The Age of CryptoFinanceHow CryptoFinance will transform the world

Johann Gevers, Founder and CEOjohann.gevers@monetas.swiss

Economics always wins.

TerrorismFinancial crisesCorrupt governmentsNatural disastersClimate change

Problems

1. Trade barriers

2. Health (contraception, disease,malnutrition)

3. Education (illiteracy)

— Copenhagen Consensus

The World’s Biggest Problems

Removing trade barriers is

over 30 times more effective

than any other intervention.

— Copenhagen Consensus

Free trade is

50 times more effective

than democracy at reducing violent conflict.

— Economic Freedom of the World 2005 Report

Wealth creationis the fundamental driver

of individual and social well-being.

How do we build wealth?

1. Greater security of property2. Lower transaction costs3. Larger economic networks

Þ Greater division of labor and specializationÞ Higher productivityÞ Rising wealth creation and standard of living

1. Secure Property Rights

Development is very complex. But if you do not have an order that tells you who owns what, none of the rest works.

— Hernando de Soto

Two-thirds of the world’s population — four billion people — are locked out of the capitalist system.

2. Efficient Trade

A mere 0.1% reduction in transaction costsquadruples a country’s wealth— the difference between Argentinaand Switzerland.

Low transaction costs are the fundamental driver of economic growth.

0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages

0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages

Fully 2.5 billion of the world’s adults don’t use formal banks or semiformal microfinance institutions to save or borrow money, our research finds. Nearly 2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East. Unserved, however, does not mean unservable.

To read the full report, Half the World is Unbanked, visit sso.mckinsey.com/unbanked.

Counting the world’s unbanked

Alberto Chaia, Tony Goland, and Robert Schiff

Alberto Chaia is a principal in McKinsey’s Mexico City office, Tony Goland is a director in the Washington, DC, office, and Robert Schiff is a consultant in the New York office.

The microfinance movement, for example, has long helped expand credit use among the world’s poor—reaching more than 150 million clients in 2008 alone.1 Similarly, we find that of the approximately 1.2 billion adults in Africa, Asia, and the Middle East who use formal or semiformal credit or

savings products, about 800 million live on less than $5 a day. Large unserved populations represent opportunities for institutions that are able to offer an innovative range of high-quality, affordable financial products and ser- vices. Moreover, with the right financial education and support to make good

choices, lower-income consumers will benefit from credit, savings, insurance, and payments products that help them invest in economic opportunities, better manage their money, reduce risks, and plan for the future.

Sub-Saharan Africa 326 million adults

Middle East 136 million adults

Latin America 250 million adults

East Asia, Southeast Asia876 million adults

South Asia 612 million adults

Central Asia & Eastern Europe 193 million adults

High-income OECD countries60 million adults(Members of Organisation for Economic Co-operation and Development)

Percentage of total adult population who do not use formal or semiformal financial services

80%

67%65%

49%59%

58%8%

Total2,455 million adults

53%

0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages

Sub-Saharan Africa

Middle East

East Asia

South Asia

Adults who use formal or semiformal financial services, millions of adults

332 283

<$5/day >$5/day

396 45

56 25

4526

Yet serving adults who live on less than $5 a day is not only possible at scale—to a large degree, it is already happening.

Source: McKinsey research conducted in partnership with the Financial Access Initiative (a consortium of researchers at New York University, Harvard, Yale, and Innovations for Poverty Action); we relied on financial usage data from Patrick Honohan, “Cross-country variation in household access to financial services,” Journal of Banking & Finance, 2008, Volume 32, Number 11, pp. 2493–500.

The unbanked are not unservable

1 According to the Microcredit Summit Campaign, a leading advocacy group.

0–25% 26–50% 51–75% 76–100%

Percent of total adult population that do not use formal financial services

Estimates used to calculate regional averages

Adjusted for purchasing-power parity

3. Economic Network Size=> Global Financial Inclusion

We need a version 2.0of the financial system.

— Andrew Lo

Two Problem-Solving Paradigms

1. People-based systems2. Technology-based systems

Finance 2.0

Replacing expensive, fallible people-based systemswith cheap, reliable technology-based systems

What if we could develop a

technology

that

§ secures property rights§ reduces trading costs§ integrates people into the global economy?

CryptoFinance

Uses cryptographic (encryption) algorithms to:

§ secure property§ reduce trading costs§ enlarge economic network size

and thereby:

Þ extends division of labor & specializationÞ raises productivity of laborÞ dramatically boosts wealth creation and

quality of life.

CryptoFinance

will catalyze

the greatest explosion of wealth creation the world has ever seen.

The Long Tail of the efficient digital economy

Low Cost> Big Profits

High Cost> Small Profits

PRIC

E (re

venu

e, co

st) p

er u

nit

QUANTITY (volume) sold

ShortHead Long Tail

SP

SP

CP

CP SP = selling priceCP = cost price

Finance 2.0The Democratization of Finance

The financial system is at the epicenter of a fundamental transformation that is radically

changing geopolitics.

Digitization enables tremendous efficiency gainsand universal financial inclusion

resulting in vastly greater wealth creationand the elimination of poverty.

Cheques Credit cards

Debit orders Internet banking

Real-time interbank

settlement

Federated contract systems

Banknotes

1960

Bartering Coins

1975 1980 1996

Consensus blockchains

PhysicalPeer-to-Peerpre-automation

Switching, Clearing & Settlement partial automation

Cheques

ATM cards

Debit cards

1983 1994 2000

RTC

2005

DigitalPeer-to-Peer full automation

1694500 BC 1717

2009 2017

The Evolution of Finance

2013

In the beginning

The CryptoFinance Ecosystemin greater detail

Society — Structure and Process

1. Rules of the Game(framework of freedom)> politics / laww social consensus

2. The Game(production of prosperity)> economics, entrepreneurshipw individual contracts

The CryptoFinance Ecosystem

§ probabilistic consensus systems (e.g. Bitcoin)ü community standards and infrastructure✗ slow, expensive, limited scalability, public> digital assets, property registries, identity systems,

inflation-proof currencies, immutable data, ...

§ deterministic contract systems (e.g. Monetas)ü trading partiesü fast, cheap, unlimited scalability, private> secure, efficient retail transactions, micropayments,

resource allocation, internet of things, ...

Consensus technologies andContract technologies

are complementaryand synergistic

Best of both worlds

Store assets securely in consensus systems> asset layer

Trade assets efficiently in contract systems> transaction layer

The Evolution of Blockchains

1st generation > Bitcoin> solves decentralized consensus

through PoW (proof of work) algorithm

2nd generation > Ethereum> adds smart contracts

3rd generation > Tezos> adds decentralized governance,

efficient PoS (proof of stake) algorithm,and high security technology

Consensus systems(Bitcoin)

Contractsystems(Monetas)

contract vs consensus

Speed 10 min to 18 hrs milliseconds 1 000 xfaster

Cost USD 10/tr 1/1 000th cent/tr 1 000 000 x cheaper

Scalability 7 tr/sec millions tr/sec 1 000 000 x more scalable

Transaction Platforms:Contract Systems superior to Consensus Systems

The Architecture of all Transaction Systems

Notary

Sender Receiver

What differentiates transaction systems is their notary architecture

◀

centralized monopoly(client-server)

federated coopetition

(hybrid)

distributed consensus(peer-to-peer)

ü semi-efficient ü efficient ✗ inefficient✗ fragile ü prosilient ü resilient✗ single provider ü multiple providers ✗ single provider✗ single point of

attack and failureü best of both worlds:

the golden mean✗ not scalable as

transaction platform

Types of Notary Architectures / Social Structures

N N

N

U

U

UU

U

U

U U U U UU

N

N

NN

N

NN

U U U U UU

N = notaryU = user

The world’s global distribution platform:The mobile phone

Cryptographically secure, decentralizedcommunication and trading systems

— delivered globally via the mobile phone —become the enabler of

individual freedom and prosperity.

Radical Transformation of

Financial systemsCommunications systems

Production systemsGovernments and Legal systems

Explosion of Wealth creation

How fast is this coming?

nonlinear second-orderpositive feedback=> double exponential

acceleration

Kurzweil’s Law of Accelerating Returns

Progress at rate of year 2000:

➤ 25 years in 20th century

➤ 20 000 years in 21st century

Facebook went from startup in 2004to $100 billion global giant in 7 years

iPhone launched in 2007and transformed the world in 5 years

Cryptofinance services launching in 2017will completely transform finance by 2022

The financial industry,and central banks,

are facing“Swatch or Nokia?”

The Future of Cash

The Hidden Cost of Physical Cash

Developed countries: 1–2% of GDPDeveloping countries: 5–7% of GDP

— Reserve Bank of India

Billions of people are un(der)banked — no access to formal financial services (savings products, insurance, etc.)

The unbanked lose 15–25% of their savings every yearWhy save if the savings will be lost anyway?

=> The un(der)banked stay poor

The Promise of Digital Cash

Central bank digital currency will lead to an increasein the steady-state level of GDP of almost 3%.

— Bank of England

Physical Cash Digital Cash

Expensive Cheap

Insecure Secure

Local face-to-face only Local and remote transactions

Simple payments only Advanced financial services

Untraceable > crime Traceable > accountability

Digital Cash vs Physical Cash

The Key Innovation in Cryptofinance:

Digital Bearer Instruments

A bearer instrument is a contractthat entitles the holder to ownership

of the property described in the contract.

No ownership or transaction information is recordedin the instrument itself — whoever holds the instrument

is the owner of the property.

e.g. digital cash or digital tokens

The Big Story

The invention of digital bearer instruments enables the creation of true digital wallets

— making traditional accounts unnecessary.

=> Fundamental shiftfrom centralized, provider-centric, account-based systems

to decentralized, user-centric, wallet-based systems

This changes everything.

$20

Wallet-basedsystems

$20

Account-basedsystems

Users transact directly:=> real-time value transfer=> peer-to-peer exchange of value between wallets- without an intermediary- without accounts- without liabilities / counterparty risk> no reconciliation> no clearing> no settlement> less compliance costs

True Digital Wallets > No settlement requiredPayment = Settlement

The digitization of bearer instruments enables value to flow instantly and at negligible cost via the internet

Payment Message

RecordProcess

ReconcileClearSettle

Value Transfer

Instant Transfer via Digital Bearer Instruments

TODAY TOMORROW

Debts <> Accounts Asset tokens <> Wallets

Far lower infrastructure and compliance costs and risks

The Future of Financial Services

Financial services providersoffer advanced financial services

based on digital tokensstored in true digital wallets

The Role of Central Banks

Central banks issue national currencies on anopen cryptofinance platform — digital legal tender

> Financial services operators can leverage their niche, while benefiting from a unified global system

Central Bank Digital Currency

Bank of England sees big benefits:• 3% boost to GDP• New tool for central banks to

manage business cycles • Greater control of interest rates for

consumers • Reduction in systemic risk due to

fractional reserve banking

McKinsey estimates:• $3.7 trillion GDP boost to emerging economies in decade • $110 billion per year reduced leakage in public spending and tax collection• $400 billion per year cost savings for financial services providers

Central banks shifting to digital systems

The majority of the world’s central banks (over 90)are now working on a central bank digital currency.

— World Economic Forum

<$1$1-5

>$5

The Transaction Business

Where is the volume?

In Kenya, 80% of all transactions are less than $5In Switzerland, the average transaction size is $27

In the internet of things, transactions will be fractions of a cent

80/20 rule:most transactions are small

Current electronic systems aretoo expensive for daily transactions

0%

2%

4%

6%

8%

10%

12%

14%

$0.00 $0.01 $0.10 $0.25 $0.50 $1.00 $2.50 $5.00

Transaction Amount

Fee

Monetas

A

B

C, D

Still surprised that people prefer physical cash and resist electronic systems?

Monetas is the first transaction platform that can compete with physical cash:

ü Requires no bank accountü Instant settlement

ü Cheaper than physical cash

And it offers features physical cashcannot match:

ü Securityü Smart contracts

ü Global payments and trade

What is a transaction?

A transaction is a legal agreement> a contract

Transaction systems arecontracting systems.

Today’s transaction systems can only handlenarrow categories of transactions,

leading to a fragmented, inefficient transaction ecosystem.

Beyond simple payments:The universal transaction platform

Monetas has built a universal contracting platform.

It handles all types of transactionson a unified, efficient, open global platform.

A universal platform for global commerce.

Invest-ments

Savings

Credit

Insurance

Payments

Financial Services Pyramid

Standardized Financial Contracts

Major breakthrough

§ 5 fundamental building blocks§ 32 standard contracts cover all use cases

Dramatic simplification, standardization, risk reduction, and efficiency gains across the financial system

ü Being built into the Monetas platform

MonetasA universal platform for global commerce

Open, standards-based:§ All financial instruments, all national and digital currencies§ Interoperable across instruments, platforms, and borders

Globally scalable, high performance:§ Processes entire world’s transactions (millions per second)

in real time on low-cost distributed server infrastructure

Automated compliance:§ Regulatory standards enforced in real time on all transactions

The Opportunity for the Financial Industry

Cryptofinance technologies solve critical problemsand enable financial institutions to refocus on their

core strengths:

§ Trusted financial partner§ Integrated financial services

Leapfrog expensive brick-and-mortar infrastructureand reach billions of new customers.

Crypto Valley

A new generation of visionary entrepreneurs is building

Society 3.0

Join Us.

The Age of CryptoFinanceA new era in human social evolution

The Technology of Trust

The transformationof our world

The world’s most advanced transaction platform

Johann Gevers, Founder and CEOjohann.gevers@monetas.swiss