lOMoARcPSD|9024306

Technical Note Fintech and Crypto currency

Case studies in Banking and Finance (Monash University)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
 lOMoARcPSD|9024306

MONASH
BUSINESS
SCHOOL

Fintech and Cryptcurrency

Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)

 lOMoARcPSD|9024306

MONASH
BUSINESS
SCHOOL

Objectives
• Evaluate technologies impacting finance

• Define fintech companies

• Define cryptocurrency/new forms of money

• Understand innovations of block chain

• Introduce central bank digital currency

2
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
 lOMoARcPSD|9024306

Disruptive Technologies

Block Chain &

AI Cryptocurrencies Smart Contracts
Distributed ledgers

Virtual
Disintermediation Biometrics and Augmented
Reality/Augmented
Platforms Digital ID Analytics
Reality

Edge Computing & Quantum

5G mobile internet Cloud Computing
Internet of Things Computing

• Crispr (Biotech) • Drones • Renewables

• Industry 4 • Robotics • Autonomous Vehicles
• 3D Printing • Digital Twins • Nano-tech
MONASH

3
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

What is fintech?

§ Fintech short for “financial technology.” - financial services using computer

software and hardware.
§ The FSB (2017) defines fintech as a “technologically enabled financial
innovation that could result in new business models, applications, processes,
or products with an associated material effect on financial markets and
institutions and the provision of financial services.”
§ Fintech impacts financial markets as well as banks and other financial
institutions.
§ Traditional banks provide these services - fintech is also associated with non-
traditional financial services providers offering such service innovations.
§ Government is encouraging fintechs with initiatives such as open banking

MONASH

4
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 4
 lOMoARcPSD|9024306

Fintech according to McKinsey & Company

MONASH

5
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Open Banking (1)

§ Create open market places Deposits

§ Alt. Financial services

§ Customers direct their
Insurance Superannuation
account needs
§ Apps and APIs
Customer
§ Digital identity with full
account portability
Investments Credit Cards

Loans

MONASH

6
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Open Banking (2)

PSD 2 Directive

February 2020

API driven (REST)

KYC and AML

Digital Identity

Consumer Data Rights https://treasury.gov.au/consumer-data-right

MONASH

7
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

FinTech Benefits (developed markets)

Customers
§ Get better products
§ More tailored, convenient and accessible
§ Faster processes and better services
§ Greater services integration
§ More alternatives – greater competition

Firms
§ Reduced costs of servicing
§ Reduced capital and resource costs
§ Reduce funding costs
§ Ability to serve new customers
§ Reduces risk due to better information

MONASH

8 8
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

FinTech Benefits (developing markets)

§ Financial Inclusion
§ Customer access to banking
§ Less dependent on traditional infrastructure
§ Serving new customers
§ Financial Development
§ UN development objectives.

MONASH

9 9
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Examples of Money

Fiat Commodity Money

• Token Coins • Barley
• Social moneys e.g. Bristol dollar • Bark of Mulberry tree
• National Currency - Bank Notes • Cattle and live animals
• Bank or Account Money • Cigarettes
• Deposit accounts • Full Value Coins e.g. gold/silver
• Bills of Exchange
Digital Money
• Letters of Credit
• Cryptocurrencies
• Travellers Cheques • Game credits
• Stored Value Cards • Gift cards
• Debit Cards • MPesa and other m-moneys

MONASH

10
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

The Money Flower

© Bank for International Settlements

MONASH

11
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Interest in Bitcoin

MONASH

12
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 12
 lOMoARcPSD|9024306

Relative Market Sizes

1.4 trillion

Money Supply

13

MONASH

13
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Crypto-Speak

Tokens used as claim or reference to something

Blockchain immutable, crypto, time-sequenced, store of txns

Wallet digitally store tokens; crypto key access

Coins digital payment objects - represent unit of account

Stable Coins value change limited by some mechanism

MONASH

14
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 14
 lOMoARcPSD|9024306

Starting a Bitcoin Transaction

§ Bitcoin uses public-key cryptography to secure wallets and transactions.

§ Public-key cryptography (SHA-256) a combination of private and public key to encrypt
data
§ Each Bitcoin address has its own pair of private and public keys.
§ To send Bitcoins a wallet must digitally sign the transaction using related
private key.
§ Network (miners)verify transaction by examining the private key with the
public key
§ Consensus is reached using POW
§ This results in bitcoin transactions being irreversible.

https://www.xorbin.com/tools/sha256-hash-calculator

MONASH

15
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Consensus updating and Proof of Work

Mark Montgomery
https://spectrum.ieee.org/computing/networks/the-future-of-the-web-looks-a-lot-like-bitcoin

MONASH

16
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Cryptocurrency Claimed Benefits

Transacting without Faster and more

Greater security,
intermediaries effective transactions
integrity and privacy
(Knight, 2017). (Schwartz et al., 2014)

Greater efficiency and

Greater fairness and
lower cost (Richter et Borderless and
protection from
al, 2015; Henderson, frictionless.
debasement
2014).

Greater social justice

and access to finance
(Dale, 2017).

Source: Vaz, J., Brown, K. (2019) Are cryptocurrencies are more equitable form of money? Working Paper.

MONASH

17
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Cryptocurrency has many innovations

§ Cryptocurrency coins or currency

– Bitcoin, Ethereum, Stable Coins - Libra
§ Tokenized assets
– Initial Coin Offerings now Security Token Offerings
§ Platforms for other tokens and cryptocurrencies
– Ethereum, EOS
§ Disintermediated Payment systems
– Peer to Peer and Cross Border
§ Technological innovations
– smart contracts, zero knowledge proofs, atomic settlement

MONASH

18
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 18
 lOMoARcPSD|9024306

Blockchain Distributed Ledger

Source:http://www.hitachi.co.jp/products/it/finance/en/blockchain/index.html

1
9

MONASH

19
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

§ Mapping an asset to a digital representation

§ Claim on asset with ownership, or transfer of ownership

§ Unique and immutable

§ A bearer instrument – like a bank note

§ Authenticity of token easily verifiable

§ Cannot double ‘spend’ ; unique

§ Programmable – algorithmic transfers

MONASH

20
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 20
 lOMoARcPSD|9024306

Smart Contracts

Dai and Vasarhelyi (2017) Towards Blockchain-Based Accounting and Assurance,

Journal of Information Systems, Vol.31, No 3. pp5-21

MONASH

21
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Actors in Crypto asset markets

HM Treasury, FCA and BOE: Cryptoassets taskforce final report October 2018
22

MONASH

22
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Safeguards with current FIs vs cryptocurrency

§ BANKS:
– Deposit protection, insurance and account keeping services.

§ CRYPTOCURRENICES:
– Loss of digital wallet due to lost or stolen passwords or keys,
means money is lost forever unless backed up.
– Major fraud events when crypto exchanges have been hacked
– Any losses due to fraudulent activity not able to be reversed

MONASH

23
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 23
 lOMoARcPSD|9024306

Expansion of Stable Coins …

§ Questionable store of value and unit of account

§ Lack of trust as money
§ Rapid Growth of developed stable coins (>200)
– e.g. Tether, True USD, USD coin, XRP, Dai, Libra*

§ Methods
– Collaterized – Fiat backed or other asset portfolio
– Asset linked – reference basket including real or financial assets
– Reserve backed – backed by issuing organization balance sheet
– Algorithmic – Vary supply on network value or bond issue

MONASH

24
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 24
 lOMoARcPSD|9024306

Use of Cryptocurrencies

MONASH

25
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Central Bank Digital Currencies (CBDC) - The Empire Strikes Back

26
Source: Bank of England (2020) Central bank digital currencies: Opportunities, challenges, and design.

MONASH

26
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Which Countries are pursuing CBDC

MONASH

27
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 27
 lOMoARcPSD|9024306

CBDC Types

MONASH

28
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL 28
 lOMoARcPSD|9024306

MONASH
BUSINESS
SCHOOL 29
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
 lOMoARcPSD|9024306

BLOCKCHAIN APPLICATIONS – Finance

Derivatives
Currency and (futures,
Exchanges Stocks Bonds forwards, swaps,
Payments
options)

Mortgage /
Voting rights Commodities Insurance Digital assets
loan records

Bank P-P
Crowd-
Guarantees Super Funds Micro- Contracts
funding
LOC finance

Wills and
Credit rating Escrows
Trusts

MONASH

30
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

Potential Cryptocurrency Roles

Threat to
sovereign
Quasi- fiat currency
Reserve
Alternative currency
Borderless Denomination
Payment for assets
Alternative Platform
Basic investment
Money bank
Transfers ‘account’
e-commerce

31

MONASH

31
Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)
BUSINESS
SCHOOL
 lOMoARcPSD|9024306

MONASH
BUSINESS
SCHOOL

Summary

Downloaded by Vitaliy Klimenko (sfhby9ghdk@privaterelay.appleid.com)