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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
Crowd Polling Question
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?
What do we mean by
Blockchain and
cryptocurrencies?
04
distributed ledger technology (DLT) and blockchaindisruptive technology
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 affectedCompanies 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.
So what is Blockchain?
06
“…a digital, distributed transaction ledger with identical
copies maintained on each of the network’s members’
computers. All parties can review previous entries and
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
What are the characteristics of Blockchain?
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
Graphic Representation of Blockchain
08
Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html
Graphic Representation of Blockchain (continued)
09
Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html
CryptocurrenciesBroad 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.
dAppsUse 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
ProtocolsEnabling track and trace,
inventory management, and
the facilitation of the supply
chain between trading partners.
Example: VeChain
CryptocurrenciesDid you know?
011
There are over 2,100 cryptocurrencies out there! The top 3 are:
Source: https://coinmarketcap.com/all/views/all/
What is Bitcoin (BTC)?
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
What is Ethereum (ETH)?
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
What is Ripple (XRP)?
014
“Ripple was released in 2012 that acts as both a
cryptocurrency and a digital payment network for financial
transactions. It’s a global settlement network that is
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
other types of digital currencies because its primary focus
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
What are the
opportunities for the
business and
finance team?
015
Is Blockchain for real?
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
Blockchain Illustrative Use Cases Finance and Accounting
page
017
Accept Crypto and
Cross-border paymentsInstead 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 ContractsContractual 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
or part of their retirement funds
could be linked with crypto
investments..
Blockchain could help accountants
focus on planning rather than
recordkeeping. The accountant
could focus on the value of the
data. What would you do with the
extra time?
What can I do?Business and Finance
page
018
02Gain an understanding of how
the technology is being
considered within your
organisation or at your clients.
03Be involved from the
beginning, identify the risks,
and help add value to your
organisation or clients.
01Continue 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
Let’s explore the
opportunity in
capital assets
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’sPURPLE
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 financialinvestment that derives its value from an underlyingasset. It can be a tradable financial asset of any kind,broadly categorised into debt, equity and derivatives,although this may vary slightly between jurisdictions.
A Security Token Offering (STO) is a compliantprivate offering made on blockchain. It is a digitisedfinancial security that can be backed by assets, profitsor revenue of a company, and can offer legal rightssuch as voting or dividend distribution. STOs are anemerging alternative to private equity and VCfinancing as they allow for businesses to lock in fundswithout locking investors. An STO may create a non-dilutive way of financing a company’s portfolio,allowing it to raise funds without having to sell equityin its portfolio companies, but instead tokenise itscash-flows.
Security Tokens don’t change the fundamentals of afinancial security, but shift an asset’s ownership ontoblockchain’s distributed ledger, which is immutable.This is done by digitasing an asset and representingits value and allocation of shares in the form of acryptographic asset (a security token). Therefore,security tokens are an investment contract similar totraditional financial instruments, aimed to rewardinvestors 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
UndisputedOwnership
Contract terms and conditions,agreed by all relevant parties,are programmed into tokens.These may include paymentcurrency, dividend schedule,interest rate, and variousconditions for execution.
TERMS & CONDITION
S
When a triggering eventoccurs, the contract executesitself as per the pre-programmed terms. Eventsmay include expiration date,dividend distribution, newtransaction, etc.
EXECUTION TRIGGERS
Clearance and settlement ofcrypto assets is automated onblockchain due to their digitalnature. Exchange of physicalassets (e.g. stocks, fiat) isrecorded on the ledger afterphysical clearance andsettlement are complete.
SETTLEMENT PROCESS
Mechanics of Smart Contracts
BUYER
VALUE TRANSFER
based on terms & conditions
SELLER
Smart contracts are an algorithmic softwarecode that verifies terms and conditions in aconflict- and human-free manner. They allowfor security tokens to be flexibly programmableto streamline or automate key investmentfeatures.
Rights and obligations can be programmedinto the tokens via these smart contracts.Automation of such functions as dividendsdistribution allows reduction of costs andincreased efficiencies. Similarly, smartcontracts can ensure cross-jurisdictionalcompliance of KYC & AML requirements, thusprotecting both investors and issuers.
As a general rule, smart contracts areimmutable - once written, they cannot bechanged. However, there are blockchainplatforms that allow for such functionality, forexample Stellar (as opposed to Ethereum).Therefore, smart contracts can be quite flexibleto reflect requirements of the parties involvedin an investment.
Smart Contracts
What are the
potential risks?
025
Example Blockchain Risks
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
Example Blockchain Risks (continued)
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
forks. It also encompasses the risk that settlement can't be relied upon as a
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
Potential Blockchain Security Vulnerabilities
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/
Manage the risksBusiness and Finance
page
029
02Identity mitigations and
controls to manage the risks.
03 Monitor the risk management.
01Think 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 waitare you ready?
right nowtake action!
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