Virtual Currencies And Financial Services Industry ... · 5,000,000 6,000,000 7,000,000 ......
Transcript of Virtual Currencies And Financial Services Industry ... · 5,000,000 6,000,000 7,000,000 ......
CODE-0
The information contained in this document belongs to Value Partners S.p.A and to the recipient of the
document. The information is strictly linked to the oral comments which were made at its presentation, and
may only be used by attendees of that presentation. Unauthorized copying, disclosure or distribution of the
material in this document is strictly forbidden and may be unlawful.
Virtual Currencies And Financial Services Industry Disintermediation
14-15 May, 2014
Future Payments & Digital
Banking Conference & Awards
CODE-1
1
Value Partners: Multinational strategy consultancy
• An international player
Global reach: 10 offices in 8 countries with a global staffing
operating model
• A strong team of professionals
20 partners, >200 professionals, 23 nationalities
• An excellent track record
Constant growth over the last 20 years
• A large and loyal customer base
Over 350 client served in the past three years,
60% of which have been with us for over 8 years
• Leading worldwide Financial Services and TMT (Telecom,
Media, Technology) practices including the former “Spectrum
Strategy Consultants” in London
History in a snapshot
Founded in 1993 by 16 partners and senior consultants from McKinsey & Co. In February 2007, Value Partners acquired Spectrum Strategy
Consultants to further enhance its leadership in the TMT sector. In 2012 Value Partners successfully sold its fully owned IT Consulting
subsidiary, Value Team, to NTT Data (valuation at ~10x EBITDA multiple)
CODE-2
2
Contents
•Emerging business models based on P2P
•Virtual currencies the history so far
•Challenges and future scenarios
For the conditions of use of this document please refer to the front page
CODE-3
3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
2013 2014 2015 2016 2017 2018
Mobile BB Connections(3G & 4G)
Fixed BB Connections
% of wired broadbandconnections sold as partof bundle
Broadband connectivity is set to further expand as a result of Fixed-Mobile Convergence (FMC) growth
Fixed-mobile broadband connections, global 13-18f (000’s)
Connected device sales, global 13-18f (m)
13-18 CAGR
0
500
1,000
1,500
2,000
2,500
1,185
1,432
+13% 2,044 2,161
1,882
1,669
USA/ Canada
Africa
Americas
Asia Pacific
Europe: Eastern
Europe: Western
Middle East
Source: Ovum, WCIS, Value Partners analysis
CODE-4
4
This is enabling new business models (e.g. crowd-funding, P2P lending, virtual currencies) within the three core areas of banking potentially disrupting the traditional ecosystem
P2P lending
• Money lending system between
peers, without involvement of
financial intermediaries – whole
model is based online through
social media/ exchange platforms
Virtual currency payments
• Payments system using digital
currencies over a P2P network,
usually without the need for a
trusted third party or identification of
the payer and the payee
• Transactions are traceable by all
peers in the system and fully
encrypted
Crowd-funding
• Collection of funds amongst users
registered on an online platform without
involvement of banks
• Funds deposited are invested in
different assets – initial investment
typically low (<£500)
NOT EXHAUSTIVE
CODE-5
5
P2P lending registered significant growth over recent years and expected to keep pace in future
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
(GBP 000s) Money lent on Zopa
Source: Zopa, thefinanser, Value Partners analysis
Cumulative money lent on Zopa, 2006-14 (£, 000s) ILLUSTRATIVE
• P2P ‘social’ lending service launched in
the UK in 2005 and now operating
internationally (e.g. Japan, Italy, USA)
• Model entirely based online (no bank
involvement) – service leverages social
media and user’s word of mouth to
expand user base
• In the UK, Zopa lent almost £500m of
savings to UK borrowers since its
launch, lending ~£200m in the last 12
months
• Average lender returns range from 7-
11% with reported <0.2% defaults
06-14 CAGR
32%
CODE-6
6
Similarly, crowd-funding is expected to grow exponentially especially within the property market
• Centralised hub designed for online investors with the aim of simplifying the crowd-funding
market by hosting different investment opportunities on one platform
• Platform to be launched in upcoming months - reported hundreds of websites/ businesses
listed on platform
• Company specialising in crowd-investing, crowd-lending and crowd-funding
• Initial investment required can be as low as £10 – platform also provides training sessions
to users and possibility to exchange information over main social networking websites
• Over £1.2m invested amongst 6,500 registered investors
• Online platform enabling registered users to self-select different property investment
opportunities and buying shares, with investment from just £500
• As of Feb. 2014, business already raised £170k (in less than 11 days) among initial 109
investors
• Defined as ‘members club’ specialising in crowd-funding, website specialises in property
investments in the UK, also providing investment education and advise to users
• Initial investment required is low and protected from interest rate fluctuations
• Based on company’s targets, reached £1m target fund during first 2 years of operations
NOT EXHAUSTIVE
Source: Company’s websites, crowdsourcing.org, thefinanser, Value Partners analysis
CODE-7
7
Contents
•Emerging business models based on P2P
•Virtual currencies the history so far
•Challenges and future scenarios
For the conditions of use of this document please refer to the front page
CODE-8
8
To understand “virtual currencies” it is key to set a baseline definition
“a type of unregulated, digital money, which is issued and usually controlled by
its developers, and used and accepted among the members of a specific virtual
community“
European Central Bank 2012
"a medium of exchange that operates like a currency in some environments, but
does not have all the attributes of real currency“
US Department of Treasury, 2013
CODE-9
9
Virtual currencies have been long in existence evolving out of loyalty schemes…
Source: Value Partners analysis
1981-’83
Loyalty Schemes
Multi-merchant Schemes
Virtual Currencies
1994-’97 1998
Beenz.com
2003 2009
Bitcoin
2004
World of
Warcraft Gold
.com bubble
2010-ytd
Op
en
ne
ss
Of
Sc
he
me
C
lose
O
pe
n
ILLUSTRATIVE
CODE-10
10
Type 3
Type 2
Type 1
The ECB defines 3 types of virtual currencies based on their interaction with the real economy…
Source: ECB, Value Partners analysis
Virtual Currency Description Examples Real Economy
• No interaction with real economy
• V.C. is only used for buying virtual
goods and services
• V.C. is purchased using real
money at a fixed rate, but cannot
be converted back
• V.C. can be used to buy both
virtual and real goods and
services
Description
Virtual Currency Real Economy
Examples
• Users can buy and sell V.C. using
the real money at a given
exchange rate
• The V.C. is similar to real currency
in terms of interaction with the real
economy
Virtual Currency Real Economy
Description Examples
CODE-11
11
…whereas authorities in different countries are responding in various ways
Nature of the
virtual currency
• A commodity for DNK (formally rejected as a “currency”), FIN, LVA, GBR
• A financial instrument by DEU, SWE
• Scriptural money by LUX
• Not specified for other countries
Taxation
• Reviewed on single case basis by SVN
• Taxable if considered as an electronic service in DNK
• Subject to capital gains tax in FIN, SWE
• Subject to VAT if used in DEU (for purchases of goods and services), NLD
Authorisation to
operate BitCoin
• Required in AUT, DEU, LUX, GBR (on a case by cases basis on discretion of the Bitcoin operator)
• Restricted in RUS (as a for anonymous electronic transfer + businesses involved with Bitcoin are
considered associated with money laundering and terrorism financing)
• Not required in other countries
Competent
authority
• Central bank in: CYP, GRC, BEL, SVK, HRV, DNK, EST, FRA, HUN, LTU, NLD, PRT, DEU, GBR, RUS
• Financial services authority: CYP, BEL, DNK, LVA, DEU, LUX, AUT, GBR, SWE
• Ministry of finance in: BEL, SVN, CZE, FRA, IRL, NLD, POL
• Ministry of justice: NLD, SWE
• Tax authority in: DNK, FIN, GBR, SWE
• Parliament: IRL, ITA, RUS
• Local authorities: IRL
• Judiciary authorities: RUS
Source: ECB, Gov. Press Release, Value Partners analysis
BITCOIN
ILLUSTRATIVE CASE
CODE-12
12
Protection Description:
• Lack of consumer protection when making a payment transaction (e.g. no refund given as of EU law)
• Acceptance of virtual currencies by merchants is not always guaranteed
Uptake of virtual currencies pose several threats to consumer – as recently highlighted by EBA
Money
loss Description:
• Potential failure and bankruptcy of virtual currency exchange platforms may cause loss of deposits and accounts
• Theft and hacks on virtual accounts and digital wallets as well as loss of password may result in large financial
losses for users
Volatility Description:
• Virtual currencies proved to be extremely volatile
• Value of a given virtual currency is unpredictable and could even fall to zero
Criminal
activity Description:
• Although transactions are public, identity of payer/ payee is not
• Virtual currency network could likely be used for criminal activities (e.g. money laundering) exploiting untraceability
of transaction
Source: EBA, Value Partners analysis
a
b
c
d
CODE-13
13
The first most notorious virtual currency failed to take off because of a number of challenges …
• Funded in 1998 as virtual micropayments and payments solution and loyalty points scheme
• Beenz operated in the United States, Sweden, France, Germany, Italy, Japan, Singapore, Australia and
China
• As launching a new currency is illegal in many countries - Beenz management and its legal teams had to
meet with finance ministers across Europe to assure them that Beenz would be categorized as virtual
points and not as a currency
• Within days of its launch in the UK, Beenz' offices in London were visited by the Financial
Services Authority on suspicion of operating an unlicensed bank
• Due to issues with financial regulators, it was unable to sell Beenz directly to end customers
• Beenz ultimately failed in 2001 and was sold to US-based Carlson Marketing Group in 2001 for an undisclosed
sum
CODE-14
14
…while most recent new entrants have gained traction despite some hick-ups but…
Pric
e, ($
k)
Mark
et
Cap
, ($
Bn
)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0
5
10
15
2009 2010 2011 2012 2013 2014
Market Cap (USD)
Price (USD)
0
20000
40000
60000
80000
100000
120000
2009 2010 2011 2012 2013 2014
Number of Bitcointransactions perday (#)
Daily T
x v
olu
me
0
2
4
6
8
10
12
14
0112233445
2009 2010 2011 2012 2013 2014
Bitcoins incirculation
Diffculty rate
Bitc
oin
s in
circ
ula
tion
, (m) “
Min
ing
” D
iffi
cu
lty
rate
, (B
n)
BITCOIN
ILLUSTRATIVE CASE
CODE-15
15
The market is getting crowded: Bitcoin is not alone with other new players (>150 new virtual currencies) entering the virtual currency space
Total Dogecoin Peercoin Auroracoin Litecoin Ripple Bitcoin
14.2% 4.9% 1.6% 0.6% 0.5% 100.0% 78.2%
Source: Coinmarketcap, Value Partners analysis = % of total crypto-coin market cap
CODE-16
16
There appear to be an on ongoing series of touch-points between virtual and physical currencies
Wall Street Journal March 17, 2014
Xapo a start-up offering:
• Solid bank vaults (made of steel with security
guards system, biometric scanners, 24/7 video
surveillance and paper ledgers) – as for cash and
gold
• Bitcoins stored in offline hard drives
• Customers authenticated through multiple methods
before a transaction order is taken
• Authorised Xapo employee only to descends to the
vault to get the private keys to execute a transaction
BBC News January 10, 2014
Elliptic Vault a London-based firm offering:
• Bitcoin storage service providing insurance against
theft and loss of digital currency
• ‘Deep cold’ storage system with private keys stored
on offline servers and kept in multiple secure
locations
• Service fully insured by Lloyd's of London
CODE-17
17
Contents
•Emerging business models based on P2P
•Virtual currencies the history so far
•Challenges and future scenarios
For the conditions of use of this document please refer to the front page
CODE-18
18
While virtual currencies are been deemed at risk and are in early phase of establishment, other P2P solution are gaining traction …
•Volume of investment still low compared
to traditional deposit/ investment systems
•High fragmentation as industry still
nascent
•Micro-small firms can access finance
more easily
•Multi-channel approach and consultation
•Low investment required to buy equity
•No financial intermediaries
involvement
•Low rates for borrowers
•Potential lack of trust due to
financial intermediation exclusion
•Still a “geeky” game
•Low regulation and high risk
exposure
•Criminal activity through network
•Limited acceptance and money
supply
•Easy payment alternative for
online commerce
• ‘Social aspect’ through creation of
virtual communities
•Flexible/ open system
Crowd-funding
P2P lending
Virtual currency payments
CODE-19
19
… and considered by many industry commentators to further expand in the near future
“[…] among the newcomers are peer-to-peer
(P2P) lending platforms, which match borrowers
and lenders directly, usually via online auctions.
[…] the result is a strikingly better deal for
both sides”.
The Economist March 1st, 2014
“Peer-to-Peer Lending: No Longer Just a
Curiosity”. […] The upshot: Those earning
little-to-nothing on their cash can more easily be
connected to people who are willing to give
them an above-market rate of return for capital,
with no intermediary bank needed.”
Bloomberg Businessweek January 20th, 2013
ILLUSTRATIVE
“[…] the idea took off and is now offered by a
plethora of middlemen […]”.
The Economist January 22nd, 2012
“The Crowdfunding Economy Is About to
Pop”. TIME September 24th, 2013
CODE-20
20
Conclusions
• Due to recent global economic downturn, growing connectivity and effective value proposition, P2P
solutions expanded rapidly during last 3 years
• User-base is growing as services offered appear more streamlined and beneficial to all parties involved –
However challenges and issues exist even if more in some areas than others
• Virtual currencies are set to grow but loyalty still more mainstream than payments solutions and
crime-related issues are still an obstacle to penetration
• Whilst some P2P services are considered too risky, majority of them are gaining consensus and forecast
to grow exponentially in the short-term
CODE-21
21
Thank you for your attention!
Francesco Burelli
Mobile: +44 (0)7887 813003