Card No pref

Sources: Riksbank, ECB, Federal Reserve, Swiss National Bank

CHF in circulation / nominal GDP


The Economist February 2007

“The reports of my death are greatly

exaggerated”

Mark Twain



▪ Addressing a misconception: Bitcoin transactions are not private at all!

– All transactions are public and visible to everyone

– However, the identity of the transactor is not known if the unique identity is not linked to a person

(similar to email ID)

What about privacy and anti-money laundering?

Counterparty Privacy Third Party Privacy

Wholesale

Retail

▪ Several technological options exist for

protecting privacy of non-transacting parties

(channel architecture, confidential identities

etc)

▪ Central Bank naturally has full visibility of all

transactions (the decentralised model of

transactions does not imply doing away with a

governing party)

▪ Generally speaking, even cash payments do not

protect counterparty privacy (I usually know

who I receive cash from)

▪ Illicit transactions are secretive but not

necessarily anonymous

▪ Third party privacy can be achieved with non-

authorised nodes

▪ Linking digital currencies to digital identities

can be deeply detrimental to individual privacy

The anonymity of cash was a consequence of the technology available (or lack thereof), rather

than a conscious design option

▪ Monero is a lot more private and untraceable

– And this is the reason why it is so popular in the dark net and for illicit transactions


No cash, no crime?



In Code we (should) Trust

▪ One day we will (likely) get there

▪ But it is really important in which code we trust

IN CODE WE TRUST


Conclusions


In summary

▪ Offering Central Bank issued retail digital currencies is an option that should be considered

thoroughly and pursued diligently

▪ Passive monitoring until cryptos have become too big is not an advisable option

▪ If individuals get used to (‘currency’ or payments) alternatives, then playing catch up is going

to be rather difficult

Central Banks

▪ Serious business model implications, especially with regards to the shifting of funding

structures and loss of interchange revenue

▪ But also several opportunities as well, yet potentially not for all

Commercial Banks

▪ Eternal trade off: “privacy versus convenience”

▪ Whether you see a libertarian heaven or an Orwellian nightmare, the future is not going to be

the same

Individuals


Our conclusion is…

“We can influence the future, but we cannot control it”

Pieces of mail handled by the US Postal Service

“When it comes to the issuance and use of money, Central Banks have an obligation to try

to influence it”


For a White Paper

on the topic

Email me

[email protected]


The information contained herein is proprietary, confidential and may be legally privileged. Please do not distribute this presentation without the

prior written consent of True North Partners LLP or its authorised affiliates.

© 2019 True North Partners LLP.

37

Any views or opinions presented herein are

solely those of the author

(who does not necessarily agree with them)

Documents

CRYPTOS, DIGITAL CURRENCIES AND THE FUTURE OF MONEY · Webvan goes bust eToys files for bankruptcy Kozmo.com closes Flooz.com closes AOL Time Warner drops AOL from name Boo.com goes