(part c)

BLOCK CHAIN IN FINANCE

Blockchain is essentially a ledger of recorded financial transactions. This ledger is
distributed, published, and stored in multiple locations. When a transaction occurs, it is
added to each copy of the ledger. This helps ensure an accurate record of transactions.

amalgamation of records of ownership and transfer of value. A ledger is crucial to

understanding the state of the market at any moment in time

Distributed across a public or private network: An effective financing market needs to have
high resiliency and availability; a distributed database can help to maximize market uptime
and mitigate the potential instability of network participants

Using cryptography and hashing techniques to determine valid parties and transactions:
Blockchain’s cryptographic underpinnings can help ensure the security and validity of asset
ownership

Such that everyone agrees on the order or state of the ledger, without having to rely on a
trusted third party: A network of financial market participants could rely on the network to
maintain the state of the database, without relying on a centralized authority. Alternatively,
a permissioned blockchain could allow a set of trusted market participants (e.g., banks and
market makers) to validate transactions and maintain the state of the network

With a practically immutable, verifiably true audit trail: A complete log of all transactions
across the entire financial market would be maintained in an unalterable state, enhancing
audit capabilities and streamlining the clearing process

An investor buys a bond that has behaviour defined in a prospectus (that includes a given
maturity date, coupon, payment schedule, etc.). The investor and issuer enter into a
contractual arrangement enforced by various legal and regulatory underpinnings that
ensure the investor receives interest and principal in all but (hopefully) extreme default
scenarios. In a blockchain or distributed ledger implementation, this contractual
arrangement could be defined and enforced by the network itself. That is, a “blockchain
bond” could make periodic interest payments and ultimately mature programmatically. This
notion of a blockchain “smart contract” provides the capabilities to digitally facilitate, verify,
and enforce the execution of a contract. Enforcement of contractual agreements is a lengthy
and costly process in both developed and underdeveloped markets (Figure 6), and smart
contracts could significantly reduce transaction costs, time to enforce, and counterparty
risk.
 Blockchain — 7 Benefits for the Financial
Industry
1. Instant Settlements
Transactions can be settled in less than a few seconds, while the current financial systems
can take up to a week to settle payments. Using blockchain technology, settlements can be
increasingly optimized reducing the amount of time and money needed.

2. Reduced Counterparty Risks

When transactions are settled near instantly, it will remove a significant part of the risk that
the counterparty cannot meet its obligations, which could be a substantial expense for
banks.

3. Improved Contractual Performance

The use of smart contracts can shorten the time needed to finish a financial process or
transaction as a smart contract allows a bank to automate a process flow including
transactions.
Especially complex financial asset transactions can benefit from blockchain, due to
automatic settlement using smart contracts under the control of an incorruptible set of
business rules.
The only difficulty here is that a bank has to comply with any regulatory compliances, across
jurisdictions if needed.

4. Increased Transparency
Transparency greatly increases by using smart contracts and blockchain technology. The
entire monetary flow is recorded on-chain and can be audited by any party.
This transparency is a benefit but it can also be a threat. Financial transparency is needed,
however, not every user wants to see his full private profile being disclosed on-chain.
Therefore, several privacy-minded solutions have been developed.

 Zero-Knowledge Proof technology: Allows someone to verify your data without

actually disclosing it.
 Enigma Secret Contracts: Encrypt data inside smart contract using Enigma protocol
and network.
  Confidential Transactions: A scheme invented by Gregory Maxwell for hiding the
transaction amounts using math called homomorphic encryption along with range
proofs to completely obscure transaction amounts.
 Privacy focussed coins like Dash, Monero, ZCash, …

5.Money Transfers
Sending money to another country is an area ready for change, and banks are already using
blockchain for remittances. Consumers and businesses send hundreds of billions of euros
internationally every year, and the process has traditionally been slow, full of bureaucracy,
and expensive.
Bitcoin provided an “alternative” way to move money, however, mainstream banks don’t
like the idea of using a volatile cryptocurrency without any regulations. However, several
major banks have partnered with Ripple or Stellar to facilitate cross-border payments using
blockchain technology.

6.Reduced Fraud Via Self Sovereign Identity

Blockchain technology resists hacking, DDOS attacks, and other forms of fraud. It can also
help banks and others identify individuals quickly and accurately through a blockchain-
enabled digital ID.
With less fraud, business operations improve and the costs decrease. Also, users have more
control over their identity and the data they want to share.

Enforcing contract law programmatically may have significant benefits globally

Time to
4 enforce
Europe & Central 9 (days)
0
56
East Asia & pacific 6

57
OECD high income 8

63
9
Middle East & North
65
Africa 7

Sub-Saharan Africa
7
6
7
Latin America & Caribbean
1,
10
South Asia 2
 Source: The World Bank

Note: The enforcing contracts indicator measures the time and cost for resolving a commercial
dispute through a local first-instance court, and the quality of judicial processes index, evaluating
whether each economy has adopted a series of good practices that promote quality and efficiency in
the court system. The most recent round of data collection was completed in June 2017

Work is already underway to improve existing capital markets by extending them onto blockchain
implementations. These changes are likely to be transparent to existing capital users and providers
since they will rely on developing solutions in the context of existing forms of capital. This is not to
say you’ll be day trading on the blockchain anytime soon. Blockchain technology today still suffers
from significant limitations around scalability and transaction processing speed. However, financing
markets that ultimately depend less on centralized market authorities and more on a distributed
framework of ownership have, at the very least, the potential to increase efficiency, improve market
transparency, and lower costs

In April 2018, National Bank of Canada, with the support of J.P. Morgan, issued a

$150 million, one-year floating-rate Yankee certificate of deposit, with a parallel simulation of the
issuance using blockchain technology. The blockchain debt issuance application was designed to
incorporate functions across the entire debt instrument transaction lifecycle, including origination,
distribution, execution, settlement, interest rate payments, and maturity repayments. This
transaction demonstrates the technology’s capabilities and capital markets implications.

Financing short-term hurdles vs. potential long-term benefits

Perceived short-term hurdles Potential long-term benefits

 Getting regulators on board: IRS/SEC to  Ongoing and easy access to capital

approve issuance and trading
 Incremental capital structure
complexity: New definitions for fit
in the capital structure and impact
on existing securities would need
to be evaluated by
accountants/lawyers; CFOs and
treasurers might be reluctant to add
capital structure complexity
markets: Enhanced liquidity and
ability to raise capital in a
streamlined process via
crowdfunding
 Greater liquidity: Ability to
monetize existing assets via
tokenization
 Lower cost of capital:
Reduced transactions costs

Initial Coin Offering

ICO is an acronym that means Initial Coin Offering, which is how funds are raised for a new
cryptocurrency offering. It's similar to an IPO (Initial Public Offering) which raises funds
when a new company ventures onto the stock market.
TOP BLOCKCHAIN COMPANIES
 SALT Lending
 Mythical Games
 Gemini
 Circle
 Coinbase
 Chronicled
 IBM
 Voatz
 Steem
 Shipchain

 The fundraising aspect of a crowdfunding or crowd sale (be it fiat money or crypto,

but generally mostly the latter), including the fact that some sort of soft/hard cap has

to be reached in order to be valid

 The product maturity of an early-stage VC investment or even business angel round

 The fact that in return for the funds, some sort of a “token” is received, the latter

becoming “tradable” just as in the case of an IPO or Initial Public Offering

 The token sale runs on blockchain infrastructure and the tokens become available on

a blockchain platform
10 Advantages of participating in an ICO as an investor
 Early contributors can have access to and will have more liquidity in early stage
companies. Being early also increases the potential for rapid capital growth;
 Depending on the ICO, there can be a big network behind it (e.g. if the token launch
takes place on the Ethereum network), generating additional buzz and potential
capital appreciation;
 Custody without intermediaries. The one with the private key owns the tokens;
 Limited regulatory scrutiny (so far);
 ICO coins have the same anonymity as cryptocurrencies such as BTC and ETH;
 Transparency of use of funds, an escrow can be used to verify how the funds are
being spent after the ICO;
  An innovative way to deploy capital that offers a hedge against political and
economic shocks;
 Contributors are usually the first users of the (utility) token — thus unlike holding a
stock of a company whose products a contributor never used, ironically tokens can
be more tangible than securities;
 A high risk, high reward asset which is (to some extent) disconnected from the stock
market and the economy;
 Possibility to own an alternative asset not based on FIAT (state regulated) currency.

10 Disadvantages of participating in an ICO as an investor

 ICOs are not regulated and have no investor verification or protection;
 IPOs are typically supported by institutional investors, whereas ICOs are mostly
supported by investors from within the community;
 As there are limited requirements to fulfil when initiating an ICO, it is very hard for
an investor to elicit the correct and relevant information to make a sound
investment decision (e.g. in 2017, many considered watching a couple of YouTube
videos as doing sound due diligence);
 Products and projects are typically very immature, strongly increasing the inherent
risk of making an investment whatsoever. In some cases one is merely investing in an
idea without tangible planning for implementation;
 Aggravating the previous point, the company holding the ICO will receive the bulk of
the investments at the very start and as there is little to no liability, there is
essentially no pressure to actually deliver a product. Many projects either exit scam
right after the ICO or slowly wither in development activity as the team enjoys their
newfound riches;
 The exchanges where the tokens are eventually listed have relatively limited
guidelines and policies to prevent fraudulent activities;
 Even if the token sale is fully legitimate and there is a strong project behind it, crypto
exchanges and crypto wallets are hacked and stolen from on a daily basis. So the
moment you log in to smile at your incredible investment returns, it might be all
gone;
 If your money gets lost in some way, there is practically no way of retrieving it. Be it
you losing your private keys yourself or hackers stealing your tokens, there isn’t
much you can do once you lose token ownership;
 Lack in transparency. There is absolutely no enforceable obligation for a project to
actually disclose the progress made, potentially leaving investors behind in a haze;
 Your investment might be prone to artificial pump-and-dump schemes, where the
value of your coins can become even more volatile than in the case of an established
high-market-cap crypto such as BTC.
Initial Coin Offerings (ICOs) are increasingly being adopted as a mechanism for raising
capital but regulatory uncertainty remains a hurdle for wider adoption

VC funding (information technology) vs. ICOs over time ($mm)

VC funding (information technology) ICOs

$5. $5.8
$5. $5.
$5. 8 $5.2 2017 summary ($bn)
4 $4. $4. 4 $4.
0 $4. 7 $
6 6
0 2
0
.
$1.
$1. 6
$0. 7
2 $
$0. $0. $0.0$0.0$0.1 9 3.
0 2 9

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 20

17
Source: PitchBook, Coinschedule.com; Note: VC funding includes Seed, Series A and Series B funding
stages Note: Market data as 03/31/2018

Many of the ICOs described above have been issued without any future promise of return of
principal or rights to interest (so they are clearly not debt) but they also have avoided
offering voting rights or rights to cash flow typical of equity. This suggests that blockchain
technology has facilitated the creation of a new asset class, and potentially a new form of
capital. But it also raises the question of where investors see value in these structures. One
possible answer is in the potential network effect of a successful coin, whereby current
investors seek the opportunity to get in early on a technical solution that becomes a de
facto standard for the emerging digital asset class.
While mostly start-ups have been quick to seek ICO monetization opportunities based on
this network effect potential, incumbents with large existing user bases (Figure 8) may be
even better positioned to be the new standard-bearers. For example, companies could issue
“utility” tokens that users would purchase and use to pay for services; leveraging a
blockchain platform to connect billions of customers could eliminate traditional
intermediaries, reduce transaction costs, and expand the customer base.
ICOs might be interesting for companies with large user-based networks; selected
current networks (in millions)

3,20
Visa (number of cards) Facebook (number of monthly active users) 0

2,20
0
WhatsApp (number of users) Apple (number of active installed base)
1,500

1,300
WeChat (number of users) LinkedIn (number of users)
1,000

Paypal (number of active accounts)

546

Spotify (number of active users) 227

157

125
Netflix (number of members)
110

100
Marriott (number of loyalty program members)

Amazon Prime (numbers of members)

cryptocurrencies and their underlying blockchain technology are being touted as the
next-big-thing after the creation of the internet. One area where these technologies
are likely to have a major impact is the financial sector. The blockchain, as a form of
distributed ledger technology (DLT), has the potential to transform well-established
financial institutions and bring lower costs, faster execution of transactions,
improved transparency, auditability of operations, and other benefits.
Cryptocurrencies hold the promise of a new native digital asset class without a
central authority.

So what do these technological developments mean for the various players in the
sector and end users? “Blockchains have the potential to displace any business
activity built on transactions occurring on traditional corporate databases, which is
what underlies nearly every financial service function. Any financial operation that
has low transparency and limited traceability is vulnerable to disruption by
blockchain applications. DLT is therefore both a great opportunity and also a
disruptive threat,” according to Bruce Weber, dean of Lerner College and business
administration professor, and Andrew Novocin, professor of electrical and computer
engineering, both at the University of Delaware.

Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a
literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this
review, the SWIFT institute recently issued a grant to conduct new research on DLT
and cryptocurrencies in the financial sector. Weber and Novocin noted that just as
disruptors like Amazon, Google, Facebook and Uber built software platforms and
thriving businesses thanks to the connectivity provided by internet standards, next-
generation startups will build new services and businesses with blockchains. “Many
pundits expect blockchain, as a distributed technology, to become the foundation for
new services and applications that have completely different rules from those
running on hierarchical and controlled databases. Cryptocurrencies are an early
example but many others will follow,” they added