The State of Blockchain and Its Impact on Finance Profession What - - PowerPoint PPT Presentation
The State of Blockchain and Its Impact on Finance Profession What do Blockchain and cryptocurrency really mean and what are the opportunities? What about the risks that come with such wholesale change to business processes. Learn this and more
What do Blockchain and cryptocurrency really mean and what are the opportunities? What about the risks that come with such wholesale change to business processes. Learn this and more as you look beyond the hype and walks through these new technologies in a business setting. Jason Wood, CA CISA CPA (US) CIA Triple Ledger Limited, Managing Director Techemy Limited, Head of Compliance & Audit
The State of Blockchain and Its Impact on Finance Profession
“Blockchain is an accounting technology. It is concerned with the transfer of ownership of assets, and maintaining a ledger of accurate financial information. The accounting profession is broadly concerned with the measurement and communication of financial information, and the analysis of said information. Much of the profession is concerned with ascertaining or measuring rights and obligations over property, or planning how to best allocate financial resources. For accountants, using blockchain provides clarity over ownership of assets and existence of obligations, and could dramatically improve efficiency.”
Source: https://www.icaew.com/technical/technology/blockchain/blockchain-articles/blockchain-and-the-accounting- perspective
02
03
A: Yes, we have or our clients have already started using the technology! B: Yes, we have or our clients have already started thinking about the technology! C: No, we have not nor have our clients even considered this technology! D: Unsure, I do not know what this technology is!
Have you or your businesses/clients started to use or are thinking about the potential use of blockchain technologies or cryptocurrency?
04
05
what do we mean
Think about a technology that facilitates transactions and is a custodian of records. This could be payment systems, identity management, transfer of legal ownership of assets, etc. This can be on “private” ledgers; “public” ledgers; or “hybrid” ledgers. DLT and blockchain is much more than cryptocurrency.
how can I be affected
Companies are already exploring how to use the technology; and the use cases affect the processing of financial and operational information. Therefore, as a finance and accounting business partner, you need to stay abreast of the technology so you know how to evolve the business processes and get comfortable with the underlying technology processing the information.
06
“…a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’
record new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks (the ‘blockchain’). The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority – a ‘middleman’.”
Source: https://www2.deloitte.com/nl/nl/pages/financial-services/articles/blockchain-technology-speeding- up-and-simplifying-cross-border-payments.html
07
✓ Decentralised/Distributed – You can conduct transactions directly peer to peer. You do not have to rely on a centralised network or authority. ✓ Immutability— Once transactions data has been recorded on the blockchain it is impossible to tamper with it. The data become incorruptible and non-expirable. ✓ Transparency— Blockchain by definition is a network of computers used to power it. Any node in the network or anyone who interacts with it has full access to every piece of data recorded in real time. ✓ Autonomy — Individuals who use blockchain technology are in full control over their assets, they are also responsible for their security and storage. ✓ Permissioned/Permissionless – depending on the blockchain, it may require that you are permissioned to join the private blockchain; or permissionless meaning anyone can join the public blockchain. ✓ Censorship resistance— Since blockchain technology is a gigantic network of computers located around the world, it makes it by design practically impossible for regulators to interfere with this technology due to its spread out global nature.
Source for some information: https://medium.com/@SmartTaylorApp/why-blockchain-technology-and-cryptocurrencies-are-the-future-of-finance-fccdf25eef35
08
Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html
09
Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html
Cryptocurrencies Broad Categories
010
Utility Tokens
A business uses these tokens to help facilitate transactions, such as an Exchange using their own token for payment of transaction fees.
dApps
Use Ethereum blockchain to build decentralized applications – basically a user interface on a decentralized protocol. Example: Crypto Kitties
Currency Coins
Use the word currency cautiously as it depends on the jurisdiction. However, these coins essentially facilitate the exchange of value for products and services. Example: Bitcoin Source: https://medium.com/predict/do-you- know-the-5-different-types-of- cryptocurrency-medium-29298d1fad2f
Privacy Coins
Facilitate anonymous transactions without an identifiable trail. Transactions cannot be traced. Examples: Monero, Zcash
Supply Chain Protocols
Enabling track and trace, inventory management, and the facilitation of the supply chain between trading partners. Example: VeChain
011
There are over 2,100 cryptocurrencies out there! The top 3 are:
Source: https://coinmarketcap.com/all/views/all/
012
“Bitcoin was created in 2009 as an open-source software (Satoshi Nakamoto). How does Bitcoin work? Using blockchain technology, Bitcoin allows users to make transparent peer-to-peer transactions. All users can view these transactions; however, they are secured through the algorithm within the blockchain. Only the owner of that Bitcoin can decrypt it with a “private key” that is given to each owner.”
Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency
Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- ethereum-other-cryptocurrencies.html
013
“Created in 2015, Ethereum is a type of cryptocurrency that is an open source platform based on blockchain technology. While tracking ownership of digital currency transactions, Ethereum blockchain also focuses on running the programming code of any decentralized application, allowing it to be used by application developers to pay for transaction fees and services on the Ethereum network.”
Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency
Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- ethereum-other-cryptocurrencies.html
014
“Ripple was released in 2012 that acts as both a cryptocurrency and a digital payment network for financial
designed to create a fast, secure and low-cost method of transferring money. Ripple allows for any type of currency to be exchanged, from USD and Bitcoin to gold and EUR and connects to banks, unlike other currencies. Ripple also differs from
is not for person-to-person transactions, rather for moving sums of money.”
Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency
Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- ethereum-other-cryptocurrencies.html
015
016
Image Source:https://hackernoon.com/how-is-blockchain-revolutionizing-banking-and- financial-markets-9241df07c18b
Source: https://www.accountingtoday.com/opinion/blockchain-is-already-changing-accounting Amounts in $USD
page 017
Accept Crypto and Cross-border payments
Instead of using traditional banks (and currencies) to send money around the world, blockchain can make money remittance more affordable and faster. As a finance and accounting function, how will you “account” for these transactions from a book and tax standpoint?
Reduce costs of maintaining and reconciling ledgers Investments and Share Trading (Digital Assets)
Instead of using traditional brokers and stock exchange, stocks could be traded with faster settlement and transaction validation. As a finance and accounting function, how will you treat the investments in crypto shares; or what if your own company’s shares were tokenized? You could also do capital raising!
Smart Contracts
Contractual arrangements could be programmed to self execute when certain conditions have been satisfied. As a finance and accounting function, how will you work with legal to ensure that the right accounting standards are programmed?
Improve auditability and fraud detection (Governance/Compliance)
Accounting applications will be able to evidence that transactions between parties were legitimate and a joint register with a trading partner will show the entire debits and credits on both sides of the transaction. Is this too much transparency?
Pay Employees
Employees could be paid in crypto
could be linked with crypto investments.. Blockchain could help accountants focus on planning rather than
could focus on the value of the
extra time?
page 018
Gain an understanding of how the technology is being considered within your
Be involved from the beginning, identify the risks, and help add value to your
Continue to learn more about distributed ledger (blockchain) and cryptocurrency technologies.
Finance and accounting need to do the following: ➢ Be involved with any blockchain project from the beginning. ➢ Perform a detailed analysis of the technical architecture of the blockchain from an accounting and finance perspective. ➢ Develop strategies for maintaining a sufficient level of transparency and verifying that the blockchain applications are performing as intended from a finance and accounting perspective. ➢ Use professional skepticism and ask questions including: ➢ How is data security and account/wallet security maintained? ➢ How do we ensure that the smart contracts’ code is error free? ➢ How are existing policies and procedures updated to reflect the usage of blockchain? ➢ How do we manage access and permissions with the blockchain? ➢ Keep Governance and Risk Management top of mind.
Finance as a Business Partner
The information in the following slides are from Techemy Capital and have been granted permission to present at the conference but you cannot further share this information. Please contact me directly if you would like more information about Techemy Capital.
019
Security Token Offering (STO) is an alternative to private equity and VC financing. Security tokens represent financial instruments, and have legal rights similar to traditional assets.
Evolution of Capital Formation
➢Bitcoin has disrupted money and gold
➢Ethereum has disrupted capital by creating a new crowdfunding model (ICO)
➢Tokenisation is disrupting transferability of capital – anything can be securitised, digitised and tokenised (STO)
Initial Coin Offering (ICO) is a new funding model, offering funding through crowdsourcing, without a proven product. ICOs are enabled by the token economy, which implies the use of a proprietary utility token. Purple Securities are value-adding tokenised securities that have no real-life analogues. They will contain a mixture of traditional security features and utility token features.
TRADITIONAL ASSETS ARE MOVING ONTO BLOCKCHAIN
LEGACY ASSET Gold Stocks Funds Real Estate Commodities CRYPTO EXPRESSION Store of Value Digital Utility Blockchain Protocols Digitised Equity Fractional Ownership of Assets CRYPTO ASSET Bitcoin Ethereum Cryptocurrencies Security Tokens Security Tokens
EVOLUTION OF CAPITAL FORMATION
CAPITAL MARKETS CRYPTO CURRENCIES ICO’s STO’s PURPLE SECURITIES
Price Appreciation Dividends Revenue Share
Value for Issuing Entity
(Highly Efficient Fundraising Model)
Value for Investors
(Highly Liquid Investment Asset)
STO VALUE FLOW
Liquidity Premium
(More Attractive)
Global Reach
(Greater Demand)
Automated Complianc e
(Lower Costs)
A Financial Security includes any financial investment that derives its value from an underlying
broadly categorised into debt, equity and derivatives, although this may vary slightly between jurisdictions. A Security Token Offering (STO) is a compliant private offering made on blockchain. It is a digitised financial security that can be backed by assets, profits
such as voting or dividend distribution. STOs are an emerging alternative to private equity and VC financing as they allow for businesses to lock in funds without locking investors. An STO may create a non- dilutive way
financing a company’s portfolio, allowing it to raise funds without having to sell equity in its portfolio companies, but instead tokenise its cash-flows. Security Tokens don’t change the fundamentals of a financial security, but shift an asset’s ownership onto blockchain’s distributed ledger, which is immutable. This is done by digitasing an asset and representing its value and allocation of shares in the form of a cryptographic asset (a security token). Therefore, security tokens are an investment contract similar to traditional financial instruments, aimed to reward investors through such means as: revenue share, dividends, and favourable price movements.
Breakdown of Security Token Offerings
44.9B 2018
TRADITIONAL IPO MARKET IN US$ BILLIONS
53.3B 2020 63.4B 2022
CRYPTO VS TRADITIONAL MARKETS IN US$
2018 2020 2022 700M 560B Over 5T
SECURITY TOKEN MARKET SIZE IN US$
Security Token Market Opportunity to 2022
THE GLOBAL SECURITY TOKEN MARKET IS SET TO GROW EXPONENTIALLY OVER THE NEXT 2 YEARS, POTENTIALLY GROWING TO OVER US$ 5 TRILLIONS BY YE 2022
Sources: BraveNewCoin Techemy Capital The World Bank “Market Capitalisation” SIFMA “Bonds Outstanding” Bank of International Settlements “Global Derivatives” Savills “Global Real Estate Value” BP “Statistical Review of World Energy” Bloomberg Markets “Global Debt” SEC “Capital Raising in the US” BLOCKCHAIN LEDGER
Automated Clearance & Settlement Undisputed Ownership
Contract terms and conditions, agreed by all relevant parties, are programmed into tokens. These may include payment currency, dividend schedule, interest rate, and various conditions for execution.
TERMS & CONDITION S
When a triggering event
itself as per the pre- programmed terms. Events may include expiration date, dividend distribution, new transaction, etc.
EXECUTION TRIGGERS
Clearance and settlement of crypto assets is automated on blockchain due to their digital
assets (e.g. stocks, fiat) is recorded on the ledger after physical clearance and settlement are complete.
SETTLEMENT PROCESS
Mechanics of Smart Contracts
BUYER VALUE TRANSFER
based on terms & conditions
SELLER
Smart contracts are an algorithmic software code that verifies terms and conditions in a conflict- and human-free manner. They allow for security tokens to be flexibly programmable to streamline
automate key investment features. Rights and obligations can be programmed into the tokens via these smart contracts. Automation of such functions as dividends distribution allows reduction
costs and increased efficiencies. Similarly, smart contracts can ensure cross-jurisdictional compliance of KYC & AML requirements, thus protecting both investors and issuers. As a general rule, smart contracts are immutable - once written, they cannot be changed. However, there are blockchain platforms that allow for such functionality, for example Stellar (as opposed to Ethereum). Therefore, smart contracts can be quite flexible to reflect requirements of the parties involved in an investment.
Smart Contracts
025
026 ✓ Legal risks ✓ Shift from known party to unknown party on public blockchain ✓ Legal liability to mitigate loss from a smart contract code being hacked ✓ Settlement risk ✓ When is a financial transaction complete (private blockchains may have ability to make changes due to centralised control) ✓ Financial risk ✓ Blockchain will enable real-time or near real-time transaction settlement, which reduces credit exposure and frees up liquidity that may be otherwise tied up as collateral. ✓ Operational risk ✓ Risk gets shifted to end points in a blockchain model where the end users are responsible for managing their own digital assets. ✓ Key management risk ✓ Mismanaging private keys and resulting hacks usually come from a failure to back up the keys and store them in a safe or other appropriate method.
Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html
027 ✓ Code and cryptography risk ✓ Current cryptographic methods can be broken with more sophisticated technology, like quantum computing, or that those methods can't be improved and implemented in time to thwart an attack. ✓ Forks and chain-split risks ✓ Forking and chain-split risk may adversely affect the assets, liquidity, creditworthiness, and solvency of participants because of the time and resources it takes to work through the change. Finance professionals must anticipate and hedge the new realm of risks that arise with blockchains. ✓ Consensus and governance risks ✓ Consensus and governance risks are the risks that developers or other responsible stakeholders can't agree on a timely change to a protocol or that a protocol change is enacted that adversely affects a party similarly to blockchain
legally defined moment because of the possibility that a transaction, block of transactions, or the blockchain ledger is eventually rewritten.
Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html
028 ✓ Endpoint Vulnerabilities ✓ The reason comes down to the credentials that are required to access a shared distributed ledger, and how those credentials can be exposed by security weaknesses at the endpoints. ✓ Public and Private Key Security ✓ Anytime blockchain keys are entered, displayed, or stored unencrypted on such devices, the prying eyes of hackers can capture them. ✓ Vendor Risks ✓ Weak security on their own systems, flawed code, and even personnel vulnerabilities can expose their clients’ blockchain credentials and data to unauthorized persons. ✓ Untested at Full Scale ✓ blockchains could be susceptible to fraud, if a significant number of participants conspire against the rest of the participants. Known as a majority attack, or as the 51% problem, this theoretical threat could materialize, considering that a large number of mining farms are built in nations where electrical power is cheap, and oversight questionable. ✓ Lack of Standards and Regulation ✓ standards and regulations is more complex than that of most of the technical issues. ✓ Untested Code ✓ attacker exploiting vulnerabilities in the code.
Source: https://igniteoutsourcing.com/blockchain/blockchain-security-vulnerabilities-risks/
page 029
Identity mitigations and controls to manage the risks.
Monitor the risk management.
Think about risks broadly across your organisation. How will your processes change? The Blockchain has additional risks such as: ➢ “51% attack” where one group or entity gains control of more than half the computing power of the blockchain network. ➢ Quantum computing could compromise existing cryptography solutions, so ensure that the solution used is quantum-proof. ➢ What Information is stored – how much information do you want stored on the blockchain? ➢ How keys are stored – don’t store your private keys on servers that could be compromised?
Blockchain Risk Management Framework
➢ Source: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-risk-blockchain-risk-management.pdf
technology does not wait are you ready?
contacts
031
address
Level 27, 188 Quay Street Auckland, NZ 1010 Come visit us!
phones
Office +64-9-363-2717 Mobile +64-27-403-9587 Call us!
tripleledger.com info@tripleledger.com www.linkedin.com/in/woodcpa/