THEFUTUREOFMONEYHAMPUSBRODÉN – ENTREPRENEURINSTEALTHMODE

BMIBALTICMANAGEMENTINSTITUTE13JANUARY2017

INNOVATIONA- COMMODITYMONEY

+mediumofexchange+storeofvalue+unitofaccount=money

Abyssinia

WestIndies

PacificIslandsNewFoundland

Rome

Virginia Scotland

Africa

MiddleEast

COMMODITYMONEY

(recognizable,fungible,divisible,transportable,transferable,hardtocounterfeit,stablesupply,durable,securable)

CHARACTERISTICS

INNOVATIONB– FIATMONEY

IslandofYapinMicronesia

EXAMPLE- STONEMONEYOFYAP

EarlymoneytransferontheislandofYap

Eventuallyislandersdecided

nottomovestonesaround…

…andinsteadkeept verbaltrackof who ownedwhat share ofeach stone…

…even astonethatsanktothebottomofthesearemainedcurrencyincirculation

INNOVATIONC- CREDIT

Asset

Liability

EXAMPLE- TALLYSTICKSOFMEDIEVALEUROPE

Creditwascarvedintoasplittallyandthedebtorandthecreditoreachgotonehalf.ThetechniquebecamecommoninmedievalEurope,whichwasconstantlyshortofmoney(coins).ThesplittallywasacceptedaslegalproofinmedievalcourtsandtheNapoleonicCode(1804)stillmakesreferencetothetallystickinArticle1333.

INNOVATIOND– TURNINGCREDITINTOMONEY

Assets Liabilities

1)Diversification

1stloss

2ndloss

3rdloss

4thloss

3)Structuring

2)Collateralization 4)Maturitytransformation

Longterm

Shortterm

Voila!Feelsjustlikemoney.

BANK

NEWLOANSMAKEMORE MONEY

Assets Liabilities

Housebuyer´sbank

Newmortgage

loan

Newdeposit

Houseseller´sbank

Assets Liabilities

Reserves DepositsReserves Deposits

NEWLOANSMAKEMORE MONEY

Assets Liabilities

Housebuyer´sbank

Mortgageloan

Houseseller´sbank

Assets Liabilities

Transferredreserves

Newdeposit

Reserves

Deposits Reserves Deposits

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 0001998

1998

1999

2000

2001

2002

2003

2003

2004

2005

2006

2007

2008

2008

2009

2010

2011

2012

2013

2013

2014

2015

2016

SEKm

"CREDITMONEY”ISTHEMOSTCOMMONMONEY

Ondemanddepositsfromnon-bankpublic

Coinsandnotesincirculation

SWEDISHMONEYSUPPLY

“Actualmoney”isdecreasingatthesametimeas”creditmoney”

isincreasingMoneysupply

“ACTUALMONEY”ISBECOMINGRARE

InSweden98%ofwhatweperceivetobemoneyactuallyiscredit

(loanstothebanksthatis)

IsolatedledgerA

IsolatedledgerB

Email

Mon

ey

Mon

ey

Time=instantCost=0%

Time=days

Cost=Upto8%

PAYER RECEIVER

“CREDITMONEY”HASITS CHALLENGES

Bank

Assets Liabilities

Loans Deposits

Illiquid

TRANSACTIONCOSTSINSTABILITY

+ =RISKUnstable

ENTERDIGITALMONEY- BITCOIN

• Decentralizeddigitalcurrency

• Notbackedbyanygovernmentororganization

• Instantaneouspeer-to-peertransactions

• Noneedfortrustedthirdparty

• Nocounterpartyrisk

• Cryptographicsecurity

• Lowcostbankingforeverybodyeverywhere

• Inflationproof

• Basedsolelyontheconsensusthatithasvalue

Distributedledger– samecopyineverynode

• Thereceivernowcanspendthatamount• Transactioncost=virtuallyzero• Time=~10minutes

PAYER

RECEIVER

Receiver’spublickey/adress

HOWBITCOINWORKS

Longversion:1. Newtransactionsarebroadcasttoallnodes.2. Eachnodecollectsnewtransactionsintoablock.3. Eachnodeworksonfindingadifficultproof-of-workforitsblock.4. Whenanodefindsaproof-of-work,itbroadcaststheblocktoallnodes.5. Nodesaccepttheblockonlyifalltransactionsinitarevalidandnotalreadyspent.6. Nodesexpresstheiracceptanceoftheblockbyworkingoncreatingthenextblockinthe7. chain,usingthehashoftheacceptedblockastheprevioushash8. https://bitcoin.org/bitcoin.pdf

GLOBALANDINSTANTREACH

• ProtestersinKievheldsignsforthetelevisioncamerasaskingformoneyin2014

• Thousandsaroundtheworldpointedtheircellphonecamerasattheon-screenvideoandmadedonationswithliterallythreeclicks

• Thetransactionswerecommunicatedin20secondsandconfirmedwithintenminutesatacostofafractionofacentperdollar

• Transactionswereanonymous:thegovernmentcouldnotmonitorthem,andtherecipientsdidnotknowwhomtothank.

- BostonConsultingGroup– ThinkingOutsidetheBlocksDecember1,2016

UKRAINIANEXAMPLE

CONSENSUSFORMINGTHEREISVALUEINBITCOIN

#OFWALLETSINUSEMARKETCAPITALIZATION

Source:Bitcoinity.org Source:Blockchain.info

0

2 000 000 000

4 000 000 000

6 000 000 000

8 000 000 000

10 000 000 000

12 000 000 000

14 000 000 000

2012-01-02 2013-01-02 2014-01-02 2015-01-02 2016-01-02

USD

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

03/0…

06/0…

08/0…

09/1…

10/0…

13/0…

15/0…

16/1…

17/0…

20/0…

22/0…

23/1…

24/0…

26/0…

28/0…

29/1…

30/0…

03/0…

04/0…

05/1…

06/0…

10/0…

11/0…

12/1…

13/0…

17/0…

18/0…

19/1…

20/0…

23/0…

24/0…

Num

bero

fBitcoinwalletsinuse

GROWINGFROMASMALLBASE

#TRANSACTIONSPERMONTHBITCOINACCEPTANCE

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

7 000 000

8 000 000

9 000 000

2011 2012 2013 2014 2015

Source:Coinmap.org Source:Bitcoinity.orgForlivetransactiondata:https://blockchain.info

STARTINGTOBEPOSSIBLETOGETBYONBITCOINS

BuenosAires London Tokyo

Source:Coinmap.org

CORPORATESTHATACCEPTBITCOINTODAY

Microsoft,Dell,Tesla,Subway,Time,VirginGalactic,Expedia,Bloomberg,Square,Sears,Intuit,WordPress,PayPal,HomeDepot,Shopify,WholeFoods

INCREASINGLYDIFFICULTTOTELLTHEDIFFERENCE

CREDITMONEYACTUALMONEY

CANYOUTELLTHEDIFFERENCE?

Assets Liabilities

WHATISTHEBIGDEAL?

• Globalpaymentscouldbecomeinstant,availabletoanyonewithasmartphoneandverycheapregardlessiftransactionsarecrossborder

• ThenewglobalpaymentnetworkwouldnotinvolveincumbentinfrastructurefrominstitutionssuchasVISA,Mastercard,AmericanExpress,orbanks

• Formerdepositorscanholdlargequantitiesofelectronicmoneywithouthavingtoexposethemselvestocounterpartyriskorworryaboutphysicalstorage

• TheBitcoinnetworkhasnotbeendownsinceitsinceptionin2009

• Afullscaleadoptionofdigitalmoneycouldbeverydisruptiveforbanksastheystillmakelargepartoftheirlivingonfacilitatingtransactions*

• The2nd,andperhapsmostdisruptivechange,wouldbeadisappearingdemandfortransactionaccountsfromhouseholdsandcorporations

*Paymentfeesmakeup40%ofglobalbanks’totalrevenueaccordingtoMcKinseyreport“GlobalPayments2015:AHealthyIndustryConfrontsDisruption”

BANKSARE VERY DEPENDENT ONDEPOSITS

Capital

>1Yearfunding

DepositsfromhouseholdsandSMEs

Otherdeposits

Derivatives

Source:Liquidatum andRiksbanken

10

20

30

40

50

60

Almost40%ofEuropeanbanks’assetsarefundedbydeposits

Fund

ingofEurop

eanbanks’assets,%

IFDEPOSITSMORPHINTODIGITALCASH

• Bankswouldhavetoofferhigherratestoconvincethepublictolendthemmoney• Higherfundingcostswouldlikelydepressprofitabilityofthebankingsector• Lowerbanksectorprofitabilitycouldaffectcreditratingswhichwouldputupwardpressureonwholesale

fundingcostsaswell• Higherbankfundingcostsmeansincreasedcostofcreditforbanks’borrowers• Higherborrowingcostscouldimpactassetpriceslikeresidentialandcommercialrealestate,equities,

bonds,commodities,infrastructureetc.• Banksabilityto“createmoney”wouldbemateriallyimpactedandassuchcentralbanks’abilityto

conductmonetarypolicythroughthebankingsystemwillbetoo• Ironically,bankscouldhelpmaketheproblemworseasdigitalcashcouldbecomeamoreattractiveasset

tokeepasliquidityreserveinsteadoftoday’scentralbankdeposits,governmentbondsandotherbanks’coveredbonds.Today’sissuersofinstrumentsthatareheldasliquidassetsi.e.governmentsandmortgageinstitutions,couldseefundingcostsgoupforthisreasontoo.*

• Intheend,wewouldprobablyendupwithasaferbankingsystem,withlessmaturitytransformationandhigherqualityliquidityreserves– thetransitioncouldbesomewhatuncomfortablethough- forbanks’shareholders,holdersofimpactedassetsandhighlyindebtedborrowersthataredependentontheperseveranceoflowcostofcredit

*15%oftotalassets,ofbanksunderBaselCommitteesupervision,aresocalled”highqualityliquidassets”accordingtospeechbyBaselCommitteeChairmanStefanIngves 2December2016

THESETHOUGHTSAREACTUALLYNOTTHATNOVEL

“IthinkthattheInternetisgoingtobeoneofthemajorforcesforreducingtheroleofgovernment.”

“Theonethingthat’smissing,butthatwillsoonbedeveloped,isareliablee-cash,amethodwherebyontheInternetyoucantransferfundsfromAtoB,withoutAknowingBorBknowingA.”

- MiltonFriedman1999,NobelLaureate1976

https://www.youtube.com/watch?v=6MnQJFEVY7s

M.Friedman1999 F.A.Hayek1990

THANK YOU

HTTPS://SE.LINKEDIN.COM/IN/HAMPUSBRODEN

MYCONTACTADRESS MYVALUEADRESS

1PSGnH85LKpeRTHmR27TYTAXXSCMFaHvdm

DISCLAIMERThismaterialfocusesonthepotentialofdigitalmoney.Itdoesnotfocusonrisks.Assuchherefollowsafewnotesfornuanceanddisclosure• Althoughtheauthorownssomecryptocurrency,thismaterialdoesnotconstituteadvisetoanyoneto

investinbitcoinsorothercryptocurrencies• Bitcoinisayoungtechnologyandittakesrelativelydeepknowledgeforindividualstohandledigital

currencyinasecureway.Thereisnowaytoretrievelostbitcoinswhenaprivatekeyislostorstolen.• Thepriceofcryptocurrency,inparticularcryptocurrencythatisnotBitcoin,hasbeenveryvolatile.• Mostinstitutionslikeexchanges,custodiansetc inthecryptocurrencyspacearelessmatureandfarless

regulatedthanbluechipinstitutions.Assuchtherehavebeenexamplesofbothpoorgovernanceandfraudcausingcustomersfinancialharm.

• WhenitcomestoBitcoininparticularlyadisproportionatelylargeshareoftradingandconfirmationoftransactionstakeplaceinChinawhichmakestheglobalnetworksomewhatvulnerabletoChinesegovernment’sstanceoncryptocurrencies.

• Taxandlegaltreatmentofdigitalcurrenciesdiffersignificantlybetweenjurisdictions.Also,insomepartsoftheworld,typicallyinjurisdictionswithunstablestatebackedmonetaryregimes,thereareexamplesofwhengovernmentshavetakenoutrighthostilepositionsondigitalcurrency.

APPENDIX

WHATISABLOCKCHAIN – BITCOINEXAMPLE1)Chainofsignedtransactions

Source:InspiredbyBitcoinandcryptocurrencytechnologies,2016

SignedbyPrivateKeycreator

CreateCoin (uniqueCoinID)

SignedbyPrivateKeycreator

PaytoPublicKeyAlice:H()

SignedbyPrivateKeyAlice

PaytoPublicKeyBob:H()

SignedbyPrivateKeyBob

PaytoPublicKeyCharlie:H()

2)Arrangedintoblocks

prev:H()

transID:71

transactions

prev:H()

transID:72

transactions

prev:H()

transID:73

transactions

3)Confirmedbydistributedconsensusnetwork

100%

centralised

DIFFERENTWAYSOFSETTINGUPBLOCKCHAINS

Differentledgertechnologiesvaryintheirdegreesofcentralisation

100%

decentralised

Today’stypicalsystemsPermissioned,privatesharedsystems

Permissioned,publicsharedsystems

Permissionless,public,sharedsystems

Distributedledgertechnologycoversasbroadsetofusages Centralised ledgers

Source:UKGovernmentChiefScientificAdviser

BLOCKCHAIN ASUNIVERSALLEDGER

Bitcoin&othercrypto-currencies

“Blockchain”

Createdigitalmoneybycreating newassets

Createdigitalmoneybydigitizingexisting assets

Noinstitutions

Financialmarketparticipants

Bitcoininnovation

ALTERNATIVEUSESOFBLOCKCHAINTECHNOLOGY

Source:ErikOlofsson ofchain.com