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Virtual Currencies And Financial Services Industry Disintermediation

14-15 May, 2014

Future Payments & Digital

Banking Conference & Awards

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Value Partners: Multinational strategy consultancy

• An international player

Global reach: 10 offices in 8 countries with a global staffing

operating model

• A strong team of professionals

20 partners, >200 professionals, 23 nationalities

• An excellent track record

Constant growth over the last 20 years

• A large and loyal customer base

Over 350 client served in the past three years,

60% of which have been with us for over 8 years

• Leading worldwide Financial Services and TMT (Telecom,

Media, Technology) practices including the former “Spectrum

Strategy Consultants” in London

History in a snapshot

Founded in 1993 by 16 partners and senior consultants from McKinsey & Co. In February 2007, Value Partners acquired Spectrum Strategy

Consultants to further enhance its leadership in the TMT sector. In 2012 Value Partners successfully sold its fully owned IT Consulting

subsidiary, Value Team, to NTT Data (valuation at ~10x EBITDA multiple)

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Contents

•Emerging business models based on P2P

•Virtual currencies the history so far

•Challenges and future scenarios

For the conditions of use of this document please refer to the front page

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2013 2014 2015 2016 2017 2018

Mobile BB Connections(3G & 4G)

Fixed BB Connections

% of wired broadbandconnections sold as partof bundle

Broadband connectivity is set to further expand as a result of Fixed-Mobile Convergence (FMC) growth

Fixed-mobile broadband connections, global 13-18f (000’s)

Connected device sales, global 13-18f (m)

13-18 CAGR

0

500

1,000

1,500

2,000

2,500

1,185

1,432

+13% 2,044 2,161

1,882

1,669

USA/ Canada

Africa

Americas

Asia Pacific

Europe: Eastern

Europe: Western

Middle East

Source: Ovum, WCIS, Value Partners analysis

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This is enabling new business models (e.g. crowd-funding, P2P lending, virtual currencies) within the three core areas of banking potentially disrupting the traditional ecosystem

P2P lending

• Money lending system between

peers, without involvement of

financial intermediaries – whole

model is based online through

social media/ exchange platforms

Virtual currency payments

• Payments system using digital

currencies over a P2P network,

usually without the need for a

trusted third party or identification of

the payer and the payee

• Transactions are traceable by all

peers in the system and fully

encrypted

Crowd-funding

• Collection of funds amongst users

registered on an online platform without

involvement of banks

• Funds deposited are invested in

different assets – initial investment

typically low (<£500)

NOT EXHAUSTIVE

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P2P lending registered significant growth over recent years and expected to keep pace in future

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

(GBP 000s) Money lent on Zopa

Source: Zopa, thefinanser, Value Partners analysis

Cumulative money lent on Zopa, 2006-14 (£, 000s) ILLUSTRATIVE

• P2P ‘social’ lending service launched in

the UK in 2005 and now operating

internationally (e.g. Japan, Italy, USA)

• Model entirely based online (no bank

involvement) – service leverages social

media and user’s word of mouth to

expand user base

• In the UK, Zopa lent almost £500m of

savings to UK borrowers since its

launch, lending ~£200m in the last 12

months

• Average lender returns range from 7-

11% with reported <0.2% defaults

06-14 CAGR

32%

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Similarly, crowd-funding is expected to grow exponentially especially within the property market

• Centralised hub designed for online investors with the aim of simplifying the crowd-funding

market by hosting different investment opportunities on one platform

• Platform to be launched in upcoming months - reported hundreds of websites/ businesses

listed on platform

• Company specialising in crowd-investing, crowd-lending and crowd-funding

• Initial investment required can be as low as £10 – platform also provides training sessions

to users and possibility to exchange information over main social networking websites

• Over £1.2m invested amongst 6,500 registered investors

• Online platform enabling registered users to self-select different property investment

opportunities and buying shares, with investment from just £500

• As of Feb. 2014, business already raised £170k (in less than 11 days) among initial 109

investors

• Defined as ‘members club’ specialising in crowd-funding, website specialises in property

investments in the UK, also providing investment education and advise to users

• Initial investment required is low and protected from interest rate fluctuations

• Based on company’s targets, reached £1m target fund during first 2 years of operations

NOT EXHAUSTIVE

Source: Company’s websites, crowdsourcing.org, thefinanser, Value Partners analysis

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Contents

•Emerging business models based on P2P

•Virtual currencies the history so far

•Challenges and future scenarios

For the conditions of use of this document please refer to the front page

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To understand “virtual currencies” it is key to set a baseline definition

“a type of unregulated, digital money, which is issued and usually controlled by

its developers, and used and accepted among the members of a specific virtual

community“

European Central Bank 2012

"a medium of exchange that operates like a currency in some environments, but

does not have all the attributes of real currency“

US Department of Treasury, 2013

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Virtual currencies have been long in existence evolving out of loyalty schemes…

Source: Value Partners analysis

1981-’83

Loyalty Schemes

Multi-merchant Schemes

Virtual Currencies

1994-’97 1998

Beenz.com

2003 2009

Bitcoin

2004

World of

Warcraft Gold

.com bubble

2010-ytd

Op

en

ne

ss

Of

Sc

he

me

C

lose

O

pe

n

ILLUSTRATIVE

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Type 3

Type 2

Type 1

The ECB defines 3 types of virtual currencies based on their interaction with the real economy…

Source: ECB, Value Partners analysis

Virtual Currency Description Examples Real Economy

• No interaction with real economy

• V.C. is only used for buying virtual

goods and services

• V.C. is purchased using real

money at a fixed rate, but cannot

be converted back

• V.C. can be used to buy both

virtual and real goods and

services

Description

Virtual Currency Real Economy

Examples

• Users can buy and sell V.C. using

the real money at a given

exchange rate

• The V.C. is similar to real currency

in terms of interaction with the real

economy

Virtual Currency Real Economy

Description Examples

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…whereas authorities in different countries are responding in various ways

Nature of the

virtual currency

• A commodity for DNK (formally rejected as a “currency”), FIN, LVA, GBR

• A financial instrument by DEU, SWE

• Scriptural money by LUX

• Not specified for other countries

Taxation

• Reviewed on single case basis by SVN

• Taxable if considered as an electronic service in DNK

• Subject to capital gains tax in FIN, SWE

• Subject to VAT if used in DEU (for purchases of goods and services), NLD

Authorisation to

operate BitCoin

• Required in AUT, DEU, LUX, GBR (on a case by cases basis on discretion of the Bitcoin operator)

• Restricted in RUS (as a for anonymous electronic transfer + businesses involved with Bitcoin are

considered associated with money laundering and terrorism financing)

• Not required in other countries

Competent

authority

• Central bank in: CYP, GRC, BEL, SVK, HRV, DNK, EST, FRA, HUN, LTU, NLD, PRT, DEU, GBR, RUS

• Financial services authority: CYP, BEL, DNK, LVA, DEU, LUX, AUT, GBR, SWE

• Ministry of finance in: BEL, SVN, CZE, FRA, IRL, NLD, POL

• Ministry of justice: NLD, SWE

• Tax authority in: DNK, FIN, GBR, SWE

• Parliament: IRL, ITA, RUS

• Local authorities: IRL

• Judiciary authorities: RUS

Source: ECB, Gov. Press Release, Value Partners analysis

BITCOIN

ILLUSTRATIVE CASE

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Protection Description:

• Lack of consumer protection when making a payment transaction (e.g. no refund given as of EU law)

• Acceptance of virtual currencies by merchants is not always guaranteed

Uptake of virtual currencies pose several threats to consumer – as recently highlighted by EBA

Money

loss Description:

• Potential failure and bankruptcy of virtual currency exchange platforms may cause loss of deposits and accounts

• Theft and hacks on virtual accounts and digital wallets as well as loss of password may result in large financial

losses for users

Volatility Description:

• Virtual currencies proved to be extremely volatile

• Value of a given virtual currency is unpredictable and could even fall to zero

Criminal

activity Description:

• Although transactions are public, identity of payer/ payee is not

• Virtual currency network could likely be used for criminal activities (e.g. money laundering) exploiting untraceability

of transaction

Source: EBA, Value Partners analysis

a

b

c

d

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The first most notorious virtual currency failed to take off because of a number of challenges …

• Funded in 1998 as virtual micropayments and payments solution and loyalty points scheme

• Beenz operated in the United States, Sweden, France, Germany, Italy, Japan, Singapore, Australia and

China

• As launching a new currency is illegal in many countries - Beenz management and its legal teams had to

meet with finance ministers across Europe to assure them that Beenz would be categorized as virtual

points and not as a currency

• Within days of its launch in the UK, Beenz' offices in London were visited by the Financial

Services Authority on suspicion of operating an unlicensed bank

• Due to issues with financial regulators, it was unable to sell Beenz directly to end customers

• Beenz ultimately failed in 2001 and was sold to US-based Carlson Marketing Group in 2001 for an undisclosed

sum

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…while most recent new entrants have gained traction despite some hick-ups but…

Pric

e, ($

k)

Mark

et

Cap

, ($

Bn

)

0

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0.8

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1.2

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15

2009 2010 2011 2012 2013 2014

Market Cap (USD)

Price (USD)

0

20000

40000

60000

80000

100000

120000

2009 2010 2011 2012 2013 2014

Number of Bitcointransactions perday (#)

Daily T

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Bitcoins incirculation

Diffculty rate

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BITCOIN

ILLUSTRATIVE CASE

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The market is getting crowded: Bitcoin is not alone with other new players (>150 new virtual currencies) entering the virtual currency space

Total Dogecoin Peercoin Auroracoin Litecoin Ripple Bitcoin

14.2% 4.9% 1.6% 0.6% 0.5% 100.0% 78.2%

Source: Coinmarketcap, Value Partners analysis = % of total crypto-coin market cap

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There appear to be an on ongoing series of touch-points between virtual and physical currencies

Wall Street Journal March 17, 2014

Xapo a start-up offering:

• Solid bank vaults (made of steel with security

guards system, biometric scanners, 24/7 video

surveillance and paper ledgers) – as for cash and

gold

• Bitcoins stored in offline hard drives

• Customers authenticated through multiple methods

before a transaction order is taken

• Authorised Xapo employee only to descends to the

vault to get the private keys to execute a transaction

BBC News January 10, 2014

Elliptic Vault a London-based firm offering:

• Bitcoin storage service providing insurance against

theft and loss of digital currency

• ‘Deep cold’ storage system with private keys stored

on offline servers and kept in multiple secure

locations

• Service fully insured by Lloyd's of London

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Contents

•Emerging business models based on P2P

•Virtual currencies the history so far

•Challenges and future scenarios

For the conditions of use of this document please refer to the front page

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While virtual currencies are been deemed at risk and are in early phase of establishment, other P2P solution are gaining traction …

•Volume of investment still low compared

to traditional deposit/ investment systems

•High fragmentation as industry still

nascent

•Micro-small firms can access finance

more easily

•Multi-channel approach and consultation

•Low investment required to buy equity

•No financial intermediaries

involvement

•Low rates for borrowers

•Potential lack of trust due to

financial intermediation exclusion

•Still a “geeky” game

•Low regulation and high risk

exposure

•Criminal activity through network

•Limited acceptance and money

supply

•Easy payment alternative for

online commerce

• ‘Social aspect’ through creation of

virtual communities

•Flexible/ open system

Crowd-funding

P2P lending

Virtual currency payments

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… and considered by many industry commentators to further expand in the near future

“[…] among the newcomers are peer-to-peer

(P2P) lending platforms, which match borrowers

and lenders directly, usually via online auctions.

[…] the result is a strikingly better deal for

both sides”.

The Economist March 1st, 2014

“Peer-to-Peer Lending: No Longer Just a

Curiosity”. […] The upshot: Those earning

little-to-nothing on their cash can more easily be

connected to people who are willing to give

them an above-market rate of return for capital,

with no intermediary bank needed.”

Bloomberg Businessweek January 20th, 2013

ILLUSTRATIVE

“[…] the idea took off and is now offered by a

plethora of middlemen […]”.

The Economist January 22nd, 2012

“The Crowdfunding Economy Is About to

Pop”. TIME September 24th, 2013

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Conclusions

• Due to recent global economic downturn, growing connectivity and effective value proposition, P2P

solutions expanded rapidly during last 3 years

• User-base is growing as services offered appear more streamlined and beneficial to all parties involved –

However challenges and issues exist even if more in some areas than others

• Virtual currencies are set to grow but loyalty still more mainstream than payments solutions and

crime-related issues are still an obstacle to penetration

• Whilst some P2P services are considered too risky, majority of them are gaining consensus and forecast

to grow exponentially in the short-term

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Thank you for your attention!

Francesco Burelli

francesco.burelli@valuepartners.com

Mobile: +44 (0)7887 813003