Here is Tarmo Ploom, Co-Founder of SmartCredit.io, on the Blockchain Challenge in Basel. Tarmo defined for students the task to build compliance filter for whitelisting crypto accounts — it’s about making whitelisting FINMA compliant. Task was accomplished.
SmartCredit.io
October 3, 2018
Here is Tarmo Ploom, Co-Founder of SmartCredit.io, on the Blockchain Challenge in Basel. Tarmo defined for students the task to build compliance filter for whitelisting crypto accounts — it’s about making whitelisting FINMA...
SmartCredit.io
Oct 3, 2018 . 3 min read
Here is Tarmo Ploom, Co-Founder of SmartCredit.io, on the Blockchain Challenge in Basel. Tarmo defined for students the task to build compliance filter for whitelisting crypto accounts — it’s about making whitelisting FINMA compliant. Task was accomplished.
Just in case — Tarmo is on the left on this picture, in not very-business like costume.
Btw, in the first row is Prof. Dr. Walter Dettling, one of our advisors.
Here is the Youtube video explaining the idea of SmartCredit.io Here is the transcript: Hi guys, this is Tarmo speaking. Hi guys, I'm Martin, I'm Co-Founder of SmartCredit.io. We are...
SmartCredit.io
Aug 12, 2018 . 10 min read
Here is the Youtube video explaining the idea of SmartCredit.io
Here is the transcript:
Hi guys, this is Tarmo speaking.
Hi guys, I’m Martin, I’m Co-Founder of SmartCredit.io. We are here in Zurich in one of the financial centers in the world. And we are in the heart of the financial center in the old town of Zurich.
Martin, you are Co-Founder of SmartCredit.io. What is the idea of SmartCredit.io?
The key idea of SmartCredit.io is to create credit-money for the crypto sphere. If you are thinking of Bitcoin, everyone speaks about the Bitcoin, but Bitcoin is just the base money-in the same way the base money, as central banks are creating the base money.
But let’s think on the economy. In the real economy, people are using credit-money. Base money is 3% – 7% of the money and 90% to 97% is the credit-money.
If you are thinking of Bitcoin and Bitcoin economy then we have only base money. Real economy needs credit money. It has not been so in the last 5 years or in the last 50 years. It has been so for the last 5’000 years.
There is a simple reason for this – production, farming – it needs time. We have to pay for energy, we have to pay for the labor, we have to pay for the time. Everything needs to be financed. And this financing, in the last 5’000 years, has been done with the credit and credit-money.
Back to the Bitcoin – Bitcoin is missing the credit-money approach. What we want to introduce is the credit-money approach into the crypto sphere and to achieve this enabler of higher penetration of crypto technology and decentralization of the economy.
How does the credit-money creation work today?
Let’s speak about the base money creation – created by central banks like Swiss National Bank, European Central Bank or Federal Reserve – the base money.
But the credit money is created by private companies – these are the commercial banks. And credit money has to be legally accepted as a mean of payment. Private companies are creating fiat money and public people have to accept it.
How is it created – it’s created in the lending transactions. If I am taking a loan from the bank, then the bank is actually creating new credit-money and he is lending me this credit-money. Bank does not own the money, what they are lending to me; they are creating it and this is a legal mean of payment in the respective national economy.
You mentioned lending, but lending is a risky business?
Everyone is saying that lending is a highly risky business. Now, let’s look from this way – commercial banks have most of their business created through lending.
If we are taking a traditional bigger commercial bank, then 40% or so of the profits are through the lending business. The lending business is a money creation business.
Commercial banks are doing the risk analysis of the clients, they are calculating how much a client can borrow and all other parameters. Commercial banks are doing this for many years, they are doing this for hundreds of years. They have developed the systems and like said – around 40% of commercial banks profits are created through the lending business.
Do you want SmartCredit.io to become a decentral commercial bank?
We have commercial banks, they are creating credit-money, and in SmartCredit.io our aim is as well to create credit-money for the crypto sphere. But we do not want to be a bank.
We want to be a marketplace – we want to be a marketplace, where we are connecting borrowers and lenders globally. So that people can provide to each other the credit and from this credit, we create the credit money to pay the next persons.
Actually, we are doing everything that commercial banks are doing. But we are doing this without being a bank – we are doing this by being a marketplace.
Very interesting! Let’s take customers viewpoint – what can customers get from SmartCredit.io?
Let’s take a borrowers viewpoint and let’s take a lenders viewpoint. For the borrowers, it means a very advanced credit process. We are doing automated credit risk rating by the registration, so we know credit risk and borrower gets fast process. Compared to our competitors we have many advantages and much less collateral and so on. So, that’s for the borrower.
If we are looking on the lender – the key advantage of our system is – when I’m lending Ether to another peer-to-peer person in the world – I’m lending out my Ether and I’m receiving Smart Money tokens, which is the crypto credit-money and I can use this crypto credit-money to pay the next persons.
So, I’m lending out my money, my Ether; and I receive crypto credit-money – Smart Money tokens, which exists as long, as the loan exists, and I can pay next persons with this.
Sorry, do you mean that I can earn profit and in parallel I am liquid?
Exactly. That’s what the commercial banks are doing at the moment – they are liquid and they earn a profit – because they are creating credit-money.
So, I can earn profit from my Ethereum funds and still have liquidity. It sounds like a miracle?
Again, commercial banks are doing this. When I am a lender, I’m lending out my money, I’m receiving crypto credit-money. And this crypto credit-money, the Smart Money tokens, are the mean of payment to pay the next parties.
Commercial banks are creating credit-money, I’m as a borrower- I’m receiving it. In SmartCredit.io as well we are creating the Smart Money tokens and through this the lender has liquidity. He has immediate liquidity.
And not only that he has liquidity – who is keeping Smart Money token, will receive as well interest. If I am passing my tokens to the next person, then he will earn the interest; if I am passing to the fifth person, then he will earn the interest. So, it’s pro-rate interest is earned from the holders of the tokens.
So, it’s not only that I have liquidity – we distribute as well the profits from credit creation to the peer-to-peer network.
It sounds wonderful! Can you tell a little bit more about these Smart Money tokens?
SmartMoney tokens represent the claims. There is a borrower and there is a lender. The lender is receiving Smart Money tokens. If the lender is lending 5 Ethers, he will receive 5 Smart Money tokens. And the owner of Smart Money tokens is as well the interest.
Smart Money tokens are backed up with the respective claim, with the respective lending contract. Smart Money tokens are protected, that means their value is always one Ether. We have a protection mechanism, it’s a unique protection mechanism, which is protecting the value of Smart Money tokens.
If commercial banks are creating the credit-money, they are protecting the value of credit-money through their balance sheets and reserves. The same way SmartCredit.io is protecting the credit-money through own protection mechanism.
So, this means – Smart Money token represents the claim, it can be used as a mean of payment, it collects interest to the holder and its face value protected.
Sounds really like a break-through innovation?
What we are doing – we are just mirroring what commercial banks are doing today. Commercial banks are doing this in a centrally. It has been so because of scale effects and lower transaction costs.
Thanks to the blockchain it will become possible to do all this what commercial banks are doing in the lending business, where they generate 40% of their profits to the view instead of the many. Thanks to blockchain technologies it will be possible to decentralize all these logics – for the benefit of many instead of the benefit for the few.
What are your future plans?
The first step is to create a decentral marketplace for the credit, then we create credit-money. The second step is to create a crypto credit- card. But this is not the credit-card or debit-card, which are connected with the huge existing credit card businesses.
We want to create virtual crypto credit card, without having any connectivity to existing credit card businesses, but having only SmartCredit.io account, which you can use the in online shops and by the online merchants.
So, you can buy from an online merchant on credit and it’s all backed up with the Smart Money tokens in the same way as in lending transactions.
So, the first step is – we are creating a peer to peer decentral lending and the credit-money; the second step is – we are creating virtual credit cards, what can be used in the online processing.
In this video, we discuss the essence of the credit-money - of different incarnations of the credit-money in the last 5'000 years and about what will happen as next. For...
SmartCredit.io
Aug 12, 2018 . 10 min read
In this video, we discuss the essence of the credit-money – of different incarnations of the credit-money in the last 5’000 years and about what will happen as next.
For the beginning, let’s recap how our current fiat monetary system works. We do have:
Base money has existed in different incarnations (commodities, gold, minted coins, and our current central banking money)
Credit money has existed in different incarnations as well (decentral credit money, private credit money and our current highly centralized credit money)
Credit-money is actually not so young, as one might think. Some think, that credit-money exists since the Federal Reserve was created in 1913, others think that credit money exists since central banking was created in 1660s. Actually, credit-money started 5’000 years ago in Mesopotamia.
On this picture we see different combinations of the credit money:
The pendula will move now back from high centralization into the decentralization:
Our current credit-money is heavily centralized through the issuing process via commercial banks deposit insurance and central banking system
Here is the transcript:
Hello guys, I’m Martin, Co-Founder of SmartCredit.io. We are here in Zurich, in the heart of one of the biggest financial centers. We will speak today about credit and credit-money.
Martin, how do world credit system work currently?
It’s actually a pretty simple system, but it’s made very-very highly complex, so that’s it difficult to understand. But let’s explain it in this way:
One one side there are central banks, they create the base-money and they try fo control the speed of monetary expansion. On one other side, we have commercial banks and commercial banks are creating the credit-money.
What is the exact role of central banks in this system?
Central banks are creating base money – these are the coins and electronic base money. In parallel, central banks, what they are trying to do is to control the speed of credit-money creation. Credi-money is created by the commercial banks, it’s ca 90% – 97% of the total money. The base-money is 3% – 7% of the total money.
And what central banks are trying to do is to manage this system.
And how successful are central banks in controlling the growth speed of credit-money?
That’s a point of a view, depending on whom do you ask. If you ask central bank guys, there are many of them, then they will tell you obviously that it’s very successful.
My comment on this is – economies are living systems. And to control living systems from a part of the living system is quite difficult. We see that the credit-money growth has been actually the cause for the most of economical crisis – the Russia economical crisis or Asia economical crisis. If credit-money is growing too fast, then there will be as well the phase where credit-money will be declining. The decline will result in a recession.
Obviously, central banks are saying that they are doing a perfect job, but there are different views about this topic.
You speak about the credit-money and you speak about the credit. What is the difference between these two?
Credit is so that anyone can give credit to anyone – it’s our basic right, it’s basic law – I can give credit to anyone. Credit is becoming credit-money if my counterparty is giving me a claim (I’m a lender in this scenario) and I can use this claim as a means to pay the next persons. That was the way how the earlier monetary systems worked.
Practically the credit-money was created decentrally, it was created peer to peer. And there was the base-money, which was then created by the kings, the sovereigns. On top of the base-money, was the credit-money, which was created by people for people.
And concerning credit-money – the amount of credit-money, why is the amount of credit-money important?
We have a base-money, that’s what central banks are creating. The economy is growing, it’s like a living organism – if a living organism is bigger, then the organism needs more blood in his body. If a living organism is smaller, then he needs less blood.
And the credit is like the blood in a human’s body. If there is fast economic growth, then we need automatically more credit. If there is low economic growth, then we need less credit. This problem cannot be solved with the base-money only, this problem has to be solved with the credit-money. That’s why the credit-money is very important for economic development.
If there is no credit-money, if there is only the base-money, then it will probably end up in the deflationary economy, because the price of the money will be too high for the fast growth phases. That’s the reason for the credit-money.
In today’s world, we have commercial banks and central banks. When did the commercial banks emerge?
People think that commercial banks have been there forever. Actually, it’s not so. The commercial banks started to emerge like 350 years ago. The first central bank was created in Sweden, it was around the 1660s; the second one was created in London around the same time.
And the first commercial bank was Netherlands Wechsel and Handelsbanken, the role of this bank was to trade the wechsels, because peer to peer money creation was based on the wechsel, in English: bill of the exchange system. That’s the first commercial bank was created.
However, the economy worked as well before, and it worked pretty nicely before the commercial banks were created.
And how did it worked before?
Commercial banks – they cam 350 years ago. But the peer-to-peer credit systems and credit-money systems they were there already 5’000 years ago in Mesopotamia. They were there in Phonecia 3’000 years ago, 2’500 years ago. They were used in the Islamic trading network, they were used in the Mediterranean trading network, they were used in the Hanseatic trading network.
So, peer-to-peer credit money has always been there in human history. And interesting is, that the peer-to-peer credit-money, which is actually 5’000 years old, is olden that the coins-based money, which was created by Greeks, by Romans, by Chinese and by Indian civilizations, at the same time – ca 2’500 years ago. But the peer-to-peer credit-money is older than the coins-based money.
Your question was – how did the economy then work before? It was a prosperous economy, we know the renaissance in Europe, we know how good the Hanseatic network developed, how good the Mediterranean network developed. We know as well Phonecia, how strong was their economic system; Mesopotamia – the very old country. So, these were the phases of pretty nice economical development.
But if the economy worked without the commercial banks, why did these commercial banks emerge at all?
Initially, when the commercial banks emerged 350 years ago, then at that time the peer-to-peer money system had some short-comings. For example bill of exchanges had different loan tenures – one can have one week, one can have one month, one can have one quarter. Additionally, there are different nominations.
It wasn’t standard money like it was today, where we have standard units of money. The units were arbitrary at this time, as well the loan tenures were ar at this time.
So, the commercial banks were like a marketplace to exchange different loan tenures, to exchange different nominations – 1 gulden in Holland, 5 guldens or 99 guldens – that was the first role of Netherlands Handels- and Wechsel Bank.
What happened after that?
raryInitally commercial banks were created to enable the wechsel (bill of exchange) system, then the system developed so that the commercial banks started to issue their own fiat money, their own credit-money. So, it wasn’t anymore the peer-to-peer credit-money, but the commercial banks took over.
Nowaday’s commercial banks taking over is very much connected with electronic money. If you have older systems if you go even back 50 years ago or 100 years ago, the peer-to-peer systems, the peer-to-peer credit-money systems, they were still used. But the more and more electronic money has appeared the less the peer-to-peer credit-money systems have been used.
That means the credit business is consolidated into the commercial banks.
So, you imply that all these central credit money systems emerged as a result of standardization?
It emerged as a way to deliver the scale effects. From one side you had this wechsel system with the limitations, which btw, can be solved very easily with the blockchain system and from another side the commercial banks had their scale effects.
These were scale effects, these were the effects of the transaction costs. They were able to process credit and credit-money much easier than the peer-to-peer systems. And that’s why the commercial banks emerged this way as they are. They just did this in a more effective way.
What if there is some other way to achieve this standardization you mentioned? With blockchain?
If you are looking back, then there are always these two competing systems – one is the peer-to-peer system (decentral credit system) and the other is the central credit system like it is today with the commercial banks.
The current commercial bank’s based credit system is more effective to create credit – there is a scale effect, there is processing the information and the transaction costs are lower.
However, if we are adding now the blockchain technologies, then this will enable the peer-to-peer credit networks and credit-money networks, it will give the same information to every participant. It will enable the alternative monetary system, which has been there much longer, than the coin based money.
Does it mean that with blockchain technology we can bring more emphasis again to the decentral credit-money-system?
Exactly, blockchain will be an enabler for the peer-to-peer decentral credit-money system. It takes away the advantage of commercial banks, the advantage being the scale effects and the lower transaction costs. These advantages will be taken away from commercial banks as dis-intermediaries. Probably they are not so much required as they are required now. And the credit can be created in a peer-to-peer way and credit-money can be created in a peer-to-peer way.
Are you saying that we are going back to a decentral future like we had decentral past?
Human history has been pretty much the decentralization fight with the centralization fight. There have been cultures, which have been more decentral and there are more central cultures. Central cultures try to control more things, than the decentral cultures, where the degree of freedom is higher.
There is always this question of how you process the information. If you are centrally processing information, like commercial banks are doing this today, then they have an advantage. But thanks to the blockchain technologies we can go again on this decentral route, we can start to do more and more in the decentral systems, meaning the degree of centralization of big organizations will go down.
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields “The Bitcoin whitepaper defined the base money for the Internet. SmartCredit.io defines the...
SmartCredit.io
Jun 12, 2018 . 3 min read
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields
“The Bitcoin whitepaper defined the base money for the Internet.
SmartCredit.io defines the credit-money for the Internet.”
In the traditional banking system, credit money earns interest for the commercial banks. Our mission is to create the first decentralized system of crypto-credit money in the world, empowering people to take back control over their own money — without the commercial banks and fees.
We have been in this space for a long time and would, therefore, like to share some of our expert insights — from articles in our blog from recent years.
We published our first Bitcoin price forecast in the Swiss CFA Magazine in January 2014, where we forecasted a Bitcoin price of USD 10,000. Our price forecast was accompanied by some dismissive laughter. So, we used every opportunity to transfer the message of blockchain’s key values.
We are convinced about the upcoming massive disruption to the traditional banking industry, which is why we published another analysis in the Swiss CFA Magazine in November 2015. Naturally, we attempted to spread the message from within Credit Suisse, where we worked at that time. But, well, private banks are not exactly places for “out of the box” thinking…
Our next article is based on the Swiss banking unit of Credit Suisse and analyzes how much revenue Credit Suisse will lose as a result of blockchain disintermediation. I tried to present this analysis to the upper echelons of Credit Suisse, but you might be able to imagine how it was received…
Up next is the analysis of how core banking processes will change as a result of blockchain disintermediation.
This article and previous analyses provided the key triggers for the idea behind SmartCredit.io.
We analyzed how to combine traditional banking with crypto finance based on the Swiss banking ecosystem one year ago. There have been some minor changes in the landscape during the last year, which serve to confirm our position — crypto businesses will not face any competition to speak of from the traditional banks. Indeed, the playing field is reserved only for new crypto entrants. A huge thanks here goes to the traditional banks!
Once ICOs really started to boom around 12 months ago, we analyzed what could be the best way to invest in ICOs. And we came up with the “lazy approach” — for all of us who lead busy lives… Incidentally, at that time we viewed Antshares/NEO, Ark, Komodo and Singular to be investments worth considering. Interestingly, these crypto-assets subsequently performed in line with our rather positive view. Disclaimer: We also valued a number of other tokens that performed less well.
We realized that more and more investors are streaming into the crypto space. So, last summer, we published an article on how to use modern portfolio management approaches for crypto assets investments. As some of our readers here are from crypto investment funds, we hope to share some valuable insights for your investment fund strategies as well! 😉
We will continue to publish our thought leadership articles and we hope you enjoy reading them.
By the way, our new website, the prototype (with our pilot coming soon), as well as our intro video, are also available. Please take a look and visit SmartCredit.io.
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields. “The Bitcoin whitepaper defined the base-money for the Internet. SmartCredit.io defines the credit-money...
SmartCredit.io
May 29, 2018 . 2 min read
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields.
“The Bitcoin whitepaper defined the base-money for the Internet. SmartCredit.io defines the credit-money for the Internet.”
In the traditional banking system, credit money earns interest for the commercial banks. Our mission is to create the first decentralized system of crypto-credit money in the world, empowering people to take back control over their own money — without the commercial banks and fees.
Solves the credit problem in the crypto space.
Disintermediates credit card companies and creating crypto credit cards.
Replaces today’s fiat credit money by offering Smart Money tokens.
We are happy to announce that Jon Matonis is joining the team as an advisor to SmartCredit.io. Jon is a Founding Director of the Bitcoin Foundation. Jon advocates Bitcoin and its disruptive economic implications to a wide variety of audiences around the world. His early work on digital cash systems and financial cryptography has been published by Dow Jones and the London School of Economics.
We are also pleased to announce that the SmartCredit.io prototype is available after being released at the end of March, and we are getting closer to completing our pilot phase. The prototype can be accessed from our website.
SmartCredit.io presented in the Pitch Battle at the Growth Conference in Frankfurt. We did well! We will continue presenting at various pitch battle events.
Our new website and intro video are also available — please have a look and enjoy it!
In January 2014 we forecasted Bitcoin valuation of 10'000 USD in the Swiss CFA Charter Magazine. The value of Bitcoin reached a record high of $19,850 in December 2017. Given...
SmartCredit.io
Apr 10, 2018 . 7 min read
In January 2014 we forecasted Bitcoin valuation of 10’000 USD in the Swiss CFA Charter Magazine. The value of Bitcoin reached a record high of $19,850 in December 2017. Given the hype surrounding the value of Bitcoin, what could we expect its value to be in the future? The value of Bitcoin can be derived from the following as:
The value of Bitcoin can be derived from the following as:
The following graph shows the Bitcoin price on a logarithmic scale
Most users of Bitcoin will use the currency through the use of an ‘internal blockchain wallet” on the Exchange (e.g. Bitfinex, Bitstamp, Coinbase, etc.) rather than an “external bitcoin wallet” in the blockchain. After getting more experienced in Crypto, we expect these users will create their own wallets on the public Bitcoin blockchain. In this situation, they will be real owners of their Bitcoins (as opposed to having a claim with the Exchange who owns the private keys for the Bitcoins).
There are no user numbers available for Bitfinex which is the largest crypto exchange. However, data is available for Coinbase (also known as GDAX), which is the second-largest crypto exchange –. Coinbase is growing at the moment by 50’000–100’000 users per day. The following graph shows the number of Coinbase users. The graph is on a logarithmic scale and so the straight line depicts and exponential growth in a number of grand
Coinbase trades 10% of the total global Bitcoin volume and there are over one hundred exchanges. If Coinbase is growing 50–100,000 users per day and blockchain.info by 50–80,000 users per day, then we estimate conservatively daily growth rate of 200,000–300,000 users per day (users usually register not only on one exchange but on multiple exchanges).
We estimate approximately 20 million direct users of Bitcoin blockchain and an additional 15 million users who use Bitcoin through their exchange wallets. Not all of these users own Bitcoins many of them have moved into other cryptocurrencies. Many of the users own more than one address as well and we estimate 35 million active cryptocurrency users at the moment.
On 11.12.2017 there were approximately 400’000 transactions on the network and the total transaction value was 4.3 Billion USD. The following graph shows transaction volume on a logarithmic scale and exponential growth
One can see exponential growth in Bitcoin Price, in the number of Bitcoin users and in the transaction value over the Bitcoin blockchain.
To consider how to translate the growth into Bitcoin value, I consider the application of Metcalfe’s law, which states that the value of the network is not growing linearly but to the square of the number of users. The number of users has been growing more than two times every year. Currently, the network grows by 200,000–300,000 users per day. If we assume doubling the number of users of Bitcoin per year, this translates into value growth of two and four times.
Many cryptocurrency platforms (like Bitcoin and others) are instances of the “network economy”. These are not like traditional companies that grow through scale but where the value is linear to capital used. The network economy value is not driven by capital used and by scale effects but rather two parameters:
Bitcoin network received major re-design in August this year when the so-called SegWit protocol was initialized. The next step is to initialize the Lightning Network protocol. These protocols increase the throughput of the network by introducing “two-layer” transactions. There are transactions on the main blockchain and light transactions settled later on the main network. This will lead to a massive increase in transactions on the Bitcoin network because current transaction fees which can exceed 50 USD are relatively expensive for users.
Every new technology such as fax, e-mail, internet, and even Bitcoin can follow the adoption curve. The following graph shows the Gauss bell-curve and the S-Curve, which both can be used for adaption.
Our analysis above estimates approximately 35 million active cryptocurrency users. The world population is 7.6 billion less young children, the elderly and people in state institutions. And if we assume half of the world population would be potential Bitcoin users, this translates into a worldwide adaption rate of 1%.
However, we could expect most of the cryptocurrency users are in OECD countries and contribute to 80% of its use considering that 80% of the number of Bitcoin nodes are deployed in OECD countries. Given the OECD population is 1’154 million, from which the economically active population is 700–800 million people, the OECD adaption rate is 3.5%.
This implies that the Bitcoin network has entered the early adopter’s phase on the S-Curve in OECD countries. This phase will be characterized by the development of real-world business use cases, by emerging “killer apps” and by increasing the rate of adoption.
Bitcoin is a highly secure network, but it does not support “smart contracts”, which are supported by about ten different crypto-platforms. Smart contracts allow us to build value-adding business applications on top of the crypto-platforms and generate additional usage on the platform. This translates into higher valuation given the value of the network depends on the number of nodes and on the number of transactions on the network. For example, the Ethereum platform has thousands of so-called “decentral apps” which are often financed through Initial Coin Offerings — ICO’s.
However, through emerging sidechain technology it will become possible to connect Bitcoin with Smart Contract platforms such as the “Rootstock project”. This would build “decentral apps” which are connected to Bitcoin blockchain security and translate into a higher number of transactions on the network and higher value.
“Decentral apps” offer the potential to build new business models through disintermediation. Today’s big corporations, which enjoy oligopoly or monopoly positions have been built through solving the coordination problem with hierarchical and process-based methods rather than through a market mechanism outside of the banks.
If one is dealing with digital goods, like in banking, media or insurance sectors, and if coordination mechanisms can be solved through blockchain and decentral app-based marketplaces, then the need for big corporations, as we know them today, will reduce.
Adam Smiths’ “Wealth of Nations” describes the model of free-market capitalism but was based on companies that would today classify as small companies. However, the coordination problem led to the emergence of large corporations, and through their oligopoly and monopoly market positions have moved away from the concept of free-market capitalism as defined by Adam Smith.
Disintermediation of centralized business models through blockchain and decentral apps will lead to significant value creation in new business models and at the same time to value the destruction of today’s big corporations.
We consider the valuation has three components:
Network value as a store of value
The number of Bitcoin users doubles every year and if we take the base price in 2017 at approximately 1’000 USD, then the price by the end of 2018 should be 2’000 and 4’000 USD.
The current price is higher and will lead to a short-term correction over the coming months. However, by taking 3’000 USD as the current fair price and projecting exponential growth of the network, the price in four years would be expected to be between 50’000 and 750’000 USD.
Network value based on the possibility to execute transactions between the users
The Bitcoin network has reached its current throughput limits. However full implementation of Segwit and Lightning protocols will lead to massive enablement of the smaller transactions on the network, which will increase the network’s value.
This allows us to adjust the forecasted price in four years from 50’000 to 80’000 USD.
Network value through value-adding services on Bitcoin Network
The Internet boom beginning of this century focused first on technology (telecoms, broadband, etc.) and then emerging companies such as Facebook, Google, and Amazon. The same trend is happening in the crypto-sphere. — The current focus on underlying technologies will shift to network-based business models, which will result in newly created applications and lead to the major adoption of the platform.
Bitcoin enrichment with Smart Contract functionality facilitates further applications and will translate into additional Bitcoin network value increase at the same time.
This allows further adjustment in the forecasted price of Bitcoin in four years to 80’000 to 100’000 USD.
Blockchain technologies, which were first implemented with Bitcoin, will enable the “Cambrian explosion” of new blockchain-based business models, which started with simple use cases like “store of value” and “payment”. Adding “disintermediation” models allow real blockchain-based killer-apps, and a networked economy based business models. Bitcoin network will be the key beneficiary of this upcoming “Cambrian explosion“.
Our forecast four years ago was that Bitcoin will be 10’000 USD. Our new conservative forecast will be that Bitcoin will reach 100’000 USD in the next four years.
Here is the presentation about Blockchain Value Cases held at the University of Applied Sciences in Basel (via Slideshare): [slideshare id=79187491&doc=blockchainvaluecasesinstartupscenev0-170827105313] The short version is this:
SmartCredit.io
Aug 28, 2017 . 1 min read
Here is the presentation about Blockchain Value Cases held at the University of Applied Sciences in Basel (via Slideshare):
[slideshare id=79187491&doc=blockchainvaluecasesinstartupscenev0-170827105313]
The short version is this:
Blockchain technology will bring about changes to client value networks: New alternative financial services providers will emerge, and services that are currently billable will become free or virtually free (including...
SmartCredit.io
Aug 15, 2017 . 12 min read
Blockchain technology will bring about changes to client value networks:
This article looks at the key processes of private banking and considers how they will be impacted by blockchain. We can categorize these processes as follows:
Compliance and regulatory processes, which do not directly add value for the client or the bank, but represent a requirement.
In the following table, key banking processes are divided into the “1st level Category” and the “2nd Level Category”:
Client opening processes — these processes are related to opening new client relationships. It encompasses KYC (Know Your Client) and establishing who is the beneficial owner or the real owner of the assets.
Client opening also covers product opening processes. Different products require different setup parameters from the client. For example, when ordering a credit card, you can specify whether it is “silver”, “gold” or “platinum” and whether there a need for a partner credit card (with corresponding fees).
Some products might not be allowed in some jurisdictions (determined by the client’s domicile) or, for example, US persons may be excluded from the offer (regardless of jurisdiction).
Client compliance processes — there is a high level of client activity monitoring that takes place in modern banking; most of this is determined by regulations, but not exclusively. For instance, if a bank has given a mortgage to a client who then decides to transfer assets out of the bank, the client would quickly receive a phone call from their relationship manager.
But this also relates to flow-of-funds analysis (if clients make larger payments, they might need to add additional justification for these payments) or AML-related (Anti-Money Laundering) issues. Regulatory client reporting, such as FATCA, AEI, withholding tax, MIFID, etc., also fall under the same category.
Client tax reporting is likewise covered by this category. Clients are provided tax documents that are required each year. If a client decides not to submit these documents to the relevant tax authorities, the tax authorities will still obtain digital access to these documents via the AEI (Automated Exchange of Information).
Client profile updates are also relevant here. This concerns keeping client profiles up to date (regarding domicile, nationality, etc.), as this information determines which products can be offered to which clients. Indeed, it can also determine that certain clients cannot be contacted actively at all, for example, if they are offshore clients in certain domiciles.
Sales management processes — this involves a lot of client profitability analysis (which is always running in the background) or client potential analysis (which is about identifying additional suitable products for specific clients). These processes are intended to identify which customers are “good” and which products may be sold to these customers.
Banks earn their revenue by selling financial products to clients; banks are not altruistic organizations that seek to serve the common good in society. They want to sell, sell, sell. And there are also fee structures that are not always transparent (one could speculate that this is deliberate).
Of course, there are product suitability processes in place. Lehman Brothers structured notes (a global financial services provider that declared bankruptcy after the Lehman Brothers default) are not suitable for grandmothers, for example. Advisory risk processes would also not allow a 100-percent portfolio allocation in structured notes (which would be subordinated claims, if the issuer went bust).
Client reporting processes are likewise included here. They provide clients with helpful summaries about transactions or the investment performance of their assets.
Client transaction processes — these mainly relate to payments and client trading.
Portfolio management processes — here we have a full stack of processes starting from creating the Investment Policy Statement (IPS) and ending with the client portfolio review with the client.
Every client has an IPS which is determined by their ability to take investment risk, their willingness to take investment risk and the constraints issued by the client (for example, no investments in the tobacco sector). All investments should always be made in accordance with the IPS.
Each bank defines the strategic asset allocation (the range of assets that should be invested into specific asset classes) and the tactical asset allocation (which is a more short-term form of asset allocation). This is usually performed by research departments.
This process category is advice-intensive. And this advice is and will continue to be, the core competence of banking.
Credit processes — this category refers to lending and the associated monitoring of risks. This is the process category in which banks generate most of their revenue.
The key process here is the client credit risk calculation. This risk determines the loan interest rate. It is dictated by client income, other obligations, the amount to lend, family circumstances, and other factors.
Another key process is credit payback monitoring: Is the client still able to repay the loan and are any adjustments required? If the client is unable to pay back the loan, the client default handling process is initiated.
Client closing processes — the costs for clients to switch banks are relatively high in the traditional banking system. If a client changes their banking relationship, it is necessary to transfer their assets to another bank. This is a costly process that also takes a lot of time.
In the previous article, we looked at how private banks generate revenue and how this would be impacted by blockchain disintermediation:
But let us consider client opening, client compliance, and client closing — since the client would be in control of their own assets and their switching costs for blockchain-based assets would be minimal, clients will be much less tied to banks than they are currently. This will bring major changes to this process category.
Client assets would not be listed on the banks’ books like they are today. Client assets would be controlled by the respective private keys and secured on the corresponding crypto-asset blockchains. If a client needs portfolio management from a bank, in the future they could set up 1:2 multi-signature access (signature one for the client and signature two for the bank) for the asset manager.
Sales management processes will likewise transform due to the following:
The key question here is how exactly will the timeline of blockchain disintermediation unfold.
Technology adoption can be expressed using an S-curve comprising the following adoption phases:
We would probably not be inaccurate to assume that less than one percent of the working population in OECD countries currently own any cryptocurrencies — this comes under the “Innovators’ Phase”. Real business value will develop from the middle of the “Early Adopters’ Phase” — from an adoption rate of ten percent.
It is difficult to forecast when an adoption rate of ten percent will be achieved, but we could estimate a time frame of three to five years. This adoption will not only involve “owning tokens” but also “value-adding business services”, including banking, meaning there is a real impact on banking processes and banking revenues.
This analysis can be summarized in the following table:
Blockchain disintermediation will affect key banking processes, such as client transactions, portfolio management, and credit processes. They are all among the key processes in which banks generate revenue today.
On the one hand, there will be huge opportunities for crypto/fintech companies to focus on these areas. On the other hand, traditional banks will have to seriously rethink their future processes and revenue streams.
Additional information
1. The S-Curve of technological adoption: https://medium.com/@mcasey0827/speculative-bitcoin-adoption-price-theory-2eed48ecf7da
2. How traditional banking business revenues will be impacted by crypto and smart contracts
The traditional banking business is based on fiat currencies. Conversely, a diverse range of cryptographically secured digital coins underlies the crypto-asset industry. In previous articles, we looked at how traditional...
SmartCredit.io
Aug 19, 2017 . 10 min read
The traditional banking business is based on fiat currencies. Conversely, a diverse range of cryptographically secured digital coins underlies the crypto-asset industry. In previous articles, we looked at how traditional banking revenues will be intermediated with blockchain technologies and how the key banking processes will be impacted by blockchain disintermediation.
Now let’s consider the big question: How will traditional banking react to emerging crypto finance?
Four response strategies are possible and this article will explore these options in greater detail:
· Do nothing — continue to run the business without adjusting course
· Wait and see — monitor the situation on an ongoing basis and develop internal capabilities
· Gradual integration — try to selectively integrate crypto-finance products into traditional banking
· All-in commitment to crypto finance — shift fully to crypto finance
These strategies can be positioned on a product offering/capability matrix as follows. Here, the product offering dimension describes how advanced the crypto-product offering is, while the capability dimension indicates the degree to which advanced crypto-finance capabilities have been developed and are available to the banking organization:
This article will explore each of these strategies in further depth.
This strategy involves taking no action at all. Essentially, it represents the delegation of decision-making on an active response strategy to a point in time in the future.
This response strategy can be considered in relation to the client base of a given traditional bank:
· For private banking, i.e. the wealth management branch of traditional banking, most clients are found in the 50+ age group. All private banks have online banking channels, but usually, less than a third of the client base are actually using these online channels. Obviously, it could be difficult to explain the benefits of crypto products to technology-adverse clients, which in turn would result in this strategic choice.
· However, retail banking is different. This branch of banking serves everyday needs; it’s about payments, credit cards, and small loans. These are the financial services that 95 percent of people regularly use. The retail client segment also has a greater affinity with technology. For this reason, it is possible to explain to them the benefits of crypto finance, including inexpensive and fast cross-border payments in the remittances, use case.
This is also associated with a “copycat” strategy. Sometimes it can be a good idea to let other banks make the first moves — to become the pioneers and also to make costly mistakes. This would allow others to learn from their mistakes and imitate successful strategies. Nonetheless, the total market capitalization of crypto-assets is approaching USD 150 billion; this market cannot remain ignored for much longer.
An extension of the “do nothing” strategy would be the “wait and see” strategy. This entails monitoring the market, analyzing competitors’ strategies and incrementally developing the internal know-how.
This offers a strategic option for traditional banks. If cryptocurrency adoption increases and if clients’ demand for crypto products grows, then a crypto offering can be developed on existing internal capabilities.
Implementing new products in traditional banking is relatively complicated and costly. However, if initial frameworks are already in place in traditional banks, this will result in smoother implementation.
Bridging the gap between the fiat and crypto world and developing these two sectors in concert is key to this strategy.
According to this strategy, crypto products are gradually integrated into the existing offering of respective banks. For instance, this could start with the following simple products:
· The topic of remittances is often discussed, but thus far this service has not been supported by traditional banks. The “cannibalization” of respective strategies is one reason for this. However, offering remittance products would enable banks to include additional client segments as well as profit from additional offerings beyond this segment, for example through credit card revenues.
· International fiat-crypto proxy accounts could be useful products for international companies. International companies need international banking accounts, but transferring funds between these accounts take time and incur considerable costs. These transfers could be accelerated while reducing the associated costs by using fiat-crypto proxies.
· Another example of possible products includes smart contract-based lending. Banks would earn revenue from the usual interest rate, but the additional margin on top of this interest rate would be almost zero since the operating costs of this form of lending would be eliminated. Corporate clients who use this lending facility would benefit from lower interest rates than usual (due to the eliminated margin).
· Investments products like funds for crypto assets are also conceivable. Due to the fact that crypto-assets exhibit valuable performance characteristics as well as valuable volatility characteristics, they would represent a useful addition to the alternative assets category within client portfolios.
Examples of this strategy include:
· SwissQuote, a Swiss bank, is cooperating with the fiat/cryptocurrency exchange Bitstamp in order to offer its clients the possibility to trade directly with Bitcoin.
· Falcon Private Bank, likewise a Swiss bank, offers to its wealth management clients the possibility to invest in Bitcoin products.
So far, these are the first two examples in Switzerland — in a country with around 250+ regulated banks. We assume that additional banks will follow suit.
On the one hand, the banks are able to present themselves as innovative and, on the other, they offer meaningful products to their clients, which also generates revenue for the banks. Banks can develop their internal capabilities for crypto-product offerings and achieve quite a competitive advantage in the process.
This would imply dropping traditional banking and converting the bank into a fully-fledged crypto institution that would offer the following products:
· Payments (already available in crypto finance)
· Custody (already available in crypto finance)
· Credit cards (already available in crypto finance)
· Lending (not yet fully established in crypto finance)
· Wealth management (not yet available in crypto finance)
At present, this strategy might be challenging for traditional banks, especially in view of their current client base. Around 99 percent of clients do not own any crypto assets and those who do own crypto assets would rather not go through the traditional banking system.
However, since several key cornerstones of traditional banking are already available in crypto finance, we can anticipate that solutions for remaining areas will also be developed, which in turn would enable this “all-in” strategy.
The distribution of these strategies are currently as follows:
· Most financial institutions are currently pursuing the “do nothing” strategy
· A limited number of institutions are applying the “wait and see” strategy
· A very small number of institutions are following the “gradual integration” strategy
· The “all-in commitment to crypto finance” strategy cannot be observed currently
We can anticipate the following strategic moves towards increasing blockchain capabilities in traditional banking:
· Progression from the “do nothing” strategy to the “wait and see” strategy
· Progression from the “wait and see” strategy to the “gradual integration” strategy
It will probably take a while until the “all-in commitment to crypto finance” strategy is implemented. The main factor for this will be the mass adoption of crypto-assets. However, if this strategy is implemented, we will see the increasing erosion of traditional banking revenue.
1. Swiss financial center opens up to Bitcoin: https://www.swissinfo.ch/eng/-game-changer-_swiss-private-bank-accepts-bitcoin/43328354
2. How traditional banking business revenues will be impacted by crypto and smart contracts
3. How private banking processes will be impacted by blockchain disintermediation
Many banks are participating in a range of blockchain consortia and are looking for ways to apply blockchain technologies to improve their internal processing. Here, the approach is to essentially...
SmartCredit.io
Jul 12, 2017 . 5 min read
Many banks are participating in a range of blockchain consortia and are looking for ways to apply blockchain technologies to improve their internal processing. Here, the approach is to essentially carry on “business as usual” but achieve efficiency gains. Banks are able to increase their effectiveness with the help of blockchain technologies.
However, the change in ecosystems will not only facilitate improvements to internal processes. It also means that clients will receive blockchain-based service alternatives and require fewer traditional banking services for their value networks.
In current value networks, clients have very much been tied to their banks. The cost of changing a banking relationship is relatively high, and this has made it quite easy for banks to generate revenue. The changes facing value networks will significantly reduce exit costs for clients, while the cost models of banks will become more transparent. Clients will be able to switch easily between financial services providers and select the best fit for their needs.
The following figure visualizes this change to value networks. As discussed, banks clearly lie in the center of clients’ value networks at present. But as alternative blockchain-based services emerge, clients will start to use these alternatives, thereby reducing their dependency on banks.
This results in a revenue decline of the banks. But how big is this impact and what will be the timeline of this impact?
This analysis looks on:
· How banks are generating revenues at the moment?
· How blockchain-based business models will disintermediate banking revenues?
· What will be the timeline of this transformation?
Let us evaluate the key components of banking revenue based on the Swiss unit of Credit Suisse. This division encompasses retail banking (for clients domiciled in Switzerland), private banking (wealth management), and commercial banking (one-third of companies in Switzerland maintain a banking relationship with Credit Suisse).
The revenue figures are publicly available in the investor section of the Credit Suisse website. Here are the revenues for the first quarter of 2017:
The key components of banking revenue are as follows:
· Net interest income
· Recurring commissions and fees
· Transaction revenues
This refers to the revenue from money lending. At this point, we will not discuss the degree to which banks lend depositors’ funds or create new money during the lending process. However, we can assume that approximately 97 percent of electronic money in Switzerland is created by commercial banks during the lending process; the other 3 percent is created by the Swiss Central Bank.
Lending incurs a cost to banks; reserve ratios have to be applied, parts of loans have to be covered by core capital and/or high-grade capital instruments, high-grade financial instruments and so on. These guidelines are defined by the regulator and are binding for the banks. Thus, although banks create money in the lending process, this money creation is not free for the banks. There are costs associated with lending money which are determined by banking regulations and capital markets.
Now let us return to net interest income: It comprises the difference between the price of money which the clients pay and the cost of lending. This is the category in which banks generate most of their revenues (assuming client risks are properly assessed). If the economy is booming, there is more money creation and more revenue in this category. In the event of an economic slump, the reverse is true.
These concern the revenues raised from custodial accounts, banking packages as well as portfolio management fees. Banks love recurring revenue, following the idea of “sell once, collect revenue over many years”. As the exit costs for clients are relatively high, clients are locked in, thereby providing a stable stream of revenue for banks with relatively low maintenance costs.
Transaction revenues refer to payment fees, fees for buying and selling shares, mutual funds, and ETFs. Essentially, these fees are connected with either the business or investment activity of bank clients.
Net interest income will be substituted by smart contracts. In this scenario, clients would not need a bank. Lending would be conducted using automated lending facilities. However, some lending is performed on the basis of advice, and this advice-based revenue will remain available to banks. Nonetheless, this would only account for a small part of net interest income. We estimate a conservative level of around 50-percent revenue disintermediation in this respect.
In the case of recurring services, clients will hold their assets as digital tokens on blockchains, rather than in custodial bank accounts. Banking packages will not be required, as they will be replaced with blockchain-based products (the cost of which is close to zero). Only advice-based services will continue to generate revenue for the banks. In this context, our conservative estimate is a degree of revenue disintermediation amounting to two thirds.
Transaction revenues for payments and trading will reduce significantly. Clients will no longer need banks for these services. However, advice-based fees for complex transactions will remain unaffected. But again, this only represents a small part of current transaction revenues. Here, we conservatively estimate a degree of revenue disintermediation of around two thirds.
It is clear that advice-based services will remain intact. Most other services, however, could be replaced with blockchain-based smart contracts or digital tokens. The disintermediation impact is shown in the following table:
The timeframe of the change in value network can be expressed using an S-curve. JPMorgan published an S-curve in its assessment, which can be used as a basis for the analysis here.
The next three years will be used to establish and develop shared infrastructure (i.e. service-specific blockchain offers). The mass adoption of these new services will start after three years and this is also when the disintermediation of banking revenue will commence.
Transaction revenues: impact in 3–5 years.
This revenue position will be the first to be impacted by blockchain technologies. Transaction revenues are currently collected as payment fees or fees for trading securities; this will be disintermediated by blockchain-based solutions.
Recurring commissions and fees: impact in 4–6 years.
Infrastructure development could require more time here. For example, in the case of custodial services, we will also need a digital representation of financial assets.
Net interest income: impact in 4–6 years.
In this context, we need digital asset infrastructure as well as smart contract-based solutions for debt products.
Banks are currently focusing on using blockchains in order to improve internal processes. However, as blockchains will enable changes to client value networks, banks will have to prepare to lose significant portions of their revenue to new blockchain-based financial services providers.
The following table shows the expected disintermediation impact and associated timeframe using the example of the Credit Suisse banking unit in Switzerland:
Banks will begin to lose revenue on basic transactions. Most of these services will be free, almost free or subject to significantly lower service fees. Advice-based services will remain within the purview of banks; this includes portfolio management, risk management, and the management of special transactions and products. Indeed, these concern services where specialist expertise is required, and banks will still be required to offer them in the future.
On 29th of March I was giving a lecture about Blockchain Use Cases in Finance at University of Applied Sciences in Basel. [caption id="attachment_381" align="aligncenter" width="556"] Basel[/caption] Blockchain started with...
SmartCredit.io
Mar 29, 2017 . 10 min read
On 29th of March I was giving a lecture about Blockchain Use Cases in Finance at University of Applied Sciences in Basel.
Blockchain started with the Bitcoin and we can consider Bitcoin as a new base-money. But Bitcoin is just one of many use-cases in the blockchain economy.
In this lecture we analyze what are blockchain potential use cases in finance. Here are the slides:
[slideshare id=131932471&doc=basel-blockchainvaluecasesinfinancever2-190215153736]
On 11th of October 2016 I participated on Panel Disussion at Hyperledger Meetup in Zurich. It was good brainstorming and with many new ideas. A Panel: Blockchain May Change the...
SmartCredit.io
Nov 11, 2016 . 5 min read
On 11th of October 2016 I participated on Panel Disussion at Hyperledger Meetup in Zurich. It was good brainstorming and with many new ideas.
A Panel: Blockchain May Change the Way Financial Orgs Operate — Cloud Foundry Live | Altoros
My friends, myself and my brother published book Blockchain Technology: Einführung für Business- und IT Manager Blockchain Technology - Einführung für Business- und IT Manager OK, it’s in German. However, it’s...
SmartCredit.io
Nov 22, 2016 . 5 min read
My friends, myself and my brother published book Blockchain Technology: Einführung für Business- und IT Manager
OK, it’s in German. However, it’s very praxis oriented and follows always the thought about what is business value and what business models we will have.
Video of the first book presentation is available here. I’m starting to talk at 18:28, my brother follows immediately to me.
If you have more time to watch, then we had here as well very nice presentation about Hyperledger and discussion about Ethereum Classics versus Ethereum.
Introduction Digital Banking is on everyone’s mind — it’s about automating end-to-end banking processes and offering a digital experience to end clients. The focus on Digital Banking is understandable —...
SmartCredit.io
Nov 10, 2015 . 12 min read
Digital Banking is on everyone’s mind — it’s about automating end-to-end banking processes and offering a digital experience to end clients. The focus on Digital Banking is understandable — we are all witnessing increasing cost pressures, regulatory pressures, and a low-interest-rate environment. Digital Banking is the answer from the traditional banking system to these pressures. However, Digital Banking per se causes little changes to the banking ecosystem: in principle banks continue as they are, just operate more effectively.
Most of us witnessed the emergence of the Internet and World Wide Web 2.0 and the new network-based business models that were born. Could the same happen with Digital Banking? Could we anticipate the emergence of Digital Banking 2.0? Would it result in widespread changes in the banking landscape and business models in the same way as Web 2.0 did?
I represent the thesis that Bitcoin and its underlying conceptual technology — Blockchain — may enable revolutionary changes to the banking landscape and the emergence of Digital Banking 2.0.
Bitcoin is a digital currency that enables instant payments to anyone, anywhere in the world. It is based on private-public key cryptography, where the owner of the private key can do transactions with his Bitcoins and where a public key allows anyone to see the number of Bitcoins on a specific address or to send Bitcoins to this address.
The Bitcoin system is based on blockchain technology, which is, in essence, a cryptographically secured, distributed ledger. Old transactions cannot be changed and new transactions are added to the end of the distributed ledger in an unchangeable way. The integrity of the ledger is ensured by a computationally heavy process known as proof of work, which verifies transactions and is executed by a network of anonymous computer owners known as Bitcoin-miners. The Bitcoin Blockchain distributed ledger is available to anyone who participates in the Bitcoin system.
The Bitcoin Blockchain is used to track ownership and transactions between Bitcoin holders, but the Blockchain technology is not limited only to Bitcoins — any transaction with digital assets could be represented with this same Blockchain approach.
Most financial assets have digital representation and hence they could be stored in Blockchain. The transactions between the holders (addresses in Blockchain terminology) could be modeled in blockchain, and they could be available to anyone using Blockchain technology.
Blockchain represents an innovation that could be compared in its impact to the invention of the double-entry bookkeeping system or of the legal form of doing business, a corporation. These last two innovations shaped the way we do business today. Will Blockchain be the next big invention?
Most of the financial industry is based on ledgers which record who owns which assets, who receive payments from these assets, and how to transfer ownership of these assets from one participant to another. But these ledgers are all private to banking institutions. This creates the need for a new ecosystem of participants whose core business is transferring ownership between asset owners.
For example: If client A sells 10 shares of IBM to client B, we see the following transactions: Client A’s custodian transfers shares and receives money, and Client B’s custodian receives shares and transfers money. The process can take up to 3 banking days and there is a middleman (clearinghouse) validating that all runs properly. The middleman will charge a fee for this service.
However, Blockchain technology allows the creation of distributed ledgers between all market participants. This results in new business models that exclude middlemen. Client A and Client B may interact directly with each other using a public distributed ledger. It is obvious that this public ledger-based approach increases the efficiency, transparency, and quality of the transaction execution, and at the same time reduces its total cost.
As I said before, most financial assets can be represented digitally: publicly traded instruments will have ISIN codes, and similar codes are being created for OTC instruments too (UTI from ISDA for example). Digitally represented assets can be stored into Blockchains, including information about who owns how much of which asset. Buy and sell transactions would be as simple as moving a specified number of digital assets from one owner to another in a cryptographically secured way. The transferor of the asset has a private key for the authorization of the transaction; the receiver of the asset has to use his private key for payment authorization. The settlement and clearing of trading transactions would be significantly simplified and speeded up by such an approach.
If all assets of a banking client can be represented digitally, his portfolio can be completely represented by the digital asset registry. A client portfolio could contain digitally represented assets and digital money (Bitcoin, Litecoin, Ethereum, etc.). The client could be able to access his portfolio from any place with his private key; he could execute transactions in his digital assets or digital money with his private key; or he can delegate management of his assets to a professional asset manager by assigning him his private key or by using a multi-signature approach in which specific transactions have to be signed by two or more private keys.
In today’s custody business model, the asset manager either has his own custody (if he is a bank) or uses the custody services of another bank. However, by using public ledger-based asset registries, the client will be the real owner of his assets. The client will not run the risk of bank failures. He will not face situations where part of his assets may be converted into bank equity (based on too big to fail provisions, when bank capital ratios are sinking below regulatory targets) or be lent out by the bank — with Blockchain, the client will be the real owner of his assets.
Another business case for distributed ledgers can be collateral management in the lending process. By registering collateral in a distributed ledger and by specifying for whom and how long the collateral is allocated, we create an effective means of collateral management. The speed of collateral management will be increased, the traceability will be available and transparency for regulatory reporting will be created. Additionally, collateral margin calculation would be simplified as it would become transparent how many times specific collateral is already lent out.
These were some examples of the potential uses of distributed ledgers. One can assume that there will be as many new potential uses of distributed ledgers as there are ledgers today.
Blockchain technology also allows for the implementation of “Smart Contracts” where assets are exchanged on certain conditions against payments. Let’s look again at the example “asset in exchange for payment”. If we have a digital asset that represents an IBM share and if we have a digital means of payment (Bitcoin), then the exchange between Client A and Client B can be executed in one transaction. This new transaction will be added to the Blockchain, it will be cryptographically signed and there will be no way to change it after that. There will be no need for complex 3-banking-days long business processes — everything can be completed within 10 minutes.
This is an example of a basic smart contract. The business logic of a smart contract can be extended in arbitrary ways: there can be multiple participants, there can be escrow services, multiple payment terms, etc. These will be digitally executable contracts between digital assets and digital money. All derivative, future or bond contracts could be represented as smart contracts so that their processing can be 100% automated.
Bitcoin Blockchain is a public ledger and thus is available to any member of a Bitcoin system. Asset registries and transactions between holders of these assets on Bitcoin Blockchain are visible to anyone too. Public ledgers do not have any gatekeepers defining who can or cannot participate.
At the same time, there are several technology providers offering Private Blockchains. These are “mini-Bitcoin” systems, where only the participants of the private blockchains can transact with each other. These Private Blockchains can be use-case specific or participant-specific — for example, private collateral management blockchains for big banks. Private Blockchains would work on the basis of permission, namely there would still be a central instance that will grant or remove memberships to respective blockchains. These gatekeepers would thus have a potential revenue source or even provide new business models.
Every bank has either built or bought their “ledger” systems for managing huge numbers of standardized digital transactions. Middlemen are facilitating the ownership and flows of funds between banks. Both these bank “ledger” systems and middlemen are becoming obsolete.
Both services can be taken over by public or private Blockchain ledgers from new service providers. One bank probably does not want to become a member of another bank’s private Blockchain ledger, where the other bank is the gatekeeper to the service. However, the same bank could be ready to become a member of a private Blockchain of an independent service provider. The private Blockchain would have a higher utility as more participants join, which would attract new participants and so on. It’s the same network effect which is the core for e-Bay or Facebook business models.
This creates room for new market participants whose core business will be running today’s diverse banking ledgers. The businesses of these new service providers will benefit strongly from network effects, however, which will likely lead to the consolidation of these new service providers.
By September 2015 venture capital investments into Bitcoins were USD 921 Mio; the number of venture capital-backed startups was 119 and the Bitcoin sector became the fastest growing startup sector. Investments into Bitcoin companies in 2014 and 2015 match investments into early internet companies in 1994 and 1995. Blockchain and Hybrid startups have received USD 285 Mio in investments, representing 22% of startups in the Bitcoin sphere.
Additionally, there are a number of big banks experimenting with Blockchain technologies, whose main focus is on how to use decentralized ledgers in banking business processes.
Bitcoin may have caused people to overlook the potential of its underlying technology, but based on venture capital investments and on experiments in the major banks, we can say for sure that the Blockchain technology is here to stay.
Digital Banking 2.0, based on Bitcoin and Blockchain technology, will result in revolutionary changes in banking. The role of current players in the ecosystem will change and new players will emerge. Many current services will be provided at a much lower cost basis. Middlemen will lose their positions in value chains in the same way it happened in the music industry about 15 years ago. This will translate into changes in banks’ revenue models, which, together with the entrance of new participants to the market, will trigger changes in business models, and result in complete banking ecosystem changes.
The transactional part of the banking business will change as well. Many of the complexities of ledgers, asset transfers, and collateral management will be simplified, and banks will be able to decrease headcount. Transaction management will become a commodity in the banking business.
However, the advisory process, portfolio management, credit management, and risk management — the know-how intensive disciplines of modern banking — will stay. Banks will simply focus more on their core competencies and less on transaction processing. This will result in an increased focus on know-how intensive areas, which at the end means real value creation for clients.
(This article was first published in Swiss CFA Society Magazine 2015 November Edition)
Bitcoin is a digital currency that enables instant payments to anyone and anywhere in the world. There are many differences to other currencies: · Other currencies are issued by Central...
SmartCredit.io
Jan 10, 2014 . 12 min read
Bitcoin is a digital currency that enables instant payments to anyone and anywhere in the world.
There are many differences to other currencies:
· Other currencies are issued by Central Banks and have the role of legal tender. Bitcoins are issued de-centrally; there is no Central Bank, and they are not legal tender.
· Other currencies have some physical representations (bills). Bitcoin exists only digitally.
· Other currencies have central authorities. Bitcoin has no central authority; validation of transactions is done from Bitcoin Network.
· Monetary Base of other Currencies is continuously increased, which translates into inflation in the long term. But in Bitcoin Network will contain only 21 Million Bitcoins (the smallest transferable unit being 0.00000001 Bitcoins), which translates into deflation in the long term.
Bitcoin is based on a combination of several existing technologies:
· Peer to Peer Systems (like BitTorrent)
· Private / Public key Cryptography
· Application of this combination for creating a currency
First Private / Public key cryptography algorithms were published in 1977. The first famous Peer-to-Peer system was Napster, published in 1999. However, it took till 2008 when Satoshi Nakamoto (pseudonym) connected peer to peer systems with state of the art cryptography to create the first cryptocurrency — Bitcoin.
Bitcoin has properties of currency — it’s unit of account; it’s portable, durable, divisible and fungible. However, Bitcoins are much more just as a simple currency. Satoshi’s ideas went much further — Bitcoin Network is a mean to describe economic contracts and transactions between the participants of the Network. Additionally, the distributed storage of transactions (Blockchain in Bitcoin terminology) can be considered as a public general ledger, but not only simple payment transactions but many more complex economic contracts can be stored and easily distributed/published to any node of the network.
Bitcoin price development from Aug 2010 till Jan 2014 is described on the following graph. It follows a linear trend on the logarithmic graph.
There have been several price corrections, which have received quite some media attention:
· In 2011 from 31 to 2 USD per BTC
· In 2013 from 266 to 50 USD per BTC
· In 2013 from 1242 to 455 USD per BTC
However, we hardly recognize these price corrections on the logarithmic scale.
Will this logarithmic growth continue? Where will be the price of one Bitcoin in one year? How to calculate the fair value of Bitcoin? This article evaluates approaches for Bitcoin valuation.
Bitcoin Network has currently 2’400’000 addresses. One person can have more than one address.
The value of the network is not growing linearly but in the square with the growth of network members (Metcalfe’s law). I.e. if we have 2 times more participants, then the value of the network grows 4 times; if we have 10 times more participants, then the value of the network grows 100 times and so on.
Currently, the network grows by 7000–8000 addresses per day. If we assume the same constant growth for the year, then the number of addresses will double this year, implying the value of Bitcoin Network will grow 4 times this year.
As we are speaking of ca 2 million people using the network then we are still in early phases on the Bitcoin Network development. It can be compared to the “pre-Mosaic browser” phase of the Internet — there were many enthusiasts on the Internet, but most of them were “techies”. The breakthrough happened when Netscape introduced the Mosaic Browser. The rest is history.
There are several discussions about the intrinsic value of the Bitcoin Network. One side has the opinion that Bitcoin Network does not have any intrinsic value; the other side has the opinion that there is high intrinsic value.
Bitcoin Network is like an Internet network. It’s not the Internet that has the value, but its diverse products and services on top of the Internet network, which creates the value of the Internet. It’s the same with Bitcoin Network — it’s the products and services on top of Bitcoin Network, which create value for Bitcoins.
The most exposed intrinsic value is the Bitcoin Network as a Payment Processor:
The additional intrinsic value of Bitcoin Network is the “base money” functionality and “value-added services”.
Bitcoin enables payments just in time between any countries in the world it practically no fees. Bitcoin is the current 9th biggest payment processor worldwide. Additional adoption of the Bitcoin Network will result in reduced demand for the services of companies like Visa, Mastercard or Western Union.
Visa’s market capitalization is 140 B USD, Mastercard’s capitalization is 100 B USD, and Western Union is 9 B USD.
Let’s assume the total market cap of these payment processors is 250 B USD, If Bitcoin Network would replace 1/3 of their businesses, then this result in the price of 3929 USD per BTC.
Payment Processors total Market Capitalization (in B USD) 250
Substitution ratio with Bitcoins 33%
Total Bitcoin Network Valuation (in B USD) 82.5
Final Number of Bitcoins (in B USD) 21'000'000
Value per 1 BTC (in USD) 3'929
Bitcoin can be considered as “base money”, it can be considered as gold — “crypto gold” in this case. One way to value Bitcoins is to compare the money supply of Bitcoins to the U.S. money supply.
The current market capitalization of Bitcoins is 12 B USD. The current monetary base of the U.S. is 4’000 B USD.
If Bitcoins would substitute U.S. monetary base, then their value should increase 4’000 / 12 times. However, let’s assume 10% of the US monetary base will be substituted with Bitcoins. The money velocity of Bitcoins is much higher (let’s say 10 times higher than the velocity of fiat money); this would reduce the demand for the Bitcoin base money. This would result in the following valuation:
U.S. Base Money (in B USD) 4'000
Substitution ratio with Bitcoins 10%
Increase in money velocity (in times) 10
Total Bitcoin Network Valuation (in B USD) 40
Final number of Bitcoins 21'000'000
Value per 1 BTC (in USD) 1'905
However, Bitcoin is not a national currency; it’s a supra-national currency. If we repeat the same exercise for the world monetary base and if we use the substitution ratio of 5% then we get the following valuation:
World Base Money (in B USD) 26'903
Substitution ratio with Bitcoins 5%
Increase in money velocity (in times) 10
Total Bitcoin Network Valuation (in B USD) 135
Final number of Bitcoins 21'000'000
Value per 1 BTC (in USD) 6'405
Levers for valuation:
Bitcoin is not only a payment mechanism; it allows building a stack of additional services and products on top of the Bitcoin protocol.
It’s the same as the Internet — what started initially as simple web browsing with Netscape Browser, developed into Google search and Web 2.0 — Facebook, LinkedIn, and Twitter. All these products are based on Internet stack. However, it took 10+ years, till these Web 2.0 products emerged.
Bitcoin protocol allows moving asset ownerships into the Bitcoin network — for example share registries and custody solutions can be implemented as part of the Bitcoin network. Ownerships of any assets (real estate, shares, and cars) can be stored in the Bitcoin network. Most public registries will become obsolete as all this information can be mapped into the Bitcoin network.
We are still in the very early phase of Bitcoin adoption; we are in the “pre-Mosaic Browser” phase. We can expect many new applications on top of the Bitcoin network — in the same way as it happened with the Internet network. However, we are not able to quantify the value of these additional services. We just say — there will be many additional services.
We looked at three valuation approaches. All of them are complementary.
Ergo Bitcoin valuation is:
Bitcoin as Payment Processor 3'929
Bitcoin as Base Money 6'405
Bitcoin as Additional Services NA
Value per 1 BTC (in USD) > 10'334
We foresee continuing network growth (based on Metcalfe’s law) and we foresee the significant potential for Bitcoin price appreciation.
We recommend allocating part of alternate assets in investment portfolios into Bitcoins.
(This article was first published in Swiss CFA Society Magazine 2014 January Edition)
· Bitcoin live market data: https://www.tradingview.com/x/0JIHqWR4/
· Bitcoin Wiki: https://en.bitcoin.it/wiki/Main_Page
· Daily transaction volume of payment networks: http://www.coinometrics.com/bitcoin/btix
· Monetary base of national economies: http://www.coinometrics.com/bitcoin/bmix
· Exchange volume comparison by Currency: http://bitcoincharts.com/charts/volumepie/
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