Cryptocurrency 101: Webinar Replay

Amy: Hello everyone and welcome to the First Citizens Wealth Management webinar Cryptocurrency 101. I'm Amy Thomas, a Delivery Specialist with First Citizens Bank. We're joined today by Penn Nugent, the Manager of Portfolio Strategy Group, to talk about the basics of cryptocurrency.

We'll get started in just a moment because there's a lot of people still getting logged in. While everyone is signing in, I want to walk through a couple of housekeeping items with you. Today's webinar is being recorded, and a replay will be sent to you following the conference. Secondly, you'll have the opportunity to ask questions. If you submitted a question during our registration process, thank you. Should you have a question during today's call, please use the Q&A or chat feature to submit your question on the right-hand side of your screen. We'll be monitoring both throughout the webinar. All questions are confidential and only visible to Penn and myself. We will try to keep the discussion broad. So if you have a specific question about your financial plan or we don't get to answer your question during today's webinar, please reach out to your First Citizens partner.

The purpose of this webinar is to provide you with educational information and to reaffirm that this is a topic that we're watching very closely. First Citizens Bank currently stands neutral on all cryptocurrencies and subsidiaries. The bank does not offer or include cryptocurrency in any investment strategy or model. The bank does not currently offer or endorse the purchase or sale of any cryptocurrency. The information you're about to hear are the opinions of First Citizens Bank and are for educational purposes only. If you have any concerns regarding any of this information, you're about to hear, please reach out to your First Citizens Relationship Manager. Penn, we've been planning this webinar for months, and I'm so glad it's finally here, so I'll kick it over to you to get us started.

Penn: Thank you, Amy, and welcome to Cryptocurrency 101. I am Penn Nugent and I am thrilled to be speaking today about all things crypto. The crypto world is quickly changing. It's an exciting, and for many, it's very new. So today, I plan to provide an overview of many topics within the crypto space, including blockchain, NFTs, DeFi and, of course, cryptocurrencies. So, what better place to start than the beginning of it all?

You may have heard of Satoshi Nakamoto: the anonymous creator of Bitcoin. The name Satoshi Nakamoto is a pseudonym of the inventor of Bitcoin. In 2008, someone, or some group, used the name and mailed a Bitcoin white paper to a cryptographic mailing list. That is why this name is so famous. Today, there are rumors about who or (what group) the name represents, and legend certainly remains, as the identity of the inventor of Bitcoin is still a mystery. So reviewing this email, you see it reveals some of the core concepts, many of which we will cover today, to this proposed new cash system.

First, there is no trusted third party. Second, new coins come from a proof of work process, and that's a process that also powers the network and prevents double spending. And last, the author defines Bitcoin as a peer-to-peer electronic cash system. So there we have it. Cryptocurrency was born. So what is cryptocurrency? Let's start with the definition. A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography, thus the crypto in cryptocurrency, to secure and verify transactions, as well as to control the creation of new units of a particular cryptocurrency. So go ahead and start accepting that there is value in things you can't see or hold.

Consider when you last went to the ATM. How did you know you were able to get money? Well, you knew there was money because you most likely looked at an app on your phone and saw a value in your account. We all realize the bank doesn't actually have your cash in a separate pile with your name on it in a vault. So why do you trust it to be there? Well, you trust it because you know the bank has a ledger, and they keep track of it. And in the early days, the ledger was an actual book with written entries. Today, of course, it is electronic, but since you trust the bank to keep the ledger accurate, the system, which is now electronic, works. And in this example, the bank controls the ledger. It's within the bank, literally. But what if the ledger was not centralized? What if it was not in one place at the bank, but rather decentralized across an entire network across the globe? And the information on that network was verified and open for anyone to see. You wouldn't have to rely or trust on a bank or any other third party because the network I just described, also known as a blockchain, would prove that your balance was accurate and true. It would verify the information and it would be distributed throughout the network. But I get ahead of myself, so let's stick with cryptocurrency, and let's compare this new currency with traditional fiat.

So fiat is a currency that is established as money and often by government regulation. Fiat money does not have intrinsic value. What, you say? Does not? No, it has value only because a government maintains its value or because parties engaging in the exchange agree on its value. So let's check out this slide. If you look at the fiat, it's a physical medium of exchange. And I think we've established now that crypto is a digital medium of exchange. With fiat, you'll have actual bills and coins. We're all very familiar with this, but with crypto, you're going to have a private and a public piece of code or keys. With fiat, government can produce it as needed and in unlimited supply. Whereas, many cryptocurrencies have a set maximum. Fiat is issued by a government where crypto is produced by computers. Fiat is centralized, meaning it is controlled by law and banks. Crypto decentralized, meaning it is not controlled by any government or any entity. And with fiat, the value is determined by the market and regulations, and with crypto, the value is determined by supply and demand. So look at a couple of definitions there. First, I want to talk about the private and public pieces of code or keys. These are private and public, and I want you to think about them as your street address, which is public and your house key, which is private. A street address is something I could easily obtain. It is public record, and we keep our addresses on our mailboxes, for that matter. So we aren't concerned about the information getting into other's hands, but in order for me to get into a specific house, I need a specific house key, a private and very difficult to obtain house key. So if you keep with this analogy and you put it into the crypto space, you use your private key to spend or send your crypto. You would need your private key to both create it, excuse me, and confirm it. You would use your public key to receive crypto (that would be your street address that you would give people). So a quick example: I want to send you crypto, you provide me your public address (which you can think of as your wallet) and then I use my private key (my door key) to send it from my address to your address (my wallet to your wallet). It's that easy.

Now let's dig a little in to the term decentralized. Remember my earlier example where crypto had no central ledger? Without a central ledger, there is no single control point. And a decentralized network, participants do the work and the validation. This is done via the blockchain, a public ledger of all transactions that have ever happened within the network available to everyone. Think of the blockchain like a Google Doc where you have the "track changes" feature enabled and you can see every time someone makes a change, as well as all previous changes. Every transaction is within a file that consists of the senders and the recipient's public keys (those wallet addresses) and the amount of the coins transferred. And, as I mentioned earlier, the transaction needs to be confirmed by the sender with their private key. And last, before the transaction is broadcast throughout the network and becomes part of that ledger, it needs to be confirmed. And so here, we welcome in our miners.

Miners can confirm transactions by solving cryptographic puzzles. Essentially, miners are providing a bookkeeping service for their respective communities, and they contribute their computing power to solving complicated cryptographic puzzles, which is necessary to confirm a transaction and record it in a distributed public ledger (that blockchain we just talked about). They take transactions, they mark them as legitimate, and they spread them across the network. Afterwards, every node, and a node is just a copy of the blockchain that exists on a computer, so nodes are basically replicas of that ledger, over and over again. So every node of the network adds it to its database and once the transaction is confirmed, it becomes permanent and irreversible and a miner receives a payment or a reward. So the miners use computers to validate transactions and receive a payment for doing so. Once validated, the information is added to that permanent blockchain for all to see. So by now, you might be saying," Well, why doesn't everyone mine?" One of the interesting things about mining is that the difficulty of the puzzles correlate to the number of people trying to solve it. So the more popular a certain cryptocurrency becomes and the more people try to mine it, the more difficult the process becomes. A lot of people have made fortunes by mining Bitcoin. Back in the early days, you could make substantial profits from mining using just your computer or even a powerful enough laptop. In fact, about five years ago, my son and I actually mined Ethereum for a weekend. It wasn't overly complicated using technology we had in the home, but these days, Bitcoin mining can only become profitable if you're willing to invest in industrial grade mining hardware. And this, of course, incurs huge electricity bills on top of the price of all the necessary equipment, and it requires technical expertise, labor, and significant capital.

So moving on, let's summarize what the entire blockchain process looks like. And first, let me remind you that there isn't just one blockchain, there are many. Some examples are Ethereum and Cardano and Solano, just to name a few. But this slide depicts how the blockchain works. A person has their digital wallet, and we'll talk more about digital wallets here in a moment, and they request a transaction and someone's going to pay them in this example. So the transaction is broadcast across the entire network. The network confirms and validates it. And then those miners, the ones doing the validation that we just talked about, they get compensated for that work. And then once completed, the information is grouped together with other transactions and added to the chain as the next block. It's permanent and it's unchangeable. The original requester now has the cryptocurrency and is said to be hodling. You may have heard of hodling or the term HODL. So what does that mean? Well, it's all the result of a typo. Back in 2013, a member of a Bitcoin online forum was trying to type holding, but instead typed hodling, and he was trying to say that he was a long-term holder of Bitcoin, but the typo stuck. And now, when you are long an asset or a holder of the asset, you HODL or you are hodling. Alright, so now we've got that covered. Let's move on to coins, currencies, and tokens.

I want to start with altcoins. An altcoin is any digital cryptocurrency similar to Bitcoin. The term is said to stand for an alternative to Bitcoin. Litecoin and Peercoin are examples. Turning to tokens, they are a special kind of virtual currency because they usually reside on their own blockchain and they represent an asset or a utility. For example, you can have a utility token that represents a certain number of customer loyalty points on a blockchain that would be used to manage such details for maybe a retail chain. There also could be a crypto token that gives entitlements to a token holder to view, say, 10 hours of streaming content on a video sharing blockchain. Now, moving over to stablecoins. Stablecoin is a class of cryptocurrency that attempts to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they've attempted to offer the best of both worlds: the instant processing and security and privacy of payments of cryptocurrency, and the volatility-free stable valuations of fiat currencies. Examples include Tether, USD coin and Binance USD. And we wouldn't be able to talk about this if we didn't talk about the meme coins, right? The memes, which are, of course, ideas and concepts that spread from person to person by sharing online. Memes can be images, videos and even words or phrases. But forever, we will all remember the first coin that went parabolic as a meme coin and of course, it was Dogecoin. And in order to understand how technical and specialized the field of cryptocurrency and blockchain have become, let me read you a brief history of Dogecoin. The adorable Doge was first posted on a random blog in 2010, and it was given an inner monologue on Tumblr in 2011. It was used to spam Reddit in 2013 and eventually became the namesake of a crypto project that same year. At the time, it was an elaborate joke. It was a fork of Luckycoin, which is a fork of Litecoin, which itself splintered from Bitcoin. It began to develop a serious community of users, and people use Dogecoin to tip each other for the good content. And, there was this good faith effort to rebrand it as the people's crypto, as opposed to what they viewed as the elitist Bitcoin at the time. Well, fast forward, because joke or no joke, Dogecoin recently had

There are literally thousands of coins and currencies, and in some of these you may recognize here, if you think about them from a market cap point of view, Bitcoin, which of course was the first that started it all, is a little under a trillion dollars in market cap (so a trillion with a "t"). And then Ethereum is second around $500 billion. And you can constantly kind of check the internet for updates on how the different rankings go. But Bitcoin and Ethereum have remained the top two for quite some time. Now, let's turn our attention to some real-world examples to better understand why cryptocurrencies appeal to so many.

I want to start with a basic example. Here is a hypothetical transfer of money from you to your friend, and this is local. Go to your bank. The bank moves it to your friend's bank and often through a central bank, and then your friend sees the money in her account. This usually would involve two or possibly three intermediary parties to complete the transaction. Now, let's take a look at something similar, but let's add international to it. Let's send money, in this example, to your parents and you live in one country. Let's say you live in the United States, but your parents live in Singapore in this example. Your bank sends to a central bank, who sends to another central bank in your parent’s country, and then finally, the Singapore central bank sends it to your parent’s bank and it shows up in their account. Now I think we can all agree. That's a lot of transactions. It's a lot of transfers, and most likely it incurs expense, and it takes a lot of time. Or, with crypto, you would go into your wallet, you would send crypto to anyone who has a wallet, anyone anywhere in the world, and you would do it directly with no government or bank involved. It's a single transaction between the two of you confirmed within minutes. Sounds great, you say? Well, you're going to need a wallet. So the definition of a cryptocurrency wallet is really quite simple and it's pretty predictable, it's a digital wallet which allows its owner to store, receive and send cryptocurrency. Now how can a wallet be digital? Well, in fact, it is software which performs functions of the wallet, making it possible to view the balance and make online transactions. A crypto wallet is a necessity if you want to own or use cryptocurrency because it is the only platform where you can keep it. Unlike fiat money, you cannot take crypto into your hands. Some wallets have been designed to store and use only one crypto coin, while others are suitable for many different coins. The number of cryptocurrencies supported by the wallet means that the platform has access to those specific public addresses for the blockchain. And as we talked about earlier, these addresses are numbers which characterize every account and are used to receive a certain type of crypto. And if you want someone to transfer crypto to your account, you give him or her that public address and those coins are delivered to your account. The wallet has access to your address and shows its balance. Now, this is very similar to a bank app showing you your bank account balance, but the wallet doesn't hold your crypto. It is simply giving you information that is found on the blockchain. Now you'll recall, every wallet owner has that private key, and that allows them to manage and operate it. Some of the more common types of wallets are desktop wallets. There's mobile device wallets, online wallets, hardware wallets. So hardware wallet is one where you take something like a USB device, and it's specifically created for keeping cryptocurrency and making transactions, but only when it's plugged in and has access to an internet connection. So when it is disconnected, the hardware can be transported and stored offline. Alright, so how does one start?

Although this may sound complicated, it really is easy to get started. Coinbase, for example, is well known. It's based in the United States and actually it has become a publicly traded company last April. And so to start, you would download the app or you'd visit the website, you'd provide some information and then you would link your digital wallet to your bank account so that you can then fund your account with fiat currency. And once you have that funding completed, you are now ready to trade into crypto and hold or HODL it in your wallet. As you explore, you're going to realize that there's some companies designed as wallets and others are trading platforms, and some are actually both. Now, depending on which cryptocurrency you want to buy or trade, that often will depend which wallet or trading platform, you'll need to use. KuCoin is an example of an exchange or trading platform and based in Hong Kong. It supports clients for more than 200 countries, but it doesn't trade in fiat so to fund an account, you must move crypto to it. It is designed to allow people to exchange cryptocurrencies efficiently and effectively. The platform allows you to see trade information, you can see real time market bids and asks and more. And in addition, many of the exchanges and trading platforms allow for very complicated trading and hedging strategies. The traditional wallets do not. Now, to be clear, they are usually very low costs to transfer from wallet to wallet, and companies which help facilitate this often do not add any additional costs. However, when you trade, when you buy or sell, there are costs, and they are very similar to what you'd expect when you buy and sell stocks or bonds. KuCoin makes money from matching buyers with sellers and charging trading fees. Coinbase, which we mentioned earlier, brings in billions of dollars in revenue annually, mostly through trading fees, but also they generate revenue through other means, such as subscriptions, expedited cash transfers and premium services, to name a few.

So now I'd like to turn our attention to some of the risks within cryptocurrency. As governments around the world, regulatory agencies, central banks and other financial institutions are working to understand the nature and meaning of digital currencies. Investors assume certain legal risks when they buy and sell cryptocurrencies. And the first of those is thinking about cryptocurrency as property. So one of the most critical legal considerations for any cryptocurrency Investor has to do with the way the central authorities view cryptocurrency holdings. And in the United States, the IRS has defined cryptocurrencies as property rather than currency. So this means that individual investors are beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses, and profits, on their annual tax returns. And it is regardless of where they purchase their digital coins. This aspect of the cryptocurrency space adds layers of confusion and complexity for US taxpayers, but the difficulty does not end there. Indeed, it remains unclear whether digital currency investors who have purchased their holdings on foreign exchanges must face additional reporting come tax time. All of this suggests that digital currency investors should take special precautions to follow the advice of tax professionals when it comes to reporting profits and losses in cryptocurrency. You should seek professional tax advice for all crypto related topics.

The next is its decentralized status. So one of the great draws of many digital and cryptocurrencies is also a potential risk factor for the individual investor because decentralized means that there is no physical presence and it is not backed by a central authority. And so while governments around the world have stepped in to assert their regulatory power in various ways, Bitcoin, and other cryptocurrencies like it, remain unattached to any jurisdiction or institution. The value of cryptocurrencies is dependent entirely upon the value that other owners and investors ascribe. This is true across all currencies, digital, crypto or fiat. But without a central authority backing the value of a cryptocurrency, investors may be left without help should complications with transactions or ownership arise. There is no 800 number to call when your Bitcoin transaction does not go well. Third is business registrations and licensing. So a growing number of businesses are taking advantage of digital and cryptocurrencies as a form of payment. As in other financial areas, businesses may be required to register and obtain licenses for particular jurisdictions and activities. The onus of responsibility falls on business owners and managers to ensure that they are following proper legal procedures for their operations at both the local and state levels. And at the federal level, for example, financial institutions must maintain certain activities related to protections against money laundering and fraud, transmissions of fund and more. Considerations like these also apply to businesses dealing with digital and cryptocurrencies. And speaking of fraud and money laundering, while there is widespread belief that cryptocurrencies provide criminal organizations with a new means of committing fraud, money laundering and a host of other financial crimes, this does not directly impact most cryptocurrency investors because we don't intend on using this new technology to commit such crimes. But, investors who find themselves in the unfortunate position of being a victim of financial crime, do not likely have the same legal options as traditional victims of fraud.

And finally, and perhaps most importantly, it isn't easy, but cryptocurrency, blockchain, wallets: it can be very complicated. And for those of you who own it, you must assure that family can gain access to your account should something happen to you. It isn't easy to explain. They need to know which wallets or exchanges you have accounts with, how to gain access (so think passwords), how the dual authentication system works. Most use an authenticator app. Many wallets have an additional trading password, and there are other considerations. Then what would they do with it? How would they trade it? Would they trade it back into fiat? So these are things you must think about, and if you have it and you own it, please make sure that someone else can gain access to it and most importantly, let them know it exists. Alright, that was a lot. Let's move on to a few more topics and some more recently occurring and being talked about within the space. And let's start with NFTs.

So a non-fungible token, or NFT, is a unit of data stored on a digital ledger. We now know this as a blockchain, and it certifies that a digital asset is unique and therefore it is not interchangeable. NFTs can be used to represent items such as photos, videos, audios, and other types of digital files. Access to any copy of the original file, however, is not restricted to the buyer of the NFT. So while copies of these digital items are available for anyone to obtain, NFTs are tracked on blockchains and provide the owner with a proof of their ownership that is separate from copyright. And here, of course, is the picture of my favorite NFT. And mostly, it's because I own it. And who doesn't love my labradoodle, Bailey, chilling in her lounge chair? So, yes, I did this one weekend because I wanted to create and own an NFT, and it was relatively easy. But let me tell you, we are not just talking about pet pictures here. Oh no, this is exploding. And this is one of the reasons Ethereum has been in the news so much recently. Ethereum is the blockchain most used for NFTs, currently. And if you don't think this is happening, just listen to this. Last year, an NFT sold for $69 million. Major art houses are auctioning NFTs now. College athletes under the new NIL rules are creating NFTs: the NBA, their Top Shot website, that is the NBA's NFT collection home. The sports NFTs are hot right now. Draftkings has an NFT marketplace, and all major sports now have, or all develop or are developing currently, NFTs and corresponding marketplaces.

I want you to think of it as the baseball card of today, and there's more. Nike is working on using NFTs to demonstrate ownership of a pair of Nike shoes and to be able to show that they are authentic, and not counterfeit, you would be able to produce the NFT. So in the future, when you buy a pair of shoes or say, a name brand purse, you're going to also get an NFT, an electronic copy, a proof that you own the actual item and that it is authentic. And then, in the future, if you ever want to sell it, you'd sell the new buyer, not only the shoes or the purse, but you would also have the NFTs sold to them, and it would all be documented via a blockchain transaction. The possibilities are just beginning. Imagine the fun having a one-of-a-kind item that you don't have to lock in your safe or keep in a private room, but instead, you can show it on anything digital. No one can steal it or damage it, and everyone knows it is rightfully yours. You could put it on social media pages. You can put it on a company website, and it's obviously easy to move. And when you stop and think about it, we've actually been doing this for years, especially if you're a gamer. You play video games, buying and selling virtual items such as land or clothing, homes, animals. It's been going on for many, many years. So NFTs are a natural outcome of the blockchain and one of the benefits an open ledger can bring. So let's move from NFTs to smart contracts. And let me start with a description.

A smart contract is a self-executing contract with the terms of the agreement between a buyer and a seller being directly written into lines of code and the code and the agreements contain or, across a distributed, decentralized blockchain network. So the code controls the execution and transactions are trackable and irreversible. Smart contracts permit trusted transactions and agreements to be carried out among different, anonymous parties, without the need of a central authority, a legal system or external enforcement mechanisms. Now that's a lot. But let me give you a real example. You're buying or selling a home. Traditionally, contracts would require a third party to verify the transactions and the process. It slows down the time it takes to accomplish it. And it also has multiple fee levels. But a smart contract, as diagrammed here, would be a computerized program on the blockchain with no third party required. Clearing and settlement is automated. All aspects of the process are open and available for review by interested parties and regulators. Imagine, no more waiting for a human to click a button to make a process like this continue. So today, many documents are already available for public view from, for example, your county courthouse. It's really only a matter of time until these documents are, not only on the blockchain, but maintained on the blockchain. Alright, let that sink in for a second, and we're going to move on to DeFi. So DeFi is a movement that uses open source and distributed networks to transform traditional financial products into a reliable and transparent protocol without intermediaries. So said another way, decentralized finance is a blockchain-based form of finance that does not rely on central financial intermediaries, such as brokerages, exchanges, or banks to offer those traditional financial instruments that we're used to getting and instead, they use smart contracts on the blockchain. So you've got to think of it like peer-to-peer financial services. Now today, DeFi platforms already allow people to lend or borrow funds from others to speculate on price movements on a range of assets using derivatives. You can trade cryptocurrencies, you can insure against risk, and you can earn interest in savings-like accounts. That's all happening now. In October 2020, there was over $11 billion deposited in various decentralized financial protocols. That represented a tenfold growth during the course of 2020. As of January 2021, there was $20.5 billion invested in DeFi. And today, a year later, that number is over $40 billion. So it is a quickly growing part of this space. There is so much happening at such an amazing speed. Let me update you on what we're doing here at First Citizens and I want to start with two quotes from our Chief Investment Officer, Brett Ciliano. And the first on the broad topic of crypto. He says, "We are proactively researching and studying cryptocurrencies, digital currencies, and other digital related mediums, and we are working with various partners and organizations to bring you updated information as research increases, the regulatory landscape develops, and markets mature and broaden." And let me remind you that while cryptocurrencies are managed by a computer algorithm, digital currencies, which he mentions, they are backed by an authority, and many governments have discussed creating digital forms of their currencies. For example, digital US dollar. And he mentions digital mediums, and an example for that would be like the NFTs we just spoke about. So now I want to share with you Brent's thoughts specific to our investment process. As we learn more from this research and valuation methodologies, risk modeling becomes more defined, we will be better positioned to evaluate if, and how, these assets may play a role in our future models to assure proper allocation in our clients diversified portfolios. At First Citizens, we are working to understand several actions related to crypto, including custody requirements, trading, and transfer protocols, as well as reporting requirements and tax ramifications. We are already beginning to assist with the impact cryptoassets and NFTs are having within estate plans, how to gift crypto to both charity and family, how to properly plan the wealth transfer of crypto assets and much, much more. We have written general papers on taxation of cryptocurrency and the future of the blockchain and NFTs, and both are available from your First Citizens Relationship Manager.

And we are just getting started. As we come to the end of my prepared remarks, I'd like to summarize a few points with you before we answer some questions. I want to talk about the value proposition for crypto, and I believe it to be straightforward: digital payments are here to stay. A decentralized approach provides what many to believe a value. Crypto provides broader access to many, not currently within what we think of as the traditional banking system because they either don't have access, because they don't have the technology or infrastructure for access, or they live in a country where their governments don't allow them access. Some view crypto as an alternative store of value, and for that, they believe there's a strong value proposition. And finally, it is believed that it is impossible to counterfeit, and so many see that as a strong value proposition of crypto. Currently, central banks and governments around the world are studying cryptocurrencies, blockchain technologies, and they're issuing their own digital currencies. Global banks are involved in the creation, investing, trading, and building investment vehicles with crypto. Some trading desks are using blockchain technologies within their processes today. This is a relatively new space. It is evolving rapidly, and as I mentioned, regulations are going to impact the future. Some countries tax mining revenue, so that Bitcoin mining we were talking about, while others have actually made it illegal. Some are concerned about the inefficient power usage, while others are concerned about the lack of control that they have over it. El Salvador recently made Bitcoin legal currency. The story on cryptocurrencies is still in its early chapters. But regardless of what you think about crypto, blockchains are going to be a part of our future. Just think about the impact of smart contracts that we talked about and the NFT explosion that's occurring and record keeping. We looked at the example of the buying, the home, the faster trade settlements and the faster settlements of documents. There are literally thousands of applications within both the government and private sectors for blockchain technology. And one last point to please take away not all cryptocurrencies are made equal. Some coins have a supply limit like Bitcoin, for example. We know there will only be 21 million Bitcoin ever. Some don't have a supply limit, however, like Dogecoin. we talked about Dogecoin. Some are actively maintained by programmers and some are not. Some are means that have legitimately nothing, no real use at all. There literally means while others are designed to actually help a process or a group of people. And there are literally thousands of options. So I hope this has been helpful as we've explored a number of topics within the crypto world. At First Citizens, we remain committed to education and as we continue to study, learn and evaluate the opportunities this emerging asset class offers, we are going to continue to provide you updates. And now, let's take some questions.

Amy: And thank you so, so very much for that information. You know, I've had several conversations over the last few months about cryptocurrency, and I always come away from them with a little bit better understanding of what's happening. But as you know, with understanding comes questions, and we have received a lot of questions. So many of them were covered during our main content today. Just a reminder, this is being recorded and we're going to send out a replay. If you need to hear anything again or missed anything, you'll have that opportunity. If you have question, please submit it using the chat feature or the Q&A feature. Also, I want to mention that we received a number of questions regarding the taxation of cryptocurrency, and as Penn mentioned, that's something that you'll need to speak with your tax professional about. That's not our lane, so to speak. However, we do have some general information available on the subject of crypto taxation that our Wealth Planning Director Nerre Shuriah put together. That's available on firstcitizens.com/wealth right now, and we'll also be sending a link out to you to that since there was so much interest on it. So Penn, going to our first question for you, can you talk a little bit about federal governments and their move towards developing digital currencies, specifically in the United States?

Penn: Sure, we mentioned that a little bit there at the end. The Federal Reserve, they've said that they are actively considering a CBDC, which is a Central Bank Digital Currency. Some recent reports suggest that they are building prototypes as we sit here today. So it is certainly possible that we would see a, what I would think of as, a prototype digital dollar by the end of this calendar year. So by the end of 22, it is absolutely going to happen. It is just a matter of how soon.

Amy: So, Penn, we talked a lot about the transferring from one person to another using digital wallets. Do you ever see, this person is asking, do you ever see a world where sending payments through cryptocurrency would be as easy as sending money from one account to another through traditional online banking, such as Venmo or Zelle® or anything like that?

Penn: Sure I mean, actually, I think the reality is it's here today, if the question is, is it as easy as sending it account to account, you know, transfer within your online bank or whatnot? It is. If you're comfortable doing it in crypto, then you simply go to your wallet and you send it. As I showed in the example to anyone literally in the world who has a wallet via blockchain transaction. And it will happen in almost all cases much faster, usually in less than 10 minutes, with no third-party intermediary. So I think the world is here. The biggest choice or issue really for most would be, you've got to do it in a cryptocurrency versus being able to do it like within your bank and do it with the US dollars, for example. But the speed is here, the ease is here. It's really just a matter of more and more adoption.

Amy: And Penn, in that same vein, we've got a couple of folks asking, I think there might be some confusion between what Venmo, and apps like that, what the difference is with those digital wallets versus a crypto wallet. Could you talk about that for a second

Penn: Sure I mean, the simple thing when you use Venmo, Venmo basically is going into your bank account and moving money on its behalf. You may think you have a Venmo account and it will hold some money for you. But the reality is it's part of the traditional system and there is a third party there. You know, Venmo has a financial backing in terms of the company itself. It's like a financial company, whereas a crypto wallet has nothing once you funded it. So the connection to your bank is simply for the funding. Once you've done that, then the bank is completely out of the system and you're dealing with assets held within the crypto space. So digital and crypto only. It is easy to see how they all work. Very similarly, they do. But in most cases you cannot compare sending Venmo to your friend that is in, you know, name of place China, Singapore or wherever, versus doing it with your wallet with a blockchain key. It would be much easier doing it via the blockchain, and you would have no third party intermediary or additional costs. So definitely encourage those people that are asking that question to go online and study some of this. And in fact, all of this. I mean, certainly, you know, you need to take some time and learn about it, but there are significant differences to the way those different applications work.

Amy: Thank you, Penn. And you and I know that there are things, there are many tools, we can use out on the world to see to measure the value of stocks and bonds on the open market. However, how are the valuations for measuring crypto being used?

Penn: Well, valuations for crypto is very difficult, and it's unfortunate, but we're still so early in this, there really isn't a clear answer, as I believe one of Brent's quotes mentioned, we really have to continue to do research, get better defined methodologies, and he talked about risk modeling, right? We have to be able to understand the risks so that we can then say with some certainty how you would value an asset and how that value would be created. So you know, the unfortunate answer to that question is there's more to come, but it's just not clear at this time. Definitely what a lot of us are working on, though.

Amy: Exactly so whenever you turn on the television right now, the first topic is bitcoin, and then the second topic is inflation. So a lot of people are talking about how Bitcoin and other cryptocurrencies might be used as a potential inflation hedge or protection against inflation. Could you talk a little bit about that?

Penn: Sure, so the big argument for Bitcoin as an inflation hedge is that it, I think I mentioned it, there are 21 million bitcoins that will ever be produced. There will never be any more. As of today, there's a little over 19 million that are in circulation, if you will, in existence that have been mined. The final coin will be mined. I believe it's around 2140, so literally more than 100 years from now. If you're looking for an interesting read, just, you know, Google how the algorithm works to allow mining of Bitcoin and you'll see that halves over time, and it is literally predetermined, so algorithms control that process. It will not go higher than 21 million coins. And so as a result, since you can't get any new coins to enter the system, the Bitcoin will not have inflation. And that's the main argument because the government. So if you compare a Bitcoin to a US dollar, the governments, they can increase the money supply by printing more dollars. And in the US, for example, that's the argument, right? So the US can print more dollars and create more, whereas Bitcoin, the supply is fixed. And so that's the main argument to why it's an inflation hedge.

Amy: Thanks, Penn. So we talked a lot about the blockchain and how that infrastructure is used in the cryptocurrency world. Can you talk a little bit? And we touched on this a little bit, but I think it's fascinating. So let's talk a little bit about some current uses for the blockchain and where you think that may be going

Penn: Sure, well, in the presentation, we talked about NFTs, obviously, we talked about some asset trading and tracking that's going on now and some transaction documentation, right? Think about the smart contract example. In addition, you've got some examples would be like the food industry is using blockchain and they are literally tracking food from its origin to its final consumption point. And they're using blockchain technology to do that. Insurance companies, there are examples where they are using the blockchain to automate claims against policy owner claims. And as a result of that, they're getting efficiencies, but they're also reducing paperwork. There are applications in health care. Think about patient records and how they go from doctor to doctor hospital to hospital, city to city. So big hospital chains are using blockchain, their sectors like energy sector, cybersecurity, supply chain management. The airlines are doing it for both routing and as well as passenger identities and, you know, listings for who's on what plane. And there's really just so much more. There's just a couple of examples that I've read about, but the blockchain really will find its way into all sectors at some level, is my belief. I just think it's an amazing technology that there's just a lot of research being put into it. There's a lot of money being put into it. A lot of capital and it's going to be definitely part of our future.

Amy: Thank you, Penn. We are getting really close to time, actually, we were booked 45 minutes for this call, so I want to go ahead and get us wrapped up here. I want to thank everyone for being with us today. As we said, this is a growing field, and we'll continue to provide updates as we learn more. We're also going to provide the replay of this webinar as soon as it's available. I also want to invite you to join our monthly web series Making Sense, where our Chief Investment Officer, Brent Ciliano, and Manager of Institutional Portfolio Strategy, Phillip Neuhart, provide updates to help you make sense of what's going on in the markets and the economy. The first webinar for 2022 is scheduled for January 27th at noon ET and we'll send out that registration information soon. From all of us here at First Citizens, I want to thank you for trusting us to bring you this information. That's not something we ever take for granted, so we hope you have a wonderful week, and we hope to see you on our next webinar. Thanks, everyone.