Investment Management Division
An Overview of the Current State of Cryptocurrencies and Blockchain
Technology
November 15, 2017
Investment Strategy Group
Today’s Discussion
Investment
Management
Division
I. The Cryptocurrency Marketplace
II.
III.
IV.
Blockchain Technology and Potential Uses
How Cryptocurrencies Work
Is Bitcoin a Viable Currency?
V. Is Bitcoin a Viable Asset?
VI.
Cryptocurrency Risks
VII. Key Takeaways
Source: Investment Strategy Group
1
Cryptocurrencies Have Received Enormous Attention
Investment
Management
Division
1. Bitcoin Currency Value – Through November 14, 2017
2. Cryptocurrencies with Market Capitalization over US$1 Billion
$120
7000
6000
6,590
592%
YTD
$100
107.5
$80
USD per Bitcoin (XBT)
5000
4000
3000
$60
$40
30.2
2000
$20
22.6
1000
0
2011 2012 2013 2014 2015 2016 2017
$0
Bitcoin Ethereum Bitcoin
Cash
7.8
3.4 3.3
1.8 1.8 1.7 1.7 1.6
Ripple Dash Litecoin Monero NEO NEM IOTA Ethereum
Classic
• Bitcoin was conceived in 2008 by an anonymous inventor who is known by the pseudonym, Satoshi Nakamoto.
• Since then, an estimated 2,000+ cryptocurrencies have come into existence, with a combined market cap of over $200bn. 1
• There are an estimated 129 focused hedge funds 2 and 121 cryptocurrency exchanges globally. 3
(1) Coinranking.com, (2) https://next.autonomous.com/thoughts//how-many-crypto-hedge-funds-can-you-count, (3) https://cryptocoincharts.info/markets/info
Source: Investment Strategy Group, Cryptocompare.com.
2
Cryptocurrencies have Garnered Diverging Views
Timeline of Statements and Measures over Recent Months
Investment
Management
Division
Japanese
government
recognizes
Bitcoin as
legal tender
Apr. 1, 2017
China
bans
ICOs
Sept. 4, 2017
“It’s a
fraud…worse than
tulip bulbs” 1
–J. Dimon
Sept. 12, 2017
South
Korea
bans
ICOs
Sept. 28, 2017
Japan’s FSA
approves 11
operators of
cryptocurrency
exchanges
Sept. 29, 2017
“Still thinking about
#Bitcoin. No
conclusion - not
endorsing/rejecting” 3
- Lloyd Blankfein
Oct. 3, 2017
“Bitcoin is 'a ponzi
scheme’”
- DBS Group
(David Gledhill)
Nov. 14, 2017
Sept. 11, 2017
Sept. 17, 2017
July 24, 2017
US CFTC
approves
Bitcoin futures
trading
China bans
cryptocurrency
exchanges
BIS publishes
report weighing
risks and
benefits of
cryptocurrencies
Sept. 27, 2017
“[Bitcoin is]
certainly more than
just a fad” 2
– MS CEO, Gorman
Sept. 29, 2017
SEC
charges two
ICOs with
fraud
Oct. 13, 2017
“Index of money
laundering.”
- Blackrock CEO
Larry Fink
(1) Barclays Investor Conference, September 12, 2017. (2) Wall Street Journal Event, September 27, 2017. (3) Twitter, October 3, 2017. (4) CNBC, November 14, 2017.
Source: Investment Strategy Group, public news sources.
3
What is Blockchain Technology?
Investment
Management
Division
Illustrative Schematic: Centralized Network versus Distributed Network
Centralized Network
Distributed Network
• Blockchain is the critical and differentiating infrastructure that underlies cryptocurrencies.
• Unlike most networks today, which rely on a centralized hub, a blockchain is a public distributed network whose
complete database can be accessed and maintained by each member of the network.
• The blockchain is a shared and continually reconciled database. As new transactions occur, data is quickly
disseminated to, verified, and incorporated across all nodes on the network.
• Because it has no single maintainer, the blockchain’s history is resistant to editing by a malicious actor.
Source: Investment Strategy Group, http://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/ .
4
Blockchain Technology Holds Potential for a Range of
Applications
Investment
Management
Division
1. Financial Market Transactions
2. Identity Validation and Security
Client XYZ
Current
State
T+ 2
DMV
Blockchain-
Enabled
Settlement
T+ 0
Credit Card Issuer
US Dept. of State
Online Retailer
Mortgage Lender
Secure Digital Identity
• Banks are focused on blockchain technology for post-trade
settlement and clearing, with aims to:
� Streamline equities settlement from T+2 to T+0.
• Potential to securely link identity and payment credentials to
a unique individual.
� Benefit peer-to-peer businesses reliant on counterparty
trust.
� Streamline compliance and anti-money laundering
surveillance.
• Goldman Sachs Global Investment Research expects limited blockchain adoption over the next 2-5 years, and broader
acceptance after 5-10 years.
─
Capital market adoption may take over 10 years, given regulatory oversight and the multitude of participants.
Source: Investment Strategy Group, GS Investment Research, Profiles in Innovation: Blockchain: https://360.gs.com/gs/portal/?st=1&action=action.binary&d=21760456&fn=/document.pdf.
Goldman Sachs & Co LLC, Blockchain, The New Technology of Trust, http://www.goldmansachs.com/our-thinking/pages/blockchain/index.html 5
What is a Cryptocurrency and
Why is Blockchain Technology Important?
Investment
Management
Division
Common Features of Cryptocurrencies
Common Features of
Cryptocurrencies
� Digital
Attributes
• Coin ownership is represented by entries on a digital
ledger, not by a physical token.
� Decentralization • No single entity controls the currency.
� Open Source • All source code is available freely online.
� Distributed
Consensus
� Pseudonymity
� Cryptography
(computerized encoding)
• Each cryptocurrency uses a method for obtaining
consensus on ownership without a central arbiter.
• Coin ownership is not linked to real-world identities
within the blockchain.
• Several cryptographic techniques are used to verify
transactions, protect identities, and limit supply.
• A cryptocurrency is a decentralized digital coin. It allows users to make transactions and store money in a secure and
pseudonymous manner.
• All cryptocurrency transactions are recorded chronologically on a blockchain, which acts as the critical infrastructure
underlying a cryptocurrency.
• The process of verifying transactions and ensuring the validity of the blockchain is called “mining.”
• Mining solves the “double-spending” problem that had plagued previous attempts to implement a digital currency.
Source: Investment Strategy Group, http://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/ .
6
How Do Miners Process Individual Transactions?
Investment
Management
Division
Step 1: Bob wants to pay Alice 0.5 BTC
Illustrative Schematic of a Bitcoin Transaction
Step 2: Miners Verify the Transfer Request and add
it to the next block
Step 3: Block Containing Bob and Alice’s
Transaction is Added to the Blockchain
Bob
Alice
Miner
B
Bob owns 1BTC
Previous transaction
in which Bob was
paid 1 BTC
New transaction
Miner
A
Bob wants to pay
Alice 0.5BTC
Does Bob have
0.5BTC??
Yes!
Miner
C
1) Before sending any bitcoins, Bob must hold bitcoins
in his wallet from a previous transaction (or by
solving a block to earn the mining reward).
2) Bob creates a new transaction in which he pays 0.5
BTC (of his 1 BTC) to Alice.
3) Bob broadcasts this transaction to the network for
validation and inclusion in the blockchain.
Bob has 1BTC
Bob wants to pay
Alice 0.5BTC
Does Bob have
0.5BTC??
Yes!
Record Bob’s
0.5BTC Transfer
to Alice
Record Bob’s
0.5BTC Transfer
to Alice
Bob owns 1BTC
Bob wants to pay
Alice 0.5BTC
Does Bob have
0.5BTC??
Yes!
Record Bob’s
0.5BTC Transfer
to Alice
1) Miner B happens to be the first to solve this block
and adds it to the blockchain. Miner B collects 12.5-
bitcoin reward.
2) If Bob’s transaction is included the block, Alice
becomes the owner of 0.5 BTC, which will register
in her wallet.
• Consensus transaction validation creates a book of record for all transactions that have ever occurred.
– Transactions may only occur if they are supported by evidence from previous transactions.
– To send bitcoins, an owner’s wallet uses its private key to prove ownership of the referenced bitcoins.
• Transaction processing typically take 10-20 minutes, but can take up to 18 hours if the network is congested.
Source: Investment Strategy Group. 7
What is Mining?
Investment
Management
Division
ASIC Mining Computer and a Mining Rig
6.2”
13.8”
5.3”
• Miners use highly specialized computers designed to run an algorithm that attempts to solve a cryptographic puzzle in order
to add a new block on the blockchain. By design, a bitcoin block is created once every ten minutes.
• The computing power required to solve the cryptographic puzzle is high and expensive; bitcoin mining consumes an
estimated $1.3bn worth of electricity annually 1 —equivalent to Ireland’s annual electricity consumption.
• In order to incentivize mining, the first miner to complete a block is rewarded 12.5 bitcoins. The global supply of bitcoins is
capped at 21mil (currently ~16.5m) and follows a predetermined growth rate—the miners’ rewards halve every four years.
• Given ~1-1.5m mining units globally, the likelihood of any one miner solving a block is low. Many miners join “mining
pools,” which are cooperatives which share block rewards proportionate to contributed mining power.
– Mining pools are highly concentrated; the top four pools represent over 50% of total mining power.
(1) Bitcoin Energy Consumption Index: https://digiconomist.net/bitcoin-energy-consumption
Source: Investment Strategy Group, http://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/.
8
ICOs Fund the Development of New Currencies
Investment
Management
Division
1. Approximate Funds Raised by ICOs by Calendar Year (US$ Milllions)
2. Total Funds Raised by Month (US$ Millions): Angel and Seed Stage
Internet VC versus ICO
$4,000
900
Angel & Seed VC Funding (Internet)
ICO Fundraising
839
Approximate Annual Funds Raised Through ICOs ($mil)
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
$3,461
$222
$26 $14
2014 2015 2016 2017 YTD
Total Funds Raised ($Mn)
800
700
600
500
400
300
200
100
0
369
346
298
262 271
256
259 268 278
235
235
207
190
80
638
572
397
319
230 237
2 12 12 12 21
5 15 25 19
7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17
• New blockchain-related projects are funded via an Initial Coin Offering (ICO). This process raises capital through token sales.
• In an ICO, the object offered is either a new digital coin or a yet-undeveloped concept in search of funding. ICO investors
purchase an ownership percentage of a future money supply or functionality.
• While many ICOs support legitimate use cases, Autonomous Research asserts, “unfortunately, many ICOs are fraudulent.” 1
• Rather than raising fiat currency, ICOs primarily raise capital in the form of Bitcoin and Ether, driving additional demand for
the cryptocurrencies.
(1) #Token Mania, Autonomous Research, July 2017.
Source: Investment Strategy Group, Bloomberg, Goldman Sachs Global Investment Research, Cryptocompare.com.
9
Why Have Cryptocurrencies Rallied So Much?
Investment
Management
Division
1. Bitcoin Supply Over Time (Million Tokens)
2. Currency Composition of Bitcoin Purchase Volume
25
100%
US Dollar Japanese Yen South Korean Won Chinese Renminbi Euro Polish Zloty British Pound
90%
20
80%
Bitcoin Supply (Million)
15
10
5
Current Supply
70%
60%
50%
40%
30%
20%
10%
0
2009
2014
2019
2024
2029
2034
2039
2044
2049
2054
2059
2064
2069
2074
2079
2084
2089
2094
2099
2104
2109
2114
2119
2124
2129
2134
2139
0%
2011 2012 2013 2014 2015 2016 2017
• In addition to speculation, which has been the biggest driver of cryptocurrency appreciation, other drivers include:
• Perceived Scarcity: Bitcoin’s 21 million token cap is expected to be reached in 2140 (16.5 million today). Many of the
over 2,000 other cryptocurrencies, however, do not have a capped supply. Further, while unlikely, bitcoin’s token cap
could be raised if a consensus of programmers decided so.
• Desired Safe-haven: Increased global participation reflects desire for an asset independent from governments or central
banks (“digital gold”). Many governments from which investors have sought diversification, however, have recently
banned domestic crypto-exchanges.
Source: Investment Strategy Group, Bloomberg, Cryptocompare.com.
10
As Bitcoin Ownership is Not Anonymous, Illicit Use has Fallen
Investment
Management
Division
Larry Fink on Bitcoin’s Illicit Use
"Bitcoin just shows you how much demand for money
laundering there is in the world. That’s all it is. It’s an
index of money laundering.”
– BlackRock CEO Larry Fink, October 13, 2017
• Because bitcoin is pseudonymous, not anonymous, users’ real-world identities are ascertainable once the individual
converts bitcoin to fiat currency.
• Digital intelligence companies continually scan the blockchain to identify suspicious transaction activity.
• The Blockchain Intelligence Group estimates that illegal transactions in bitcoin fell from ~50% of total volume in 2015
to ~20% in 2016, and represent “significantly less than that” today.
• As law enforcement has become better able to track bitcoin ransom, cybercriminals have begun to favor currencies that
allow anonymity, such as Monero and Zcash, and even Ether.
Source: Investment Strategy Group, Blockchain Intelligence Group, https://www.cnbc.com/2017/08/29/dark-web-finds-bitcoin-increasingly-more-of-a-problem-than-a-help-tries-otherdigital-currencies.html.
11
Sovereign Currencies Meet Three Criteria
Investment
Management
Division
1) They are used as a medium of exchange.
– To represent a medium of exchange, an instrument must facilitate the transaction
of goods or services between parities (US$ are used to buy a barrel of oil).
2) They serve as unit of account.
– A unit of account is a measurement which allows value to be accounted and
compared (a barrel of WTI is worth ~$55).
3) They are a store of value.
– A store of value is an asset that can be saved, stored, and exchanged in the future
for a predictable stable value (with 2% annual inflation, a nominal dollar today
will be worth 82¢ in 10 years).
Source: Investment Strategy Group, Do Digital Currencies Pose a Threat to Sovereign Currencies and Central Banks?, Daniel Heller, PIIE.
12
Do Cryptocurrencies Meet the Criteria for Currencies?
1) Bitcoin is an Inefficient Medium of Exchange
Investment
Management
Division
Average Transaction Fees (US$ Monthly Average)
6
5
4
$ Per Transaction
3
2
$3.4
$2.1
1
0
Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17
• Processing is expensive. The average transaction cost is ~$3.40, rendering transfer of small fund balances uneconomical.
• Processing is slow. Transaction processing typically takes a minimum of 10-20 minutes, but can take up to 18 hours if
the network is congested (Visa and Mastercard authorize transactions in ~20 milliseconds).
• Bitcoin is not broadly accepted. A mere 9k merchants accept bitcoin, compared to the 37mil that accept Visa and
MasterCard, and the billions of merchants and people globally that accept US dollars. 1
• Further, the IRS considers all cryptocurrency gains a taxable event (including for de minimis purchases).
(1) Do Digital Currencies Pose a Threat to Sovereign Currencies and Central Banks?, Daniel Heller, PIIE.
Source: Investment Strategy Group, Bloomberg, Cryptocompare.com. 13
Do Cryptocurrencies Meet the Criteria for Currencies?
2) Bitcoin is an Unreliable Unit of Account
Investment
Management
Division
Illustrative Pricing: US$ vs. Bitcoin as a Unit of Account
January 2nd 2017:
1 Bitcoin =
$1,012 =
1 Bosch Dishwasher ($1,079)
November 14th 2017:
1 Bitcoin =
$6,590 =
6 Bosch Dishwashers ($6,474)
• Bitcoin’s rapid appreciation makes it an unsatisfactory candidate as a unit of account.
• In January, one could have purchased a dishwasher for one bitcoin. Today, it would cost 1/6 th a bitcoin to buy the
unit, implying severe deflation over the past several months.
• In deflationary environments, people hoard their money in order to buy goods more cheaply at a later date, which has
prompted most people to hoard their bitcoin.
Source: Investment Strategy Group, Bloomberg, Cryptocompare.com. 14
Do Cryptocurrencies Meet the Criteria for Currencies?
3) Bitcoin is an Unstable Store of Value
Investment
Management
Division
1. Volatility: Bitcoin versus Most Volatile EM Currencies
2. Bitcoin, Ether and Ripple versus S&P 500 Historical Drawdowns
100%
95.0%
60
Bitcoin Ether Ripple S&P 500 (Over Bitcoin's History) S&P 500 (Since 1945)
47
47
5Y Annualized Volatility
75%
50%
40
20
0
-20
33
1
22
-19%
0%
-30%
25%
0%
11.7% 11.9% 12.9%
Turkey
(TRY)
Mexico
(MXN)
Colombia
(COP)
15.6% 16.1% 16.7%
South Africa
(ZAR)
Brazil
(BRL)
Argentina
(ARS)
20.6%
Russia
(RUB)
Bitcoin
(XBT)
-40
-60
-80
Count of Drawdowns of 15% or More
(Left Axis)
-69%
-67%
-63%
-57%
Worst Historical Drawdown
(Right Axis)
-60%
• Bitcoin’s annualized volatility of 95% dwarfs even the most volatile of EM currencies.
• Bitcoin’s volatility is 8x the volatility of US equities. In terms of both count and magnitude, Bitcoin, Ether and Ripple have all
experienced more severe drawdowns over their short histories than the S&P 500 has since 1945.
• Bitcoin exchanges have thin liquidity, which plays a role in driving enormous price movement—so far to the upside, but which
could cause a flash crash upon a large sell order. A ~$30 million sell order would likely move the market by 5%.
• A store of value should predictably preserve wealth. Bitcoin is unable to do so, as it neither generates income nor grows with
earnings.
Source: Investment Strategy Group, Bloomberg, Coindesk.com. 15
Compared to Commodities, Bitcoin’s Market Price is Dislocated
Relative to its Marginal Production Cost
Investment
Management
Division
Oil, Gold and Bitcoin: Marginal Production Cost versus Current Market Price
8000
7000
Marginal Production Cost
Current Market Price
(% above marginal production cost)
$6,517
(+350%)
6000
5000
4000
3000
2000
$1,278
(+50%)
$1200-1700
1000
0
$57
(+8%)
$52.5
$850
Crude Oil (WTI) Gold Bitcoin
• Bitcoin tokens possesses no physicality, a criteria for traditional commodities.
• Compared to other commodities, Bitcoin’s market price stands far above its marginal production cost.
– Gold miners’ and oil drillers’ revenues stand 50% and 8% above their marginal production costs, respectively.
– Bitcoin miners’ revenue per bitcoin stands approximately 350% above their electricity expenditures.
(1) Peter C.B. Phillips, Shu-Ping Shi and Jun Yu, “Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500,” International Economic Review, Oct 28, 2015.
Source: Investment Strategy Group, Bloomberg. 16
Bitcoin’s Market Cap is Dislocated Relative to that of Payment
Processors
Investment
Management
Division
Relative Transaction Volume and Market Cap
$10
12m Transaction Volume ($Trillion)
Market Cap as % of 12m Transaction Volume (Right)
96.8%
100%
$9
$8.9
$8
$7
75%
$6
$5
$4.8
50%
$4
$3
$2
25%
$1
$0
2.8% 3.3%
$0.1
Visa Mastercard Bitcoin
0%
• Traditional payment processors, Visa and Mastercard, each processed several trillion worth of transaction volumes in
2016. Bitcoin has processed $111 billion of transactions over the last 12 months.
– Bitcoin’s slow transaction time precipitated its recent “hard fork” in attempt to enhance processing capacity.
• Whereas traditional payment processors’ market cap represents ~3% of their transaction volume, Bitcoin’s represents
97%, suggesting its valuation is dislocated from its fundamental value and that speculation has driven its price.
(1) “Future of Finance Payment Ecosystems,” Goldman Sachs Global Investment Research, August 3, 2017.
Source: Investment Strategy Group, Bloomberg, Corporate Annual Reports, Cryptocompare.com. 17
(1) Peter C.B. Phillips, Shu-Ping Shi and Jun Yu, “Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500,” International Economic Review, Oct 28, 2015.
Source: Investment Strategy Group, Bloomberg. 18
Bitcoin’s Historical Risk Premium is Unexplainable
Investment
Management
Division
1. Bitcoin Factor Exposures and Unexplained Premium 2. Tactical Hedge Funds’ Factor Exposures and Unexplained Premium
1.2%
Annual Risk Premium
1.0%
0.8%
0.6%
0.4%
0.2%
Equity
Term
Funding
Liquidity
Exchange Rate
Emerging Market
0.0%
Tactical Trading Hedge Funds
7.0%
6.0%
~341pp
Annual Risk Premium
5.0%
4.0%
3.0%
2.0%
2.8pp
Factor Risk Premium
Historical Risk Premium
1.0%
0.0%
Tactical Trading Hedge Funds
2.8%
± 3.6%
• Bitcoin’s 300%+ historical annual risk premium is idiosyncratic and cannot be explained by ISG’s multi-factor model.
• An inability to understand sources of risk and return makes one incapable of predicting when performance will reverse.
• For tactical hedge funds, half of the historical risk premium is explained by the factor model.
(1) Peter C.B. Phillips, Shu-Ping Shi and Jun Yu, “Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500,” International Economic Review, Oct 28, 2015.
Source: Investment Strategy Group, Bloomberg. 19
Bitcoin’s Recent Performance is Suggestive of Bubble Territory
Investment
Management
Division
Bitcoin Performance in the Context of ISG Bubble Indicator
• A bubble-detection test that measures explosive price behavior based on the S&P 500’s price-to-dividend ratio 1
suggests only a 16% probability that the US stock market is currently in a bubble.
• Bitcoin’s price performance, on the other hand, suggests the asset has been in bubble territory since early this year.
Key Cryptocurrency Risks
Investment
Management
Division
• In addition to their extreme volatility, cryptocurrencies are vulnerable to:
– Hacking of Exchanges
– Unintentional Coding Error
– Government Regulation
– Central Bank Disruption
– Developments in Quantum Computing (which would increase success of private key hacking)
Source: Investment Strategy Group.
20
The Cryptocurrency Infrastructure is Young and
Susceptible to Hacking
Investment
Management
Division
Timeline of Major Cryptocurrency Hacks and Amount Stolen
2011
- Allinvain – 25,000 BTC
2012
BitFloor – 24,000 BTC - - Bitcoin Savings and Trust – 46,703 BTC
2013
BIPS – 1,295 BTC - - Inputs.io – 4,100 BTC
- Picostocks – 6,000 BTC
2014
Mt Gox – 75,000 BTC - - Flexcoin – 1,000 BTC
Poloniex – undisclosed BTC -
- Bitcurex – undisclosed BTC
Canadian Bitcoins – undisclosed BTC -
2015
Coinapult – 150 BTC - - BitStamp – 18,866 BTC
Bitfinex – 1,500 BTC - - BTER – 7,170 BTC
Scrypt.CC – undisclosed BTC - - Purse.io – 10,235 BTC
2016
Bitfinex – $65mil -
Gatecoin – $2mil -
- Cryptsy – 13,000 BTC
- Cointrader – undisclosed BTC
- DAO – $55mil
2017
æternity blockchain – undisclosed - - CoinDash – $7mil
Edgeless Casino – undisclosed -
Parity (Ethereum) – ~$350mil -
- Swarm City – $32.6mil
- Bithumb – $1mil
- Veritaseum – $8.4mil
• Although cryptocurrencies cannot be spent without control of the corresponding private keys, care must be taken to
protect those private keys. Many bitcoin owners allow exchanges to custody their private keys, which leaves them
vulnerable:
– If hackers are able to access owners’ private keys, they can deplete owners’ digital wallets.
– As of August 2016, Reuters reported that a third of bitcoin exchanges had been hacked. 1
– Ethereum’s recent Parity hack is the first time a coding error has resulted in a loss of funds.
• Estimates vary but suggest that hackers have stolen at least several hundred million dollars of cryptocurrencies.
(1) http://fortune.com/2016/08/29/risk-of-bitcoin-hacking-is-real/
21
Cryptocurrencies’ Legal and Regulatory Status Remains Uncertain
Investment
Management
Division
Country
Illustrative
Acceptance of
Cryptocurrencies’ Status Key Regulator
Cryptocurrencies 1
Switzerland Assets, not Securities • FINMA
Singapore Assets, not Securities • Monetary Authority of Singapore
Japan Recognized as legal tender (Bitcoin only) • Financial Services Agency
United Kingdom Private Currency • Financial Conduct Authority
United States
− Commodities, potentially securities
(SEC has not yet made determination)
− IRS treats as property for tax purposes
(Exchanges, however, are not required to
create 1099s).
• SEC
• CFTC
• OCC
• 50 States
Russia Financial instruments, not currency • Central Bank of Russia
• Russian Finance Ministry
China Non-monetary digital asset • People’s Bank of China
• The cryptocurrency world operates across geographic and jurisdictional borders, creating ambiguity as to its legal
status.
• Individual countries have taken differing views on cryptocurrencies.
(1) Data according to Autonomous NEXT #Token Mania (July 2017)
Source: Investment Strategy Group, Cryptocompare.com. 22
Central Banks Have Begun Exploring Cryptocurrency Options
Investment
Management
Division
1. Central Bank Current State 2. Illustrative Potential State: Central Bank Cryptocurrencies
• Sovereign central banks have begun exploring cryptocurrency options.
• A retail central bank cryptocurrency would effectively give the public access to accounts at the central bank with the
ability to transfer payments peer-to-peer.
• Cryptocurrency proposals are being considered by several central banks, including Singapore’s MAS, China’s PBOC,
Russia’s Central Bank, Sweden’s Riksbank and Ecuador’s Banco Central.
• A successful central bank cryptocurrency could substantially reduce fraud and tax evasion.
Source: Investment Strategy Group, “Central Bank Cryptocurrencies,” Morten Bech, Rodney Garratt, Bank of International Settlements.
23
Central Bank Cryptocurrencies Could Substantially Reduce Fraud
Investment
Management
Division
“Say there’s a grant to Nigeria for health stuff—if it’s digital money, they can track that it
was paid to a certain person and when it was paid out. Then you can audit later and say,
‘Did that really happen?’ You don’t want to tell donors that three percent went astray. Now
that there’s digital traceability in a place like Nigeria, where corruption is a huge problem,
we can bring that down. A lot of the optimism we have at the foundation about disease,
education and financial services is because we’re sitting on top of a digital miracle.”
– Bill Gates, September 25, 2017
Source: Investment Strategy Group, “Brain Trust: A Rare Joint Interview with Microsoft CEO Satya Nadella and Bill Gates,” The Wall Street Journal, September 25, 2017.
24
Key Takeaways
Investment
Management
Division
• Blockchain technology, which underlies cryptocurrencies, is revolutionary, and likely
to have many applications.
• Cryptocurrencies are currently too volatile to be a medium of exchange, unit of
account, or store of value, and have many vulnerabilities.
• The cryptocurrency ecosystem will evolve substantially over time.
• The current incarnation of cryptocurrencies is unlikely to persist, but we expect
central bank digital currencies to prevail.
Source: Investment Strategy Group.
25
Investment Management Division
Economic and Market Monitors
Economics Monitor
Investment
Management
Division
US Labor Market Data Period Actual Survey Prior Revised European PMI Data Period Actual Survey Prior Revised
JOLTS Job Openings (k) Sep 6,093 6,075 6,082 6,090 Markit Eurozone Composite PMI Oct F 56.0 55.9 55.9 --
Initial Jobless Claims (k) 4-Nov 239 232 229 -- Markit/BME Germany Composite PMI Oct F 56.6 56.9 56.9 --
Continuing Claims (k) 28-Oct 1,901 1,885 1,884 -- Markit France Composite PMI Oct F 57.4 57.5 57.5 --
Markit/ADACI Italy Composite PMI Oct 53.9 54.3 54.3 --
US Consumer Sentiment Period Actual Survey Prior Revised Markit Spain Composite PMI Oct 55.1 54.6 56.4 --
U. of Mich. Sentiment Nov P 97.8 100.8 100.7 --
U. of Mich. 5-10 Yr Inflation Nov P 2.5% -- 2.5% -- European Activity Data Period Actual Survey Prior Revised
Eurozone Retail Sales YoY Sep 3.7% 2.8% 1.2% 2.3%
China Activity Data Period Actual Survey Prior Revised Italy Retail Sales YoY Sep 3.4% 0.5% -0.5% -0.1%
Foreign Reserves Oct 3,109 3,110 3,109 -- Germany Industrial Prod. WDA YoY Sep 3.6% 4.5% 4.7% 4.6%
Exports YoY Oct 6.9% 7.1% 8.1% 8.0% France Industrial Production YoY Sep 3.2% 3.1% 1.1% 1.0%
Imports YoY Oct 17.2% 17.0% 18.7% 18.6% Italy Industrial Production WDA YoY Sep 2.4% 4.8% 5.7% 5.8%
CPI YoY Oct 1.9% 1.8% 1.6% -- Spain Industrial Output SA YoY Sep 3.4% 3.1% 1.8% 1.9%
• The US labor market continues to tighten; the small miss in claims is largely explained by Puerto Rico.
• Chinese trade growth moderated; deals announced during President Trump’s visit are unlikely to reduce trade deficit.
• Eurozone data came in mixed relative to consensus expectations, but still points to above-trend growth in the region.
Source: Investment Strategy Group, Bloomberg.
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Markets Monitor
Investment
Management
Division
1Y Price Range 11/14/2017 WTD Last Week¹ YTD 1Y Price Range 11/14/2017 WTD Last Week¹ YTD
S&P 500 2,579 -0.1% -0.2% 15.2% MSCI AC World 573 -0.4% -0.4% 14.6%
Cons Disc 738 0.4% 0.7% 13.9% MSCI EAFE 1,148 -0.8% -1.1% 10.7%
Cons Staples 564 0.9% 2.1% 6.0% TOPIX 1,779 -1.2% 0.4% 17.1%
Energy 503 -2.1% 1.1% -9.3% FTSE 100 7,414 -0.2% -1.7% 3.8%
Financials 433 0.1% -2.7% 12.0% DAX 13,033 -0.7% -2.6% 13.5%
Health Care 936 -0.3% -0.5% 17.4% IBEX 35 9,990 -1.0% -2.6% 6.8%
Industrials 596 -0.9% -1.1% 10.7% Euro Stoxx 50 3,556 -1.0% -2.6% 8.1%
Info Tech 1,106 -0.2% 0.0% 36.9% MSCI EM 60,154 -0.7% 0.2% 26.2%
Materials 362 -0.6% -1.2% 15.9% MSCI China 88 -0.7% 2.4% 50.7%
Real Estate 209 0.1% 3.2% 9.8% MSCI India 1,214 -1.3% -1.6% 23.5%
Telecom 142 -1.7% -1.3% -19.8% MSCI Brazil 240,688 -1.9% -2.3% 15.4%
Utilities 288 2.4% 0.4% 16.6% MSCI Russia 969 -0.3% 5.4% -3.0%
NASDAQ 6,738 -0.2% -0.2% 25.2% USD Trade Weighted 81.16 -0.3% -0.5% -7.0%
VIX 11.59 0.30 2.15 (2.45) EUR 1.1798 1.1% 0.5% 12.2%
2yr Yield 1.69% 0.03% 0.04% 0.50% JPY 113.46 0.1% 0.5% 3.1%
10yr Yield 2.37% -0.03% 0.07% -0.07% GBP 1.3165 -0.2% 0.9% 6.7%
30yr Yield 2.83% -0.05% 0.07% -0.24% EM Currencies² -0.2% 0.0% 7.6%
30yr AA Yield 3.83% -0.05% 0.14% -0.33% CNH 6.6357 0.4% -0.4% 5.1%
HY Spread (bps) 360 0 21 -49 WTI Crude Oil 55.70 -1.8% 2.0% 3.7%
LIBOR 1.42% 0.00% 0.02% 0.42% Gold Spot Price 1,280 0.4% 0.5% 11.1%
1Y Low
1Y Avg.
Current
1Y High
• Equities were softer as concerns around tax reform outweighed a mostly positive Q3 earnings season. Bond yields
rose globally and the dollar weakened, while oil continued to rally on geopolitical concerns.
* Based on the MSCI EM Currency index.
Source: Investment Strategy Group, Bloomberg.
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Investment Management Division
Appendix & Disclosures
Appendix
Investment
Management
Division
• Allinvain - https://www.forbes.com/sites/timworstall/2011/06/17/bitcoin-the-first-500000-theft/#68fa3f5929b3
• BitFloor - https://www.theverge.com/2012/9/5/3293375/bitfloor-bitcoin-exchange-suspended-theft
• Bitcoin Savings and Trust - https://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-pyramid-scheme-shuts-down
• BIPS - https://www.coindesk.com/bitcoin-payment-processor-bips-attacked-1m-stolen/
• Inputs.io - https://www.coindesk.com/hackers-steal-bitcoins-inputs-io-wallet-service/
• Picostocks - https://bitcointalk.org/index.php?topic=576337#post_toc_58
• Mt. Gox - https://www.forbes.com/sites/andygreenberg/2014/02/25/bitcoins-price-plummets-as-mt-gox-goes-dark-with-massive-hack-rumored/#5b7199ffce1f
• Poloniex - https://www.coindesk.com/poloniex-loses-12-3-bitcoins-latest-bitcoin-exchange-hack/
• Canadian Bitcoins - https://news.vice.com/article/over-100k-in-bitcoin-was-stolen-in-a-ridiculously-low-tech-heist
• Flexcoin - https://www.coindesk.com/bitcoin-bank-flexcoin-close-600000-bitcoin-theft/
• Bitcurex - https://www.coindesk.com/polish-bitcoin-exchange-bitcurex-targeted-hacking-attack/
• Coinapult - https://bravenewcoin.com/news/bitcoin-exchange-bitfinex-integrates-bitgo-following-recent-hack/
• Bitfinex - https://cointelegraph.com/news/breaking-bitfinex-hot-wallet-hacked-bitcoins-stolen
• Scrypt.CC - http://insidebitcoins.com/news/cloud-mining-provider-scrypt-cc-drains-bitcoin-from-user-balances/34500
• BitStamp - http://www.zdnet.com/article/bitstamp-bitcoin-exchange-suspended-amid-hack-concerns-heres-what-we-know/
• BTER - https://www.coindesk.com/bter-bitcoin-stolen-cold-wallet-hack/
• Purse.io - https://www.cryptocoinsnews.com/purse-io-users-are-targeted-by-hackers-10-235-btc-stolen/
• Bitfinex - http://fortune.com/2016/08/03/bitcoin-stolen-bitfinex-hack-hong-kong/
• Gatecoin - https://siliconangle.com/blog/2016/05/17/cryptocurrency-exchange-gatecoin-hacked-2m-in-bitcoin-and-ethereum-stolen/
• Cryptsy - https://www.coindesk.com/cryptsy-bankruptcy-millions-bitcoin-stolen/
• Cointrader - https://www.pymnts.com/news/bitcoin-tracker/2016/obama-declares-bitcoin-a-national-currency/
• DAO - https://www.coindesk.com/dao-attacked-code-issue-leads-60-million-ether-theft/
• Aeternity blockchain - http://www.businessinsider.com/report-hackers-stole-32-million-in-ethereum-after-a-parity-breach-2017-7
• Edgeless Casino - http://www.businessinsider.com/report-hackers-stole-32-million-in-ethereum-after-a-parity-breach-2017-7
• Parity (Ethereum) - https://motherboard.vice.com/en_us/article/ywbqmg/parity-multi-signature-wallet-vulnerability-300-million-hard-fork
• CoinDash - https://www.coindesk.com/coindash-ico-hacker-nets-additional-ether-theft-tops-10-million/
• Swarm City - https://www.cnbc.com/2017/07/20/32-million-worth-of-digital-currency-ether-stolen-by-hackers.html
• Bithumb - http://www.livebitcoinnews.com/south-korean-government-investigates-latest-bithumb-hack/
• Veritaseum - https://www.coindesk.com/veritaseum-founder-claims-8-million-ico-token-stolen/
30
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