CH&Cie_Article Cryptocurrencies

CHAPPUIS HALDER & CIE MARKET STUDY

CRYPTOCURRENCIES

THE FUNDAMENTALS

OF CRYPTOCURRENCIES Autumn, 2014

Cryptocurrencies All about cryptocurrencies

Autumn 2014 – page 2/15

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www.chappuishalder.com Chappuis Halder & Cie

Contents What are bitcoin, litecoin, peercoin, etc.? ...................................................................................................... 3

What is a cryptocurrency? ............................................................................................................................. 3

Basic definition................................................................................................................................................... 3

Is cryptocurrency a real currency? Or is it a commodity? ................................................................................. 4

Regulations in major countries .......................................................................................................................... 5

How does cryptocurrency work? ....................................................................................................................... 6

4 Key concepts in cryptocurrency ...................................................................................................................... 6

Overview of the major cryptocurrencies today ................................................................................................. 7

Major events and recent developments of cryptocurrencies........................................................................... 8

Advantages and disadvantages of cryptocurrencies today .............................................................................. 9

Using cryptocurrencies has many advantages over the other existing alternatives ......................................... 9

However there are also disadvantages of using cryptocurrencies over the other existing alternatives ........ 10

The future of cryptocurrency - opportunities against challenges ................................................................... 11

On volatility: Bitcoin as an investment for the public market ...................................................................... 11

Bitcoin Exchange Traded Fund (ETF) by the Winklevoss twins ........................................................................ 11

Bitcoin Investment Fund by SecondMarket .................................................................................................... 11

On acceptance: Bitcoin as mobile money in transfers and payments .......................................................... 11

Focusing on P2P transfers in developing markets ........................................................................................... 12

Bitcoin wallet in Kenya by Kipochi ................................................................................................................... 12

Rebit.ph in the Philippines by Satoshi Citadel Industries ................................................................................ 12

Focusing on P2B payments .............................................................................................................................. 13

On legality: Bitcoin as a solution to eradicating web based illicit activities ................................................. 13

On security: Heightened security platform with insured bitcoin storage service ........................................ 13

On regulation: Positive impacts beyond regulatory barriers ........................................................................ 14

Conclusion- The future of bitcoin and cryptocurrencies ................................................................................ 14

Glossary ...................................................................................................................................................... 15

About CH&Cie ............................................................................................................................................. 15



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What are bitcoin, litecoin, peercoin, etc.? Following the initial launch in 2009 by pseudonymous developer Satoshi Nakamoto, bitcoin

has been in the media limelight for both good and bad reasons. Its meteoric global adoption

has also inspired the introduction of other alternative coins including litecoin, peercoin,

namecoin and the list goes on with over 275 “coins” trading online to date. So what are

these “coins”? Industry associates and researches have endeavoured to collectively agree

on the terminology to describe these “coins” as

cryptocurrencies.

As the majority of the cryptocurrencies are

payment systems that work peer-to-peer

without a central repository or single

administrator, they are therefore also known as

decentralised digital currencies. Technically,

cryptocurrencies are digital currencies but not

all digital currencies are actually

cryptocurrencies. Other digital currencies

include e-gold and Rand and they are not to be confused with cryptocurrencies.

What is a cryptocurrency? Basic definition Cryptocurrency is named as such because of its relation to cryptography and currency.

Cryptography is the study of the methods of encrypting information to send out a message

securely and privately, and currency is commonly referred to generally accepted money

used as a medium of exchange for goods and services.

Cryptocurrency is hence a form of digital currency that relies on distributed networks and

shared transaction ledgers to become secure, anonymous or pseudonymous, traceable and

potentially stable. Bitcoin is the first and most popular cryptocurrency and other

cryptocurrencies are often termed as alternative currencies or altcurrencies.

Bitcoin, Litecoin, Peercoin, etc. are known as cryptocurrencies and unlike

other digital currencies such as e-gold, they rely on distributed networks

and shared transaction ledgers through cryptography to become secure,

anonymous, traceable and potentially stable.



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Is cryptocurrency a real currency? Or is it a commodity? Cryptocurrency, though in name shares great resemblance with currency, is very dissimilar to a real currency.

Most major cryptocurrencies, except for peercoin, have limited supply (e.g., Bitcoin has a total of 21 million

bitcoins), therefore prices will need to vary according to the shifts in demand. For fiat currencies, this works the

other way round whereby supply can be adjusted to maintain stability of the value of the currencies.

So with limited supply, is cryptocurrency a commodity like gold which is a good store of value and remains stable

over time? To understand how similar or different cryptocurrency is from real fiat currency and commodity,

table 1 is drawn up to compare Bitcoin with USD and gold based on their respective attributes.

Attributes

Limited supply Yes, 21 million, decentralised No, supply is adjusted to

maintain stability of the value,

centralised

Yes, a finite resource

Ease of storage Yes, private keys are used Yes, physical/e-cash in savings

account

Yes, non-radioactive and dense

element

Portability Yes, very minimal transportation

cost

Yes, minimal transportation cost No, high transportation costs

Stability of value

and predictability

No (at present), highly subjects

to trust in the system and

acceptance of use by merchants,

which is highly unpredictable

Yes, it is known as a hard

currency

Yes, least reactive solid element

with predictability on demand

Substitutability Yes, it can be substituted by

other cryptocurrencies such as

Litecoin or Ripple, although they

are not yet serious threats

No, widely accepted globally No, silver and platinum, the

closest elements, are unable to

substitute the value of gold

Acceptance Low, but rising use in payments

and investment

High, widely accepted globally High, industrial, medical and

technological uses

Table 1: Comparison of bitcoin, USD and gold

As illustrated in table 1, Bitcoin shares greater similarities with gold than USD, but because of its unstable value

and limited alternative uses, its status as a commodity still remains debatable.

As Bitcoin and altcurrencies are generally still in their early stages of development, the status of Bitcoin as a

currency or a commodity is therefore highly subject to the regulator’s definition. For example, Germany has

defined them as “private money and a financial instrument” and on the other hand, the People's Bank of China

has stated that bitcoin "is fundamentally not a currency". As the definition of bitcoin is not yet universal,

cryptocurrencies are still largely distinguished from real currency in the media.



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Regulations in major countries With varied accepted definition of what a cryptocurrency is across regions and countries, the regulatory and

legal status of bitcoin is also different, with the majority having legalised the usage, and a few restricting the

usage and implementing partial or full prohibition of bitcoin.

To highlight, besides Iceland, which has prohibited engagement in foreign exchange trading with electronic

currency, and Bolivia, which has explicitly banned the bitcoin for fear of permitting enterprises to evade taxes,

China (excluding Hong Kong), Taiwan, India and Indonesia have also implemented restricted measures to

prevent money laundering and limit speculation of bitcoins. On the other hand, the other major countries have

developed warm attitudes towards the use of bitcoin by legalising the usage of bitcoin, though with increasing

number of propositions to tighten regulations. For instance, in August 2014, New York State’s Department of

Financial Services has recently proposed regulatory framework for virtual currency, which may require any

businesses in New York that store or exchange virtual currencies to first obtain a license from the state. Also,

licensed virtual currency firms may need to hold the same amount of virtual currency they owe to customers

without selling or loaning it out, which is somewhat similar to the liquidity principles behind the Third Basel

Accord (Basel III). In Australia, the tax legislation has taken steps to consider bitcoin as legal tender.

Full/ partial prohibition Legalised usage Restricted legal usage

Figure 1: Legal status of bitcoin by country

Source: "Legal status of bitcoin" by Habarithor - Own work



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How does cryptocurrency work? The first goal of Bitcoin was to manage P2P transfers and payments. With that, cryptocurrencies in general

involve a solution to what is known as the double-spending problem. Any payment that is not cash handed over

in person, such as entries in a bank account, may be duplicated, allowing people to spend the same money

twice. A trusted third party, such as a payment system run by Visa, MasterCard or a Bank’s payment system

confirms identities and ownership preventing double-spending.

The problem is solved by creating a public ledger that establishes ownership by anonymously recording who

owns what bitcoins. A volunteer network of computers validates every single transaction on the network by

performing computations that prove they have done the work, and receive new bitcoins in return, eliminating

the need for a third party.

4 Key concepts in cryptocurrency

Address

•It works like a wallet

•It is a string of letters and numbers, such as 1HULMwZEPkjEPeCh43B

•Each address tracks its own balance of Bitcoins

•Users can have as many addresses as they want to stay anonymous

Peer-to-Peer (P2P)

•A group of computers is connected to enable the sharing of resources and information by users

•No central location for the network

•Bitcoin uses a P2P network to connect users for transacting and “Mining”

Blockchain

•It works like a ledger and is shared by everyone

•All Bitcoin transactions, without exception, are recorded here

•Once it is recorded, it cannot be reversed (to prevent the double-spending problem)

•Everyone will have the same blockchain and therefore the access to the recorded history transactions; this is unlike owning a currency note which will not reveal the past transactions made using the curency

Mining/Miners

•Bitcoin miners use powerful computers to track and compile pending Bitcoin transactions (i.e. create the Blockchain)

•Miners need to communicate the verified transactions to the entire Bitcoin P2P network

•They earn bitcoin through "Mining”

Bitcoin is a “payment rail,” like Visa, Western Union or the bank-debiting system--

unlike those systems, bitcoin is also the currency.

Bitcoin is “a bearer instrument” in that there is no need to know if a user has the

money -- it exists by virtue of the instrument.



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Overview of the major cryptocurrencies today Even with the introduction of a plethora of

cryptocurrencies of late, Bitcoin, with its first mover

advantage, remains bested by virtually no others

with the highest market capitalization of US$8,099

million, followed by Litecoin, which was launched in

2011, with US$257 million.

Table 3 below illustrates the differences and

similarities of the various major cryptocurrencies.

Notably, Litecoin and Peercoin are technically nearly

identical to Bitcoin, but Litecoin has a higher

maximum number of coins and reduced block

generation time, while Peercoin does not have an

enforced limit on the number of possible coins.

Ripple functions not only as a payment system like the others, it also performs as a currency exchange and

remittance network for other fiat currencies and cryptocurrencies. Lastly, Darkcoin is the only closed source

cryptocurrency that uses its proprietary DarkSend to add privacy to transactions to allow for 100% anonymity.

Cryptocurrency, year launched

Function(s) Unit of currency

Hashing Algorithm

Coins released (mn)

Open/Closed source, Type of ledger

Transaction time

Bitcoin, 2009 Payment system

bitcoin (BTC)

SHA-256 ~13.20 of 21 Open, Public

10 mins/ blockchain

Litecoin, 2011 litecoin (LTC)

SCRYPT

~31.55 of 84 2.5 mins/ blockchain

Peercoin, 2012 peercoin (PPC)

SHA-256

~21.67 of ∞ 10 mins/ blockchain

Ripple, 2013 Payment system, currency exchange & remittance network

ripple (XRP)

ECDSA

100,000 of 100,000

Open, Public consensus

2 to 5 secs/consensus ledger

Darkcoin, 2014 Payment system

darkcoin (DRK)

X11 ~4.60 of 22 Closed-DarkSend, Public

NA

Table 3: Overview of the major cryptocurrencies as of 29th

August 2014

Figure 2: Comparison of major cryptocurrencies based on launch

year and market cap as of 21st

July 2014, Statista Chart

8099

257 30 42 31 0

2000

4000

6000

8000

10000

Bitcoin,2009

Litecoin,2011

Peercoin,2012

Ripple,2013

Darkcoin,2014

Market Cap (US$ mn)

Bitcoin with the uppercase “B” is the underlying peer-to-peer network supporting the

unit of that network, bitcoin, with the lowercase “b”.



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Major events and recent developments of cryptocurrencies The development of cryptocurrencies has been incredibly fast since its launch in 2009 as highlighted below.

Introduction of Bitcoin system that launches with 21 million bitcoins, to end in 2040.

First Bitcoin transaction by a Floridan man who sent 10,000 bitcoins for a pizza to a volunteer in the U.K.

184 billion bitcoins were generated due to a system loophole.

Inter-government Financial Action Task Force warned against the use of digital currency for illegal means.

Launch of Bitcoin

2009/10

Namecoin was created, followed by Litecoin and then Peercoin.

Bitcoin Foundation was established.

Wikileaks and WordPress began to accept bitcoins.

BitPay reported having over 1,000 merchants accepting bitcoin. The Bitcoin debit card was announced.

First Bitcoin bank opened.

Bitcoin bubble witnessed the fluctuation in bitcoin prices, $30 to $10 then to $3.

Mt. Gox had bitcoins stolen, Bitomat lost over 17,000 bitcoins, and Bitfloor exchange was hacked with 24,000 bitcoins stolen.

Bitcoins were accepted for drugs on Silk Road.

Altcurrencies, and ups and downs of bitcoin

2011/12

Numerous alternative currencies (altcurrencies) such as Ripple, Dogecoin, Mastercoin etc. were introduced.

Wider acceptance points for bitcoins: Pizza Hut, Domino’s, OkCupid, Foodler, The University of Nicosia, Zynga, overstock.com, The D Las Vegas Casino Hotel and Golden Gate Hotel & Casino and in real estate for properties.

Venture capital investment in Bitcoin startups reached $3 million.

Kenya introduced M-Pesa linked Bitcoin wallet.

World's first Bitcoin ATM was launched in Vancouver, BC, Canada.

Opportunities

US announced regulatory position on cryptocurrencies.

System vulnerability was in question when two incompatible Bitcoin softwares clashed, causing its price to dip by 23%. Insufficient capacity resulted in great fluctuations in prices ($266 to $76 then $160).

FBI seized approximately 26,000 bitcoins from website Silk Road. China banned financial companies from bitcoin transactions.

Challenges

2013

More altcurrencies such as Auroracoin, Vertcoin and etc. were introduced.

Price of bitcoin spiked to $1000 at its highest. Collapse of Mt Gox, the largest bitcoin exchange, after losing around 850,000 bitcoins.

Rise of startups (e.g. BitGo) and associations focusing on providing security solutions to cryptocurrencies wallet.

VC Tim Draper bought $18m of bitcoins auctioned by the US government following the shutdown of the Silk Road marketplace.

Status of cryptocurrencies

2014



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Advantages and disadvantages of cryptocurrencies today Using cryptocurrencies has many advantages over the other existing alternatives

Faster 10 minutes vs. a few days Transactions between two individuals using different Mobile Network Operators or banking services can happen instantaneously if they are “zero-confirmation” transactions, or in 10 minutes if a merchant requires the transaction to be confirmed by the block chain. This is significantly shorter as compared to inter-bank transfers that could take up to a few days to be completed.

Cheaper 1% or free vs. 3% or more While credit/debit cards can also be fast-paying tools, the charges are typically 3% compared to decentralised cryptocurrencies which have minimal charges of about 1% or in some cases, free.

Greater privacy protection

No more sacrifices of personal particulars for purchases Unlike credit/debit cards, users need not disclose important details to initiate a transaction. When sending cryptocurrencies, the transaction can be completed by combining the public and private keys together. The public key can be assessed by anyone and the private key is personal, and cannot be stolen, unlike credit/debit card details.

More secure

Less susceptible to credit card fraud for buyers Since Bitcoin is a digital bearer instrument, the recipient of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant. Much like email, which is traceable, Bitcoin is pseudonymous, not anonymous. Furthermore, every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin block chain, or permanent record, available for all to see. As a result, Bitcoin is considerably easier for law enforcement to trace than cash, gold or diamonds. Less susceptible to chargeback fraud for merchants As transactions are not reversible, it reduces the risk of chargeback fraud.

Decentralised model

No government control on personal financial assets When an economy is in distress, a centralized government will have the authority to enforce monetary policy that can, in the worst-case scenario, cause a meltdown. For instance, during the Cypriot financial crisis, the government was empowered to seize depositor's funds through "bail-ins" and this will never happen with a decentralized model.

Cryptocurrencies can be faster, cheaper, more private and more secure than other

common alternatives in payments services.



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However there are also disadvantages of using cryptocurrencies over the other existing alternatives

Volatility Unstable value makes it less practical as money High volatility and unpredictability on price movements due to external factors including vulnerabilities in the security platform render it less useful as a medium of exchange.

Source: CitiFX, Blockchain.com, Bloomberg, BitMex

Acceptance

Demand for daily use is still relatively weak Limited acceptance points and awareness across the globe make real currencies much better alternatives due to their wider acceptance of use and demand.

Legal issues

Use of cryptocurrencies for illegal means The pseudonymous nature creates unintended protection for illicit and illegal activities.

Security issues

Users have to face risks with merchants and cyber-attacks As transactions are not reversible, buyers have to put their complete trust with the merchant, who in this case is the protected party in the transaction. Given its digital nature, cryptocurrencies are also subject to cyber-attacks – several exchanges including Mt Gox, TradeHill Bitcoin and Bitcoinica exchange have faced similar challenges, leading to their downfall.

Regulations

Legal restrictions hinder growth and increasing regulations may increase cost of use Cryptocurrencies have restricted use in countries including China, Japan, India, Indonesia, etc. Increasing regulations will also likely increase cost of use in the future.

0%

20%

40%

60%

80%

100%

Gold spot NASDAQComposite

BRL/JPY BitcoinMarket Price

Realised volatility over 250 days from Aug 13 to April 14

However, the great volatility, limited acceptance, and legal, security and regulatory

issues might impede the usage of cryptocurrencies in daily lives.



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The future of cryptocurrency - opportunities against challenges The cryptocurrency landscape is experiencing a transformation as its challenges evolve in time with its rapid

development. Most recently, the challenges of Bitcoin on volatility, acceptance, and security, legal and

regulatory issues have given rise to new opportunities.

On volatility: Bitcoin as an investment for the public market The volatile nature of bitcoin can now be partially resolved with the soon-to-be introduced bitcoin exchange

traded fund and public bitcoin investment fund which may potentially escalate the circulation of bitcoin in the

global markets, enhancing its stability.

Bitcoin Exchange Traded Fund (ETF) by the Winklevoss twins

Bitcoin Investment Fund by SecondMarket

A bitcoin ETF would allow investors to participate in the daily price movement of an index called the Winkdex, named after the Winklevoss twins who initiated the formation of ETF. According to the SEC filing, the ETF is "designed for investors seeking a cost-effective and convenient means to gain exposure to bitcoins with minimal credit risk." The Winklevoss Bitcoin Trust is designed to hold bitcoins and issue baskets of shares in exchange for deposits and vice versa. The bitcoins held by the trust will be stored in a digital wallet and the custodian will be responsible for the safekeeping of these assets. Source: Nasdaq

With impending competition from ETF, SecondMarket is planning to open up its private bitcoin investment fund to ordinary investors by the fourth quarter of 2014. SecondMarket launched its Bitcoin Investment Trust (BIT) last September, but it was reserved for private investors with $1m in assets and incomes above $200,000. The trust buys and sells bitcoins and allows investors to place bets on the value of bitcoin without owning any coins directly. The company currently has $54m in assets under management. Source: Coindesk

On acceptance: Bitcoin as mobile money in transfers and payments With prevailing transaction costs ranging from 2.5% for retail and e-commerce to 9% for remittance services,

bitcoin, which on average incurs a standardised transaction fee of 1% on most service platforms, it appears that

by leveraging the advantages of bitcoin in transaction savings, a clearer solution for the issue on acceptance and

security has emerged. This upward trend is evidently shown in the recent news on the auction of bitcoins,

introduction of bitcoin wallets in emerging markets for the underbanked, and the increasing number of

merchants accepting bitcoins.



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Focusing on P2P transfers in developing markets In July 2014, Vaurum, a California-based startup that enables companies including banks and brokerages to

trade and store bitcoins on behalf of customers, successfully bid for 30,000 bitcoins, which was part of a larger

pool of virtual currency seized from the Silk Road website at a U.S. government auction. These 30,000 bitcoins

will serve as a source of liquidity for the startup in providing access to bitcoins in developing economies.

The idea of using bitcoins as mobile money in developing economies is not entirely new. There have been

instances in several states including the pioneer in mobile money, Kenya and the Philippines, the second largest

recipient for remittances in Asia, with a total of US$23 billion transferred in 2013.

Bitcoin wallet in Kenya by Kipochi Rebit.ph in the Philippines by Satoshi Citadel Industries

Kipochi Ltd has launched a groundbreaking solution in July 2013 that allows people to send/receive Bitcoin and convert it to and from an M-Pesa balance. This enables Kenyans to receive money transfers from the diaspora in an easier, faster and cheaper way, compared to using banks and money transferring services such as Western Union and MoneyGram. Source: Kipochi

Rebit.ph was launched in July 2014 as an easier, faster and cheaper alternative for the 12 million Filipinos working abroad to remit their money back home. As compared to the other existing remittance services that charge 10% or more in fees and exchange rates if the sent amount is less than $125 USD, Rebit.ph allows users to send small amounts of money, even $50 or $25, at much more reasonable fees. Source: Reddit

Table 5: Comparison between bitcoin and e-money Source: CGAP & SwitchYard Media

Accessibility Largely limited to internet connection Access to electronic devices such as mobile phones, and an agent network

Value Determined by supply and demand, and credibility of the system

Determined by the amount of fiat currency exchanged into electronic form

Customer ID Anonymous Financial Action Task Force standards apply for customer identifications

Production Mathematically generated (mined) by peer network

Digitally issued against receipt of equal value of fiat currency of central authority

Issuer Community of developers, called “miners” Legally established e-money issuer

Regulator None, though an increasing number of regulators have stepped in

Regulated by central authority, typically a central bank

Differences between bitcoin and e-money

The comparison chart below illustrates the fundamental differences and it is evident

that there are still gaps that bitcoin has to close before becoming a true alternative

to e-money.



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Focusing on P2B payments The rising popularity of bitcoin as the medium of exchange for goods and services between end users and

merchants is illustrated with the tremendous increase in acceptance of use with Coinbase, a US-based Bitcoin

exchange established in mid-2012 which has been noted for its user-friendly interface. As highlighted in figures 3

and 4 below, the number of Coinbase wallet users tripled and the number of merchants partnered with

Coinbase increased more than six fold within 5 months.

Figure 3: Number of Coinbase wallet users Figure 4: Number of merchants partnered with Coinbase Source: Coinbase Source: Coinbase

On legality: Bitcoin as a solution to eradicating web based illicit activities There have been rising concerns on how bitcoin can provide unintended protection for illicit activities given that

it can be used to make private and irreversible payments. However, these features already exist with cash and

wire transfer, which are widely used and well-established. The use of Bitcoin will undoubtedly be subjected to

similar regulations that are already in place inside existing financial systems. With the recent seizure and auction

of bitcoins from Silk Road, the online illicit drug marketplace, it has affirmed the fact that the Bitcoin is not likely

to prevent criminal investigations from being conducted.

Contrary to common belief, Bitcoin is designed to make money more secure and act as a significant protection

against many forms of financial crime. The following are some points worth noting:

Bitcoin is impossible to counterfeit.

Users are in full control of their payments and cannot receive unapproved charges such as with credit

card fraud.

Bitcoin transactions are irreversible and immune to fraudulent chargebacks.

Bitcoin allows money to be secured against theft and loss through tried and tested mechanisms such as

backups, encryption, and multiple signatures.

On security: Heightened security platform with insured bitcoin storage service Protecting financial health with insurance has long been a common practice. With the increasing use of bitcoin

as a digital currency, insurance has now come into play with Elliptic Vault, the world’s first insured bitcoin

storage service, launched in the UK by Elliptic. Elliptic Vault offers protection against the loss or theft of Bitcoin

holdings, with insurance underwritten by Lloyd’s of London. Thus, an individual who stores bitcoins with Elliptic

Vault will have his/her bitcoins protected with strong encryption and secure physical locations known as the

“deep cold storage” and in the event of loss, the liability to the individual will be the market value of bitcoins,

capped by the liability limit determined by the individual, with a cost of 2% bitcoin of that limit per annum.



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On regulation: Positive impacts beyond regulatory barriers The increasing efforts by regulators to set rules and guidelines on the adoption of cryptocurrencies may raise

concerns among the general public regarding its usability, security and reliability: why would the authorities

impose rules on something unless it is susceptible to abuse? For existing users of cryptocurrencies, regulations

may be seen as unwelcome events that set boundaries to what they can or are currently doing with their

currencies, and may hurt their pockets as a result.

However, we believe that the positive spillover effect of these regulations will be significantly higher than its

perceived negative impacts. This is mainly due to the fact that formal regulations and guidelines provide a well-

defined playing field for the users of cryptocurrencies. With clear guidelines and “guarantees” on its usage, the

level of confidence that one have on cryptocurrencies may increase, and both consumers as well as merchants

may find themselves more comfortable to accept cryptocurrencies as a medium for payment, thus encouraging

its adoption.

Since 2008, the financial services sector has experienced significant reforms through regulations such as the

Dodd-Frank and Basel III, which inevitably increased their cost of adherence to the new regulations while also

shedding of once-profitable business lines. However, the industry is not devoid of opportunities. Improved

visibility on guidelines and regulations will allow financial institutions such as banks and insurance companies to

strategise appropriate business and marketing opportunities for cryptocurrencies efficiently and in the process

avoid venturing into the grey areas of the law. In addition, the communication should ideally be two-way, i.e.,

banks should also propose to their regulators how cryptocurrencies might be adopted. For example, a bank

could explore with its regulator the possibility of using cryptocurrencies as assets to be accounted for in their

capital or reserve requirements.

We propose that heightened regulations on cryptocurrencies should not be viewed by financial institutions as

deterrence to its adoption; on the contrary, these present valuable opportunities for them to open new revenue

streams amidst a highly competitive economy.

Conclusion- The future of bitcoin and cryptocurrencies Lastly, while it is still too early to determine if bitcoin will be an eventual success, it is beyond doubt that with

the promising P2P ledger networks and the potential in greater acceptance level, its value added to the existing

banking, finance and payments infrastructure cannot be undermined.

If the issue on value volatility, resulting from the enforced limit on the maximum number, can potentially be a

challenge for bitcoin to gain widespread adoption, altcurrencies such as Litecoin and Peercoin might actually

grow in importance and attain a breakthrough in the cryptocurrencies landscape. With more and more

innovations and players paving the way, this new technology is no doubt a major event that is shaking up the

world of payments and might ultimately become a major competitor to traditional banking networks. Because of

its fast and widespread acceptance, security issues and association with illicit activity have recently been more

visible, which will most probably lead to even more innovations and greater intervention of regulators around

the world.



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Glossary Cryptocurrency Cryptocurrency is a form of digital currency that relies on distributed networks and

shared transaction ledgers to become secure, anonymous or pseudonymous, traceable and potentially stable.

Bitcoin and bitcoin Bitcoin with the uppercase “B” is the underlying peer-to-peer network supporting the unit of that network, bitcoin, with the lowercase “b”.

Altcurrencies Alternative currencies; a general term for cryptocurrencies other than bitcoin.

Chargeback fraud Chargeback fraud occurs when a consumer makes an online shopping purchase with their own credit card, and then intentionally requests a chargeback from the issuing bank after receiving the purchased goods or services.

About CH&Cie

Patrick Bucquet is a Senior Partner, Head of Digital FS practice, in CH&Cie’s New York office. Contact him at: [email protected] Guillaume Martin is a Senior Manager in the CH&Cie’s Singapore office. Contact him at: [email protected]

Chappuis Halder & Co is a global management consultancy delivering strategic and operational

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CH&Cie_Article Cryptocurrencies