blockchain technology - vurore · blockchains are public, and no permissions are required to join....

Blockchain technology: How this could impact the audit

EY

March 20, 2018

René Jongma Senior Manager

Risk Assurance

Data Analytics & IT

Phone: +31 88 407 12 95

Mobile: +31 6 21 25 27 79

Email: [email protected]

PART 1: Blockchain: Why, How, and What

PART 2: Blockchain in real life

PART 3: Blockchain for the financial (impact on audit)

Overview

QU

ESTI

ON

What is your vision about

Blockchain?

PART 2: Blockchain for the financial…. video time……..

QU

ESTI

ON

How far have you already

encountered Blockchain

related challanges during your

work?

▶ Chain of ledgers interconnected to record, verify and validate

transactions

▶ A transaction can be recorded in the blockchain if it has been validated

by a majority of the parties.

▶ Once a transaction is recorded in the blockchain it cannot be removed

▶ The blockchain is the technology underlying the bitcoin.

So what is Blockchain?

Blockchain what is the Blockchain concept?

Blockchain is an open, public database that can record transactions between

two parties efficiently and in a verifiable and permanent way.

It promises to radically speed up transactions and cut costs by

establishing trust and the transfer of value without the involvement of

traditional intermediaries

Blockchain

Plateau Enlightenment Disillusion Peak Innovation

5 to 10 years

Blockchain hype cycle Types of Blockchain

Public and

permission-less

Private and

permissioned

Hybrid

Blockchains

• All transactions in these

Blockchains are public,

and no permissions are

required to join.

• Example, Bitcoin

• Limited to designated members

• Transactions are private, and

permission from an owner or

manager entity is required to

join

Example, used by private consortia

to manage industry value chain

opportunities

• Different (public or

private) Blockchains can

communicate with each

other, enabling

transactions between

participants across

Blockchain networks

Example, Sidechain

Blockchain is simply a database that is publicly distributed and continuously updated, and secured by the art of cryptography.

https://www.youtube.com/watch?v=oSP-taqLWPQ

How does Blockchain exactly work? (1/5)

Traditional Blockchain

Central infrastructure Blockchain network

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4

4

3

5

2

2

1

2

6

5

Comparing transactions, the old way and the

(new) Blockchain way…..


Blockchain

Blockchain network

Purpose

Messaging

Processing

Ledger

Front end

In traditional networks In Blockchain networks

Node or user – the

trigger of the

transaction

Technical connectivity

with the ledger

(database)

Execution of agreed

actions

Auditable repository

or database

Through central

infrastructure Peer-to-peer

• Centrally

• Batch or per

transaction

• Distributed (at

device)

• Pre -programmed

• Central

• Closed (one trusted

party)

• Multiparty

• Decentralised

• Highest encryption

In principle remains the same though IoT

likely to increase and diversify the number

of machine nodes

1

1

2

3

4

4

2

2

Institution Own and administer

the transaction

Centrally with cost

added to

transaction price

Redundant as

transaction owner 5

5

The network becomes distributed and acts like a highly secure “intra” or “inter” net

Centralized Decentralized Distributed ledgers

Distributed ledgers can be public or private and vary in their structure

and size

Public Blockchains

► Users are anonymous

► Each user has a copy of the ledger and participates in confirming transactions independently

Private Blockchains

► Users are not anonymous

► Permission is required for users to have a copy of the ledge and participate in confirming transactions


Allows the move from master ledgers,

e.g., clearing houses, banks … … to distributed ledgers with no intermediaries

Blockchains eliminate the need for a trusted central authority throughout the lifetime of an transaction.

Trusted Intermediary Trusted Network

cutting out the intermediary


The Blockchain is a network and a database

Distributed ledger

Back-end database that

maintains a shared,

distributed ledger

Smart contract Time-stamped and

permanent

Consensus

validation

Embedding trust rules

inside transactions and

interactions

Time-stamping, rights

and ownership proofs

Resistance to single

point of failure of

censorship

Secure and

encrypted

Trust vs No Trust Smart wallet Peer to peer network Immutable Traceable

Self-execution of

business logic with self-

enforcement

Transactions are stored in virtual blocks, which are connected together in a chain, creating a complete history of all transactions that have ever occurred

within a particular network


Adding transactions to the Blockchain

Smart Contracts why distributed transactions are possible

Traditional contracts Smart contracts What?

Business rules

or terms of agreement

form the transaction

How?

Code-based,

stored in the Blockchain

and self-executed

Advantages

Guaranteed future execution.

Verifiable, signed and encrypted

Challenges

Scalability in speed of execution

Interoperability with “old”systems

► Protocol intended to facilitate, verify, or enforce the negotiation or performance of a contract.

► The advantage of Blockchain-based contracts is that they reduce the amount of human involvement required to create, execute and enforce

a contract

► Thereby lowering its cost while raising the assurance of execution and enforcement processes. By automating a transaction in a fully verifiable framework

(the Blockchain) the transactions can have legal validity even at high frequency – a key enabler for network balancing

Smart Contracts

are bits of executable code

that act only if specific conditions

within the Blockchain are met

Benefits of Blockchain

PART 2: Blockchain in real life

Trade Finance: Oil transaction on a Blockchain

Blockchain in real life (1/5)

► On 22 February, ING and Société Générale Corporate & Investment Banking

presented Blockchain prototype testing results coinciding with IP Week in London

together with trading house Mercuria.

► Both banks presented the results of the Easy Trading Connect Blockchain prototype

after successfully using the new technology to carry out a live oil trade between

parties with Mercuria, a global commodity trading group. The test proved that there

were significant speed, cost and risk benefits to be achieved.

► The platform, called Easy Trading Connect, is designed for paperless trading and

aims to digitalise and standardise commodity transactions in order to increase

speed and efficiencies in the trade process.

► The prototype was used in a real trade to validate expectations. The experiment

involved an oil cargo shipment containing African crude which was sold three

times on its way to China, and included traders, banks as well as an agent and

an inspector, all performing their role in the transaction directly on the platform.

► The challenge at the core of this project is the need for technological advancements

in commodity trading and finance, an age-old sector that is still very much based on

the exchange of physical paper documents travelling around the world

Trade Finance: Oil transaction on a Blockchain

Blockchain in real life (2/5)

Blockchain in real life (3/5) Example from the healthcare industry

Health care in the US

• Current system is centralized and vulnerable

• The amount of information and the complexity results in high overhead costs

• Systems are not dynamic with reading, analysing or sharing information

• Due to recent data breaches this subject has raised extra attention

Company: Patientory

Where: Atlanta, US

What: Patientory is a developer of electronical

database for medical information for individuals

built on a private Blockchain

ICO: $7.2 million USD

Blockchain application in real life

• Users can create a profile in an app

• The can connect “care providers” and other users (with comparable medical issues)

• Patients increase their control on their own health information / data

• The amount & quality of data can substantially increase as well as a decrease of overall

costs

• Decentralization could increase data safety and security

• Disintermediation could increase overall trust in the system

Blockchain in real life (4/5) Example from the clothing industry

Company: A Transparent Company

Where: UK

What: A Transparent Company led the strategy and

implementation for a collaborative case study

between Danish fashion designer Martine Jarlgaard

and the app behind the technology, Provenance.

Blockchain in the supply chain for retail

• Development of a pilot project to track end-to-end a UK Alpaca supply chain, from farm to

finished product.

• Consumers we want to know that what we are buying is true and education on how we can

trust the information is needed.

• Blockchain penetration in the fashion industry will take some time, but it is happening. It is

vital for proof of origin and authenticity, to help fashion businesses track their

products in their supply chain.

Blockchain application in real life

• Each step in the production process is registered and tracked on the Blockchain ->

from shearing at an Alpaca fashion farm in England, to spinning at Two Rivers Mill, through

to knitting at Knitster LDN and then finally to the designer’s studio in London.

• A unique digital token is given to each garment which enables Provenance to verify

every step of its production and create a digital history (including location data and

timescales).

• This information is presented through the app, which consumers can access through

their item’s QR code or NFC-enabled label, working on both Apple and Android devices.

Blockchain in real life (5/5) Example from the clothing industry

PART 3: Blockchain for the financial (impact on audit)

PART 2: Blockchain for the financial…. video time again!

The changing role of the financial

1950

2000

2027

Innovation 2017 Blockchain

Reporting

Reporting

Information sharing

Process optimisation

Robotics Cloud

Analytics

Artificial Intelligence

Big data

► Increase in IT security:

Blockchains are considered as safe and difficult to manipulate, which

results in an decrease in fraud and hacking

► Control over the value chain:

Blockchain applications offer flexibility over efficient internal control

systems. The entire supply chain process could be integrated in one

system with Smart Contracts to automatically execute

► Organizing and enforcing contracts

In line with the abovementioned control over the value chain, the

delivery and payment process occurring when a product is sold and

delivered to the client can be organized within one system

#1 Identification & security

#2 Blockchain use with

validation in audits,

increasing efficiency

#3 Adjustments for internal

& external control

systems

#4 Regulatory

requirements

Financials will use Blockchain because:

Applications

Why Financials will use Blockchain….

It provides the possibility to record transactions between two (unknown) parties in a safe way

How Blockchain could impact the financial

Execution role:

Enablement role:

Development role:

EY’s point of view

EY identified three main pillars for the financial:

How Blockchain could impact the financial EY’s point of view of

Execution role:

► Blockchains distributed nature decreases the opportunity for fraud or reporting inaccuracy.

► The immutable transaction history provides a single documentation trail that will streamline

the audit process and allow for greater focus on systems and controls.

► The centralized data source will allow for greater reporting speed and validity for both internal

and external stakeholders.

Enablement role:

► A distributed ledger will allow for more efficient and transparent intercompany transactions

that are settled simultaneously.

► Less manual attention will be needed for reconciliation and consolidation processes,

allowing for a more efficient finance function.

► Blockchain’s data trail will allow for more accurate monitoring of transactions, balances and

project results.

Development role:

► With improved efficiency and strategic analysis, the finance function will be able to devote

more time and attention to organizational strategy.

► With some public transactions and improved audit approaches, the financial will be able to

communicate to the marketplace more quickly and with more clarity and transparency.

Execution (planning & control)

Enablement (Funding & strategic support)

Development (strategy & communication)

Blockchain applications (1/3)

Blockchain

Application

Manufacturing, Power & Utilities

► Supply chain managemnent

► Cross-border trade & logistics

Regulators

► Explore central-bank controlled digital currency

► Estalish policies and guidelines to manage Blockchain-based economy

Healthcare

► Healthcare records management

► Medical procedure billing & ordering

Cross-sector

► Corporate Audit, regulatory reporting

► Identify management

► Private blokchains for internal efficiencies

Public Sector

► Public registries (IDs, titles)

► Ownership rights, dispute & fraud management

► Voting

Media / Telecom

► IP management (music, art)

► Loyalty

► New micro-transaction revenue models

Retail / Consumer Goods

► Decentralized market places

► Organic food and ethically caught tuna traceability

examples of impact on sector level

Financial Services, Exchanges

► Cross-border payments

► Stock / debt issuance

► Securities and derivative clearing & settlement

► Trade finance, Asset Custody

Contacts (from digital contract

module) will be referenced by

transaction hash on supplied

goods. These will be recorded at

point of contact; shipping, transit,

receipt.

Digital contracts Fulfillment notification Digital invoices Information system Payments

Digital contracts are issued

via Blockchain.

Goods traced via

asset transaction in

the Blockchain

Issue an digital

invoice for goods

Transactions

implemented to

settle invoices.

Transactions

continuously

viewable &

integrated into full

reporting systems

Smart contracts, written in Go and

Java will be deployed from the

customer. Variables within the

contract can be altered by parties

until both agree and lock the

contract.

Nodes and applications will be

established to monitor contract and

party events. These will record

transactions to the Blockchain, and

trigger events through

C++/JavaScript interfaces with

secondary applications.

QR codes may be scanned through

an Iroha mobile application to

update the asset state provided.

Manual updates are available as

well through single-use transaction

codes. IoT device integration will be

considered as well.

Digital contracts fulfilled via

fulfillment notification module are

eligible for a digital invoice. This is

issued by the supplier as a smart

contract, and references the

previous contract and transaction

records.

Customer can raise a dispute during

a reasonable timeline following the

invoice module, and may dispute

the earlier transaction record. Off-

chain data will be provided via

Oracle inputs, and a third party

delegated when possible.

Using an agreed upon token to

represent currency, invoices can be

settled. These tokens will serve as

IOUs against a shared general

ledger, and should settle for USD or

other agreed-upon currency.

Later stages of the POC will allow

for bank integration, as well as

more advanced financial services

such as escrow, credit and

securitized traded assets.

All transactions on the chain are

viewable through a block explorer

application. Users may set users,

contracts and assets as watchable,

with generated reports and alerts

on their activities.

All data generated by the platform

will be available in on-demand,

real-time supply to ERP platforms.

Enterprise reports will be developed

for the POC, and available in a

variety of outputs.

order to cash

Blockchain applications (2/3)

Manufacturing

China

US Customs

Intercompany

agreement

Smart

contract

Device components

manufactured in

China

Freight forwarder Shipping Final

assembly

US

Delivery to

retailer

Distributed

Intercompany

Ledger

Shipment

notification

F/X Rates

Ordering

party

Settlement

Trade review

and approval

Tax review

and approval

Company XYZ — China Company XYZ — US Company XYZ — US

Disparate

ERPs

Info received and

registered in the

distributed

intercompany ledger.

Coded smart

contract rules, value

of components is

calculated

The ledger calculates the

value of the transaction in

each currency

The transaction is settled, and

the US subsidiary pays the

Chinese subsidiary the

calculated value.

The transaction &

value can be reviewed and

approved by appropriate

internal and external

authorities.

Ledger =

integrated, transaction

flow to each subsidiary’s

ERP system

Company XYZ US

subsidiary places an

order with its Chinese

subsidiary.

Manufactured in

China, shipped to

the US.

The end result of this process is an automated

transaction that follows standardized policies and

procedures. All business units simultaneously reflect the same accurate

information for many intercompany transactions.

The forwarder sends XYZ

notification being

shipped to the US.

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Blockchain applications (3/3) order to cash

QU

ESTI

ON

Will Blockchain be able to

contribute to our work?

► Blockchain remains a very relevant

subjects

► Disruption in the financial column

► Organizations are experimenting

with Blockchain and smart contracts

Blockchain adoption what do we make of it…..

Important questions remain

► Right to be forgotten

► Privacy

► Audit trail

► Transaction limits

► Scalability

► Security

► Regulation

► Hacking

► Standardization

The changing perspective on Audit

René Jongma Senior Manager

Risk Assurance

Data Analytics & IT

Phone: +31 88 407 12 95

Mobile: +31 6 21 25 27 79

Email: [email protected]

Thank you for your

attention

blockchain technology - vurore · blockchains are public, and no permissions are required to join....

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