CRYPTOS, DIGITAL CURRENCIES AND THE FUTURE OF MONEY IMPLICATIONS FOR CENTRAL BANKS, COMMERCIAL BANKS AND INDIVIDUALS Periklis Thivaios CFA, FRM
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?
22Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
33Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
44Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
55Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Do cryptos have a future?
Images © of their respective owners
66Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
What is the best way to predict the future?
Images may be subject to copyright
77Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
How many of you here are statisticians?
What is the best way to make predictions about the future?
Images may be subject to copyright
88Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Bitcoin is hugely problematic, isn’t it?
Source: https://www.buybitcoinworldwide.com/volatility-index/ Source: https://digiconomist.net/bitcoin-energy-consumption
99Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
But Bitcoin is only one of 1,600
Images © of their respective owners
Will ALL of them dissipate?
1010Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
1111Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Should Central Banks care?
All images © of their respective owners
1212Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
▪ 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
Images © of their respective owners
1313Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
1515Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
1616Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Should Central Banks be
interested in issuing digital
currencies?
All images © of their respective owners
1717Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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.”
1818Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Wholesale CB digital currencies Retail CB digital currencies
Progress is still conceptual (and DLT biased)
1919Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
2020Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
“Everyone can create money; the problem is
to get it accepted”
All images © of their respective owners
Hyman Minsky, 1986
2121Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
A note of warning (or common sense)
Digital currencies do not have to be based
on blockchain!
Pros Cons
All images © of their respective owners
2222Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
2323Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
2424Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Should Commercial Banks worry?
All images © of their respective owners
2525Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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."
2626Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
All images © of their respective owners
2727Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Should anyone care about the
public?
All images © of their respective owners
2828Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
2929Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
The Economist February 2007
“The reports of my death are greatly
exaggerated”
Mark Twain
All images © of their respective owners
3030Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
▪ 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
3131Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
No cash, no crime?
All images © of their respective owners
3232Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
3333Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
Conclusions
3434Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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
3535Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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”
3636Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
For a White Paper
on the topic
Email me
3737Periklis Thivaios Digital Banking & Payments Conference, Nicosia 2019
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)