What is Blockchain?

Scott Wilkinson

June 2016

• If asked then ‘what is the Internet’? – Dial-up modem, finicky software – Netscape Browser, Email, Chat-Room … AOL, Compuserve

• In 2016 Internet means much more… – TV, Movies, Music services – Facebook and social media – Ubiquitous, real-time, broad-band – Low cost computing and connectivity – Companies run on internet infrastructure

• Blockchain could be same thing for financial services companies… Amara’s Law – Real time – Sharing ledgers between systems, vendors in ecosphere – Standardization and transparency

Remember 1994?

• Blockchain technologies describe distributed ledger technologies that enable real-time, non-repudiable transactions between counter parties. – Every counter-party has a real-time ledger … Transactions

are applied to all ledgers simultaneously … makes fraud complex

– Enacts message in real time – Defines and protects a given “true” record – Transactions are transparent, historical, forming a “chain”

on a given company, or specific instrument history. – Traditional 3rd party roles such as clearinghouses are not

required – Reconciliation is automated

What is Blockchain?

• Real-Time, Non-Repudiable – Hastens transactions …. to immediate

• Cost Savings – Replacing intermediaries in transactions (clearing houses et al) – Reducing costs / risks of reconciliation – Position/regulatory reporting

• Robust – Cryptography – Distributed networks with failure resistance – Scalable

• Accurate – Documents, records, transactions agreed on and encrypted – Tampering expensive/difficult

Why are Blockchains Being Considered?

• The Clearinghouse Model(s) – Industry intermediary to facilitate trade and transactions

– Example TMX, CDS

• The Transaction Facilitator Model(s) – Intermediary such as a bank to enable payments

• The Messaging Model(s) – Intermediary such as SWIFT to enable communication of

instructions

• True Source Model(s) – Intermediaries that validate and maintain legal/certificates

(eg. Title)

Blockchain Replaces 4 Business Models

Concept 1: Today’s Securities Model

Counter Party 1

Counter Party 2

Counter Party 3

Counter Party 4

Counter Party 5

Counter Party 6

Counter Party 7

Counter Party 8

Clearinghouse

• Time to settle • Cost of Clearinghouse • 4x Reconciliation / NIGO clouds • Clearinghouse counterparty, defines membership

Concept 2: Blockchain Ledgers

Counter Party 1

Counter Party 2

Counter Party 3

Counter Party 4

Counter Party 5

Counter Party 6

Counter Party 7

Counter Party 8

• Real Time/Non-repudiable • All ledgers updated (transparency) • No reconciliation • Direct counterparty, all counterparties in blockchain

network

• Unique documents and chain of transactions. – Blockchain cryptography can be used to create definition

of “true” document, changes in document and show history of use/ownership in real time. • Use cases:

– Legal documents – legal, real-time record of backlines and proof of authorization.

– Bonds/Securities/GICs – Unique certificates can show ownership in real time and history of ownership without impacting issuer books/transfers. Also communicate special/unique elements that define value.

– Trade finance – Definitive invoicing, real time item tracking and customs audit

– Invoices

– Shared in real time with counter-parties, regulators etc.

Concept 3: Blockchain “Chain Value”

• Blockchain can be used to replace value facilitation roles and messaging.

Concept 4: Transaction Facilitation

Traditional P2P Payment Blockchain P2P Payment

• Crypto Currencies • Direct advice • Open access

• There will be a variety of public, limited counter-party, private and internal applications of blockchains. – Definition of Blockchain in use will evolve.

• Counter-Parties and stakeholders

• Blockchain data and use pattern

• Systemic risk and importance

– Early experiments have been mixed

• RPM pilot

• Ripple

• Bitcoin

• R3

– Government of Canada is pushing for more roles

• Bank of Canada

• CDS/TM

Concept 5: Blockchains Will Evolve

• Crypto-currency

• HV Payments

• Securities, bonds, GICs

• Legal document retention

• Trade finance

• Public land title

• Internal finance applications

• Music / movies / IP

Future Use Cases

• Legacy inertia • Role of messaging, clearing house and facilitation models • Access to Blockchain networks

– Selection of counter-parties – Enforcement risks – Regulation

• Systemic risks (real time, immediate) – Flash trade risk – Intermediary SRO, Stabilization, Vetting roles

• Cost savings realization • Transparency/privacy and arbitrage • Fraud/Gaming of system • Public/Open, Closed and Internal uses

Risks of Blockchain