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THE ADVANCEOF BITCOIN ANDVIRTUAL PAYMENTSBLOCKCHAINTECHNOLOGY0104The year blockchaintechnology andBitcoin take offR3: The bankingsector s support forblockchain technologyFINTECH SERIES BY0205Bitcoin: the goodand bad sidesVIDEOBitcoin andcryptocurrencyinnovation edge03REPORTThe regulationof bitcoin

01The year blockchaintechnology andBitcoin take off?Little is known about the advance in thistechnology, as with Bitcoin –its strongestvirtual currency– which after a fewmonths immersed in scams andirregularities, is now recovering consumerconfidence.FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en

Bitcoin is the most famous andthe strongest of the around700 virtual currenciescirculating on the Internet.Behind the currency lies thetechnology known asblockchain which –as definedby BBVA Research,“is a peerto-peer public accountingsystem maintained by meansof a distributed network ofcomputes which requires nocentral authority or thirdparties acting asintermediaries”.This technology “consists ofthree fundamentalcomponents: a transaction, atransaction register and asystem that verifies and storesthe transaction. The blocks aregenerated using open-codesoftware and registerinformation regarding whenand in what sequence thetransaction takes place. This"block" stores chronologicalinformation on all thetransactions taking place in thechain –the origin of the name"blockchain". In other words,blockchain is a stamped andimmutable hourly database ofeach transaction that isreplicated in servers aroundFINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/enthe world. This technology isthe basis of Bitcoin, acryptographic currency”.

The mysteriousdisappearance of SatoshiNakamotoWhat distinguishes “normal”transactions is that they do notrequire an intermediary orcentralized entity, and thereforethe risk of human error isreduced. People who buyBitcoin on the Internet obtainan alphanumeric code –between 27 and 34 characters–which allows them to makepayments to other people whohave the electronic wallet.Bitcoin allows transactionsbetween users via P2P, theexchange of informationbetween equals, the samesystem used in the exchange ofmusic and film archives. In2008, according to Wikipedia,Satoshi Nakamoto published anarticle describing the BitcoinJanuary 2009 the P2P Bitcoinnetwork came on line with thepublication of the firstcustomer, code, and thecreation of the firstBitcoins.Curiously, SatoshiNakamoto today is on alljournalists' most wanted lists.After writing the article thatlaunched Bitcoin andexchanging mails on the virtualcurrency for two years withcolleagues, in 2011 hedisappeared. No one has everseen his face or heard hisvoice, and it is not even knownFINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/enwhether his name is real orinvented. A mystery aboutwhich much has been written,and which has even found itsway into the world of comics(Bitcoin,the hunt for SatoshiNakamoto, by Alex Preukschat).Satoshi Nakamoto was the firstto “mine” Bitcoins. Back toBBVA Research: “When peoplebuy or sell Bitcoins, a secretcode or token is sent to thesystem.

The "miners" use nodes,computers, or devicesconnected to a network toidentify and validate thetransaction, using copies of allor some of the blockchaininformation. Before the networkaccepts the transaction, theminers have to show a "proof-ofwork" using a cryptographichash function: a specialalgorithm designed to providehigh levels of protection. Theminers receive some kind ofremuneration for theircontribution to computingpower, thus avoiding the needfor a centralized system”.Since its creation in 2009 thevirtual currency has grownrelentlessly. It is estimated thatinvestment in Bitcointechnologies is now worthFINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/enalmost one billion dollars, andall the signs are that this figurewill continue growing. And thisinvestment comes not onlyfrom venture capital companies.Some of the financing rounds in2016 are predicted to exceed100 million dollars, according tothe financial consultantsMagister Advisors.

02Bitcoin: the good andbad sidesThe virtual currency is making a comebackafter a turbulent year. The InternationalMonetary Fund is giving it a vote ofconfidence and the banking sector isfocusing on its development.

You can't mention Blockchainwithout mentioning Bitcoin.The virtual currency is thesymbol of blockchaintechnology which aspires tochange payment systems.Bitcoin has been at the centerof scandals since was launchedin 2009, although proof of thefact that it is becomingstronger can be found in thefirst statement by theInternational Monetary Fundabout virtual currencies. Thestatement, made in January,says that “Virtual currenciesand their technology canprovide quicker and cheaperfinancial services which couldbecome a powerful tool to takefinancial inclusion further in adeveloping world”. Manypeople think that this is thetime when Bitcoin is enteringits mature phase after six-and-a-half years surrounded byirregularities and some fraudcases. Even the founder -whohas disappeared, who isfaceless whose name is even indoubt- of the virtual currencyhas been nominated for the2016 Nobel Prize inEconomics.He was nominated byAmerican economist BhagwanChowdhry who says thefollowing about the virtualcurrency founded by SatoshiNakamoto: "Bitcoin, whichexists purely as a mathematicalobject, offers many advantagesover both physical and papercurrencies. It is secure, relyingon almost unbreakablecryptographic code. Itbypasses governments, centralbanks and financialintermediaries such as Visa,FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/enMastercard, Paypal orcommercial banks eliminatingtime delays and transactionscosts."

Bhagwan Chowdhry alsopoints out that “the consumerswill be big beneficiaries andindeed the poor and marginalsections of the society will reapthe benefits of financial andsocial inclusion”.Bitcoin seems to be entering agolden age after quite a fewdark years. When it wascreated, the banking sectorwas very wary of it, whilerebellious geeks, cyberanarchists and followers of theanti- globalization movementembraced the virtual currency.They saw it as an anti-systemFINTECH SERIES · JANUARY 2016way of competing with thecapitalist model. It was also away of laundering money orcommitting tax evasion.andthis was evident in thefluctuations of the currency:in January 2013 it cost 13dollars, more than 1,000dollars nine months later,before falling again to 300dollars.

Support from BanksThe banking sector is currentlysupporting Blockchaintechnology. BBVA is part ofthe group of internationalbanks that are looking at whatthis technology could bring totheir business, and they haveplaced their trust in anAmerican startup, R3, todevelop applications using thistechnology in the financialsector.This project currently includesaround 30 global banks,including BBVA (whichfeatured among the foundersin September this year), Bankof America, Barclays, GoldmanSachs, HSBC, JP Morgan,Morgan Stanley, SociétéGénérale, BNP Paribas,Canadian Imperial Bank ofCommerce, ING,Commerzbank, UBS, andothers.Also at the beginning of 2015,BBVA invested in the largestwallet of virtualcryptocurrencies in the world,Coinbase, which includes anexchange service that allowsusers to buy and sell and then.FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/enBanks have arrived on thescene late, although they havecome to realize the revolutionthat is coming. This revolutiondoes not only affect payments.According to BBVA Research:“the greatest of a publicaccounting system could gobeyond payment systems.Because most financial assets,like bonds, securities,derivatives and loans arealready electronic, some daythe whole system could bereplaced by a decentralizedstructure. In fact, the mostrecent innovations use tokensto store and market assets likesecurities, bonds, motorvehicles, houses and staplefood commodities".

"The so-called "colored coins"carry additional informationabout the asset, whichgenerates a "smart property" orthe ability to record andconduct transactions withthese assets using "smartcontracts" via complexalgorithms through distributedplatforms without a centralizedlog, increasing their efficiency.In this regard, the currentsystem in which financialinstitutions record individuals'accounts in a centralizeddatabase and banks' reservesare stored in the central bank(for example, the FederalReserve) would be replaced bythe "Internet of money" or the"Internet of finance", a fullydecentralized financial system”.FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en

03/REPORTThe regulationof BitcoinThere is a race to determine therules of the virtual currency. Butis it too soon? the consultancyfirm Deloitte wonders.FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en

Bitcoin has captured theimagination of consumers andbusinesses around the worldas one of the greatestadvances in exchangingshares. Blockchain technologyhas been a major ITbreakthrough that seems tosolve what seemed unsolvable:ensuring that a digitaltransaction occurs only once.However, there is afundamental question thatlooms over Bitcoin, whichcould slow the pace ofinnovation and its adoption,and that is what its regulationwill be, as highlighted BY thisreport by Deloitte.There are three reasons, saysthe consultancy firm, why theauthorities and regulatorsshould consider delaying theregulation of Bitcoin, to givemore time and freedom toblockchain to explore its fullpotential. Deloitte emphasizesthe following points:1. Bitcoin is still very smallcompared to traditionaltransaction systems Bitcoinreceives considerable attentionand scrutiny from politiciansand regulators, far beyondwhat its current size and itsimpact on the market seem tojustify.FINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/en

Currently, the total global valueof Bitcoins is less than US 4billion, which pales incomparison to the nearly US 1.36 trillion in circulation.Similarly, the penetration ofBitcoin in the market as amethod of payment is almostnil. With the power of theInternet, it's true that manyAmericans have heard ofBitcoin, but very few havebitcoins or used them for atransaction. Many of those fewusers are just experimentingwith the new technology, andnot necessarily as a method ofpayment for goods andservices.(US 700 million since 2014),we are far from actual productsthat could generate a realMoreover, while it's true thatventure capital investmentswith bitcoins in startups haveincreased a lot in the last yearFINTECH SERIES · JANUARY 2016 · www.centrodeinnovacionbbva.com/endemand for bitcoins relatedwith services to the generalpublic.

2. Other key innovationshad more time to developbefore being regulated.Looking back history ofinnovation, other technologiesthat have transformed oursociety had more time todevelop before being seriouslyregulated. Some notableexamples are the following:- Phone: invented in 1876,regulated in 1913 (37 yearslater).- Aircrafts: invented in 1903,regulated in 1938 (35 yearslater).- Radio: invented in 1907,regulated in 1927 (20 yearslater).- Cell phones: invented in1965, the first FCC wirelessspectrum bidding processfocused on mobile data in1989 (24 years later).- Internet: invented in 1969, ithas only become an area withintense regulatory focus inrecent years, nearly 46 yearsafter its development.The open code softwareprogram that is Bitcoin wasfirst launched in 2009. It hasonly been six years sinceBitcoin was developed that isvery far from the time inwhich other technologies wereadopted by the general publicin the past.