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1000 Wilshire Boulevard • Los Angeles, CA 90017 • (213) 688-8000Member NYSE/FINRA/SIPC

ADVANCED SECURITIES DIVISION

BLOCKCHAIN TECHNOLOGY AND CRYPTOCURRENCIES:

IMPROVING LIVES AND TRANSFORMING BUSINESSES

November 27, 2017Sheri Kaiserman

WEDBUSH SECURITIES INC. • 1000 WILSHIRE BLVD • LOS ANGELES, CALIFORNIA 90017 • (213) 688-8000 • WWW.WEDBUSH.COM • Member NYSE/FINRA/SIPC

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TECHNOLOGY IN THE EARLY 1990’s

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THE TECHNOLOGY BEHIND EMAIL & NETSCAPE

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IT’S ALL ABOUT THE BLOCKCHAIN

• Open source technology innovation– The mainframe, the pc,

commercial internet. And now…

BLOCKCHAIN! The internet of value/ownership

• The Commercial Internet (of Information) - changed how we communicate and consume data

• Blockchain technology enables machine validated trust and will transform how we store, exchange and manage anything of value – ANYTHING!!

• Development and adoption of countless use cases already underway at government, corporate, and consumer levels. Naysayers like early internet

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WHAT IS A BLOCKCHAIN • Public & Permissionless blockchains (Vs. Private & Permissioned)

• Append only digital ledger – time stamped data, non-alterable, trusted

• Immutably keeps track of ANYTHING of value - money, securities, goods, property, identity, votes, healthcare records, driving stats, etc.

• Decentralized – no central authority owns and no single point of failure

• Available to everyone –provides transparency, accessible to 2B unbanked

• Allows for peer-to-peer transactions – new business models? Micropayments

• Efficient – Smart Contracts, Eliminates Redundancies, errors & reconciliation of silod record keeping, speeds up transactions less risk & less capital tied up

• Lowers Cost – removes middleman & fees – Intermediary Businesses

• Improves Security & Reduces Fraud, Protects asset rights, identity privacy

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3 KEY PRINCIPALS OF BLOCKCHAIN: SECURITY, CONSENSUS, AND INCENTIVE

• Cryptography– Creates a secure digital identity/signature based on holding the combination

of a private and public cryptographic key. Authenticates ownership

• Decentralized, distributed network securing a shared ledger– A peer-to-peer decentralized network come to consensus to establish

validity of ownership and the recording of a transaction. Transaction data is hashed and contains hashed info from the prior block – difficult to defraud, no single point of failure

• Incentives – For providing computing power to perform the above, incentives are

embedded in the platform. Nodes mint new crypto-currency and enjoy transaction fees. Aligned incentives with stakeholders

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BITCOIN – THE SOLUTION TO DOUBLE SPEND & BYZANTINE GENERAL’S PROBLEM• Double Spend

– In the internet of information – A copy is sent, not the original• When sending an asset like money or a stock – Need the original• Solution – Intermediaries who provide trust services

• Byzantine General’s Problem – A story in distributed computing world– Illustrates possibilities of communication failures among 2+ parties– Story: The need for geographically dispersed generals to trust their

messengers to know when to simultaneously attack the castle

• Trusted intermediaries– Bank’s, Accountants, Lawyers, Real Estate Brokers, Depository Trust &

Clearing Corp (DTCC), Brokerage Firms

• Blockchain establishes trust Eliminating the Need for an Intermediary

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BITCOIN BLOCKCHAIN

IT’S ALL ABOUT THE BLOCKCHAIN TECHNOLOGY

• Bitcoin – Merely an application of blockchain technology − i.e. email, Amazon – Applications of various internet technologies

• 2008, Satoshi Nakamoto− BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM – 9 Pages – Read it!

• Two main components of Bitcoin – One can’t exist without the other– Crypto Currency – Medium of exchange & incentive– Disruptive Payment Network Technology

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BASICS OF THE BITCOIN BLOCKCHAIN

• Amazing network built without fundraising − The bitcoin community members/participants contribute computing

power to the network to allow peer-to-peer transaction validation, and exchange of value

−

− Not centrally controlled – Decentralized, distributed network

• Bitcoin Blockchain is a digital ledger that keeps record of every single bitcoin transaction

• Incentives to run bitcoin software bitcoin and transaction fees

• Contribution of one’s computing power to support the network and earn bitcoin is known as “Mining” (PoW)

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BITCOIN MINING:MORE THAN JUST MINTING COINS

• Mining is what secures the network and is both the mechanism to create bitcoin as well as to verify and process transactions.

– Copies of the bitcoin ledger sits on each computer (node) – A majority (consensus) must agree when Person A wants to send person B money. Every computer examines their existing ledger to ensure the transaction is legitimate based on the history

– If legitimized, this transaction, along with other verified transactions of the last 10 minutes the next potential block in the blockchain

– Then computers all race to solve a computational puzzle- takes about 10 minutes to solve. (PoW Consensus Protocol)

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MINING BITCOIN & ADDING A BLOCK TO THE BLOCKCHAIN GO HAND IN HAND

• Once a miner solves the puzzle, the solution is sent to the rest of the network for verification. If verified, the new block becomes a new trusted additional block in the blockchain ledger

− In addition to earning 12.5 bitcoin for creating a new block, miners are also paid transaction fees. i.e. Visa or MC “interchange” fees

• The longer the chain the more complex it is to hack. If someone alters something in the block, that block’s hash (or cryptograph identifier) would change because it contains the hash of the previous block too

– Fraud immediately is identified

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CONSENSUS PROTOCOLS

• Two Most popular Consensus Protocols

– Proof-of-Work (PoW)

– Proof-of-Stake (PoS)

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CONSENSUS PROTOCOLS

Proof-of Work (PoW)

• Miners compete to add the next block in the chain by racing to solve an extremely difficult mathematical puzzle

• Currently utilized by the most secure & therefore largest public blockchains: Bitcoin, Ethereum

• Computationally intensive operation requiring expensive ASICs (highly specialized processors) and enormous amounts electricity

• Probability of mining is equated to the percentage of computing power being contributed to the network

• To defraud the network by completing a 51% attack would require a bad actor to deploy more computing power and resources than the stolen asset is worth

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CONSENSUS PROTOCOLSProof-of-Stake (PoS)

• A 'validator' invests in the coins of the system, rather than expensive computers – No mining involved– Requires much less computational power and electricity

• All coins exist from day one, Validators/Stakeholders are paid in Transaction Fees

• How many blocks you get to create depends on the share of coins you own in the system.

• Once a validator creates a block, consensus to add the block is reached in 1 of 2 ways:– Every node in the system has to sign off on a block until a majority vote is reached – A random group of signers is chosen

• Validators required to have coins on deposit – Lost if rules not followed

• Again, making an attempt to defraud, more costly than the potential gain is worth

• Ethereum currently relies on proof of work, but is planning a move to proof of stake– Peercoin, Blackcoin and NXT all use POS

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HOW IS THE BITCOIN NETWORK SO SECURE?

• Despite constant attempts, the bitcoin network has never been hacked– Websites or wallets exchanging bitcoin have been hacked

− No different than a bank being robbed

• Decentralization and size is fundamental to blockchain’s security – No single point of failure or target for a hack. Hashing.

• A public blockchain is more decentralized and therefore viewed as more secure

• The bitcoin network code is constantly getting stronger. – Soft Forks (backwards compatible), Hard Forks (messier progress)

• Bitcoin is resilient! Subsequent to each significant price correction, new highs have been made

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BITCOIN SUPPLY

• There will be a capped total of 21M bitcoin in circulation by 2140

• Every 10 minutes new bitcoin are created

• Originally a miner would earn 50 bitcoin incentive halves every 4 years. − Currently the reward is 12.5 bitcoin (as of July 2016)

• What is the incentive when miners can no longer earn bitcoin?

− Transaction fees associated with each block− As the bitcoin rewards decline, bitcoins earned from growing # of

transaction fees will rise as network usage grows

• Miners aka Transaction Processors, the Visa & Mastercard of the new rails

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VALUING BITCOIN

• Bitcoin (BTC) = equity in a payment network.− As network usage grows, value of equity should increase

• Market cap - 16.7M bitcoin @ $8,150 = $136B

• $8 trillion of gold held in the world - 5% = $25,000 Bitcoin price.− In the US – Important demographic shift next 30 years

− $20T being handed down from the older generation − Millennials already consider bitcoin a new asset class.

• According to the IMF, foreign currency reserves supporting cross border trade are around $7.5 trillion. 5% = $375B, $23,000

• What percent of the $200 trillion currently in cash, stocks, gold and bonds will shift into cryptocurrencies as a new asset class? 1% = $2 trillion BTC > $100,000

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BITCOIN (USD) PRICE

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WHY USE BITCOIN?

.

Developed Countries Developing Countries

Speculative Trading Receiving money & keeping more of it

Money Remittance Currency

New Asset Class Political upheaval safe haven

Currency Hyper inflation protection

Illicit Activities Access to the financial system

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BLOCKCHAIN TECH IS TRANSFORMATIVE

• DIGITAL LEDGER TECHNOLOGY IS NOT JUST FOR FINANCIAL ASSETS

• Internet allowed information to be digitized

• Ethereum Blockchain – Enables any asset to be digitized and securely transferred over the internet.

– Smart Contract – self executing contract when certain conditions are met– ERC-20 Protocol – Established a standard for token creation - ICO’s– Ethereum Enterprise Alliance - Over 150 participants from Gov’t & many

industries – Learn about and leverage the Ethereum blockchain

• Disruption coming for all intermediary businesses

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OTHER BLOCKCHAINS

• Private & Permissioned blockchains

• Gives operators control over permission rights– Who can view the ledger– Who can submit transactions– Who can operate a node and verify transactions

• Allows for faster transactions – No need to wait a couple of hours.

− Trusted parties are responsible for the verification process and broadcast to the rest of the network

– Ability to fix errors, reverse transactions, restrict access and reduce likelihood of outsider attacks. (Less secure – relying on trust)

• Analogous to intranets vs. the internet

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CRYTPO-CURRENCIES & TOKENS

• There are over 1200 crypto-currencies/tokens which can be traded on various exchanges

• Market cap is $245B− Top 5 = 85% of the market cap:− BTC= 56%, ETC = 14%, BCH =9%, XRP = 4%, DASH = 2%

• Crypto-currencies are the mechanisms used for incentives & exchanging value on their native blockchain – BTC, ETH, XRP

• Tokens represent any asset or utility that is fungible in a decentralized application utilizing an existing blockchain like Ethereum. - Filecoin

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USE CASE: INITIAL COIN OFFERINGS (ICO’s)• Ownership in the protocol layer vs. application layer –

– Ie. Owning a piece of HTML vs. an app like Facebook

– Liquid Venture Capital, • Security Token – Similar to equity but liquid• Utility Tokens - non dilutive capital

– More money raised in ICO’s Vs. VC’s in 2017 • > $3.6B raised YTD in ICO’s

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ICO’S: Total Raised $3,557,667,313Total Number of ICO’s: 222

Top Ten ICOs of 2017

Position Project Total Raised

1 Filecoin $257,000,0002 Tezos $232,319,9853 EOS Stage 1 $185,000,0004 Paragon $183,157,2755 Bancor $153,000,0006 Kin $97,041,9367 Status $90,000,0008 TenX $64,000,0009 MobileGO $53,069,23510 KyberNetwork $48,000,000

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USE CASE: MONEY REMITTANCE / CROSS BORDER PAYMENTS • Blockchain speeds up and simplifies cross boarder payments

• Access to the Financial System for 2B unbanked • = Internet connection + a smart phone

• The way developing countries leapfrogged landline technology wireless• Expect to bypass intermediaries like banks Finance on the blockchain

• $600B/year is sent by international migrants to their families in other countries. 73% is to developing countries, recipient has no access to bank accounts (-World Bank)

• Businesses send $155T+ of cross boarder payments (- Standard Chartered) • Spend $1.7T in supporting operational costs (- McKinsey, Global Payments

Industry Study, 2016)

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USE CASE: MONEY REMITTANCE / CROSS BORDER PAYMENTS

• Western Union takes 8-10% of funds - testing Coinbase integration

• Abra – Allows money to be sent from mobile to mobile utilizing tellers– Costs only 2%

• Ripple - real time cross border payments between banks in seconds– 75+ clients including Bank of America, RBC, Standard Chartered, UBS,

BBVA & a 47 bank consortium in Japan – Microsoft using for mobile payments for the unbanked.

• JP Morgan – announced a new interbank payment platform focused on correspondent banking market –> Quorum, Ethereum based private blockchain

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USE CASE: WALL STREET

• Clearing and Settlement of trades – instantaneous, freeing up capital, reduce duplicative processes, creates synergistic simultaneous access to constantly updated information. $10B/yr savings (– Accenture)

• Smart Contract + Digital Ledger will automate work flows, speed up transactions, cut costs

• Nasdaq - Private Equity Cap Table Management

• The State of Delaware – Incorporating new companies and simultaneously have the shares issued on the blockchain, keep track of them correctly and eliminate the many errors often made

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USE CASE: DERIVATIVES

• By December 2017:

– CME Group (the world’s largest derivatives exchange) is expected to trade bitcoin futures contracts –

• Will give investors ability to hedge bitcoin investments

– The UK’s Royal Mint & The CME Group will be putting gold on the blockchain to streamline trading

– 1 gram of gold = 1 token called RMG (Royal Mint Gold) issued by the Royal Mint and tradeable

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USE CASE: INTERNATIONAL TRADE FINANCE• Manual, paper based process involving 30+ pieces of original

documentation, hundreds of copies and 50+ people – Letters of credit, bills of lading, physical stamping of paper– Shipping companies, agents, freight providers, ports, customs,

insurers, etc.

• Companies all over the world are working to create a chain of custody which all involved parties can track. Eliminating all the paperwork from the supply chain– CargoChain of Germany, Wave of Israel, EssDocs of Malta and

Bolero in the UK

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USE CASE: SUPPLY CHAIN MANAGMENT

• Provenance –

• IBM - tomatoes on a blockchain– Trusting a sticker Vs. a QR Code – Which product would you buy?

• Walmart’s blockchain-based supply chain test with IBM and Tsinghua University

• Focused on tracking pork in China• Tainted food products are tracked in minutes vs. days

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USE CASE: IDENTITY

• According to the World Bank, as many as 1.5 billion people lack "legal identity," - difficult to obtain bank account & access other services including education and social welfare programs

• Microsoft and Accenture Unveiled Global ID System for Refugees At the ID2020 Summit hosted in the United Nations June 2017 − Millions of refugees and others without documents can whip out a

phone or other device to quickly show who they are and where they came from

− Combines biometric data (like a fingerprint or an iris scan) and Ethereum’s blockchain technology to create a permanent identity

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USE CASE: LAND REGISTRY

• According to the American Land Title Association, the title insurance industry generated $14.3 billion in title insurance premiums during 2016

• Peruvian economist, Hernando DeSoto, has estimated that worldwide, people have $20 trillion of value in houses, cars &other assets for which they do not have legal title

• Believes this is the #1 issue for economic mobility

• BitFury is helping the Government of Ukraine to move their land registry to the blockchain, Factom in Honduras

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USE CASE: HEALTHCARE

• Enabling truly interoperable electronic health records

• Patient maintains full access & control of own data, easy to share

• Fraud significantly eliminated, Claims payment processes automated

• Phillips Healthcare formed a Blockchain Lab to develop solutions for industry

• Pfizer and Genentech formed MediLedger blockchain platform, powered by JPM’s Ethereum based Quorum blockchain, to keep counterfeit goods out of medical supply chains

• The Estonian e-Health Authority is developing a blockchain based system to secure medical records (with hash values indicating when files were updated)

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USE CASE: THE INTERNET OF THINGS (IoT)

• Blockchain technology allows for trusted transactions not just among people but with and among smart devices

• Safeguarding against Cyber warfare

• IBM is using blockchain as the backbone for their IOT.– According to Coindesk, IBM has 1500 employees dedicated to

blockchain technology projects

• Devices will communicate with each other by exchanging information on the blockchain -

• NEM smart certificate program to control IoT devices. Owner of certificate has control of the IoT device. Transferable

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USE CASE: AUTONOMOUS CARS AND INSURANCE

• Toyota enlisted a series of partners that specialize in different aspects of blockchain technology to explore how the technology may be applied to the car industry

• Initially focusing on sharing data on every trip that an autonomous vehicle takes; − Create new insurance products that based on the way owners

use the cars− On developing tools that users can have to make ride-sharing

easier

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USE CASE: ANTI-CORRUPTION & ECONOMIC GROWTH• Adeolu Fadele, President of CDIN says, “CDIN (Cryptography

Development Initiative of Nigeria) hopes to bring together relevant government agencies, investors, consumers and other stakeholders interested in Blockchain technology, in order to raise awareness, discourage crime, protect consumers and unlock new jobs and business opportunities in Nigeria.” – www.Cointelegraph.com

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USE CASE: ADVERTISING

• Comcast, Disney, NBC, Cox, and others to launch blockchain ad platform in 2018Mediaset Italia, Channel 4, and TF1 group are also involved

• The platform will enable marketers, publishers and programmers to match their own customer data anonymously in order to determine which network program may have the best result for a certain product ad

• They will all share access to data without having to pool it in any one place

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CONCLUSION

• Dream up the unimaginable blockchain technology can and will create!

• Blockchain - decentralized ledger, enables any asset to be digitized & kept track of updated securely, eliminating the need for manual, duplicative processes & trusted 3rd

parties

• Bitcoin – public blockchain, disruptive payment network, a digital currency and possibly a new asset class

– Bitcoin is just one application of blockchain technology as Amazon is of the Internet

• We can’t even imagine all the ways blockchain will be used but:– Lives will be improved all over the world – Businesses across all industries will be streamlined– Disruption is coming – all companies should expect competition from blockchain

versions of themselves

BLOCKCHAIN IS JUST AS, OR MORE TRANSFORMATIVE AS THE INTERNET

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Blockchain Technology and Cryptocurrencies: Improving Lives and Transforming Businesses Globally

Sheri KaisermanHead of Advanced Securitiessheri.kaiserman@wedbush.com

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BECOME A BILLIONAIRE

New definition of a billionaire in a blockchain world:

“Someone who impacts the lives of billions of people”

– Brock Pierce