Blockchain Technology · 2016-06-06 · graduate schools of finance and management •Authors articles for industry trades ... operational risk, and lowers capital requirements. Blockchain

1 | © 2015 Jack Henry & Associates, Inc.®

Blockchain Technology:

What It Is & How It May

Change the Financial Industry

June 2016

1

The Credit Union

Webinar Network

Lee Wetherington, AAPDirector of Strategic InsightJack Henry & Associates, Inc.®

Produced & Presented By: Directed By:


Disclaimer

This presentation is designed to provide accurate and authoritative information in

regard to the subject matter covered. The handouts, visuals, and verbal

information provided are current as of the webinar date. However, due to an

evolving regulatory environment, Financial Education & Development, Inc. does

not guarantee that this is the most-current information on this subject after that

time.

Webinar content is provided with the understanding that the publisher is not

rendering legal, accounting, or other professional services. Before relying on the

material in any important matter, users should carefully evaluate its accuracy,

currency, completeness, and relevance for their purposes, and should obtain any

appropriate professional advice. The content does not necessarily reflect the

views of the publisher or indicate a commitment to a particular course of

action. Links to other websites are inserted for convenience and do not constitute

endorsement of material at those sites, or any associated organization, product,

or service.


Sponsors

• Carolinas Credit Union League

• Cooperative Credit Union Association

• Credit Union League of Connecticut

• Cornerstone Credit Union League

• Credit Union Association of the Dakotas

• Delaware Credit Union League

• Georgia Credit Union Affiliates

• Hawaii Credit Union League

• Heartland Credit Union Association

• Idaho Credit Union League

• Illinois Credit Union League

• Indiana Credit Union League

• Kentucky Credit Union League

• League of Southeastern Credit Unions

• Louisiana Credit Union League

• Maryland & DC Credit Union Association

• Minnesota Credit Union Network

• Mississippi Credit Union Association

• Montana Credit Union Network

• Mountain West Credit Union Association

• Nebraska Credit Union League

• New Jersey Credit Union League

• Credit Union Association of New Mexico

• New York Credit Union Association

• Northwest Credit Union Association

• Pennsylvania Credit Union Association

• Tennessee Credit Union League

• Association of Vermont Credit Unions

• Virginia Credit Union League

• West Virginia Credit Union League

• Wisconsin Credit Union League

Directed by

The Credit Union Webinar Network


Lee WetheringtonDirector of Strategic Insight

• Develops actionable insight and strategy

for the financial services industry

• Delivers keynotes nationwide

• Technology Faculty Chair for several

graduate schools of finance and

management

• Authors articles for industry trades

• Degrees in Economics and English

from Duke University

• Accredited ACH Professional (AAP)

Presenter

@leewetherington

“…transfers facilitated by central authorities

such as FIs and clearinghouses have not

changed in the last 150 years. Distributed

ledger technology can eliminate the need

for that trusted middleman.”

SOURCE: World Economic Forum

via www.forbes.com


Mixed Reviews about Blockchain

“Morgan Stanley Report Dampens Distributed Ledger Hype”--FINEXTRA

“Blockchain technology continues to redefine

not only how the exchange sector operates,

but the global financial economy as a whole” --Bob Greifeld, CEO, Nasdaq

“Blockchain is ‘Once-in-a-

Generation Opportunity’”--Depository Trust and Clearing

Corporation (DTCC)

“If 2015 was the year that financial institutions realized the power of the

technology behind Blockchain…2016 may be the year this technology

begins to be adopted in a more mainstream way.”--FORBES

7 | © 2015 Jack Henry & Associates, Inc.®7

• Internet of information

• Internet of things

• Internet of value

A secure transaction database offering a shared

ledger for all parties in a distributed network.

Uses cryptographic data to record and store

every transaction that occurs in the network,

creating an irrevocable and auditable transaction

history accessible to all (authorized) parties.

SOURCE: BANKING ON BLOCKCHAIN: CHARTING THE PROGRESS OF

DISTRIBUTED LEDGER TECHNOLOGY IN FINANCIAL SERVICES, February 2016

8


Blockchain is a Distributed Ledger


Protocol Application

TCP/IP & SMTP Email

TCP/IP & HTTP Web browser

TCP/IP & VoIP Skype & FaceTime

Distributed Ledgers

(Blockchains)

Bitcoin, NASDAQ Pre-IPO

private stock exchange, etc.

Blockchain is a Protocol…


Blockchain: How It Works



Permissionless vs. Permissioned

Permissionless

• Anyone can play

• Governance is code itself

• Usually “Proof of Work”

• Usually requires

cryptocurrency

• Censorship resistant

• Consolidation of mining pools

create concentrations of

currency ownership

– Bad for security because if

more than half of currency in

hands of one pool, double-

spend can happen

Permissioned

• Known, vetted validators

– Ex., financial institutions

• Governance is critical

• Usually implement Byzantine

Fault Tolerant (BFT) protocol

• Can be private or public

• Usually faster, easier to scale

– Lower latency and higher

throughput than “Proof of

Work” protocols

• Equal level of “Diffuse Trust”

achieved with less computing

power

SOURCE: www.culedger.com


Things You Should Know

• For FIs, the primary promise of blockchain is drastic

systemic cost reductions

• For FIs, the primary fear is that blockchain could

drive more profit pool towards firms holding the

keys to the data and the IT architecture.

– That’s why biggest FIs are investing in Linux

Hyperledger and R3

• No policymaker or regulator will allow an

"unpermissioned" distributed ledger for financial

applications of blockchain

• All proofs of concept for banking applications of

blockchain use permissioned distributed ledgers

SOURCE: Morgan Stanley: “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”; 4/20/16


Distributed ledgers

could/might maybe

change everything

…but only if all FIs

have/share access.


Blockchain Misconceptions

• Blockchain adoption does not mean

unpermissioned networks

• Blockchain adoption does not mean T+0

settlement timeframe

• Not just one blockchain. Expect many blockchains

• Blockchains will not require a complete

transformation of IT; early trials will use

workarounds

• Blockchain technology is not centered on

paymentsSOURCE: Morgan Stanley: “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”; 4/20/16


17Smart Contracts – business rules (implied by a contract)

are embedded in the blockchain and executed/enforced as a

part of the transaction or exchange of value.

Distributed Ledger – the distributed nature of blockchain

reduces or eliminates the need for intermediaries to validate

financial transactions.

Shared Infrastructure – avoids costly duplication,

reconciliation, and protection of separate but different

renditions of the same information among parties.

Faster Settlement – prevents fraudulent double spending of

same value, eliminates reconciliation, minimizes errors and

operational risk, and lowers capital requirements.

Blockchain Benefits


Blockchain Use Cases

Parties Use Cases

FI-centric

• May reduce regulatory pressures – trade finance

• Could speed up payments – a crypto-currency

that coincides with instant clearing and

settlement, is not reversible and resembles cash

• May advance payment technologies – P2P or

international money remittance

FI-to-business• FIs could offer cash management/treasury

services on the back of transactions made visible

and reliable on the blockchain

Business-to-business • Corporations could potentially rely on blockchain

to build smart contracts between the parties

Machine-to-machine• Blockchain digitization extends to the Internet of

Things (IoT)


Financial Use Cases

1. Post-trade settlement

2. Trade finance

3. International payments

4. Reference data

5. Regulatory

20 | © 2015 Jack Henry & Associates, Inc.® SOURCE: LTP Blockchain Momentum 2016 (Infographic), December 2015

Will blockchain move the needle?

http://letstalkpayments.com/ltp-blockchain-momentum-2016-infographic/


Enterprise Providers Consortiums Partnerships

Blockchain Players & Alternatives

42 Bank Partners

Hyperledger

Foundation

IBM/Linux

Testing Sandbox

Smart Contracts

Cross Border Payments

Security Settlement

CU Consortium

Corda™Corda is a distributed ledger platform designed to record,

manage and synchronize financial agreements between

regulated financial institutions. It is inspired by and

captures the benefits of blockchain systems, without the

design choices that make blockchains inappropriate for

many banking scenarios.


Fraud

Reliability

KYC & AML

Blockchain Challenges

Regulation


Challenges to Full-Scale Deployment

• Strong governance

– research at very early stage but to a large extent,

not yet addressed

• Data controls

– addressed partially; no clear trend on best

resolution strategy

• Compliance


not yet addressed

• Standardization


not yet addressedSOURCE: SWIFT & Accenture Study on Distributed Ledger Technologies; April 2016


Challenges to Full-Scale Deployment

• Identity framework

– promising development, but significant R&D work

still required

• Security and cyber defense


still required

• Reliability


still required

• Scalability

– addressed partially; no clear trend on best

resolution strategySOURCE: SWIFT & Accenture Study on Distributed Ledger Technologies; April 2016


What about

faster payments?


• Fragmented approaches will eventually converge

– Fed joins NACHA Same-Day ACH bandwagon rolling out

September 2016

– Early Warning acquires clearXchange

– FIS PayNet partners with The Clearing House

• These approaches aren’t ubiquitous…yet

– NACHA’s ACH Same-Day Settlement; The Clearing

House’s Real-Time Payments Initiative; MasterCard Send

• Immediate notification more important than immediate

settlement

• What about virtual currencies?

– Bitcoin, RippleLabs, etc.

Faster Payments?


Ripple Partnerships

West Pac

29


31

32

Blockchain as a Service

Private / hosted | Digital assets | Shared ledgers


34


• “…faster, cheaper and more secure/transparent way to

manipulate money electronically…”

• “…financial services face the most immediate threat.”

– But layers of infrastructure must be built first, and

consumers and regulators must be persuaded to

trust blockchain – two prerequisites that give

incumbents an early edge.

• “…shortened settlement time also reduces the risk of

fraud. Shared ledger technology could even curb the

current epidemic of identity theft.”

– Applications: payments; title insurance; buying/selling a

house; buying/selling stocks; corporate syndicated loans

and trades; private stock and repurchase agreements

Will blockchain matter for FIs?

SOURCE: “Bitcoin's Shared Ledger Technology: Money's New

Operating System”;Laura Shin, Sep 9, 2015; http://www.forbes.com

36


When will blockchain matter?

• While blockchain has potential to disrupt financial

intermediaries, it won’t make an impact until 2020-2025.

(Morgan Stanley)

• Blockchain could cut ultimately cut FI costs up to 50%,

increase the speed of transactions, reduce errors, and make

it easier to resolve disputes.

• Likely to see a number of different blockchains, each

designed for specific purposes, and this could lead to

fragmentation and complexity problem, which will delay

adoption, and diminish the value of blockchain applications

since the value of a the network is directly related to the

ubiquity of that network in its addressable market.

Morgan Stanley: “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”; 4/20/16


When will blockchain matter? Pt. 2

Timeline Developments

2014-2016 Assessments of blockchain’s value for financial assets

2016-2018 Testing of proofs of concept

2017-2020 Shared infrastructure emerges

2020-2025 Blockchain solutions proliferate

Morgan Stanley: “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”; 4/20/16


Questions to Ask

• Is the blockchain solution open or closed?

• If closed, who controls who’s in and who’s out?

– Permissioned ledgers imply an entity or set of

criteria that determines who has permission to

be a part of the network.

• Has network or application been blessed or

approved by regulatory or central authority?

– E.g., does blockchain payments network or

application meet FRB’s 36 criteria for faster

payments?


Resources

• Khan Academy: Video Lesson on Blockchain

www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-transaction-block-chains

• Morgan Stanley: “Global Insight: Blockchain in Banking:

Disruptive Threat or Tool?”; 4/20/16

www.the-blockchain.com/docs/Morgan-Stanley-blockchain-report.pdf

• SWIFT & Accenture; “SWIFT on distributed ledger

technologies”; April 2016

www.swift.com/insights/press-releases/swift-and-accenture-outline-path-to-distributed-ledger-technology-adoption-within-financial-services

http://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-transaction-block-chains

http://www.the-blockchain.com/docs/Morgan-Stanley-blockchain-report.pdf

http://www.swift.com/insights/press-releases/swift-and-accenture-outline-path-to-distributed-ledger-technology-adoption-within-financial-services


Lee Wetherington, [email protected]

http://discover.profitstars.com/leewetherington

@leewetherington

/in/leewetherington

Thank You!

Documents

Blockchain Technology · 2016-06-06 · graduate schools of finance and management •Authors articles for industry trades ... operational risk, and lowers capital requirements. Blockchain