WHO NEEDS THE BLOCKCHAIN AND WHY? (OR WHY NOT) David V. Croft

Transcription

1 WHO NEEDS THE BLOCKCHAIN AND WHY? (OR WHY NOT) David V. Croft 1

2 INTRODUCTION Concepts: Blockchain History Cryptocurrency Smart contracts Mining Industry use: Securities and ICO s KYC/AML Real Estate IOT Cybersecurity The part you will play in all of this 2

3 ABOUT ME 3

4 Some History Andreas Antonopoulis, Future of Money conference, San Francisco, circa M 4

5 Some History (cont.) Cryptocurrency = internet Made the world smaller Instantaneous Complex 5

6 Some History (cont.) 6

7 Some History (cont.) 1991 Time-stamping documents Haber and Stornetta 7

8 Some History (cont.) THE FIRST INNOVATION: BITCOIN Blockchain is to bitcoin as internet is to . Satoshi Nakamoto, Implemented, core component of bitcoin August GB (gigabytes). In GB in size. Approx. 169 GB. 8

9 Some History (cont.) SECOND INNOVATION: USE OF BLOCKCHAIN TECHNOLOGY OUTSIDE OF BITCOIN Using it to facilitate things like: Secured Transactions IoT Food and Product Tracking Supply Chain and Logistics Insurance Real Estate and Title Escrow Privacy/Cybersecurity Government Policy THIRD INNOVATION: THE SMART CONTRACT 9

10 Some History (cont.) FOURTH MAJOR INNOVATION: PROOF OF STAKE Proof of work The group with the largest total computing power makes the decisions. Miners A person can mine or validate block transactions according to how many coins he or she holds. The more Bitcoin or altcoin owned by a miner, the more mining power he or she has. 10

11 Some History (cont.) FIFTH MAJOR INNOVATION - BLOCKCHAIN SCALING Every computer processes every transaction A scaled blockchain accelerates the process Fast enough to power IOT and compete with major payment middlemen 11

12 Example Bonnie loves Susie loves This Photo by Unknown Author is licensed under CC BY-SA $500 wager This Photo by Unknown Author is licensed under CC BY-SA 12

13 Example (cont.) $50 vs. $500 WINNER: Lawsuit? This Photo by Unknown Author is licensed under CC BY-SA 13

14 Example (cont.) Wager recorded on a Agreed to by both parties and neither can modify the wager We have a perfect record Smart-contract Susie owes Bonnie $500. This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA 14

15 Cryptocurrency Digital currency that is fungible into another currency Not This tied Photo by Unknown Author is licensed to under CC BY-SA a specific government (usually) It s Geographically Agnostic. It s transparent 15

16 Cryptocurrency (cont.) Anonymity (kind of) Bitcoin addresses are not tied to the identity of users Transactions are not tied to the identity of users Bitcoin transaction data is transmitted and forwarded by nodes to a random set of nodes on the peer-to-peer network 16

17 Cryptocurrency (cont.) If an attacker, for instance, has the means to connect multiple nodes to the Bitcoin network, the combined data collected from these different nodes might be enough to determine where a transaction originated. Bitcoin addresses can be linked to real identities if these real identities are used in combination with the Bitcoin addresses in some way. 17

18 Mining This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY-SA Miners verify the transactions, ensure they aren't false, and keep the infrastructure humming along. The reward for doing so is payment in that block's coin. Each miner competes for those rewards. 18

19 Mining Electricity Computing power Luck This Photo by Unknown Author is licensed under CC BY-SA 19

20 SMART CONTRACTS Not a traditional contract Software program Many uses, but hasn t replaced the original (yet) Transfer of real property example: The purchaser pays down payment Lender pays the remaining balance Clear outstanding liens Remaining funds distributed to seller New liens are added Title is transferred 20

21 SMART CONTRACTS (cont.) Adding blockchain and smart contracts here s what we need: Data stored in a single blockchain Government-owned system would have to exist System needs to be able to transfer payment Write the program (smart contract): Purchaser and seller agree to and input terms into the smart contract and digitally sign Application writes the terms and authorizations into a blockchain transaction At closing, the purchaser transfers down payment through the smart contract to the escrow account New escrow balance and the payment record written into blockchain Lender transfers remaining funds to the smart contract s escrow account. The smart contract application writes the new escrow balance and the payment record into the blockchain. 21

22 SMART CONTRACTS (cont.) Application transfers funds to each lien holder, marks each lien record as closed, reduces the escrow balance appropriately, and records all actions as a transaction on the blockchain Application transfers the title to the purchaser, establishes a new lien for the mortgage company, transfers remaining funds to the seller, and records all actions as a transaction on the blockchain Was my partner right to be concerned? Will we be replaced? What does this not contemplate? 22

23 ICO An Initial Coin Offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin and ether. It's somewhat similar to an Initial Public Offering ( IPO ) in which investors purchase shares of a company. 43 ICOs in 2016 raising an aggregate $256 million 343 ICOs in 2017 raising in excess of $5.4 billion So far in 2018, 92 ICOs have raised in excess of $3 billion SEC CFTC FinCEN IRS 23

24 ICO (cont.) Equity. Tokens characterized as equity of a corporation Debt. Tokens characterized as debt (because, for example, there is a definite obligation to repay the investor with interest) Prepaid good/services. Tokens may represent the ability to acquire goods or services provided on the platform and, as such, may be characterized as a prepayment for such goods or services Property. Tokens characterized as property 24

25 ICO (cont.) The Howey Test. Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 It is an investment of money There is an expectation of profits from the investment The investment of money is in a common enterprise Any profit comes from the efforts of a promoter or third party (1946) This Photo by Unknown Author is licensed under CC BY-SA 25

26 OH SB 300 Ohio Senate Bill 300 amends sections of the Uniform Electronic Transactions Act to include blockchain records and smart contracts as electronic records Smart contracts would be legally enforceable as any other contract may be Notwithstanding any other law, a person that, in or affecting interstate or foreign commerce, uses blockchain technology to secure information that the person owns or has the right to use retains the same rights of ownership or use with respect to that information as before the person secured the information using blockchain technology." "This division does not apply to the use of blockchain technology to secure information in connection with a transaction to the extent that the terms of the transaction expressly provide for the transfer of rights of ownership or use with respect to that information." Amends language to include that "smart contracts may exist in commerce." 26

27 KYC/AML Due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information from their clients for the purpose of doing business with them Also employed by companies of all sizes for the purpose of ensuring their proposed agents', consultants' or distributors' anti-bribery compliance This falls under the responsibility of each financial institution and/or regulated company 27

28 KYC/AML (cont.) "Anti-money Laundering Set of procedures, laws or regulations designed to stop the practice of generating income through illegal actions The Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989 April 1990, FATF issued a report containing a comprehensive list of actions needed to fight against money laundering. AML regulations differ from country to country 28

29 KYC/AML (cont.) Enter blockchain Allows real-time reporting to adhere to regulatory rules set out by various agencies and The Federal Reserve Bank Includes compiling, tracking, and storing massive amounts of data all recorded on the ledger and readily available to risk teams and regulators Data Quality And Governance Data cannot be altered easily and a shared ledger combines all data onto one platform. From there, a software program can be developed to extract specific data and generate reports KYC And Suspicious Activity Reporting KYC process can be monitored and adjusted more efficiently Direct access to a shared ledger would save institutions the time-intensive process of identifying fraud and reporting it Automated reports could be generated from the ledger reducing errors 29

30 KYC/AML (cont.) Identity Management Comprehensive Authentication Process Background information and identification could be stored on one blockchain network for the institution to tap into during the process Cryptographic verification Sensitive Data and Cryptography Identifying and acting on suspicious behavior Access only by trusted sources Extremely challenging for fraudsters to access a client s financial data, commit identity theft, or engage in an illicit financial activity 30

31 Real Property Buying With Bitcoin Certain sellers will only accept BTC Companies are using the purchasing power of cryptocurrencies to transfer ownership of properties Eliminating The Middlemen Brokerages, lawyers, and bankers can all be bypassed Eradicate most fees and repayments Think about cutting out an extra two or three percent on the sale of a $600,000 piece of property Savings of three percent would mean $18,000 31

32 Real Property (cont.) Smart Contracts The conditions of a contract remain transparent, parties can mutually write the conditions into the blockchain Blockchain can speed up the process of ownership transfer and confirmation Searched could be simplified and contain information about the previous owners, repairs, additions, and the cost of running the home in a year. Fraud Protection False entries, forged documents, and local rental scams will all be very difficult when digital ownership is linked to a property listed on the blockchain 32

33 Real Property (cont.) Affordable Investing With Bitcoin and other valuable cryptocurrencies, people can buy fractional ownership Blockchain can minimize the home buying process with efficient and secure payment, property transfer and validation features 33

34 IOT The Internet of Things The concept of connecting any device to the Internet and to other connected devices. How does it work? This Photo by Unknown Author is licensed under CC BY-SA Devices and objects with built in sensors are connected to an Internet of Things platform, which integrates data from the different devices and applies analytics to share the most valuable information with applications built to address specific needs. Car manufacturing business, example - I want to know which optional components are the most popular. Scenario #1: IoT in your home Scenario #2: IoT in transport 34

35 IOT (cont.) The Industrial Internet of Things What s the difference? More about connecting industrial machines and devices in what could be called higher risk industries, where system failures or unplanned downtime is detrimental to small companies. A company can now keep an eye on machines across the world, adjusting prices to coincide with the degree of operation By distributing processing power and managing multi-step authentication by multiple parties, Blockchain can decrease expenses and provide mutual benefits to consumers and producers estimated 8.4 billion internet-enabled thermostats, cameras, streetlights and other electronics could exceed 20 billion billion or more 35

36 IOT (cont.) GREAT RIGHT? Well Online all the time and they will be vulnerable Most smart internet-connected devices are made by large companies More and more devices are being made by unknown companies, many in developing countries, without the funds or ability to incorporate strong security features Blockchain solution When tech companies find vulnerabilities, they program updates and send them out to users These solutions are accompanied by staffing needs and enormous investment They require software, storage space, and network bandwidth to send it all out to millions of users quickly This Photo by Unknown Author is licensed under CC BY-SA 36

37 IOT (cont.) Internet-connected cameras and accessories manufacturer, based near Shanghai, China Products contain administrative passwords that were set in the factory Enter hackers Little the manufacturer could do to update their devices With Blockchain: Put simply, a blockchain is a transaction-recording computer database that s stored in many different places at once In a sense, it s like a public bulletin board where people can post notices of transactions. Each post must be accompanied by a digital signature which is VERY difficult to change or delete. Blockchain consortium: Available for device makers to use in place of creating their own software update infrastructure These smaller companies would have to program their products to check in with a blockchain system periodically Then they would securely upload their updates Each device would have a strong cryptographic identity, to ensure the manufacturer is communicating with the right device Easy to program into small devices with limited memory space and processing power 37

38 Cybersecurity GDPR - General Data Protection Regulation European Union May 25, 2018 Designed to give EU citizens more control over their personal data GDPR applies to any organization operating within the EU, as well as any organizations outside of the EU which offer goods or services to customers or businesses in the EU Almost every major corporation in the world will need to comply with GDPR Failure to comply can result in a fine ranging from 10 million euros to four per cent of the company's annual global turnover The maximum fine of 20 million euros or four percent of worldwide turnover -- whichever is greater -- is for infringements of the rights of the data subjects, unauthorized international transfer of personal data, and failure to put procedures in place for or ignoring subject access requests for their data 38

39 Cybersecurity (cont.) How can Blockchain help? Eliminating Human Factor from Authentication Businesses are able to authenticate devices and users without the need for a password Decentralized Storage Blockchain users can maintain their data on their computer in their network Traceability Every transaction added to a private or public blockchain is timestamped and signed digitally 39

40 Cybersecurity (cont.) Where are the holes? Humans You could have computers that are more powerful than the rest of the nodes combined Creative ways to cheat Selfish miner Eclipse attack Software clients and third-party applications Hot wallets Smart contracts 40

41 Cybersecurity (cont.) The centralization question Security guarantee - decentralization Alternative consensus protocols Permission to join Authority to grant permission? How will the system ensure that the validators are who they say they are? 41

42 Putting Blockchain Into Practice Cryptocurrency Instead of traditional currency in your current transactions Tax consequences? Money transmitters under FINCEN laws? Smart contracts What will the hybrid look like? Who will prepare what? 42

43 Putting Blockchain Into Practice (cont.) Mining Power purchase agreements Equipment purchase Real estate concepts International dealings Securities and ICO s Compliance More access to money without giving up equity? KYC/AML Do you represent financial institutions that are required to comply? Perhaps this makes it easier 43

44 Putting Blockchain Into Practice (cont.) The real estate industry Escrow Title insurance IOT Who owns what technology? What if your stuff talks to someone else s stuff? Who owns the data? Cybersecurity Are you compliant? What is your plan to become compliant? Are your clients complying? 44

45 Questions? Comments? David V. Croft