blockchain and hyperledger

© 2016 IBM Corporation

Blockchain and HyperledgerBriefing for ISITC

1

© 2016 IBM Corporation © 2016 IBM Corporation

The requirement for Blockchain standards and how Hyperledger can help

The objectives, fabric strategy and governance for Hyperledger

How is Hyperledger being deployed in Wholesale Markets

Contents

© 2016 IBM Corporation 3

Problem …

… Inefficient, expensive, vulnerable

Bank records

Party A’s records

Party C’s records

Auditor records

Party B’s records

Party D’s records


Solution …

… Consensus, provenance, immutability, finality

Party C’s records

Auditor records

Party B’s records

Party D’s records

Bank records

Party A’s records

Shared, replicated, permissioned


Blockchain for business …

Append-only distributed system of record shared across

business network

Business terms embedded in transaction database & executed with transactions

All parties agree to network verified transaction

Ensuring appropriate visibility; transactions are

secure, authenticated & verifiable Privacy

Shared ledger

… Broader participation, lower cost, increased efficiency

Smart contract

Consensus


Blockchain benefits

Saves time

Removes cost

Reduces risk

Increases trust

Transaction time from days to near

instantaneous

Overheads and cost intermediaries

Tampering, fraud & cyber crime

Through shared processes and recordkeeping


What? •  Competitors/collaborators in a business network need

to share reference data •  Currently each member maintains their own codes,

and forwards changes to a central authority for collection and distribution

How? •  Each participant maintains their own codes within a

blockchain network •  Blockchain creates single view of entire dataset

Benefits 1.  Consolidated, consistent dataset reduces errors 2.  Near-real-time of reference data 3.  Naturally supports code editing and routing code

transfers between participants

Consensus Use Case – Reference Data (think SPReD, ISIN, CUSIP)


Benefits 1.  Increase speed of execution

(less than 1 day)

2.  Vastly reduced cost

3.  Reduced risk, e.g. currency fluctuations

4.  Value added services, e.g. incremental payment

What • Bank handling letters of credit (LOC) wants to offer them to a wider range of clients including startups

• Currently constrained by costs & the time to execute

How • Blockchain provides common ledger for letters of credit

• Allows all counter-parties to have the same validated record of transaction and fulfillment

Finality use case – Letter of credit

Letter of credit Republic of A

Buyer’s bank issues LC and sends to

seller’s bank A Plus Bank

Bank B

Seller’s bank authenticates LC and credits Company B

Sales contract Company B: Seller/beneficiary

Company A: Buyer/ applicant

B-land

Buyer applies for LC


Patterns for customer adoption

COMPLIANCE LEDGER

CONSORTIUM SHARED LEDGER

ASSET EXCHANGE

HIGH VALUE MARKET

•  Created by a small set of participants •  Share key reference data •  Consolidated, consistent real-time view

•  Sharing of assets (voting, dividend notification) •  Assets are information, not financial •  Provenance & finality are key

•  Transfer of high value financial assets •  Between many participants in a market •  Regulatory timeframes

•  Real-time view of compliance, audit & risk data •  Provenance, immutability & finality are key •  Transparent access to auditor & regulator



Key players for Blockchain adoption

Regulator Industry Group Market Maker – An organization who enforces

the rules of play – Regulators are keen to support

Blockchain based innovations – Concern is systemic risk – new

technology, distributed data, security

– Often funded by members of a business network

– Provide technical advice on industry trends

– Encourages best practice by making recommendations to members

– In financial markets, takes buy-side and sell-side to provide liquidity

– More generally, the organization who innovates - Creates a new good or service,

and business process (likely) - Creates a new business process

for an existing good or service


The Cambrian explosion of innovation and technologies, leading to questions of fabric standardisation and speed of adaption


Linux Foundation’s Hyperledger Project –  Linux Foundation project announced December 17, 2015

with 30 founding members, now over 80members

–  The Hyperledger Project is a collaborative effort to advance Blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally

–  Open source and open standards-based

Enable adoption of shared ledger technology at a pace and depth not achievable by any one

company or industry

QUICK FACTS

Chairman Blythe Masters/DAH

Executive Director Brian Behlendorf

Technical Chair Chris Ferris/IBM

Contribution 44,000 lines of code in February 2016

Sprint to one codebase with unified thinking

Staged releases

www.Hyperledger.org


Kireeti�Reddy

Robert Palatnick

Dan Middleton

Stefan�Teis

Todd McDonald

Toshiya�Cho

Yoshinobu Sawano

Blythe Masters

Chad Cascarilla

Chris�Ferris

Craig�Young

David�Treat

Charles Cai

Jerry�Cuomo

Thierry Chevalier

Umar Farooq

Hyperledger Governing Board


Mic�Bowman

Richard G. Brown

Hart Montgomery

Chris�Ferris

Tamás Blummer

Arnaud Le Hors

Binh Nguyen

Dan Middleton

Greg Haskins

Murali Katipalli

Sheehan Anderson

Hyperledger Technical Steering Committee


Premier

12 Members

16 Maximum

1 Board Rep

1 TSC Rep For first 6 months

1 Voting Marketing Rep

$250k Per year

General

68 Members

No Maximum

Vote on a Board Rep

1 Non-Voting Marketing Rep

Yearly fee depends on Organization Size:

$50,000: 5,000 and above

$30,000: 2,000 - 4,999 $20,000: 500 - 1,999

$10,000: 50 - 499 $5,000: Less than 50

Associate Membership is free for non-profits and open source projects

Levels and Fees


Shared Ledger

Code execution environment Ledger data structures

Modular consensus framework Modular identity services

Network peers

Core APIs

API libraries and GUIs Specialized extensions

Specialized consensus algos Membership policies

Gateway Operations dashboard

Custom Applications

Value Added

Systems

App Layer

Out$of$scope$

In-scope$

Project Scope


-  Confidentiality and trust model updates to address the needs of financial clients -  Peers have different roles: submitter, endorser, consenter, replicator peer -  Payload of the transaction is only replicated to a small set of “endorsers” -  Consenters retain a hashed copy of the payload on the blockchain ledger to ensure trust

The Submitting peer S1 requests endorsement from E1 and E2

and receives validation

Submitting peer S1 “hashes” the transaction and broadcasts it to the consenters for inclusion in

the ledger

The consensus service delivers the next block in the ledger with

the consented transaction.

Critical for wholesale markets: Next-Gen Hyperledger Fabric


Accelerating Hyperledger – IBM’s Point of View Community + Code Linux Hyperledger Project

Open Source Code: Blockchain for business; Consensus | Provenance Immutability | Finality Open Governance – 100 member cross industry board

Cloud IBM Blockchain

Blockchain managed service on IBM Cloud and z Systems; Identity | Consensus | System Integration | Hardware-assist for Performance & Security IBM Blockchain on Bluemix

Clients Blockchain Solutions Blockchain Garage

Making Blockchain real for business Blockchain Garage; New York | London | Singapore | Tokyo Blockchain Services Practice


Supporting Hyperledger - Engagement model

1.  Discuss Blockchain technology

2.  Explore customer business model

3.  Show Blockchain Application demo

1.  Understand Blockchain concepts & elements

2.  Hands on with Blockchain technology

3.  Standard demo customization

1.  Design Thinking workshop to define business challenge

2.  Agile iterations incrementally build project functionality

3.  Enterprise integration

1.  Scale up pilot or Scale out to new projects

2.  Business Process Re-engineering

3.  Systems Integration

Remote or face to face Remote or face to face Face to face Face to face

Free of charge Free of charge For fee For fee

Let’s Talk

Blockchain Hands-on

First Project

Scale


Blockchain Garages are physical hubs where multi-disciplinary teams of developers, product managers, designers and more can come together and collaborate to rapidly build and deliver new technologies with cloud.

Hyperledger Blockchain garages

HyperledgerUse Cases


What? Improve the efficiency of our commercial financing business by sharing data in a secure and transparent manner on Blockchain

How? •  Blockchain enables Comprehensive View of key operational data: Purchase Order > Transaction Approval > Shipments > Invoices > Remittances

Benefits •  Fewer disputes & faster settlement •  Reduction in dispute resolution time: 40+ days to under 10 days •  Improved capital efficiency; freer flow of capital

Our Commercial Financing business provides working capital to IT suppliers, �distributors and partners through financing of inventory and accounts receivables

See: https://www.youtube.com/watch?v=F0P7NM7d-ps

orders

Partners Suppliers

products and services

IGF

Use Case: Blockchain Solution for IBM Global Financing (IGF)


Product/Assessment category Potential Blockchainpenetration

Process complexity

Technical (functional and NFR) complexity

Time to Market

Regulatory and market convention barriers

Ecosystem complexity

Size of benefit p.a.

Commercial Paper

Corporate Bonds

Government Bonds

Syndicated Loans

Distributed Ledger Distributed Ledger

Potential Future State

Front Office Investor

Custodian? Custodian?

Broker Dealer?

heat map per instrument possible future state process

Account/Position Management

Settlement Depository&Registry

Clearing RiskManagement

Trade Capture and Reconciliation

Regulatory Compliance Management

Trade Management Controls

Trade Obligations Reconciliation

Capture and Validation

Trade Management Service

Clearance Calculations

Fees and Taxes Calculations

Settlement Instructions

Settlement Instruction Validation

Security Transfer and Confirmation

Cash Transfer and Confirmation

DVP Settlement

Commodities Physical Delivery

Reconciliation Management

Safekeeping

Pledge Services

Position Valuation

Registry Services

Depository Services

Transfer Agent Services

Corporate Actions

CSD Fee Calculations

Equity Certificate Services

Risk Monitoring

Collateral Risk and Margin Call

Monitoring

Operational and Legal Risk Control

Risk Calculations

Participant Creditworthiness

Pricing

Novation

Collateral Risk

Collateral Reconciliation

Account Validation

Instrument Registry Monitoring

Account Management

Position Management

Collateral Management

Instrument/ Security Registry

7

Financial Markets Component Business Model

CandidateProcessesforBlockchain

Plan

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Exec

utio

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Market Organization

Market Organization

Strategy

Market Model

Participation Management

Research and Development Management

Alliance Implementation

Market Evaluation and Assessment

IP and Licensing

Research and Development

Listing

Qualifications and Governance

Standards

Instrument Type and Policy

Review

Issuer Relationship Management

Quality Control

Instrument Specification

Listing Approval

Issuer Reporting

IPO Launch

Market Operations

Trading Rules Analysis

Order and Trade Strategy

Market Roll–out Strategy

Market Approvals Planning

SLA Management

Market Monitoring

Market Roll–out Management

Trading Rules Compliance

Order Handling

Market Access and Connectivity

Trade Execution

Trade Reporting

Market Roll–out Execution

Information Services

Information Product Strategy

Information Delivery Strategy

Analytics Strategy

Vendor Contracts

SLA Monitoring

Metering and Usage

Partner Reporting

Non–Trade Information

FeedsTrade

Information Feeds

Public Information

Post Trade Information

Channel Maintenance

Inbound Price Handling

Clearance

Netting Rules

Regulatory Approvals Planning

Trade Management

Rules

Settlement Cycle Control

Trade Capture and

Reconciliation

Regulatory Compliance

Management

Trade Management

Controls

Trade Obligations

Reconciliation

Capture and Validation

Trade Management

Service

Clearance Calculations

Fees and Taxes Calculations

Settlement Instructions

Settlement

Settlement Strategy

Settlement SLA Definition

Settlement Controls

Settlement SLA Compliance

Settlement Instruction Validation

Security Transfer and Confirmation

Cash Transfer and Confirmation

DVP Settlement

Commodities Physical Delivery

FX Transaction Settlement for Non–Residents

Depository and Registry

CSD Strategy

Operational Policy and Procedures Definition

Management System Definition

Reconciliation Management

CSD Policies and Management

Operational Risk Monitoring and

Controls

Safekeeping

Pledge Services

Position Valuation

Registry Services

Depository Services

Transfer Agent ServicesCorporate Actions

CSD Fee Calculations

Equity Certificate Services

Risk Management

Collateral Strategy

Risk Management Governance

CCP Risk Mitigation Strategy

Pricing Model

Risk Model Validation

Risk Monitoring

Collateral Risk and Margin Call

Monitoring

Operational and Legal Risk

Control

Risk Calculations

Participant Creditworthiness

Pricing

Novation

Collateral Risk

Default Identification

Account/ Position

Management

Account Structure Planning

Instrument Registry Planning

Collateral Reconciliation

Account Validation

Instrument Registry

Monitoring

Account Management

Position Management

Collateral Management

Instrument/ Security Registry

Participants Regulation and

Management

Regulatory Strategy

Rule Definition

Participant Requirements

Participant Contract

Management

Regulatory Reviews

Investigation

Case Management

Enforcement

Participant Setup

Regulatory Approvals

Regulatory Reporting

Stakeholder Relations and

Services

Business Growth Policy

Profitability and Effectiveness

AnalysisIT–Related

Service Offerings Planning

ISV Relationship Strategy

Stakeholder Segmentation

Customer Relationship Management

Training, Education and

Certification

SLA Definition, Management and

Monitoring

ISV Relationship Management

Technology Offerings

Customer Support

Public Relations

ISV Relationship

IT Services

IT Strategy, Governance and

Architecture

SLA Definition and Capacity

Planning

Disaster Recovery Planning

IT Governance and Coordination

Change Management

IT Operations Management

Participant Access Control

Disaster Recovery Control

Operations and Production Support

Software Development

Lifecycle

Infrastructure Support

Corporate Services

Corporate Plann and Policies

HR Strategy

Legal and Regul Strategy

Financial Plann and Execution

Corporate Risk Planning

Information Security Plann

Sustainability Planning

Process and Performance Mgt

Program and Project Mgt

Financial Management

Audit and Legal

Procurement Management

HR Management

Communications Management

Marketing Management

Financial Reporting

Procurement and Facilities

Workforce Administration

Investments Administration

Legal Services

Marketing

Extent of Blockchainpenetration in the process

Process complexity


Time to Market(Time to deliver technical solution to market)

Regulatory and market convention barriers(expected time to resolve these issues in order for solution to be authorised/adopted)


Size of Client benefit p.a. (Industry)Cost Take out or new revenue

Positive:More than 60%

Positive:Less than 50 steps

Positive:Less than 6 months to resolve

Positive:Less than 1 year

Positive:Less than 1 year

Positive:Less than 3 participants would enable functioning solution

Positive:More than $1B

Less positive:Between 40% and 59%

Less positive:Between 51 and 100 steps

Less positive:Between 6.1 months 12 months to resolve

Less positive:Between 1.1years and 2.0 years

Less positive:Between 1.1 years and 2.0 years

Less positive:Between 4 and 30 would enable functioning solution

Less positive:Between $251mand $999m

Negative:Less than 39%

Negative:Complex More than 100 steps

Negative:More than 12.1 months to resolve

Negative:More than 2.1 years

Negative:More than 2.1 years

Negative:More than 31 would be required to enable functioning solution

Negative:Less than $250m

CBM model Post Trade Process

evaluation criteria

Process/Product group

Clearing Settlement Depository & Registry Risk Management Account/Position Management

FX spot & Forward

OTC FX Derivatives

Money Market

Fixed Income

Futures and Options

OTC Interest Rate Derivatives

Repurchase Agreements

Credit Derivatives

Equities - Cash

OTC Equity Derivatives

Structured Products

Physical Commodities

Private Shares

Mutual Funds

ETFs

high level product group heat map Blockchain applicability

The need for a more granular assessment with an evaluation criteria per instrument

Assessment filtering process


Extent of Blockchain penetration in the process

Process complexity


Time to Market (Time to deliver technical solution to market)

Regulatory and market convention barriers (expected time to resolve these issues in order for solution to be authorised/adopted)


Size of Client benefit p.a. (Industry) Cost Take out or new revenue

Positive: More than 60%

Positive: Less than 50 steps

Positive: Less than 6 months to resolve

Positive: Less than 1 year

Positive: Less than 1 year

Positive: Less than 3 participants would enable functioning solution

Positive: More than $1B

Less positive: Between 40% and 59%

Less positive: Between 51 and 100 steps

Less positive: Between 6.1 months 12 months to resolve

Less positive: Between 1.1 years and 2.0 years

Less positive: Between 1.1 years and 2.0 years

Less positive: Between 4 and 30 would enable functioning solution

Less positive: Between $251m and $999m

Negative: Less than 39%

Negative: Complex More than 100 steps

Negative: More than 12.1 months to resolve

Negative: More than 2.1 years

Negative: More than 2.1 years

Negative: More than 31 would be required to enable functioning solution

Negative: Less than $250m

Assessment criteria parameters

Other Considerations: !  Weightage assessment criteria based on assessors priorities !  additional criteria !  Parameters adjusted according to assessors viewpoint !  Data weighted by confidence levels

Evaluation assessment criteria


1.  Equity/Debt - Origination/Issuance

2.  OTC Products/bilateral transactions (Repo, FX, MM, non Exchange traded derivatives, etc.)

3.  Exchange Traded Products (Equities, Bonds, F&O, Commodities, Energy, FX, OTC Derivatives, etc.)

4.  Subsidiary areas of interest •  Corporate Actions (Rights issue / Dividend payments / Proxy voting / etc.) •  Reference Data•  Legal Entity Identifiers •  Nostro & Vostro

NASDAQ: “This successful transaction marks a major advance in the global financial sector and represents a seminal moment in the application of blockchain technology,” Greifeld said in the statement. “The implications for settlement and outdated administrative functions are profound.”

Based on the filtering analysis and areas of interest


Description: Simplify existing process with option to create new distribution model (e.g. direct distribution or partially direct and reduce the number of intermediators) Potential benefits:

•  More efficient and wider distribution model (to be validated) •  Lower cost of issuance (fees) •  Lower cost of processing •  Single source of Data (Improvement in data quality, failed Trades, remediation effort leading to reduced Fines/penalties) •  Transparency of ownership for Issuers, participants, Regulators, Central Banks etc.

Potential Challenges/issues: •  Participant appetite to move to a direct distribution model •  Market adoption

Relative Attractiveness:

Product/Assessment category Potential Blockchain penetration

Process complexity


Time to Market

Regulatory and market convention barriers


Size of benefit p.a.

Commercial Paper

Corporate Bonds

Government Bonds

Syndicated Loans

Key: Positive assessment Less positive assessment Negative assessment

Use Case 1 – Equity / Debt - Origination / Issuance


Distributed Ledger Distributed Ledger

Front Office

Broker Dealer

Front Office

Investor

Internal Systems Back Office Internal

Systems Issuer’s

Custodian

Broker Dealer

DTCC

Investor’s Custodian

!  FO initiates issuance / sell process

!  Negotiates with Broker Dealer

!  Broker dealer quotes offering to investors

!  Investor(s) issues buy order

!  FO explicitly affirms trade

!  Begins booking process

!  FO manually enters trade into internal system

!  BO validates trade in internal system; manually confirms trade with FO

!  BO error checks and enters trade details into Excel file

!  Sends to Custodian

!  Custodian receives trade details via email or FTP

!  Receives details of Investor from Broker dealer

!  Administers records

!  DTCC receives trade details from custodian banks

!  Settles trade

Potential Future State

Front Office Investor

Custodian? Custodian?

Broker Dealer?

Current State Commercial Paper Issuance

Sample Flow - Debt Origination (Commercial Paper)


Summary

Blockchain … –  is a shared, replicated, permissioned

ledger technology –  can open up business networks by

taking out cost, improving efficiencies and increase accessibility

–  addresses an exciting and topical set of business challenges, which cross every industry

IBM … –  supports the Linux Foundation

Hyperledger open standard, open source, open governance Blockchain

–  has an easy to access, proven and incremental engagement model giving customers the confidence to get started NOW


Thank you!

blockchain and hyperledger

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