From Cash to Blockchain and Bitcoin: Payments of the Past, Present and Future

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1 From Cash to Blockchain and Bitcoin: Payments of the Past, Present and Future Barbara Raths, CTP Senior Relationship Manager, Government Banking, SVP 09/19/

2 Agenda 1. Our Panelists 2. Definitions: Payments of the Past and Present 3. Panel Discussion Payments of the Past Cash Checks 4. Panel Discussion Payments of the Present ACH Wire Merchant Cards (Credit, Debit, P-Cards, Virtual) 5. Definitions: Payments of the Future 6. Panel Discussion Payments of the Future Blockchain, Cryptocurrencies and Distributed Ledger Technology

3 Our Panelists Minot Powers, CFO, Commonwealth of MA Treasury. Kerri Baker, Cash Manager, State of RI Treasury. Kenneth Flatto, Finance Director, City of Bridgeport, CT. Brendan T. O Connell, Finance Director, City of Portland, ME. Wendy L. Wilton, City Treasurer and Tax Collector, Town of Rutland, VT. Karen M. Fussell, Finance Director, City of Brewer, ME.

4 Definitions: Payments of the Past and Present A payment system is a series of processes and techniques that transfer monetary value from one party to another. What makes a payment system a system is that it uses cash substitutes, such as checks or electronic messages, to instruct the debits and credits that transfer value from one party to another. Source: Association of Financial Professionals, Treasury Learning System, 4 th Edition, 2013.

5 Payments Cash Payments Non-Cash Payments Cash payments are not, per se, a payment system, since the value transfer happens as part of the transfer of the coin or currency (no clearing or settlement). For noncash payment, the value that is being transferred is typically stored in depository accounts at a financial institution. Financial Institutions are connected into the various types of payment systems, and process payments on behalf of their customers or depositors. Source: Association of Financial Professionals, Treasury Learning System, 4 th Edition, 2013.

6 The Payment Process Payment Instructions - information contained in an electronic transfer (wire or ACH) or a check. Instructions are from the payor and tell the paying bank to transfer value to the beneficiary through the receiving bank. Payment generation - instructions entered into the payment system itself. Clearing - process where financial institutions use the payment information to transfer money between themselves on behalf of the payor and the beneficiary, either directly or through some external network. Settlement - final step in the process and occurs when the beneficiary s bank account is credited and the payor s bank account is charged. Source: Association of Financial Professionals, Treasury Learning System, 4 th Edition, 2013.

7 Panel Discussion Payments of the Past

8 Panel Discussion Payments of the Past

9 Panel Discussion Payments of the Present

10 Panel Discussion Payments of the Present

11 Definitions: Payments of the Future Digital Currency: A type of currency that is non-physical, of which no banknotes and coins exist, and which can only be transmitted by electronic means. The challenge of digital currency is the double-spend. The value needs to be instantly transferred, so the payor can t spend a dollar that they already sent to someone else. Non-Cash Payments go through a payment process with a financial institution to verify the exchange of value and clear and settle the transaction.

12 What is Blockchain? Blockchain is a platform that uses an existing distributed peer-to-peer network and cryptography to create a consensus mechanism that solves the double-spend problem. The network time-stamps the first transaction and rejects subsequent spends, thus eliminating a double spend. Blockchain is an unbroken link of transactions from the very first time an asset is sold. Each block that makes up the chain must reference the previous block to be valid. The protocols also include a method for reclaiming disk space so that all nodes can efficiently store the full Blockchain. The Blockchain can be public. Anyone may see transactions taking place.

13 Cryptocurrencies (i.e. Bitcoin) Blockchain is the platform that makes cryptocurrencies possible. The first time Bitcoin swaps hands, the blockchain links each successive transaction to the one that came before it and the one that comes after it. Payments are peer-to-peer. Bitcoin does not need a third party to verify exchanges. It is a payment mechanism combined with a store of value. It behaves like electronic cash. There were more than 900 cryptocurrencies available over the internet as of July 2017 and growing. New cryptocurrency can be created any time. By market capitalization, Bitcoin is currently the largest blockchain network, followed by Ethereum, Bitcoin Cash, Ripple and Litecoin.

14 Blockchain Revolution Anything of value money, music, votes, stocks can be stored, transacted, settled, recorded and managed in a secure and private way using blockchain. Don Tapscott & Alex Tapscott, Blockchain Revolution. Penguin Publishing Group, 2016.

15 Can Financial Institutions use Blockchain to become more efficient? Distributed Ledger Technology (DLT) employs a very similar type of technology as blockchain, but is designed explicitly for global financial institutions. It would provide each FI with a real-time history of every financial transaction within the ledger. An important modification is the ability to control who can update the ledger. Banks will turn Bitcoin from punk-rock to smooth jazz. Bitcoin Entrepreneur, Andreas Antonopolous,

16 Could Governments use Blockchain to become more efficient? 2017 State of Illinois Legislative Task Force to study how and if State, county, and municipal governments can benefit from a transition to a Blockchain based system for record keeping and service delivery. The Task Force is charged with reporting out to the Legislature in January Blockchain technology is a promising way to facilitate a transition to more efficient government service delivery models and economies of scale, including facilitating safe, paperless transactions, and permanent record keeping immune to cyber-attacks, and data destruction due to its distributed databases and ledgers. IL State Legislature, Resolution 25.

17 Panel Discussion Payments of the Future

18 Barbara Raths, CTP Senior Relationship Manager, SVP Government Banking People s United Bank barbara.raths@peoples.com