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HKSA Academic Group

Introduction to Blockchain

2017 10
William Gee
Partner, PwC China
Risk Assurance Innovation & Disruption Leader
HKSA Academic Group | Blockchain Introduction 2017.10
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Technology Megatrends

http://www.pwc.com/gx/en/issues/technology/tech-breakthroughs-megatrend.html

HKSA Academic Group | Blockchain Introduction 2017.10


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About Blockchain

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Blockchain |

a permissionless distributed database based on the bitcoin protocol that maintains


a continuously growing list of transactional data records hardened against
tampering and revision, even by operators of the data store's nodes

Attributes



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Why so much attention on Blockchain?

Payment Service Payment


Consumer Retailer Acquirer
Provider Gateway

Fraud check
Payment acceptance

Refunds Issuer
Chargeback

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History of Bitcoin

2008 2010



Laszlo
Hanyecz 10,000
2 2017
5202,053
Western Union 853,218
201311 8134,126
1,000
8164,361

2009 2013 USD 5922.88


USD 99,760,717,700

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Bitcoin Blockchain

Bitcoin allows two mutually untrusting parties to Bitcoin has been a proving ground for
send money directly to each other without a blockchain technology
third party intermediary In a trust-less environment since 2008, Bitcoin
Bitcoin utilises the blockchain to store has shown blockchain to be secure, resilient and
has not been hacked
transactions and the track ownership of Bitcoins

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Core Concept of Blockchain


Distributed ledger Cryptography Consensus Smart contracts
Every participant in the Integrity and security of the Verification is achieved by The ability to run additional
network has simultaneous information on the participants confirming business logic means that
access to a view of the blockchain are ensured with changes with one another, agreement on the expected
information cryptographic functions replacing the need for a third behaviour of financial
party to authorise instruments can be
transactions embedded in the blockchain

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Distributed Ledger

Nodes

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Cryptography

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Concensus

permission-less
permissioned

Proof-of-work
Proof-of stake

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Smart Contract

contract token {
mapping (address => uint) public coinBalanceOf;
event CoinTransfer(address sender, address receiver, uint amount);

/* Initializes contract with initial supply tokens to the creator of the


contract */
function token(uint supply) {
coinBalanceOf[msg.sender] = supply;
}

/* Very simple trade function */


function sendCoin(address receiver, uint amount) returns(bool sufficient){
if (coinBalanceOf[msg.sender] < amount) return false;
coinBalanceOf[msg.sender] -= amount;
coinBalanceOf[receiver] += amount;
CoinTransfer(msg.sender, receiver, amount);
return true;
}
}

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Factors affecting future development of Blockchain


Interoperability Scalability Vulnerability Regulatory
Standards Volume DDoS attacks
Messages Issuance of assets

Consensus Response times Confidentiality


Compliance rules
APIs
Oversight

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International Standard ISO/TC 307


ISO/TC 307: Blockchain and distributed ledger
technologies
ISO/TC 307/SG 1 Reference architecture,
taxonomy and ontology Working group
ISO/TC 307/SG 2 Use cases Working group
ISO/TC 307/SG 3 Security and privacy
ISO/TC 307/SG 4 Identity Working group
ISO/TC 307/SG 5 Smart contracts

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Deploying Blockchain Technology

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The Trust Machine

the blockchain is an apparently


mundane process that has the

potential to transform how people
and businesses co-operate. Bitcoin
fanatics are enthralled by the
libertarian ideal of a pure, digital
currency beyond the reach of any
central bank. The real
Blockchain innovation is not the digital
coins themselves, but the trust
machine that mints themand
which promises much more besides.

The Economist, November 2015

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Blockchain vs. Traditional Technology

Blockchain work-flow Traditional work-flow (e.g. payments)

A B
B

B

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Views of Governments


2015 12 (SEC)
Overstock

201666


2015(ASX)( 201512
)

20161100
CHESS
20168
20162;
20163(Australia Post)( 20164
) 20168ChinaLedger


2016188
2016
P2P
20168
20166PwC
HKSA Academic Group | Blockchain Introduction 20168RSCoin 2017.10
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Chinas focus on Blockchain





20162

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Alliances: R3 has over 70 financial services institutions as members

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Blockchain adoption: China vs. rest of world




Linq





CHESS



Circle


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Blockchain disruptions are not just for financial services sector

State of Utah deploys blockchain based voting system

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Example applications of Blockchain technology


VeChain VAM


ID


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Potential Blockchain use cases

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Driving collaboration

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Towards building a new Eco-system

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Initial Coin Offerings (ICOs)

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Traditional funding mechanism

Angel PE | VC Institutions | Public


Seed funding / Angel Round A-Series, B-Series, etc. IPO

Size 20,000- 150,000-


0-25,000 ~1.5m-20m > 50m *
(USD) 150,000 1.5m
Time 1 1 1 1-2 1-2

Probability 25% 2.5% 0.25%

* 2016 median deal size of US IPO funds raised: USD 95m


Source: Median deal size of IPO in the United States from 2005 to 2016

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Traditional IPO Experience

Executing a successful IPO is the culmination of a Your IPO is not the end of the story - it's only the
long, complex process. beginning. Once listed, your company will be under
From strategy, accounting, reporting, financial far greater public scrutiny than ever before, with a
systems, governance, media and investor relations, vastly expanded universe of stakeholders - and a
to treasury and financial risk management, legal, significantly larger portfolio of new risks, and
tax, HR, technology - every piece of the puzzle must obligations, to manage. Any weakness in systems or
be in place and connected before you succeed. failure to comply with regulations may cause a loss
of investor confidence - not to mention reputational
Your listing will require orchestrating many key
damage, and the potential for significant company
players - bankers, lawyers, auditors, reporting
and personal monetary damage as well.
accountants, underwriters, investor relations and IT
professionals, among others. In more ways than one, the public's perception of
your company will have a direct effect on the value
of your stock
Source: PwC IPO Services

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Examples of global ICO deal size

2016, The Decentralized Autonomous Organisation 2017.4.24: Gnosis raised $12.5m in 10 minutes; 7m
The DAO$150m in first 30 seconds.
2014, Ethereum: $18m 2017.6.1: Brave raised $35m in 35 seconds.
2016, Waves: $16m 2017.6.12: Bancor raised $153m in under three
2017, Qtum: $15.5m hours.

2016, ICONOMI: $10.5m 2017.6.13: IOTA commenced trading on Bitfinex


and reached a market capitalisation of $1.8bn.
2016, GOLEM: $8.5m
2017.6.20: Status raised $102m.
2014, Maidsafe: $8m
2016, SingularDTV: $7.5m
source: Top 8 ICOs as of March 2017; https://blockchainhub.net/initial-coin-offerings-icos/

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ICO is the preferred funding mechanism for blockchain start-ups

2017

XYZ
VC
2.95 ICOs
3.26

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Continuous scrutiny of ICOs by regulators

Report of Investigation Pursuant to Section


21(a) of the Securities Exchange Act of 1934:
The DAO

MAS clarifies regulatory position on the offer of


digital tokens in Singapore

Consumer Advisory on Investment Schemes


Involving Digital Tokens (Including Virtual
Currencies)

OSC Highlights Potential Securities Law


Requirements for Businesses Using Distributed
Ledger Technologies

HKSFC Statement on initial coin offerings

UK FCA statement on initial coin offerings

South Korea bans ICOs

Swiss FINMA issued guidance on ICOs


Financial Commission formed ICO Certification
Committee
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Continuous scrutiny of ICOs by regulators

Brazils equivalent of the SEC, the Comiss o de Valores Mobili rios The Peoples Bank of China, along with 6 other Chinese
(CVM), published (July 13th) initial legislation instruction (Instru o government bodies including the national securities regulator
CVM No. 588) regulating crowdfunding via ICOs (CSRC), publicly banned ICO fundraising in China on
The United States SEC published on July 25th on ICOs: Report on September 4th
investigation, Investor bulletin, and Investor alert SFC in Hong Kong announced its views on ICOs on September 5th
Monetary Authority of Singapore published its views on August 1st on The UK Financial Conduct Authority (FCA) announced that it was
ICOs: Clarification statement, and Consumer advisory keeping a close eye on ICOs on September 6th; Consumer warning about
Canadian Securities Administrators (CSA), including the Ontario the risks of Initial Coin Offerings (ICOs) published on September 12th
Securities Commission, published its views on August 24th on ICOs The Securities Commission (SC) of Malaysia issued a press release
Israel Securities Authority announced on August 30th that it is forming cautioning investors in ICOs on September 7th
a committee to look at ICOs The Dubai Financial Services Authority (DFSA) warned investors that
The Financial Supervisory Commission (FSC) in South Korea ICOs were risky on September 13th
announced on September 3rd that it held a joint task force meeting to The Securities and Exchange Commission in Thailand issued some
strengthen regulations around digital currency trading, including statements regarding ICOs on September 14th
fundraising with ICOs Gibraltar Financial Services Commission (GFSC) issued an official
Central Bank of Russia issued a public statement on September 4th that statement regarding ICOs on September 22nd
included its views on ICOs

: Great Wall of Numbers, Which regulators have publicly commented on Initial Coin Offerings?
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Continuous scrutiny of ICOs by regulators

North American Securities Administrators Association (NASAA) issued Abu Dhabis Global Markets Financial Services Regulatory Authority
its annual paper and warned of risks around cryptocurrencies and ICOs (FSRA) released guidelines on ICOs on October 9th
on September 26th The Central Bank of Lithuania announced its position and guidelines
Macau Monetary Authority (AMCM) announced that banks regarding ICOs on October 11th
cannot engage with ICOs and cryptocurrencies either directly The US Commodity Futures Trading Commission (CFTC), through its
or indirectly on September 27th internal division, LabCFTC, released a primer on cryptocurrencies
The Australian Securities and Investments Commission (ASIC) released including ICOs on October 17th
formal guidance and comments about ICOs on September 28th to be continued
The Financial Services Commission in South Korea said all
kinds of initial coin offerings (ICO) will be banned as trading
of virtual currencies needs to be tightly controlled and
monitored on September 29th
The Financial Market Supervisory Authority (FINMA) in Switzerland
announced it is investigating ICO procedures and issued formal
guidance on September 29th
SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real
Estate and Diamonds on September 29th

: Great Wall of Numbers, Which regulators have publicly commented on Initial Coin Offerings?
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PwC ICO Risk Assessment Guidance

Project Background

Project Whitepaper

Project Team Members

Project Source Code

Project Operation

ICO ICO Plan

Financial Control

ICO

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PwC ICO Risk Assessment Guidance:
Overall Project Maturity Assessment

DACA | ICO 2017.09


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PwC ICO Risk Assessment Guidance:
Determination of whether an ICO is considered a securities issue

DACA | ICO 2017.09


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ICO Regulatory

People say ICOs are great for ethereum


because, look at the price, but its a ticking
time-bomb Theres an over-tokenization of
things as companies are issuing tokens when
the same tasks can be achieved with existing
blockchains. People are blinded by fast and
easy money. ICOs operating in the Wild West of finance isnt
Charles Hoskinson, Co-founder of Ethereum sustainable If it talks like a duck and walks like
a duck, the SEC will say its a duck.
Brad Garlinghouse, Ripple Chief Executive Officer

ICOs are likely to be subject to legal and regulatory restrictions in the future, and it may be necessary for
issues to proactively consider laws and regulations applicable to securities issuance and registration,
consumer and investor protection, and financial crime regulations.

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Build Trust in Society and Solve Important Problems

Contact

William Gee
Partner
Risk Assurance Innovation and Disruption Leader
Telephone: +86 (10) 6533 2269
eMail: william.gee@cn.pwc.com

2017 PwC. All rights reserved.


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