Understanding Blockchain and its application to the financial industry

1. Blockchain
Transact Faster, Safer, &
Cheaper

2. Agenda
• Blockchain – The Buzz
• Blockchain – The Basics
• Blockchain – For the Banks

3. The BUZZ
Blockchain

4. Blockchain – The Buzz is Everywhere
• Tokyo, March 01, 2017 : Japan bank consortium plan to use blockchain
technology from Google-backed Ripple to make payments
• New York, February 28, 2017 :Thirty big banks, tech giants, and other
organizations—including J.P. Morgan Chase, Microsoft, and Intel—are uniting
to build business-ready versions of the software behind Ethereum, a
decentralized computing network based on digital currency.
• Dubai, February 07, 2017 :Dubai, one of the world’s largest trading hubs, has
linked up with IBM (IBM.N) to launch a scheme using blockchain computing
technology to process transactions and keep track of goods being shipped,
IBM said on Tuesday.
• Mumbai, January 03, 2017: YES BANK, India’s 5th largest private sector bank
today announced that they have implemented a multi-nodal Blockchain
transaction to fully digitize vendor financing for Bajaj Electricals
• Mumbai , October 12,2016: ICICI Bank executes India’s first transaction on
blockchain. The ICICI Bank will expand the blockchain ecosystem and create
common working standards to push its commercial adoption, says Chanda
Kochhar

5. The Basics
Blockchain

6. Blockchain- It all started with…
• It all started with the white paper authored by Satoshi Nakamoto and published in 2008
(https://bitcoin.org/bitcoin.pdf)
• The White Paper Titled “BitCoin : A peer –to-peer electronic cash system” speaks
about online payment to be sent from one party to another without going through a
financial institution . The cryptographic currency which changes hands between the
parties is called BitCoin
• These peer to peer transactions are broadcast over the network and the nodes over
the network verify the transactions through proof-of-work
• The verified transactions are recorded in a public distributed ledger called as
Blockchain
• Like BitCoin, there are more than 710 crypto-currencies today . Example: DogeCoin,
Ether, XRP , LiteCoin
• To explain the concept of Blockchain, the next couple of slides will show a BitCoin
transaction and explain how a Transaction gets into the Block and a Block gets into the
Blockchain.

7. Transaction On The Blockchain

8. Transaction->Block->Blockchain

9. Properties of Blockchain
• Immutable - A write once read only database. A record once written into the Blockchain
can neither be altered nor be deleted
• Secure – The data is protected by complex mathematics i.e. hashing (SHA-256)
• Distributed – Many copies of the data are stored across the network i.e. Every node on
the network has the copy of the ledger, making it almost impossible to manipulate or
exploit.
• Efficient - The average time taken for the confirmation of a transaction is10 minutes.
• Cost-Effective - Lower Transaction Costs due to lesser or no intermediaries
• Transparent - The transactions are publicly recorded and available for scrutiny
• Low Counterparty Risk – No party can transfer assets which they do not own as all the
transactions are recorded on the blockchain.
• Privacy – The users are anonymous and do not need to provide address beyond their
public key.

10. For The Banks
Blockchain

11. Blockchain- An existential risk ?
• The Transactions on the blockchain do not need an intermediary
• The Transactions are created by any user who has a public and a private key on the
blockchain
• The Transactions are broadcast on the network and are verified by various nodes (i.e.
miners) on the network
• The Transactions are stored securely over the network.
• The Transaction fee is much lower than charged by any bank or payment system across
the globe.
• Thus, moving funds on the blockchain offers a lot more advantage over moving funds
through the banks.
• Hence, had the cryptographic currencies (say BitCoin) been widely accepted as
medium of payment and had there been regulations in place to control the risk of
money laundering , terror financing and tax evasion , the blockchain would eat up
into the banks business and possibly make them irrelevant in the long run.

12. Blockchain – An Opportunity
• The real innovation behind BitCoin is not the currency itself but the underlying technology
– Blockchain
• Blockchain has the potential to totally change the way we think about transaction history,
database storage and security
• Near instant settlement of funds, lower transaction costs for cross border payments are
some of the benefits the blockchain has to offer
• The challenge for the banks now is to provide the same benefits that the
permission less blockchain has to offer either by coming up with a rival
technological innovation or by exploiting the benefits the Block Chain has to offer
in a way that banks remain a part of the blockchain eco-system.
• Embedded in this challenge is the opportunity to reduce capital expenditure, lower
operational risks as well as offer better services at lower cost to the customers.
• Enter Private or Consortium Blockchain - A blockchain where a group of financial
institutions are nodes on the blockchain with some of the participants of the consortium
playing the miners or verifiers of the transactions.
• More on private blockchain in the upcoming slides

13. Private Blockchain
• A private blockchain is just like the public blockchain when it comes to the distributed
nature of the ledger – except that the private blockchain is behind the firewall and can be
mined by the computers on that network.
• Unlike the public blockchain, it is possible to quickly reverse a transaction on the private
blockchain as the number of nodes required to verify the reversal transaction are known.
• The rules of the private blockchain can be decided by the participants in the blockchain
thus giving better control.
• The nodes which verify the transaction are known. Hence there is no risk of collusion of
miners to validate a fraudulent transaction.
• The nodes are well-connected .Hence , faults if any can be fixed quickly and the time
taken for confirmation of the transaction is reduced due to fewer number of the nodes.
• Hence, the majority of the financial services firms exploring the use of blockchain are
looking at private or semi-private (consortium) blockchain.

14. Smart Contracts and Ripple Payments
• Smart Contract pioneered by Ethereum is one of the most widely talked about feature in
the blockchain ecosystem . Smart contracts have found their way in multiple business
use cases which need validation of a condition to undertake the next steps in the
business flow.
• IBM has come up with Hyperledger platform for smart contracts which is permissioned as
against the permission less smart contracts provided by Ethereum.
• Smart Contracts - It is a contract between parties written as code on the blockchain.
Once the triggering event is hit , the contract executes itself as per the terms and
conditions coded in the blockchain.
• Ripple Payments - Ripple’s distributed financial technology enables banks to send real-
time international payments across networks.

15. Banks Exploring Blockchain Use Cases

16. Blockchain Use Cases
Potential Use Cases in the financial services industry are listed below
• Trade Execution and Settlement
• Cross Border Payments
• Supply Chain Financing
• Syndicated Lending
• Centralized KYC
• Asset Registries
• Stock Exchange
• Bank Guarantees
• And many more…

17. References
• https://www.yesbank.in/media/press-releases/fy-2016-17/yes-bank-implements-multi-nodal-blockchain-
solution-in-india
• http://uk.reuters.com/article/uk-dubai-fintech-idUKKBN15M0SK
• http://www.livemint.com/Industry/R8qnQJ3Is2LAYtqt6oQeTN/ICICI-Bank-executes-Indias-first-
transaction-on-blockchain.html
• https://en.wikipedia.org/wiki/R3_(company)
• http://www.cnbc.com/2017/03/01/japanese-banks-plan-to-adopt-blockchain-for-payments.html
• http://fortune.com/2017/02/28/ethereum-jpmorgan-microsoft-alliance/
• http://cdn.americanbanker.com/media/ui/how-bit-works-big.jpg
• https://riazfaride.com/2012/07/12/is-bitcoin-an-invitation-for-money-laundering/
• http://fintechnews.ch/blockchain_bitcoin/introduction-bitcoin-blockchain-for-fiancial-services/1968/

18. Thank You