It Takes A Village: Understanding Blockchain 2:00 pm - 2:50 pm

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2 It Takes A Village: Understanding Blockchain 2:00 pm - 2:50 pm Moderator: Darrell Wheeler, Corporate Development, TAO Solutions Panelists: Zach Aarons, Co-Founder, MetaProp Harry J. Blanchard, Director, Moody s Analytics Herman Enayati, Principal, Polsinelli LLP Dzmitry Maroz, Senior Manager, Deloitte & Touche LLP Yulia Yaani, Chief Executive Officer, RealAtom.com

3 It Takes A Village: Understanding Blockchain Discussion Topics: What is blockchain? Benefits and opportunities of blockchain technology in CRE How will blockchain transform CRE? Does it have the power to transform CRE deals? What are its challenges?

4 Blockchain Should The CREFC Village Be Involved?

5 Blockchain: Sequential Data Blocks Connected by Hash Source: How does a blockchain work - Simply Explained, youtube.com, November 13, 2017.

6 Source: How does a blockchain work - Simply Explained, youtube.com, November 13, All Participants Can Validate

7 Blockchain Benefits Blockchain is a crypto-technology, relying on well-established cryptographic principles and operating as a distributed repository that provides a way for information to be recorded and shared through a peer to peer community. In this community, participants maintain their own copy of the blockchain, and they validate any new entry to the chain through a consensus-based process. Once a transaction is written to the chain, contained within a block and chained to other blocks, it is resistant to being removed or changed. 7

8 How do you transact on a Blockchain? An under-the-hood look at how a blockchain transaction is recorded on a distributed ledger Transaction occurs between two parties Transaction is placed in a queue of pending transactions Nodes determine if transaction is valid based on consensus mechanism Cryptographic keys ensure transaction is from a trusted source Valid transactions are grouped into a block, linked to prior block, and posted in a way that resembles a chain; every node has a copy of the chain Transactions on the blockchain are viewable 8

9 Blockchain Types Blockchain can be public, permissioned, or private, referring primarily to the accessibility and permissions of the network Public Permissioned Private Fully decentralized requires very low trust Fully transparent Anyone can read, send transactions and participate in the consensus process Slow confirmation of transactions Limited privacy protections anyone can read the blockchain Low cost for transactions Quasi decentralized hybrid Read permission of the blockchain restricted to participants; greater degree of privacy Consensus controlled by preselected set of nodes (M out of N) Participants can agree to rule changes, transaction reversals and modification Transaction costs agreed to by the consortium Majority of Corporate Solutions Centralized requires high trust entity Read permissions restricted to participants Only the centralized authority has capability to rule changes, transaction reversals and modification Greater privacy protection as the centralized entity controls who has access to which part of blockchain Transaction costs dictated by one entity Do you really need blockchain? Copyright 2018 Deloitte Development LLC. All rights reserved. Blockchain Roundtable Detroit, Michigan May 22,

10 What are Smart Contracts? Since the inception of Bitcoin, other interested parties have built increasingly sophisticated functionality on top of blockchain ledgers. Smart Contracts Computer code stored on the blockchain that can trigger the automated execution of a desired action under specified circumstances FORMATION NEGOTIATION PERFECTION CONSUMMATION Digital contract draft created; individual terms each coded as Blockchain script Iteration on terms between interested parties, ending in final agreement Final terms cryptographically signed by both authorized signatories, and contractual obligation immediately starts Contract execution triggered upon digital proof that conditions have been met; automatic transfer of obligations between counterparties 10

11 Challenges to CRE and Loan Implementation 1. Existing Land Registry System varies by region and data format. 2. Participants: local governments, title insurers, real estate brokers and appraisers do not benefit from blockchain 3. Standardization of origination expertise unlikely 4. Industry wide buy in unlike for equity or loans. 5. Unproven economic benefits 6. Simple Lack of Awareness Most likely to see blockchain transact with Equity or Debt Limited Partnerships 11

12 Securitization Potential Master Asset Registry Discrete & Permissioned Stakeholder Network For Funding Trust ABC Pooled Asset Registry Notes/Liabilities Registry Investors Trustee & Administrator Administrator Servicer(s) Sponsor Paying Agent

13 Each Participant Has a Different View Loan #1 Loan #5 Master Asset Registry Servicer A Loan #2 Loan #3 Loan #4 Loan #1 Loan #2 Loan #3 Loan #4 Loan #5 Loan #1 Loan #2 Loan #3 Loan #4 Loan #5 Trustee / Regulator Servicer B Beneficial Owner B Loan #2 Loan #5 Private Communication Channel Loan #1 Loan #3 Loan #4 Beneficial Owner B

14 Could Reg AB and IRP Data Be Converted? Reg AB II Asset-level Disclosures Part of the Dodd-Frank reforms Posted in flat-file format on EDGAR web site Limited set of asset classes, only for public deals CREFC Should start to consider how to improve IRP to eventually implement blockchain. Eliminates double encumbrances and could facilitate seamless conversion of origination data to issuance data Provides complete transparency and unfettered access to data for stakeholders Enforces a consistent set of business rules to validate all transactions Should improve the data security of the IRP Limited secondary costs to participants Could be supplemental component of custodial fees For CMBS Securitization it may be possible: Requires awareness to create the connectivity and interaction.