© Z/Yen Group

2016

Z/Yen Group Limited

Risk Reward Managers

90 Basinghall Street

London EC2V 5AY

United Kingdom

tel: +44 (20) 7562-9562 www.zyen.com

Mutual Distributed Ledgers

(aka blockchains)

Without The Money

Professor Michael Mainelli

@mrmainelli

michael_mainelli@zyen.com

Edinburgh, 28 April 2016

Scotland

© Z/Yen Group

2016

♦ Special – City of London’s leading commercial think-tank

♦ Services – projects, strategy, expertise on demand,

coaching, research, analytics, modern systems

♦ Sectors – technology, finance, voluntary, professional

services, outsourcing

Independent Publisher Book Awards Finance, Investment &

Economics Gold Prize 2012 for The Price of Fish

British Computer Society IT Director of the Year 2004 for

PropheZy and VizZy

DTI Smart Award 2003 for PropheZy

Sunday Times Book of the Week, Clean Business Cuisine

£1.9M Foresight Challenge Award for Financial £aboratory

visualising financial risk 1997

Z/Yen

© Z/Yen Group

2016

♦ Distributed ledgers (1995-present)

♦ LIBOR and FX surveillance (2007-present)

♦ PropheZy and VizZy – automation &

visualisation of compliance monitoring

(2002-present)

♦ Prediction markets and bubbles (1998-

present) – www.extzy.com

♦ Market intelligence – Ministry of Defence,

e.g. Vision 2020 (1994-present)

♦ Avatars for Big Data (2010-2012)

♦ Financial £aboratory Club visualising risk

(1997-1998)

Z/Yen in Finance Research

© Z/Yen Group

2016

The Study Of Money Is

The Root Of Much Madness

[www.dilbert.com, Thursday, 27 January 2015]

[http://illusionsetc.blogspot.com/2005/08/moving-mobius-strip.html]

www.longfinance.net

© Z/Yen Group

2016

Bit + Coin

Spectrum.ieee.org “How a Bitcoin Transaction Works”

© Z/Yen Group

2016

Ledgers: Look Beneath The Coins

“…

the potential impact of the distributed

ledger may be much broader than on

payment systems alone. The majority of

financial assets — such as loans,

bonds, stocks and derivatives — now

exist only in electronic form, meaning

that the financial system itself is already

simply a set of digital records.”

Bank of England, Quarterly Bulletin

(2014, Q3)

© Z/Yen Group

2016

Our Research

© Z/Yen Group

2016

Possibly Distributively Ledgerable

Area Possible Applications Financial instruments, records, models

Currency, private and public equities, certificates of deposit, bonds, derivatives, insurance policies, voting rights associated with financial instruments, commodities, derivatives, trading records, credit data, collateral management, client monies segregation, mortgage or loan records, crowd-funding, P2P lending, microfinance, (micro)charity donations, account portability, airmiles & corporate tokens, etc.

Public records Land and property titles, vehicle registries, shipping registries, satellite registries, business license, business ownership/incorporation/dissolution records, regulatory records, criminal records, passport, birth/death certificates, voting ID, health and safety inspections, tax returns, building and other types of permits, court records, government/listed companies/civil society, accounts and annual reports, etc.

Private records Contracts, ID, signature, will, trust, escrow, any other type of classifiable personal data (e.g. physical details, date of birth, taste) etc.

Semi-private/semi-public records

High school/university degrees and professional qualifications, grades, certifications, human resources records, medical records, accounting records, business transaction records, locational data, delivery records, genome and DNA, arbitration, genealogy trees, clinical trials, etc.

Physical keys Key to home, hotel, office, car, locker, deposit box, mail box, Internet of Things, etc. Intellectual property

Copyrights, licenses, patents, digital rights management of music, rights management of intellectual property such as patents or trademarks, proof of authenticity or authorship, etc.

Other records Cultural, historical events, documentary (e.g. video, photos, audio), (big) data (weather, temperatures, traffic), SIM cards, archives, geostamping, etc.

© Z/Yen Group

2016

Why Does A Central Registry Exist?

Financial services are based

on ‘mistrust’ & leverage

♦ Validate - Sin of

Commission – forgery of a

transaction

♦ Safeguard - Sin of Deletion

– reversal of a transaction

♦ Preserve - Sin of Omission

– censorship of a

transaction

[Robert Sams, “Blockchain Finance” (March 2015)]

© Z/Yen Group

2016

? Validate – “a trust model for timestamping”

Safeguard – “a set of rules for updating

state via blocks”

Preserve – “a shared state”

Persistent & Pervasive

Reducing Natural Monopolies

[Nick Williamson, “What Is A Blockchain?” (12 April 2015) - http://blog.credits.vision/what-is-a-blockchain/]

© Z/Yen Group

2016

Ledgers Are Boring

“Sharing Ledgers For Sharing Economies:

A Boring Introduction To Mutual Distributed Ledgers” Z/Yen (2015) - https://youtu.be/Hwhigpr4720

© Z/Yen Group

2016

♦ ledger – a record of transactions

♦ distributed – divided among several or many, in multiple

locations

♦ mutual – shared in common, or owned by a community

♦ mutual distributed ledger (MDL) - a record of

transactions shared in common and stored in multiple

locations

♦ mutual distributed ledger technology – a technology that

provides an immutable record of transactions shared in

common and stored in multiple locations

♦ blockchain - “a transaction database shared by all nodes

participating in a system based on the Bitcoin protocol”

Terminology Evolving

© Z/Yen Group

2016

♦ 1976 – Diffie-Hellman & Merkle

(also RSA)

♦ 1990 – Mondex, Digicash, Flooz

♦ 1993 – Encrypted Open Books

♦ 1995 – Z/Yen Stacks & Sleeves

♦ 1996 – Ricardo payment system

♦ 1998 – Wei-Dai b-money, Bitgold

♦ 1999 – LOCKSS & CLOCKSS

♦ 2000 – Gnutella

♦ 2004 – Ripple

♦ 2007 – Estonia

♦ 2009 – Bitcoin

Mutual Distributed Ledger Timetable

♦ 2013 – Silk Road, FBI, Alderney coin

♦ 2014 – Regulators – Jersey &

Alderney, Isle of Man, FATF, ECB,

State of New York

♦ 2015 – IBM-Samsung, Bank of

England research agenda, UK budget

for cryptocurrency standards,

Barclays, UBS, BNY Mellon, Goldman

Sachs, USAA, NASDAQ, Honduras

land registry, Channel Islands

Standards for MDLs, Fine (sic) Sign of

having arrived – Ripple $700,000, Sign

of the Tines – Bitcoin forking hell,

Economist Special, FT Special

♦ 2016 – UK government, Blythe

Masters DAH, R3, SafeShare

Insurance, CLEAR, …

© Z/Yen Group

2016

Buzz or Hype? The New New Thing

[Ken Tindell mashup - 14 May 2015 https://twitter.com/kentindell/status/598865133247569920]

© Z/Yen Group

2016

The Old Old New New Thing…

[www.dilbert.com, Friday, 17 November 1995]

[Internet (1976 for me), databases (Oracle, Ingres, DBII,

relational/hierarchical/distributed), web (SGML, Gopher), ‘Internal Internets’ (i.e.

intranets), social media (SixDegrees)…]

© Z/Yen Group

2016

Hype?

14 January 2016 7 Emerging Trends For Bitcoin and the Blockchain Coindesk

15 January 2016 British Isle Alderney Sponsors Distributed Ledger Project Coindesk

01 February 2016 BAFT Event Attendees See Future With Billions of Blockchains Coindesk

23 February 2016 Building Blocks: A History Lesson In Ledger Technology BlockchainBriefing

10 March 2016 Blockchain, the Technology Behind Digital Currency Bitcoin, Makes a Splash in Insurance to Offer a Solution to Homeowners Renting out Part of Their Property

City AM

14 March 2016 Lloyd's Underwrites First Blockchain Solution for Sharing Economy Insurance Post

17 March 2016 Blockchain Insurance Start-Up SafeShare Launches First Blockchain Insurance Solution with Vrumi

Blockchain News

18 March 2016 SafeShare Releases First Blockchain Insurance Solution For Sharing Economy

EconoTimes

19 March 2016 SafeShare Insurance over Blockchain for Shared Economy Businesses

NewsBTC

23 March 2016 Z/Yen: Clinical Trial Records Move To Blockchain Blockchain News

23 March 2016 Clinical Trial Records Move To Blockchain MondoVisione

01 April 2016 UK Start-Up Pilots Blockchain Powered Trading Platform - First Implementation Of Long Wavelength Trading

MondoVisione

© Z/Yen Group

2016

♦ Identity systems – PwC KYC Centre

of Excellence

♦ Wholesale insurance ‘deal rooms’

♦ Retail insurance – motor, home,

small business

♦ Credit validation and scoring

♦ Clinical trials – 60,000 per day

♦ Timestamping & retrieval –

MetroGnomo.com with States of

Alderney

Sample MDLs We Have We Built

© Z/Yen Group

2016

InterChainZ & IntereXchainZ

© Z/Yen Group

2016

Identity, Identity, Everywhere

© Z/Yen Group

2016

Insurance - ACORD Messaging

© Z/Yen Group

2016

MetroGnomo

© Z/Yen Group

2016

INSERT OTHER

Host details Property details Peroid of cover Policy

cancelled

Reason for cancellation

Premiu

m IPT

From To

First Name

Surname

Unique Refere

nce Address Poscode Address Postcod

e Date Time Date Time 9.50%

John Smith VR000

1 123 Bank

Street EC2V 5AY 54 Woodhill

Lane W17 RQ No £2.00 £0.19

Select £-

Select £-

Select £-

Select £-

Select £-

Select £-

Select £-

Select £-

© Z/Yen Group

2016

Process Change Difficulty

Technology

Change

Difficulty Asset Transfer

Archiving

Contract Execution

Shared Data Timestamping

Market

Wholesale Payments

Asset Maintenance

Regulatory Reporting

Identity

Deal Rooms

Process versus Technology

© Z/Yen Group

2016

*In some

territories these

can be onshore

Current Operating Model

Coverholder & Service Company – Key Interactions

24

NB: Relates to Lloyd’s business only. This

diagram does not include known issues such

as: oversight, approval, audits and complaints

Justification for RAG status

1) Multiple data formats

2) Negative Londonisms, e.g. Declaration,

onerous data requirements

3) Paper usage, photocopying and

scanning, duplication

4) Negative Londonisms, e.g. LPANS,

Bureau queries

5) Manual mismatch clearing, data duplication

5a) ACORD XML

6) Lack of structured data, no written data or

‘Net of RI’

7) Lack of structured data. three days to

settle monies

8) Lack of structured data, duplication

across carriers

9) and 10) Lack of audit trail and granularity,

signed data only

Various

reports

Risk query, claims, Policy etc.

Reporting Data

Risk, premium, claim

information; premium and

claims payments Referrals and

responses

Quote, Policy, Claims

Advice, Declaration,

Premium Payment etc.

Policy, Claims

Advice,

Premium

Payment etc.

Domestic Market

London Market

International

Offices

1

1

1

2 2 2

1

0

Tax and

Regulatory

Reporting

Agreement

Process

Bureau Submission

Regulatory

Information

(Lloyd’s only)

Syndicate Returns (Lloyd’s only)

Central Settlement

London Market

Carrier(s)

Approved

Broker

4

5 6

8

7

9

3

Lloyd’s

Lloyd’s

Business

placed outside

LM

Bureau

Services

LDR 5

a

* In some territories these can be onshore.

Key: Inefficient process 1 Sub-optimal process Efficient process Process sequence

Client (can be in or out of

territory)

Local / Placing /

Producing Broker*

Regulators

and Tax

Authorities

Regulators

and Tax

Authorities

Coverholder / Service

Company (TPA for some

claims)

© Z/Yen Group

2016

Regional Broker

Policy Holder

Target Operating Model (TOM)

London Market – Key Interactions

25

Local Broker

Interaction

Any direct interaction

would either be where

local broker is a

subsidiary of the

Approved Broker, or

where local broker

has been approved in

its own right

Regulatory

Information

for IUA

E.g. Quote request

Declaration

Claims Advice

Premium Payment

*

Risk query,

claims, Policy

etc.*

Non Service

Hub Activities

6

Approved Broker

2

5

4

7

6

7

2

1

Lloyd’s

Data feed

Data feeds

Direct

access to

Carrier via

Hub

Data feed

(ACORD XML)

Real-time

integration

and ACORD

messages

Real-time

integration

and ACORD

messages

Face-to

face

negotiation

(as

required)

Broker Authorised: Direct

Policy, Claims Advice,

Premium Payment,

Endorsements etc.

Justification for RAG status

1) and 2) Easier access to central

services

3) Placing avoiding paper with single

contract version and no re-keying of

data; enhance trading floors

4) and 5) Easier access to central

services (ACORD) to avoid

duplicative processes and rekeying

data

6) Data provided to Lloyd’s and IUA in

ACORD XML for consistency, audit

trail and automated reporting

7) Written as well as signed data

provided to regulators, full audit trail

and consistency

3

London Market

Carrier(s)

Optional Channels

Customer Interactions

Carrier Interactions

Carrier

Services

Bureau

Services

e-Placing Services

Document

Repository

Claims Services

Broker

Services

Customer

Services

Data services

Message Hub (TMEL)

Service Hub

* Encourage Data Standards adoption, don’t enforce a new Londonism

Key: Inefficient process 1 Sub-optimal process Efficient process Process sequence

NB: Brokers primarily interact with broker

and market services, NOT carrier or Hub

services

Surplus Lines

Broker

Local Broker

London

Market

Companies

IUA

Companies

Regulators

and Tax

Authorities

Structure Data Capture

© Z/Yen Group

2016

No

Trusted

Third

Parties

Single

Trusted

Third

Party

Efficient

Inefficient

Master Node

Supervisor Nodes

Majority Nodes

Collective Nodes

Free for All Nodes

Bitcoin Ethereum

Ripple

Central Database

‘Woven’ Broadcasting

Mistrust Costs Coins

Paper

© Z/Yen Group

2016

Economic Matters

Factor Bitcoin Ethereum ChainZy

Speed – transactions per second

7 tps 30 tps 2,000 to 10,000 tps (single transmitter)

Storage Fixed Fixed Variable

$/transaction $0.10 to $2.50 $0.20 to $5.00 <$0.000001

Validation time 10 minutes 15 seconds 0.0001 second

© Z/Yen Group

2016

♦ Identity & health, clinical trials

♦ Credit

♦ Capital markets – banks, brokers, IDBs, exchanges, CCPs,

CSDs, custodians, data vendors, industry groups

♦ Insurance – wholesale insurers and reinsurers, mutuals

♦ Standards and trade bodies (e.g. payments councils),

shipping, nuclear and other large-scale projects, aviation,

chain-of-custody, …

♦ Government – identity management, public records,

regulate-use-supply

♦ Games and prediction markets

♦ Legal - intellectual property, escrow

Where Are We Going?

© Z/Yen Group

2016

♦ Usable

visualisation, apps, key structures

reporting, e.g. ‘receivers’, data location

♦ Immutable - preserve

partial data holding

long-term data storage

♦ Distributed - safeguard

transmitting & receiving, high volumes, multiple transmitters

‘genetic splicing’ and integrity

support vector machine surveillance

♦ Mutual - validate

validation methods

standards

Digital Vellum

© Z/Yen Group

2016

♦ Mutual distributed ledgers help communities

share information across time and space, less

vulnerable to natural monopolies

♦ Mutual distributed ledgers help make better

‘contract’ utilities by:

safeguarding transactions

preserving transactions & data

♦ Mutual distributed ledger technology will

displace much messaging and shared data

functions

… try one out … www.MetroGnomo.com

Closing Thoughts

© Z/Yen Group

2016

Thank you!

When Would We Know Our Commerce Is Working?

“Get a big picture grip on the details.”

Chao Kli Ning