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Why banks invest in blockchain (and not in bitcoin)

My take on why, generally speaking, banks invest in blockchain & distributed ledger technologi and not in bitcoin. Yes, the ECB doesn't like it. But there are some myths to debunk to make the ECB demand a sound case.
Most slides are pictures, feel free to contact me.

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Why banks invest in blockchain (and not in bitcoin)

  1. 1. Koen Vingerhoets – find me on
  2. 2. Why are financial institutions investing in blockchain (and not in bitcoin)? Koen Vingerhoets @IthronKoen All views are my own.
  3. 3. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  4. 4. 2008 – “Satoshi Nakamoto” writes…
  5. 5. Bitcoin is a unique transfer of value
  6. 6. Blockchain persists all the unique transfers
  7. 7. 2008 – “Satoshi Nakamoto” schrijft…
  8. 8. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  9. 9. The fairytale of Satoshi Nakamoto, the Unicorn and the Big Bank. “What if… Satoshi is a bank employee in 2017?”
  10. 10. Introducing S. NAKAMOTO : bank employee And a rather anonymous Big Bank
  11. 11. Satoshi is full of ideas & knowledge… but who listens? “Join our 2017 Idea Competition and fly to Silicon Valley!”
  12. 12. Satoshi joins the competition with her idea… “Blockchain: a shared, resilient & protected ledger for anything”
  13. 13. Satoshi has to explain it often to her Big Bank colleagues Both Business & IT are interested but… also involved.
  14. 14. Three key drivers of “blockchain” - Cryptography science has made the recording of tamper-proof data in a chain of digital blocks possible; - Game theory explains how trust in others can be replaced mathematically via multiple actors that force self- interested rational behavior; - Software engineering connects it all over the internet to achieve scale.
  15. 15. The blockchain is, from a technical point of view,  A unique, public and transparent distributed ledger  That stores all transactions immutably and  Permits predefined actions on data in those transactions  In a cryptographically secured environment.
  16. 16. The blockchain is, from a business point of view,  A shared platform  On which parties who don’t know or trust each other  Are able to collaborate with respect for privacy  Without relying on a possibly corrupt administrator.
  17. 17. Satoshi gathers a team of believers The “Blockchain” idea ends in the top 3!
  18. 18. Our brave Satoshi has to present “blockchain” … … to the Big Bank’s Board of Directors!
  19. 19. Even in fairytales, people have to work… Satoshi elaborates her idea in the early hours of the night.
  20. 20. The great day arrives… and this is what she said. “Dear management, colleagues, I am Satoshi Nakamoto.”
  21. 21. Why? The customer experience! - People buy a house, not a mortgage or an insurance product (despite our efforts to sell products) - Then they have to visit a big bank to get the money they need for the house of their dreams. - Then they need an insurance to protect our money and the house of their dreams.
  22. 22. How? Blockchain as catalyst. - Efficiency gains in our own internal and intra-bank processes : less reconciliation, less (manual) checks,… - New offerings for our customers, exploring markets we didn’t enter before - Ecosystems to join or to build with a shared ledger of secured, trusted data
  23. 23. What? Some blockchain ideas - Efficiency - Car Loan & Mortgage - X-border X-currency realtime payment - New offerings - A Trade Finance for the SME market - Store secured documents in a vault - Ecosystems could be the most powerful (side)effect of blockchain - Ecosystems
  24. 24. But… Some challenges lie ahead! - Collaboration between banks? - Integration with legacy systems? - It’s just an idea, we’ll have to learn the possibilities of this nascent technology - Extra security or disruptive tech? - No clear regulations (yet) - Why choose blockchain for FinTech?
  25. 25. And… what if we don’t? Just imagine someone uses blockchain - To exchange value over the internet - Between unknown parties - Without central regulation/steering
  26. 26. Satoshi Nakamoto Bank Employee VOTE TEAM “BLOCKCHAIN” TO SILICON VALLEY!
  27. 27. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  28. 28. Three drivers for financial institutions 1. Efficiency gains (eg. Santander estimates $20 Bn / year) 2. New Business (eg. Digital Trade Chain wins EFMA award) 3. Ecosystems Three drivers for blockchain ideation 1. Cryptography science 2. Gaming theory 3. Software engineering & internet Three hurdles to tackle 1. Collaboration 2. Regulations 3. Integration
  29. 29. How to pay for services? How to insure goods? We are still here! What can our customers do? What’s our efficiency gain? The new fabric of trust. Who is who on our systems? Who to trust in misfortune? Identity is the new money. Logical steps for financial institutions in distributed ledger tech IT research : scalability, resilience,… Legal research : legal/compliance/risk, regulator,…
  30. 30. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  31. 31. ECB vs anarchy
  32. 32. ECB vs anarchy Old technology
  33. 33. ECB vs anarchy Old technology
  34. 34. ECB vs anarchy Old technology Mining power Hashes per second on the bitcoin blockchain – proof of work 09/2013 05/2011 01/2016 09/2016
  35. 35. ECB vs anarchy Old technology Mining power
  36. 36. ECB vs anarchy Old technology Mining power 2012 bitcoin mining farm
  37. 37. ECB vs anarchy Old technology Mining power 2017 bitcoin mining farm
  38. 38. ECB vs anarchy Old technology Mining power Say “cheese” to 91% of the hashing power (and know that 51% is already a risk)
  39. 39. ECB vs anarchy Old technology Mining power Coin or investment?
  40. 40. ECB vs anarchy Old technology Mining power Coin or investment?
  41. 41. ECB vs anarchy Old technology Mining power Coin or investment?
  42. 42. ECB vs anarchy Old technology Mining power Coin or investment?
  43. 43. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked How to get bitcoin? Buy it From someone else On an exchange Mine it Rent a miner Buy a miner Get a gift And then wot, mate?
  44. 44. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked
  45. 45. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks!
  46. 46. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks!
  47. 47. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider A bitcoin transaction is sound proof of one thing: The sending account had at least the required funds.
  48. 48. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider
  49. 49. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider Must… blockchain…
  50. 50. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider Must… blockchain…
  51. 51. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider Must… blockchain… Public & Permissionless
  52. 52. ECB vs anarchy Old technology Mining power Coin or investment? For the unbanked Bye bye banks! Identity provider Must… blockchain… Public & Permissionless
  53. 53. - High risk investments - Fast worldwide “payments” - If your money must be hidden - If the transaction must be hidden - A digital asset that can’t be copied
  54. 54. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  55. 55. D. Birch blockchain decision model
  56. 56. Our experiments / projects Digital Trade Chain Cash-on-ledger Crowdfunding secondary markets Document authentication Know Your Customer Car Loans Budget tracking UTI Management Voluntary corporate actions European commercial paper Qualitative reference data
  57. 57. Experiment Trade Finance
  58. 58. Problem statement: SME’s have no proper coverage against the risks of international trade. Lack of trust between SME’s • Unknown to each other • Delivery first vs Payment first • Unequal power between parties leads to unequal conditions Small margins within SME’s • Smaller transactions • High cost for a Letter of Credit, relative to the value of the trade • No proper KBC products to cover risks or to finance the transaction
  59. 59. Target market: Open account flows between EU parties Export to distant destinations (Asia, Russia, Central Europe, Middle East and Africa) Export EU destination €245 bn €70 bn  20% of Belgian export volume is to distant areas.  For these trade flows, documentary letters of credit or collections are used.  >70% of Belgian Export volume is done with European counterparties.  TOP 3 countries: The Netherlands, France and Germany  60% of this trade is done with advance payment
  60. 60. The solution: A platform for SME’s willing to venture into international trade. The KBC Digital Trade Chain offers • Support for Int’l Trade • Everything you need to follow up your trade, cover its risks or optimize its financing • Automatic payment when the contractual agreements are fulfilled
  61. 61. Phase 2 : ERP Integration, multiple banks, legacy integration To enhance our experiment and move closer towards production, we study feasibility of - ERP integration (explicit customer demand) - A multibank environment (technical overhaul required) - Integration with our legacy systems (to properly include our own offering)
  62. 62. Group Trade Finance 71 Buyer Buyer’s Bank Transporter/ Forwarder Seller Seller’s bank ¨Certificate issuance Credit Insurer Commercial finance Credit dpt Payments Insurance Credit Insurer Commercial finance Credit dpt Payments Insurance Phase <?> : ERP Integration, multiple banks, legacy integration
  63. 63. TrustOwnership Transparency Traceability Distributed Smart contracts Why use a blockchain?
  64. 64. Agenda 1. Shortest blockchain explanation ever 2. Omg! This sounds like a fairytale!? 3. Recap in 3*3 4. The holy bitcoin 5. Some fair tales @ KBC 6. Farewell!
  65. 65. Challenges ahead… 1. Blockchain strategy is about collaborating. 2. Not just IT, also business is involved (risk appetite) 3. Unpredictable reactions of regulator & Government 4. Financial signals (ROI) are problematic. 5. Radical uncertainty is the norm (VUCA)
  66. 66. We Banks sell trust and data. Blockchain is trust and data.
  67. 67. While I catch my breath now, some people have to catch their breath all their life. With public speaking, I raise bitcoin to support improving the daily lives of people with cystic fibrosis. Open your BTC wallet on your smartphone, scan this code. Or use 1JmSPfvJ751BYi7TVD8xXqWzPpGXqrW9Fj as recipient. Proceeds go to Muco vzw (www.muco.be) Thank you for your support and appreciation. More info, questions or remarks? Koen.Vingerhoets@kbc.be Twitter : @IthronKoen Distributed Ledger Technology Adviser @ KBC Bank & Insurance

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My take on why, generally speaking, banks invest in blockchain & distributed ledger technologi and not in bitcoin. Yes, the ECB doesn't like it. But there are some myths to debunk to make the ECB demand a sound case. Most slides are pictures, feel free to contact me.

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