Understanding Blockchain& its implications for financial professionals

Professor George M. Giaglis

Director, Institute for the Future, University of Nicosia

http://unic.ac.cy/blockchain

giaglis.g@unic.ac.cy

UNIC Blockchain Initiative

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Outline

Toward new forms of moneyFrom fiat currencies to Bitcoin, Ethereum, et al.

Toward a new InternetFrom the internet of information to the internet of value

ImplicationsDis-intermediated commerce/finance

Outline

Toward new forms of moneyFrom fiat currencies to Bitcoin, Ethereum, et al.

Toward a new InternetFrom the internet of information to the internet of value

ImplicationsDis-intermediated commerce/finance

Bitcoin

Bitcoin is a private, decentralized, digital cryptocurrency

• Private: Not issued by a sovereign

• Decentralized: No issuing party; units are issued algorithmically

• Digital: Fully electronic; no peg to other assets

• Cryptocurrency: Anti-counterfeiting through cryptography

A brief history of Bitcoin

October 2008: Satoshi Nakamoto’s Bitcoin design paper

January 2009: Genesis block – Bitcoin becomes operational

October 2009: $1 = 1,300 BTC

February 2011: $1 = 1 BTC

December 2013: 1 BTC = $1,000

…

October 14, 2017: 1 BTC = $5,679.62

BTC/USD exchange rate

Bitcoin as a payment network

Network # of transactions

(daily)

Value of transactions

(daily)

VISA (Sep 2015) 50,000,000 $4.1bn

Bitcoin (Oct 2017) 266,000 $860m

Bitcoin’s monetary features

Fixed Supply:

• Only 21,000,000 Bitcoins will ever exist

Transparent monetary policy:

• The protocol is fully open source

Consensus-based governance:

• Key features can’t change unless a majority of participants

agree to change them.

Bitcoin is not alone

Property Fiat Money Digital Money

Scarcity ✓ (trust in CB/gov) ✓ (fixed supply)

Divisibility ✓ (2 decimals) ✓✓ (8 decimals)

Storability ? (physical) ✓ (learning curve)

Durability ? (physical) ✓✓ (digital)

Fungibility ✓✓ ✗ (Bitcoin is not fungible)

Portability ? (physical) ✓✓ (digital)

Verifiability ? ✓✓ (blockchain)

Acceptability ✓✓ ✗ (it’ll take time)

Fiat money vs. Digital money

Why is this important?

• Think of Bitcoin (or any public blockchain) as a global system of trust:

• Anyone can buy in or sell out of it

• Anywhere in the world

• Without anyone’s permission or intervention

• At virtually no cost

• Without needing to know or trust one’s counterparty

• Practically, this gives us, for the first time, a way for one Internet user to

transfer a unique piece of digital property to another Internet user, such

that:

• the transfer is guaranteed to be safe and secure

• everyone knows that the transfer has taken place

• nobody can challenge the legitimacy of the transfer

The consequences and application implications are hard to overstate

Outline

Toward new forms of moneyFrom fiat currencies to Bitcoin, Ethereum, et al.

Toward a new InternetFrom the internet of information to the internet of value

ImplicationsDis-intermediated commerce/finance

The Blockchain (or DLT)

• A blockchain is a ledger of transactions.

• A blockchain is a shared, time-stamped, append-only, immutable,

cryptographically-secured ledger of transactions.

Shared: blockchains do not make much sense unless two or more

parties (or systems) are involved.

Time-stamped: transactions are stored in chronological order.

Append-only: you can only add new transactions to a blockchain.

Immutable: Once written, a transaction cannot be erased or

altered.

Cryptographically-secured: advanced cryptography enables all the above

Types of blockchains

Blockchains come in two flavors:

• Public (or permission-less), like Bitcoin & Ethereum.

• Private (or permissioned or enterprise), like Ripple & Hyperledger

Why is this important? (enterprise blockchains)

• Think of an enterprise blockchain as a networked system of

trust:

• No third party is required to clear/settle transactions

• No data reconciliation is needed between systems

• Transactions are secure and final in almost real time

Again, the consequences and application implications are hard

to overstate

Outline

Toward new forms of moneyFrom fiat currencies to Bitcoin, Ethereum, et al.

Toward a new InternetFrom the internet of information to the internet of value

ImplicationsDis-intermediated commerce/finance

Toward a new era for commerce

Digital currencies create new forms of money

• Programmable and active ☛ money for machines?

Blockchains create a new Internet layer

• Internet of trust ☛ Dis-intermediation across industries, esp. finance

Consequences will be vast:

• Money transacted in nano-quantities will lead to M2M commerce

• Autonomous, AI-based, economic agents will emerge (imagine

self-driving cars bidding for your ride)

• Cloud-based, autonomous corporations will be made possible

How far are we?

Which areas will be disrupted?

• Ultimately, all markets that rely on the following mechanisms:

• Intermediation and trust

• Clearing and settlement of transactions

• Recording and information keeping

• Auditing

• Traceability

Finance is right in the epicenter of all the above

Financial services to be disrupted

1. Payments, esp. international ones. Faster and cheaper settlement, improved security.

2. Trade finance: Transparency, shorter cycle times.

3. Data management: Improved auditability, no reconciliation, improved reporting, process automation.

4. Contracts: Letters of credit, accounts payable/receivable.

5. Loyalty schemes: based on pseudo-currencies and blockchain wallets.

Conclusions

• The ability of blockchains to transfer value in new ways has the

potential to transform the financial services industry.

• First areas to be impacted are international payments, trade finance

and data management/reconciliation.

• We expect first commercial implementations in 2018. The need for coordination between actors and regulation will delay full-scale

implementation to 2020+.

• A corporate blockchain-readiness strategy should involve:

• Studying up on blockchain.

• Forming cross-functional teams to investigate use cases.

UNIC Blockchain Initiative

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