Why banks invest in blockchain (and not in bitcoin)

Koen Vingerhoets – find me on

Why are financial institutions
investing in blockchain
(and not in bitcoin)?
Koen Vingerhoets
@IthronKoen
All views are my own.

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!

2008 – “Satoshi Nakamoto” writes…

Bitcoin is a unique transfer of value

Blockchain persists all the unique transfers

2008 – “Satoshi Nakamoto” schrijft…

The fairytale of Satoshi Nakamoto, the Unicorn and the Big Bank.
“What if… Satoshi is a bank employee in 2017?”

Introducing S. NAKAMOTO : bank employee
And a rather anonymous Big Bank

Satoshi is full of ideas & knowledge… but who listens?
“Join our 2017 Idea Competition and fly to Silicon Valley!”

Satoshi joins the competition with her idea…
“Blockchain: a shared, resilient & protected ledger for anything”

Satoshi has to explain it often to her Big Bank colleagues
Both Business & IT are interested but… also involved.

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.

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.

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.

Satoshi gathers a team of believers
The “Blockchain” idea ends in the top 3!

Our brave Satoshi has to present “blockchain” …
… to the Big Bank’s Board of Directors!

Even in fairytales, people have to work…
Satoshi elaborates her idea in the early hours of the night.

The great day arrives… and this is what she said.
“Dear management, colleagues, I am Satoshi Nakamoto.”

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.

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

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

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?

And… what if we don’t?
Just imagine someone uses blockchain
- To exchange value over the internet
- Between unknown parties
- Without central regulation/steering

Satoshi Nakamoto
Bank Employee
VOTE
TEAM “BLOCKCHAIN”
TO
SILICON VALLEY!

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

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,…

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

ECB vs anarchy
Old technology
Mining power

ECB vs anarchy
Old technology
Mining power
2012 bitcoin mining farm

ECB vs anarchy
Old technology
Mining power
2017 bitcoin mining farm

ECB vs anarchy
Old technology
Mining power
Say “cheese” to 91% of the hashing power (and know that 51% is already a risk)

ECB vs anarchy
Old technology
Mining power
Coin or investment?

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?

ECB vs anarchy
Old technology
Mining power
Coin or investment?
For the unbanked

ECB vs anarchy
Old technology
Mining power
Coin or investment?
For the unbanked
Bye bye banks!

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.

ECB vs anarchy
Old technology
Mining power
Coin or investment?
For the unbanked
Bye bye banks!
Identity provider

ECB vs anarchy
Old technology
Mining power
Coin or investment?
For the unbanked
Bye bye banks!
Identity provider
Must… blockchain…

ECB vs anarchy
Old technology
Mining power
Coin or investment?
For the unbanked
Bye bye banks!
Identity provider
Must… blockchain…
Public &
Permissionless

- 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

D. Birch blockchain decision model

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

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

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

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

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)

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

TrustOwnership
Transparency
Traceability
Distributed
Smart contracts
Why use a blockchain?

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)

We
Banks sell trust and data.
Blockchain is trust and data.

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

Why banks invest in blockchain (and not in bitcoin)

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