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. Distributed Ledger Technology
in the Financial System
EMRE TEKISALP, COLUMBIA BUSINESS SCHOOL
INVESTMENT THESIS, APRIL 2016
@etekis | etekisalp17@gsb.columbia.edu
2.
3. 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
4. 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
6. 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
7. 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
8. 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
9. 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
10. 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