A Layperson’s Guide to Blockchain and Bitcoin

Presenters: Ernie Smith from BBVA Compass and Neal Denny from Provident Metals

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Disclaimer

The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates. All accounts and credit are subject to approval, including credit approval. BBVA Compass is a trade name of Compass Bank, a member of the BBVA Group. Compass Bank is a Member FDIC.

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What is a Blockchain?

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Definition of a Blockchain

Blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping Investopedia https://www.investopedia.com/terms/b/blockchain.asp#ixzz564LA2gEC

Blockchain is a digital ledger that provides a secure way of making and recording transactions, agreements and contracts – anything that needs to be recorded and verified as having taken place. However, uniquely, rather than being kept in one place like the more traditional ledger book, the database is shared across a network of computers. This network can encompass just a handful of users, or hundreds and thousands of people. The ledger becomes a long list of transactions that have taken place since the beginning of the network, getting bigger over time.

Blockchain: what is it and what does it mean for development?, Katherine Purvis, www.theguardian.com

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Elements of a Blockchain

• A Distributed ledger • A shared network

• Verification of transactions

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Elements of a Blockchain 1. A Distributed Ledger

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Elements of a Blockchain

Shared Network

2. A Shared Network

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Elements of a Blockchain 3. Verification of transactions

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Elements of a Blockchain

Blockchain for dummies – a quick guide into the ledger technology, www.thepayers.com

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Blockchain Applications

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Future Blockchain Applications

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The Killer App Cryptocurrencies

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What is a Cryptocurrency?

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Elements of a Currency

• A medium for exchange • Portability

• Scarcity • Avoid multiple use

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Elements of a Cryptocurrency

Overstock.com Paypal Subway Expedia Microsoft

Virgin Atlantic OK Cupid Bloomberg Dish Network Reddit

1. A medium for exchange

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Elements of a Cryptocurrency 2. Portability

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Elements of a Cryptocurrency

“Digital currencies get their value through scarcity imposed on them by the need to solve difficult equations. For example, Bitcoins need to be 'mined' by computers that solve mathematical problems. Digital currencies tend to be anonymous by design, and can only be spent by using computers to handle the transaction.” Read more: http://www.businessdictionary.com/definition/currency.html

3. Scarcity/Avoid Multiple Use

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What is a Cryptocurrency Miner?

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CASE STUDY

Neal Denny CFO and Co-Founder,

Provident Metals, Inc.

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Who Are We? Provident was started to make quality gold and silver bullion available for purchase online.

We Started in 2009 Packages Shipped ◦ 2010-10,528 ◦ 2011- 45,218 ◦ 2012- 66,893 ◦ 2013-140,920

Unique products – make bullion fun and less boring. ◦ Zombucks ◦ Copper ◦ Cubes ◦ Elemental Bars ◦ Prospector

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Our History with Bitcoin

Started with ◦ Paypal ◦ Check/MO ◦Wire ◦ Credit Card

Problems with other payment methods ◦ Paypal held $80K for 6 months ◦ Lost $100K in chargebacks

Customers started asking for crypto Started in 2014

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Our History with Bitcoin

Benefits of Bitcoin ◦ No exposure, instant conversion ◦ Zero chargebacks! ◦ For a few months it accounted

for 30% of our sales ◦ $18M total revenue in 3 years ◦ Cheaper than CC’s

Downsides ◦ Customers aren’t familiar with the

checkout ◦ Copy the payment address, go to wallet,

and send ◦ Conversion rate questions from customers ◦ Fees to customers aren’t clear (this could

specific to out processor) ◦ Some banks don’t like it

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Our History with Bitcoin

Conclusion ◦Great for our business ◦ Simple to integrate with website, lots

of API’s and Plug in’s ◦Highly recommend

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What is the Future of Cryptocurrency?

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What is the Future of Cryptocurrency?

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What is the Future of Cryptocurrency? Davos: Blockchain can no longer be ignored FT

The world’s big financial institutions are wrestling with a cryptocurrency dilemma: whether to stand by and denounce a technology many distrust but also fear — or join those investing in it, FT says. The looming threat for today’s financial institutions is that the technology is based on sharing a single version of a database across multiple parties without a controlling entity in the middle. As a result, stock exchanges and clearing houses could be disintermediated, while big global foreign exchange trading houses, such as JPMorgan and Citigroup, could lose out if smaller banks start using blockchain.

To date the debate has pitted anti-establishment believers in the technology’s power to sweep away many of the faults they see in today’s financial system against top financial leaders who worry about dirty money and are warning investors of a bubble. Most banks refuse to touch cryptocurrencies, which raise anti-money laundering concerns because of their anonymity. U.K. lenders, for instance, have even declined to provide mortgages to people who have funded their purchase deposit by selling cryptocurrencies, which means their money cannot be traced.

However, many big financial institutions are investing plenty of time and money exploring the potential of blockchain technology to improve a range of activities from post-trade settlement in financial markets and cross-border payments to trade finance and syndicated loans.

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What is the Future of Cryptocurrency?

Governments look for ways to tax the cryptocurrency industry BI Intelligence

India's income tax department sent notices to “tens of thousands” of cryptocurrency and ICO investors last week, following a study that showed $3.5 billion worth of cryptocurrency transactions had taken place in India over the past 17 months, but none were put on people's tax returns or subjected to capital gains tax, according to Reuters. This makes India the latest jurisdiction to up its efforts to tax the cryptocurrency space, with the ECB also indicating concern over crypto taxation earlier this month, and Israel starting to prepare rules on how to tax ICOs last week. In addition, the Spanish Tax Agency said it will monitor bitcoin, electronic wallets and internet sales.

Governments wishing to cash in on crypto-related activity should focus on collecting taxes from exchanges directly, rather than simply trying to weed out individuals who may be skirting their local tax laws, BI Intelligence says. The increasing demands for the asset class to be subjected to existing tax regulation indicates that, while regulators are worried about the financial stability risks this nascent asset class might bring, they also recognize that it's becoming a growing part of their economies, and they don't want to miss out on this new source of income, BI Intelligence adds.

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What is the Future of Cryptocurrency? Governments continue the cryptocurrency regulation narrative BI Intelligence

Successfully regulating cryptocurrencies is a difficult and long process for countries. That's especially true when there are numerous regulatory bodies in a country that all want to take a different approach.

Now, Russia and the UK have yet again spoken out about their stance on the asset class: Russia. The government stance on cryptocurrencies is ever-changing in Russia, with the Finance Ministry previously planning to make cryptocurrencies illegal back in 2014, and other government bodies continuously voicing concerns. Having regulations in place would allow Russia to tax cryptocurrencies, while also likely reducing the risk of fraud. The UK. Minister Theresa May said companies involved with cryptocurrencies should focus on the issue of social responsibility, especially in terms of terrorism financing.

Regulating cryptocurrencies instead of banning them is likely going to be a good approach. It seems that governments have now woken up to both the opportunities and the threats of cryptocurrencies, and are now looking to regulate them in a way that affords them both benefits from the taxes, while also preventing illegal activity such as money laundering.

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What is the Future of Cryptocurrency? Crypto repurchase agreements are coming BI Intelligence

The platform Oxygen will collaborate with cryptocurrency exchange Changelly, targeting its 1.6 million private and institutional users. In a repo agreement, a party (typically a bank) sells an asset it owns, like U.S. Treasury bonds, to investors in return for funds (essentially a short-term loan), with the asset acting as collateral. The introduction of repo agreements could impact the cryptocurrency market in a couple of ways: Boosting liquidity in the market. Currently, many cryptocurrency owners struggle to liquidate their holdings. Oxygen hopes to remedy this by allowing crypto holders to lend out one asset like bitcoin, and take on another like ether as collateral. Attract sophisticated investors to cryptos. Oxygen also wants to enable cryptocurrency shorting.

Although promising in theory, the circumstances of cryptocurrency markets will make these instruments highly risky. In conventional repo agreements, the collateral in question is usually a less risky asset, most commonly government bonds and securities, whose price changes relatively little and in familiar ways. By contrast, virtually all cryptocurrencies are characterized by dramatic price fluctuations, making it very hard even for sophisticated investors — which most cryptocurrency owners aren’t — to make a reasonable guess about what the price of these tokens will do.

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What is the Future of Cryptocurrency? Cryptocurrency boom upends venture capital FT

New tech projects that would once have struggled to raise a first round of $10 million are suddenly awash in a tide of cash. Seven raised $100 million or more last year, through what are known as ICOs. Like the dotcom bubble, most of the money pouring into ICOs will be wasted, FT’s Richard Waters says. But with the possibility that a handful of real businesses will survive to become the next Facebooks and Amazons, it is hard to stand on the sidelines. Waters adds that this is a boom that should terrify venture capitalists because it has exposed shortcomings in both their funding models and their worldview.

The radical potential is still massively underestimated. Waters argues that banks talk of blockchain technology as something to be tamed and turned into a tool for the back-office. However, many of Silicon Valley’s top investors missed what has been the bigger short-term disruption: the creation of new money. But even if bitcoin turns out to have staying power, it does not mean the world needs all of the new cryptocurrencies, each one supporting a different piece of digital activity. Startups are not selling coins because they need to, but because it is the easiest way to tap into the flood of institutional money now pouring into crypto, according to FT.

Finally, Richard Waters says that the best real long-term businesses will build communities that unite their developers and wider groups of users in a shared interest. They will have a strong focus on good governance. They will provide real benefits to users and find ways to incentivize mutually reinforcing behaviors that are good for the health of the network, not just the promise of a get-rich-quick scheme. And, like all valuable new businesses, they will take time to build — not that that will stop the growing speculative crypto bubble.

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What is the Future of Cryptocurrency? Insurers look to cash in on crypto chaos:

BI Intelligence

The cryptocurrency industry has seen a lot of developments over the last few months, including the introduction of futures and a number of high-profile hacks on several exchanges. Now, insurers are getting in on the cryptocurrency hype, with some of them launching policies that protect people and exchanges against hacks and theft. These insurers include US-based XL Catlin, which offers annual crime coverage of up to $25 million per incident to exchanges, and Japanese Mitsui Sumitomo Insurance, which provides coverage of up to 1 billion yen ($9.1 million). Given the state of the cryptocurrency industry, this might be a good time for insurers to consider entering the space.

That said, insurers will face hurdles when offering these policies. Cryptocurrency prices are highly volatile, which might make it difficult for insurers to roll out suitable coverage for customers. For example, if a company insured one Bitcoin at around $2,500 back in June, it would now be worth $9,439 (Feb.1) This means customers would have to constantly change their policies, adding inconvenience to the purchase. Additionally, a lot of cryptocurrency trading is happening anonymously, meaning traders might not be willing to disclose personal information to purchase insurance. Hence, an insurer would have to be very confident that it has found an appropriate way to insure exchanges or individuals against hacks and thefts before rolling out policies, to ensure that demand will be high and the launch a success.

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Questions?