CRYPTOCURRENCY 101 Playing Catch-up - TEXPO April 2022 - Texpo Conference
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CRYPTOCURRENCY 101 Playing Catch-up TEXPO April 2022
Cryptocurrency 101 Speakers: Dave Wexler Managing Director, West Monroe dwexler@westmonroe.com Adam Keen Managing Director, West Monroe Peter Tapling Managing Director, pTap Advisory LLC
C R Y P TO / D I G I TA L
C U R R E N C I E S & B LO C KC H A I N
Our Understanding
Industry and Market Overview from Peter Tapling
Use Cases & Opportunities
GROUP POLL
1 Could you have an intelligent conversation about
cryptocurrencies?
2 Do you have a personal crypto account?
3 Does your firm have any plans around cryptocurrency?
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 4
B U R N I N G P L AT F O R M
Today, the world is moving toward deeper integration of
financial markets and lower friction in transactions. New
technologies and a changing customer are creating conditions
in markets that are brining social and commercial disruption
Blockchain, Digital and Cryptocurrency are part of a megatrend that will
create disruption in banking, payments, data exchange and global
transactions
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 5
EVIDENCE OF CHANGE
People are banking increasingly outside of the branch. This trend started 20 years ago with ATM’s but has
accelerated in the past 18 months and put new emphasis on mobile banking applications, Fintech, Open Banking
API infrastructure and Data Exchange
The ecosystem of companies seeking/offering to handle payment exchanges has grown to almost a dozen, and
new entrants in the form of Amazon, Facebook, Paypal, and Walmart to begin or plan offerings
Traditional financial technology companies like Fiserv have begun partnering to provide direct paycheck deposits
using Fintech partners like Venmo for gig economy workers
The Federal Reserve is researching a digital currency for the United States, to keep up with similar currencies
being introduced around the world, notably in countries which seek to create a replacement currency for settling
cross border transactions other than the dollar
Bitcoin’s total assets have grown from almost zero to $653B in ten years. The value of all Crypto currency is
approaching $2T
Most major brokerages have opened trading desks for crypto and it is beginning to be viewed as a reserve asset
similar to Gold even by established investment firms like Fidelity, JPM, Morgan Stanley and Goldman Sachs
Visa just bought an NFT Cryptopunk for its corporate collection
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 6
C R Y P TO / D I G I TA L C U R R E N C I E S
& B LO C KC H A I N
Our Understanding
Industry and Market Overview
Use Cases & Survey ResultsIndustry and Market Overview
Cryptocurrencies use encryption to protect and authenticate transactions.
Characteristics of Bitcoin (the genesis of this conversation):
• Purely peer to peer
• Consensus Much of this achieved
• Distributed ledger with cryptographic
transforms
• Immutable ledger
Terms to understand:
• Blockchain
• Digital Currency (Decentralized or Centralized)
• Smart Contracts
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 8Industry and Market Overview
Brief History of Value Exchange
Value exchange through out history has relied
on a medium the then-society deemed valuable
• Systems of barter relied on “local” value
• Coins of precious metal are familiar
Rai stones of the Island of Yap
• Value was convened on a stone based on
size, craftsmanship, and lore of the stone
What about your miles and points?
Photo credit: Wikipedia;
https://upload.wikimedia.org/wikipedia/common
s/7/79/Yap_Stone_Coin%2C_British_Museum.jpg
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 9Industry and Market Overview
Is There Interest in Cryptocurrency?
THERE ARE 17,000+ DIGITAL CURRENCIES*
On this day, the global crypto market cap is $2,017,677,175,695*
Beyond Bitcoin and Ether you also have of “Bob’s Repair”, ”Small Love Potion” and “Beer Money”
Each currency typically has a whitepaper which outlines the
objectives, operation and governance of the project
Value in a cryptocurrency scheme is determined by the
participants in the system
* -- Aug 26, 2021, as listed on; https://coinmarketcap.com/currencies © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 10Industry and Market Overview
Purely Public Value Can Be Scary
Volatility discourages use for standard
financial products
Confirmation times for some consensus
models create “intra transaction” risk
• BTC transactions can take
50 minutes to confirm
Mar 1, 2022; https://www.coinbase.com/price/bitcoin © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 11Industry and Market Overview
Enter the “Stablecoin”
• A “stablecoin” is a digital asset which offers price stability and is
(typically) backed by reserve assets
Stablecoins rely on centralization of some form
• Think of these as the “money market funds” of digital currency
Some popular stablecoins (coin name – market cap* – reserve
781%
asset) increase since
Aug 30, 2020!!
• Tether – $78,347,650,866 – USD
• USD Coin – $47,552,076,336 – USD
• Tether EURt – $45,241,755 – EUR (new, July 2021)
• Contrast with precious resource coins
• PAX Gold – $ 335,023,574 – Gold
• Mirrored US Oil Fund – $ 11,109,914 – Oil
• Diem (f.k.a. Libra, now defunct) was designed as a stablecoin
* -- All market caps as of Jan 23, 2022; https://coinmarketcap.com/currencies © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 12Industry and Market Overview
Early Efforts in Financial Services
Central banks have investigated for clearing and settlement
E.g. Project Jasper in Canada 1
JPM Coin is “a digital coin representing a fiat currency”
• Value exchange is “intra-bank” between reserve accounts
• Between JMPC entities and institutional customers 2
• Digital Dollar Project launched to explore a true CBDC in the United States 3
OCC Interpretive Letter 1174
“A bank may validate, store, and record payments transactions by serving as a node on an INVN and use INVNs and
related stablecoins to carry out other bank-permissible payment activities, consistent with applicable law and safe and
sound banking practices.” 4
1 - https://www.payments.ca/industry-info/our-research/project-jasper
2 - https://www.jpmorgan.com/global/news/digital-coin-payments
3 - https://www.digitaldollarproject.org
4 - https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 13Industry and Market Overview
Programmable Ledgers Have Created a Raft of Innovation
Bitcoin Stablecoin CBDC
Decentralized Centralized
Ethereum DAOs
DeFi Exchanges
Smart Contracts
STOs
NFTs
ICOs
Wallets
Asset Pools
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 14Industry and Market Overview
Cryptocurrency Timeline
Enthusiasm grows around the
Satoshi Nakamoto mined the Ethereum platform. This platform
first block of the Bitcoin facilitates blockchain-based The total market cap of
network on January 3, 2009 Bitcoin crosses the $1 threshold smart contracts and apps. cryptocurrency passes $2 Trillion USD
2 0 0 9 2 0 1 1 2 0 1 6 2 0 2 1
2 0 0 8 2 0 1 0 2 0 1 2 2 0 1 9 2 0 2 2
On October 31, 2008, Satoshi First Bitcoin transaction occurs Coinbase, one of the Libra is a cryptocurrency created by Federal Reserve releases
Nakamoto (pseudonym) on May 22, 2010 of 10,000 BTC world’s most recognized Facebook, intended to be used as a initial work on US CBDC
published the white paper for 2 large pizzas. Valuing 1 exchanges was founded simple, low-fee medium of exchange
called Bitcoin – A Peer to Peer BTC at a quarter of a penny. to be used around the world. The
Electronic Cash System digital currency is now called Diem.
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 15Industry and Market Overview
What is Fiat?
“Fiat money is a currency (a medium of exchange)
• Central banks control the basis of value
established as money, often by government
exchange within their jurisdiction
regulation, but that does not have intrinsic value.”1
• There is no “central bank standard” for
“The Federal Reserve Board is the issuing authority behavior
for Federal Reserve notes and ensures that there is – Compare US, China, Venezuela
enough cash in circulation to meet the public's • Regulation and authorization equates money
demand.”2 with notes and coins
1 – Wikipedia; https://en.wikipedia.org/wiki/Fiat_money
2 – Federal Reserve, August 30, 2020; https://www.federalreserve.gov/paymentsystems/coin_about.htm
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 16Industry and Market Overview
What is “Digital Money”?
Cash in circulation is $2,232,997,000,0001
The total balance
sheet of the Federal
Reserve stands at
$8,867,834,000,0001
75% of the balance sheet of the Federal Reserve is
represented digitally today!
Does the fact that this value is digital make it “not money”?
1 – Federal Reserve, January 24, 2022;
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 17Industry and Market Overview
What Is a CBDC?
“… a CBDC is a digital form of central bank money that is different
from balances in traditional reserve or settlement accounts ...” • Note distinction between “digital” and
BIS, Central Bank Digital Currencies, March 2018 https://www.bis.org/cpmi/publ/d174.pdf
“crypto”
• Central bank maintains control over
setting currency value
Legal tender
Central bank digital currency (CBDC) is the digital form of fiat
money. The present concept of CBDCs was directly inspired • What will change with a CBDC?
by Bitcoin, but CBDC is different from virtual
Crypto requires a change in thinking about
currency and cryptocurrency, which are not issued by the state
the distribution of money, not the
and lack the legal tender status declared by the government.
structure of it
Proposed implementations may not even use any sort
of distributed ledger.
July, 2020; https://en.wikipedia.org/wiki/Central_bank_digital_currency
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 18Industry and Market Overview
Bringing Digital Currency to the Central Bank
March 2022; https://www.atlanticcouncil.org/blogs/econographics/the-rise-
of-central-bank-digital-currencies/ © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 19Industry and Market Overview
Abundance of Activity in the US
President’s Working Group Report
on Stablecoins1
Fed Board research paper2
Fed Boston Project Hamilton3
Executive Order on Digital Assets4
1 – https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf
2 – https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
3 – file:///Users/ptap/Downloads/Project-Hamilton-Phase-1-Whitepaper%20(1).pdf
4 – https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-
ensuring-responsible-development-of-digital-assets/
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 20Industry and Market Overview
Current Realities for the Fed
Driving forces for CBDC Restraining forces against CBDC
Calls to address structural issues or problems Robust payment ecosystem, strong banking sector,
affecting specific market segments or groups and wide acceptance of banknotes
General-
Desire for innovation Immature technologies
Purpose CBDC
Advances in technological capabilities Coordination challenges
Source: U.S. Federal Reserve © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 21Industry and Market Overview
What Do We Do Now?
Understand crypto
Principles for Retail CBDCs
• Know what your customers are doing with crypto
• Monetary and financial stability
• Consider offerings under OCC 1174
• Legal and governance frameworks
Pay attention to the work of the U.S. Federal Reserve • Data privacy
Maintain a health skepticism, but balance that with a • Operational resilience and cyber security
willingness for innovation
• Competition
• Illicit finance
• Spillovers
• Energy and environment
• Digital economy and innovation
• Financial inclusion
• Payments to and from the public sector
• Cross-border functionality
• International development
G7, 2021:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachm © 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 22
ent_data/file/1025235/G7_Public_Policy_Principles_for_Retail_CBDC_FINAL.pdfC R Y P TO / D I G I TA L C U R R E N C I E S
& B LO C KC H A I N
Our Understanding
Industry and Market Overview
Use Cases & Survey ResultsUse Cases & Survey Results
West Monroe Crypto and Blockchain Awareness Survey, August 2021
STRONGLY AGREE SOMEWHAT AGREE
In August 2021, West Monroe conducted two
surveys to better understand the state of “Crypto is here BANKS 62% 27%
cryptocurrency adoption among banks, as well as to stay as a CUSTOMERS 49% 38%
banking customers’ appetite for cryptocurrency currency”
both from a general sentiment and future
investment perspective. Customers: Which of the following crypto services are you currently using?
Hold a crypto balance with an exchange (e.g. Coinbase)
Results were gathered via two surveys: Hold a crypto balance with an online brokerage firm (e.g. Robinhood)
• The first survey polled 100 bank employees at the Hold a fully-controlled crypto balance (e.g. using a desktop or mobile digital wallet like Bitcoin
director-level and above who work at banks with Wallet)
assets in excess of $1 billion. Hold a crypto balance with a FinTech company (e.g. Paypal)
• Our second survey gathered inputs from two Hold a crypto balance with their bank
categories of banking customers: Private wealth Invest in cryptocurrency via an exchange
management customers (100 polled) and Chief Invest in cryptocurrency through their bank
Financial Officers at enterprises across various Invest in cryptocurrency through private wealth/investment firm
industries (50 polled). Invest in cryptocurrency through online brokerage firm
Do not use crypto services
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 24Use Cases & Survey Results
Insights from West Monroe Crypto and Blockchain Awareness Survey, August 2021
Positive Sentiment Crypto Offerings Engagement
• Banking leaders and customers report overwhelmingly • Many banks surveyed by West Monroe are currently • CFOs and private wealth consumers are clamoring for
positive sentiment toward cryptocurrency — and the offering cryptocurrency services to at least some degree banking services that would allow them to
notable majority say it’s here to stay, with banking C- — though they’re lagging on deeper crypto services, like purchase/invest in crypto assets — a sign to banks to
suite leaders especially convinced of its staying power. direct crypto investing. pick up the pace on these currently nascent offerings.
• The majority of both bank employees and customers • 84% of banks surveyed report working on or planning an • While banks are currently lagging on more holistic crypto
surveyed by West Monroe are enthusiastic about offering around cryptocurrency services to at least some services that include direct crypto investing and portfolio
cryptocurrency: extent. management, their customers expect more momentum
• Both employees and customers report their here.
sentiment toward cryptocurrency as either “very • In terms of the types of crypto services banks are
positive” or “somewhat positive.” currently offering, there’s an unsurprising tendency • Customers surveyed listed “banks giving me the ability to
toward more basic capabilities like the ability to hold a purchase/invest in cryptocurrencies” as second only to
• Within the customer audience, the CFO segment is
crypto balance. Comparatively, banks are lagging on “clearer federal guidelines” as the factor they’re
particularly interested in crypto, with a large percentage
services that would signal crypto is more embedded depending on most to expand their use of crypto
of that audience reporting “very positive” sentiment
operationally, such as direct crypto investing services.
compared to roughly half of private banking consumers
opportunities.
• The notion of “bitcoin fever” — or any idea of • But in practice, banking customers aren’t letting these
cryptocurrency as a fad or a craze — should be put to desired advancements impede their current use and
rest: continued adoption of crypto: 88% of customers
• Across both banking employees and customers, surveyed said they currently engage with crypto in some
the strong majority say cryptocurrency is here to way, with the largest percentage of respondents holding
stay. Banking employees, however, are more crypto either via a crypto exchange, custodial service or
strongly convinced of crypto’s staying power online brokerage firm.
than their private wealth/CFO customer
counterparts.
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 25T H E C U RT R
H E NCTU RERCEO
NST YESCTOESM Y S FT O
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CHINAIAN NAD N DD DI GI GI TA
I T ALL
C U R R E NCCUYR/RTEONKC EY N
/ TSO KI S
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GWR OI W
N IGN GR AR P
A IPDI DLYLY
CONSUMER LOANS ON CRYPTO ASSETS EXCHANGE
• Blockfi • Gemini
• Nexo • Coinbase
• Celsius • Binance
CUSTODY S TA B L E CO I N S
• Gemini • USDC
• Coinbase • Diem
• Fidelity • JPM
WALLET SOLUTIONS BLOCKCHAIN
• BitAccess • Coinbase • Ethereum
• Kaleido • Exodus • Quorum
• Hyperledger
BLOCKCHAIN AS A SERVICE
• Azure • Kaleido Similar to FinTech overall, this sub segment
• AWS • Paxos (StableCoin as a Service)
is quickly specializing into service layers
© 2022 West Monroe Partners | Reproduction and distribution without West Monroe Partners prior consent is prohibited. 26QUESTIONS FOR DISCUSSION 1. What is your opinion of the change that Digital Currency and Crypto represents for the broader economy? 2. Are there aspects about Digital Currency or Smart Contracts that cause you not to consider this as a future area of investment? 3. What area do you feel represents the greatest threat to your current business where Crypto or Payments is concerned?
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