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THE ADVANCE

OF BITCOIN AND
VIRTUAL PAYMENTS

BLOCKCHAIN
TECHNOLOGY
01 02 03
The year blockchain Bitcoin: the good REPORT
technology and and bad sides The regulation
Bitcoin take off of bitcoin

04 R3: The banking


sector´s support for
05 VIDEO
Bitcoin and
cryptocurrency
blockchain technology

FINTECH SERIES BY innovation edge


01
The year blockchain
technology and
Bitcoin take off?
Little is known about the advance in this
technology, as with Bitcoin –its strongest
virtual currency– which after a few
months immersed in scams and
irregularities, is now recovering consumer
confidence.

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Bitcoin is the most famous and components: a transaction, a the world. This technology is
the strongest of the around transaction register and a the basis of Bitcoin, a
700 virtual currencies system that verifies and stores cryptographic currency”.
circulating on the Internet. the transaction. The blocks are
Behind the currency lies the generated using open-code
technology known as software and register
blockchain which –as defined information regarding when
by BBVA Research,“is a peer- and in what sequence the
to-peer public accounting transaction takes place. This
system maintained by means "block" stores chronological
of a distributed network of information on all the
computes which requires no transactions taking place in the
central authority or third chain –the origin of the name
parties acting as "blockchain". In other words,
intermediaries”. blockchain is a stamped and
immutable hourly database of
This technology “consists of each transaction that is
three fundamental replicated in servers around

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The mysterious music and film archives. In whether his name is real or
disappearance of Satoshi 2008, according to Wikipedia, invented. A mystery about
Nakamoto Satoshi Nakamoto published an which much has been written,
What distinguishes “normal” article describing the Bitcoin and which has even found its
transactions is that they do not January 2009 the P2P Bitcoin way into the world of comics
require an intermediary or network came on line with the (Bitcoin,the hunt for Satoshi
centralized entity, and therefore publication of the first Nakamoto, by Alex Preukschat).
the risk of human error is customer, code, and the
reduced. People who buy creation of the first Satoshi Nakamoto was the first
Bitcoin on the Internet obtain Bitcoins.Curiously, Satoshi to “mine” Bitcoins. Back to
an alphanumeric code – Nakamoto today is on all BBVA Research: “When people
between 27 and 34 characters– journalists' most wanted lists. buy or sell Bitcoins, a secret
which allows them to make After writing the article that code or token is sent to the
payments to other people who launched Bitcoin and system.
have the electronic wallet. exchanging mails on the virtual
Bitcoin allows transactions currency for two years with
between users via P2P, the colleagues, in 2011 he
exchange of information disappeared. No one has ever
between equals, the same seen his face or heard his
system used in the exchange of voice, and it is not even known

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The "miners" use nodes, high levels of protection. The almost one billion dollars, and
computers, or devices miners receive some kind of all the signs are that this figure
connected to a network to remuneration for their will continue growing. And this
identify and validate the contribution to computing investment comes not only
transaction, using copies of all power, thus avoiding the need from venture capital companies.
or some of the blockchain for a centralized system”. Some of the financing rounds in
information. Before the network 2016 are predicted to exceed
accepts the transaction, the Since its creation in 2009 the 100 million dollars, according to
miners have to show a "proof-of- virtual currency has grown the financial consultants
work" using a cryptographic relentlessly. It is estimated that Magister Advisors.
hash function: a special investment in Bitcoin
algorithm designed to provide technologies is now worth

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


02
Bitcoin: the good and
bad sides
The virtual currency is making a comeback
after a turbulent year. The International
Monetary Fund is giving it a vote of
confidence and the banking sector is
focusing on its development.
You can't mention Blockchain half years surrounded by Mastercard, Paypal or
without mentioning Bitcoin. irregularities and some fraud commercial banks eliminating
The virtual currency is the cases. Even the founder -who time delays and transactions
symbol of blockchain has disappeared, who is costs."
technology which aspires to faceless whose name is even in
change payment systems. doubt- of the virtual currency
Bitcoin has been at the center has been nominated for the
of scandals since was launched 2016 Nobel Prize in
in 2009, although proof of the Economics.
fact that it is becoming
stronger can be found in the He was nominated by
first statement by the American economist Bhagwan
International Monetary Fund Chowdhry who says the
about virtual currencies. The following about the virtual
statement, made in January, currency founded by Satoshi
says that “Virtual currencies Nakamoto: "Bitcoin, which
and their technology can exists purely as a mathematical
provide quicker and cheaper object, offers many advantages
financial services which could over both physical and paper
become a powerful tool to take currencies. It is secure, relying
financial inclusion further in a on almost unbreakable
developing world”. Many cryptographic code. It
people think that this is the bypasses governments, central
time when Bitcoin is entering banks and financial
its mature phase after six-and-a- intermediaries such as Visa,

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Bhagwan Chowdhry also way of competing with the in January 2013 it cost 13
points out that “the consumers capitalist model. It was also a dollars, more than 1,000
will be big beneficiaries and way of laundering money or dollars nine months later,
indeed the poor and marginal committing tax evasion...and before falling again to 300
sections of the society will reap this was evident in the dollars.
the benefits of financial and fluctuations of the currency:
social inclusion”.

Bitcoin seems to be entering a


golden age after quite a few
dark years. When it was
created, the banking sector
was very wary of it, while
rebellious geeks, cyber-
anarchists and followers of the
anti- globalization movement
embraced the virtual currency.
They saw it as an anti-system

FINTECH SERIES · JANUARY 2016


Support from Banks This project currently includes Banks have arrived on the
The banking sector is currently around 30 global banks, scene late, although they have
supporting Blockchain including BBVA (which come to realize the revolution
technology. BBVA is part of featured among the founders that is coming. This revolution
the group of international in September this year), Bank does not only affect payments.
banks that are looking at what of America, Barclays, Goldman According to BBVA Research:
this technology could bring to Sachs, HSBC, JP Morgan, “the greatest of a public
their business, and they have Morgan Stanley, Société accounting system could go
placed their trust in an Générale, BNP Paribas, beyond payment systems.
American startup, R3, to Canadian Imperial Bank of Because most financial assets,
develop applications using this Commerce, ING, like bonds, securities,
technology in the financial Commerzbank, UBS, and derivatives and loans are
sector. others. already electronic, some day
the whole system could be
Also at the beginning of 2015, replaced by a decentralized
BBVA invested in the largest structure. In fact, the most
wallet of virtual recent innovations use tokens
cryptocurrencies in the world, to store and market assets like
Coinbase, which includes an securities, bonds, motor
exchange service that allows vehicles, houses and staple
users to buy and sell and then. food commodities".

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


"The so-called "colored coins" platforms without a centralized Reserve) would be replaced by
carry additional information log, increasing their efficiency. the "Internet of money" or the
about the asset, which In this regard, the current "Internet of finance", a fully
generates a "smart property" or system in which financial decentralized financial system”.
the ability to record and institutions record individuals'
conduct transactions with accounts in a centralized
these assets using "smart database and banks' reserves
contracts" via complex are stored in the central bank
algorithms through distributed (for example, the Federal

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


03/REPORT
The regulation
of Bitcoin
There is a race to determine the
rules of the virtual currency. But
is it too soon? the consultancy
firm Deloitte wonders.

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


Bitcoin has captured the There are three reasons, says
imagination of consumers and the consultancy firm, why the
businesses around the world authorities and regulators
as one of the greatest should consider delaying the
advances in exchanging regulation of Bitcoin, to give
shares. Blockchain technology more time and freedom to
has been a major IT blockchain to explore its full
breakthrough that seems to potential. Deloitte emphasizes
solve what seemed unsolvable: the following points:
ensuring that a digital
transaction occurs only once. 1. Bitcoin is still very small
However, there is a compared to traditional
fundamental question that transaction systems Bitcoin
looms over Bitcoin, which receives considerable attention
could slow the pace of and scrutiny from politicians
innovation and its adoption, and regulators, far beyond
and that is what its regulation what its current size and its
will be, as highlighted BY this impact on the market seem to
report by Deloitte. justify.

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Currently, the total global value (US$700 million since 2014), demand for bitcoins related
of Bitcoins is less than US$ 4 we are far from actual products with services to the general
billion, which pales in that could generate a real public.
comparison to the nearly US$
1.36 trillion in circulation.
Similarly, the penetration of
Bitcoin in the market as a
method of payment is almost
nil. With the power of the
Internet, it's true that many
Americans have heard of
Bitcoin, but very few have
bitcoins or used them for a
transaction. Many of those few
users are just experimenting
with the new technology, and
not necessarily as a method of
payment for goods and
services.

Moreover, while it's true that


venture capital investments
with bitcoins in startups have
increased a lot in the last year

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


2. Other key innovations - Aircrafts: invented in 1903, - Internet: invented in 1969, it
had more time to develop regulated in 1938 (35 years has only become an area with
before being regulated. later). intense regulatory focus in
Looking back history of recent years, nearly 46 years
innovation, other technologies - Radio: invented in 1907, after its development.
that have transformed our regulated in 1927 (20 years
society had more time to later). The open code software
develop before being seriously program that is Bitcoin was
regulated. Some notable - Cell phones: invented in first launched in 2009. It has
examples are the following: 1965, the first FCC wireless only been six years since
spectrum bidding process Bitcoin was developed that is
- Phone: invented in 1876, focused on mobile data in very far from the time in
regulated in 1913 (37 years 1989 (24 years later). which other technologies were
later). adopted by the general public
in the past.
3. Other, more valuable and do not know each other could banking services to the billions
important, possible uses of change the way people live of people living in the Third
Bitcoin have still to be and interact. World, they are great ideas.
invented. Bitcoin a
breakthrough that could The list of cases in which Like others before it, it is likely
potentially transform and Bitcoin and blockchain can that Bitcoin will move from one
improve the way the public potentially be used is growing innovation to another, and
around the world carries out every day, and although it is in finally develop products,
financial and non-financial its infancy, some of its services and capabilities
transactions. However, it is emerging uses are very previously unimaginable that
much more than digital interesting. From allowing will become needs in our daily
money. More broadly, the more efficient banking lives.
protocol capacity of Bitcoin to networks to providing the
give confidence to parties that application that will promote

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


Considerations for policy our economy and, ultimately, are massively adopted only if
makers and regulators so important to our personal they are useful and create
Deloitte argues that Bitcoin lives, it may indeed cause value, and most of the time
was consciously designed to some fear. However, in their greatest value appears in
be a source of digital currency seeking to protect the public ways never imagined before
and open public accounting, from misuse, could policy and we did not know we
beyond the control of any makers and regulators not wanted or needed.
government or company. At eventually drown from the
least on the surface, it looks possible capabilities that could On the other hand, if a new
like Bitcoin and blockchain potentially change our life for technology cannot reach the
have solved a major problem the better? In many ways it is critical masses, it often
by allowing trade to evolve the classic challenge that disappears as suddenly as it
through the Internet, i.e. by policy makers and regulators appeared. The same can
making it possible to carry out always face: how to react to happen to Bitcoin. It's like the
publicly-verifiable transactions something that is so different "chicken and egg", i.e. will the
without having to exchange to what existed before? adoption of Bitcoin and
increasingly- vulnerable blockchain drive the pace of
personal financial information. It's a difficult dilemma, but the regulation, or will the
It's a bold experiment. actual market can provide the regulation help to achieve
best guidance on when and wider adoption?
As Bitcoin aims to change how regulators should step in.
something so fundamental to On the one hand, innovations

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What the future holds remains could be important in the
to be seen, but some important coming years? Given the
questions remain, as with the potential of this technology to
Internet. Must the United States disrupt both financial services
provide the enabling and technology industries, it is
environment for the incubation desirable that industry groups
and maturation of Bitcoin- as well as policy makers and
related innovation? Or should regulators encourage
we wait and see the attitude of collaboration and dialog at
others and let them capture national level, the consultancy
most of the new value, which firm concludes.

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


04
R3: The banking sector's support
for blockchain technology
The New York startup –involving participation by some 30 banks– is testing
blockchain technology in its interbank transactions.

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


The US startup R3 CEV has project, among them Barclays, every big financial services
made a preliminary test of Commonwealth Bank of institution has now
interbank transfers using Australia, TD Bank and Wells overcome that initial
blockchain technology Fargo. BI Intelligence suspicion. And the
blockchain, according to predicted that in 2016 technology has swung from
Business Insider. R3 thus blockchain technology would being a weapon wielded
becomes the first collaborative be applied to interbank against banks to being
“laboratory” for developing transfers, and the first R3 test heralded as their ultimate
these trials, and constitutes a marks an important step in back-office makeover, a bitter
milestone for the that direction. blow to the libertarians who
development of blockchain conceived the idea of the
.The test focused mainly on As reported in this article from blockchain to circumvent the
interbank transactions. The the Financial Times published global banking system. Suits
participating banks simulated in the newspaper Expansión: are replacing hoodies and
the exchange of shares in “Blockchain has been hailed by ripped jeans at blockchain
order to explore the admirers as holding the conferences", says Mark
blockchain potential for revolutionary promise that the Buitenhek, head of transaction
instant global transfers without internet did two decades ago. services at Dutch bank ING.
the need for an intermediary. Business figures from
Microsoft’s Bill Gates to According to the British
R3 used the Ethereum and Richard Branson have extolled newspaper, the technology is
Microsoft Azure technology, a its potential”. And it underlines already handling a
cloud computing platform. that after the mistrust caused considerable volume of
Eleven banks took part in the by the early scandals “almost business.

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


On a normal day over Banks are focusing on for large banks in the last
120,000 transactions are online channels quarter of 2105, according to
made through the bitcoin The banking sector is clearly Business Insider. Today banks
blockchain with a total value of commitment to blockchain are continuing to cut back on
75 million dollars, according technology. It is worth noting staff numbers in their
to blockchain.info. The that the shift from banking branches: JP Morgan, for
register now has 38,000 branches to online channels example reduced its workforce
blocks and almost 45 and mobile devices has been by 12,000 employees in 2015
gigabytes of information. one of the dominant issues (a reduction of 43,000 jobs
since 2012), and it is
estimated that Citibank plans
to close as many as 50
branches in the first quarter of
2016, opting to focus on its
six most active markets.

There is no doubt that digital


banking is still growing at a
good rate: JP Morgan itself
heads the market with almost
23 million online banking
users, up 20% over the
previous year.

FINTECH SERIES · JANUARY 2016


Wells Fargo now has 16.2 The mobile banking market is
million users, after having close to saturation. Although
followed a practically the number of digital banking
horizontal trend between the users of the three main banks
second and third quarters of in the US continues to grow,
2015. And finally, Bank of it is doing so at a slower rate
America today has 18.7 than before. As a result,
million online banking users, banks are starting to use
up 13% over the previous digital tools to create lasting
year. In fact, 15% of bank relationships with their
deposits were made via customers. For example,
cellphone, representing a Wells Fargo is investing in
growth of three points over products and services that
the previous year. increase convenience for
consumers while improving
Digital banking is becoming their customer service,
one of the big banks' most building long-term
important tools for attracting relationships with the users
and creating loyalty among “for a lifetime”. Citibank also
their customers. wants to build deeper
relationships with its
customers.

SERIES FINTEH
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If they want to move forward essential to offer exclusive through its app. This type of
in that direction, banks will services that set them apart services which contribute an
almost certainly have to build from the competition and important added value will
more and ever more complex also help build loyalty among gradually evolve in the future,
digital services; in other their customers. One in fields such as consulting or
words, once the vast majority example is Bank of America, loans.
of banks offer "mobile which began offering the
banking", it will become chance to book appointments

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05/VIDEO
Bitcoin y
cryptocurrency
Discover all the possibilities that the
rise of bitcoin and cryptocurrency
entails. We explain how they work in
this video.

VIDEO

FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en


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