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Investment Thesis on Distributed Ledger Technology in the Financial System

An investment thesis from the point of view of venture capital funds, developed as part of Columbia Business School Venture Fellows Program. This presentation looks at what transaction related problems the financial system currently faces, how different startups working on distributed ledger technologies (such as Blockchain) are proposing to solve this problem, and how the author believes the future will unfold.

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Investment Thesis on Distributed Ledger Technology in the Financial System

  1. 1. Distributed Ledger Technology in the Financial System EMRE TEKISALP, COLUMBIA BUSINESS SCHOOL INVESTMENT THESIS, APRIL 2016 @etekis | etekisalp17@gsb.columbia.edu
  2. 2. Financial transactions are settled with the help of intermediaries ◦ P2P Wire Transfers: Banks, Central Banks, Clearing Houses ◦ International Payments: Correspondent Banks ◦ Securities: DTCC (USA) ◦ Contracts: Notaries Source: Ripple
  3. 3. Financial Institutions are hoping that distributed ledgers will solve a multitude of problems regarding settlement Financial Institutions are facing: ◦ Increased regulatory costs ◦ Competition from fintech startups ◦ Antiquated systems with high maintenance costs ◦ Lack of financial inclusion ◦ Competition from alternative financial channels “Measured as a percentage of revenues, financial services firms spend more on IT than any other industry. Banks’ IT costs equal 7.3% of their revenue’s, compared to an average of 3.7% across all other industries surveyed” Source: Deutsche Bank, 2012 “Distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022” Source:Santander, 2015
  4. 4. Source: CBInsights
  5. 5. Many “potential” use cases. Payments and Capital Markets have seen most traction Syndicated loans Trade finance Supply chain provenance US Treasury repo Clearing / settling OTC derivatives and FX Cross-border payments Identity / data authentication Private stock / equity issuance 2 Capital Markets & Securities 1 Cross-border Payments
  6. 6. It’s clear that problems exist with both use cases, but not clear if blockchain is the technology banks need CROSS-BORDER PAYMENTS CAPITAL MARKETS & SECURITIES Problems Blockchain can solve • 2-4 days to settle transactions • Antiquated messaging (SWIFT) causes problems • Estimated costs of $1.6 trillion • Increasing burden of post-settlement back office work • 1-3 days to settle securities transactions Case against Blockchain • <10 banks provide most of global liquidity • Fees total $50 billion only for SMBs – which is revenue for banks • DTCC can upgrade to a more efficient relational database • $550M investment for T+2 • $1.8B for T+1* What’s everyone waiting for? COMPETITION COST EFFICIENCY (and more competition) *2012 DTCC & BCG study
  7. 7. As the solution is not clear, many players are trying out a ton of different technologies and use cases Payments Security Settlements ContractsCurrency Bitcoin Permissioned Blockchain Proprietary Use Cases Technology
  8. 8. 3 Transform Banking •Regulatory Strategy •Partner Consortium Thesis: Early winners will be the ones that lead three sequential pillars and establish a new ecosystem Payments Security Settlements ContractsCurrency Bitcoin Use Cases Technology 1 Establish Platform •Developer Traction •Flexibility 2 Consumer / SMB Products •Global Use Case •Technology Hidden
  9. 9. Promising Startups in Each Pillar Cloud and API infrastructure for hosted blockchain applications Your global investment vehicle: access US ETFs wherever you are in the world through bitcoin The global settlement network: cross- border payments infrastructure for banks of the modern era • >30 clients, many of the leading players in the field • Holistic one-stop SaaS service for all Bitcoin/Blockchain enabled applications • Betterment for the rest of the world • Huge untapped market of retail investors in emerging markets • Bitcoin is less volatile than >50% of currencies • Vetted by leading banks as leading cross-border solution • Leading regulatory strategy • Already in use by cross-border financial institutions $3.5M Seed raised to date Pre-seed Raising ~$1M $38.6M Series A raised to date Redwood City, CA New York San Francisco Platform Consumer Banking
  10. 10. Questions, thoughts? EMRE TEKISALP @etekis | etekisalp17@gsb.columbia.edu