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8 dobrauz the dynamics of innovation

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Presentation from blockchain-real.net // blockchain-real.at (9th of March 2018, Graz, Austria)

Copyright/Property of: Dr. Guenther Dobrauz-Saldapenna (CH/AT), Experte für rechtliche & regulatorische Fragen bei Blockchain-Lösungen, Partner und Leiter PwC Legal Schweiz

Title: Die Dynamik der Innovation und was staatliche Regulierung damit zu tun hat: ICOs, Cryptocurrencies und Tokenized Assets - Stand der Dinge und was zu erwarten ist

The speakers provided the slides to the public and are shared in this LinkedIn Group: https://www.linkedin.com/groups/12087113
About Blockchain-REAL: Blockchain means revolution: What does blockchain technology - the operating system behind Bitcoin & Co, so to speak - for businesses and the real estate industry? The speculation hype around the cryptocurrencies obscures the view of a truly groundbreaking technology that is slowly but surely turning some things upside down. See what Blockchain can do on a day and decide for yourself how to use this technology.

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8 dobrauz the dynamics of innovation

  1. 1. The Dynamics of Innovation and what Regulation has to do with it. ICOs, Cryptocurrencies and tokenized assets - status quo and where we are headed. Dr. iur. Guenther Dobrauz-Saldapenna, MBA PwC Legal Switzerland We are building the law firm of the future. Every day. www.pwclegal.ch
  2. 2. 9 March 2018 PwC Regulation becomes as strategic dimension 1 Regulation becomes as strategic dimension blockchain-REAL 2 Status quo and where we are headed – Regulation becomes a strategic dimension
  3. 3. PwC 9 March 2018 How we should see regulation 3 blockchain-REAL 1 Regulation becomes as strategic dimension Innovators Early Adopters Early Majority Late Majority Laggards Key Success/ Performance Parameter Time Dominant Design Innovation Production/ Efficiency Dominant Design
  4. 4. PwC 9 March 2018 How we should see regulation 4 blockchain-REAL 1 Regulation becomes as strategic dimension Innovators Early Adopters Early Majority Late Majority Laggards Key Success/ Performance Parameter Time Enforced Standard Production/ Efficiency Regulation Enforced Standard
  5. 5. 9 March 2018 PwC Smart technologies and connected business models 2 Smart technologies and connected business models blockchain-REAL 5 Regulatory roadmap for Asset & Wealth Managers – In a nutshell Smart technologies and connected business models
  6. 6. PwC 9 March 2018 Smart technologies that enable new business models… 6 blockchain-REAL 2 Smart technologies and connected business models Speech synthesis Smart Technologies Business models:  Virtual currencies (“Bitcoin”, etc.)  Payment transactions (“Apple Pay”, etc.)  “Crowdfunding” and “crowdlending”  Digital trading / Robo-advice  Data analysis and interface programs  Data security solutions  Distributed ledger technologies (DLTs), blockchain in particular
  7. 7. PwC 9 March 2018 Horizons of technology disruption 7 blockchain-REAL 2 Smart technologies and connected business models 1995 now 2025 WWW Mobility Social Visualisation Networking Cloud Big data Data analytics Early machine learning IoT Hybrid cloud Containers Cybersecurity Natural language processing Large scale machine learning Deep learning Reinforcement learning AV/VR Biometric identity 3D/4D printing Blockchain Autonomous systems – cars and drones Nano-tech Advanced robotics – cyborgs, swambots Super computer – quantum, neuromorphic Autonomous super systems 0 3 5 15 Timeinyearstopeakofadoption Time to exponential technology breakthrough pointSource: dimensions data via @mikequindazzi Robotics Past (Internet) Different (Cloud) Beyond (Smart ecosystems) Other (Super society)
  8. 8. 9 March 2018 PwC Distributed Ledger Technologies (DLTs) and Blockchain 8 blockchain-REAL 2.1 Distributed Ledger Technologies (DLTs) and Blockchain 2.1
  9. 9. 9 March 2018 PwC DLT System layers 2.1 Distributed Ledger Technologies (DLTs) and Blockchain blockchain-REAL 9 Governance layer Token layer Technology layer Legal Entity Token Holder Inclusion Network Governance Decision- making Processes Off-chain Governance System Community Infra- structure Token Type & Purpose Utility & Rights Token Value Value Distribution Supply & Inflation Legal Status Blockchain/ Ledger Architecture Protocol Code Protocol- Level Consensus Mechanism Validation Algorithm Underlying Platform Code & Contract Security
  10. 10. PwC 9 March 2018 Blockchain The three levels 10 blockchain-REAL 2.1 Distributed Ledger Technologies (DLTs) and Blockchain Storing digital records1 Blockchain allows unprecedented control of information through secure, auditable, and immutable records of not only transactions but digital representations of physical assets. Exchanging digital assets2 Users can issue new assets and transfer ownership in real time without banks, stock exchanges, or payment processors. Executing smart contracts3 Self-governing contracts simplify and automate lengthy and inefficient business processes. Ground rules Terms and conditions are recorded in the contract’s code. Implementation The shared network automatically executes the contract and monitors compliance. Verification Outcomes are validated instantaneously without a third party.
  11. 11. PwC 9 March 2018 Blockchain is changing distribution models 11 blockchain-REAL 2.1 Distributed Ledger Technologies (DLTs) and Blockchain Investor Bank Custodian and BankClearing Data Vendor Client servicing Transfer Agent Asset ManagerDistributor Paying Agent Investor 1. Blockchain offers a new approach towards data management and sharing, enabling the opportunity to improve efficiency within the asset management industry. 2. Based on the blockchain technology, all facilitators within the value chain work from common datasets, in near real-time, and supporting operations are either streamlined or made redundant. 3. Examples of enhanced blockchain technologies are – faster interbank clearing and settlement, lower transaction costs, reduced counterparty risk, and increased transparency. Traditional fund distribution model (1-4 days processing) Blockchain distribution model (3-6 seconds processing) • Distributed Ledgers • Master data • Securities issuance • Trade contract recording • Clearing & Settlement • Asset Servicing Asset Manager
  12. 12. 9 March 2018 PwC Smart Contracts 12 blockchain-REAL 2.2 Smart Contracts 2.2
  13. 13. PwC 9 March 2018 Smart Contracts on the Blockchain 13 blockchain-REAL 2.2 Smart Contracts A smart contract is a computer code with a predefined set of rules that runs on a blockchain It defines the conditions under which all parties to the smart contract agree to interact with each other – it auto executes if all conditions are met Smart contracts eliminate the need of third parties It’s like a cryptographic box that contains value, and only unlocks, if certain conditions are met
  14. 14. PwC 9 March 2018 Smart Contracts Application Examples 14 blockchain-REAL 2.2 Smart Contracts 1-3 Days Minutes Manual remittance Automatic remittance Escrow necessary Escrow may not be necessary Expensive Fraction of the cost Physical presence (wet signature) Virtual presence (digital signature) Lawyers necessary Lawyers may not be necessary Smart contractsTraditional contracts ¢
  15. 15. 9 March 2018 PwC Initial Coin Offerings (ICOs) 15 blockchain-REAL 2.3 Initial Coin Offerings (ICOs) 2.3
  16. 16. 9 March 2018 PwC Understanding the ICO Initial coin offerings are making headlines. What they are, how they work, and what you need to know about these blockchain innovations. 2.3 Initial Coin Offerings (ICOs) blockchain-REAL 16 Initial coin offering: Bubble or break- through? Learn more about this fundraising phenomena. What if you could raise millions of dollars in capital for a startup without giving away any equity? One option could be via ICOs, where tokens are offered to willing purchasers. It’s a complex and rapidly evolving market. Here is a sense of how ICOs work and the initial regulatory response. At a glance An initial coin offering (ICO) is a form of fundraising that harnesses the power of cryptocurrencies and blockchain-based trading. Similar to a crowdfunding campaign, an ICO allocates tokens instead of shares to early investors in a business. These tokens typically do not represent actual ownership in the company, but they often provide access to an ecosystem and can be traded on an aftermarket. As with cryptocurrencies, all transactions are verified through a blockchain. It’s not a hype: ICOs raised over US$5 billion in 2017 in nearly 800 deals, according to CB Insights. Blockchain equity funding by comparison was a mere US$1 billion in 215 deals for the same period1). Benefits • ICOs represent a new option for raising capital. • The funds involved are typically much greater than the funds in basic crowdfunding campaigns. • ICO issuers can be creative with their business models. • Strong interest in cryptocurrencies has triggered attention in ICOs by both buyers and sellers. Challenges • A token received in an ICO does not grant equity rights. • ICOs are often unregulated; investors and issues need to beware. • Hackers have already breached ICOs and stolen funds. • When it comes to the taxation and legal status of ICOs many gray areas still exist. • The US Securities and Exchange Commission (SEC) notes that tokens or coins ‘that are offered or sold may be securities.’ As securities, they must be registered before sale and are subject to US federal securities laws2) . • Some startups offer ‘utility’ tokens (provide access to an ecosystem) instead of security tokens (provide economic exposure). • ICO deals are more and more frequent, and one major challenge is discovering and learning enough about them for due diligence purposes. • The ultimate ecosystem or promised product may not come to fruition. 1) http://www.cbinsights.com/research/blockchain-vc-ico-funding 2) http://www.sec.gov/news/public-statement-clayton-2017-12-11?utm_source
  17. 17. 9 March 2018 PwC How an ICO works 2.3 Initial Coin Offerings (ICOs) blockchain-REAL 17 After weighing the risks and upsides, Company X decides that a ICO is the most viable way to raise funds. 1 Company X fine tunes how the tokens can be used in the ecosystem. 2 Company X formally launches an ICO campaign, explaining the goals of the project, the team’s experience, and the problem they are solving. As with an IPO, an initial price is set (either in traditional currency or, more often, in cryptocurrency). A pre- sale period often takes place. 3 On the date of the ICO, the company issues tokens to the participants. 5 Like an IPO or a crowd- funding campaign, ICOs are open for a limited time. Many have soft or hard caps on the amount that can be raised. 6 Third-party services have emerged that can aid with KYC/AML, token development, ICO marketing, and more. 4 Following the ICO, the team will continue building the promised product using the funds received. 7 An ICO is a limited period in which a company offers a predefined number of tokens to investors. SHARE LIKE BUY
  18. 18. 9 March 2018 PwC Initial regulatory response 2.3 Initial Coin Offerings (ICOs) blockchain-REAL 18 China imposed an outright ban on ‘token fundraising’ in September 20173), declaring that the activity constitutes ‘an illegal issuance of securities’ associated with financial crimes such as fraud and pyramid schemes. The government of Canada, Hong Kong, Singapore, Switzerland, and others, in similar fashion to the US, have asserted that at least some coin offerings will be subject to securities laws. The European Securities and Markets Authority (ESMA) also echoed this sentiment. Similarly, South Korea banned token offerings at the end of September 20174), asserting that these offerings, ‘regardless of technical terminology,’ violate the country’s capital market law. Additionally, the country’s Financial Services Commission plans broader reviews of cryptocurrency company practices through the end of the calendar year. Taking a different tack entirely, Japan recognized7) bitcoin as legal tender in May 2017 and has since authorized 11 cryptocurrency exchanges. Tokyo-based exchange Coincheck said in October that it was reviewing ICO proposals it received from hundreds of Chinese startups after China imposed its ban. Russia’s central bank revealed its intention beginning in October 2017 to block5) all cryptocurrency exchange websites operating in the country entirely. President Putin pointed out that cryptocurrencies can serve as a vehicle for money laundering, tax evasion, and terrorism, according to Reuters6). www.pwclegal.ch 3) https://www.coindesk.com/chinas-ico-ban-a-full- translation-of-regulator-remarks/ 4) https://www.coindesk.com/south-corean- regulator-issues-ico-ban/ 5) http://cointelegraph.com/news/breaking-russia- rejects-cryptocurrency-as-authorities-block- access-to-exchanges 6) http://www.reuters.com/article/us-russia- cenbank-bitcoin/russia-turns-cold-on-crypto- currencies-idUSKBN1CF0RF 7) http://www.cryptocoinsnews.com/japan- accepts-bitcoins-as-legal-payment-method-whats- next/ Regulators have expressed divided re- sponses to ICOs, ranging from total bans to support for the activity as long as it’s regulated. As a result, ICO activity has been migrating to countries such as Japan, which has taken steps toward legalization.
  19. 19. 9 March 2018 PwC The new "Tech" phenomenon 3 The new "Tech" phenomenon blockchain-REAL 19 The new "Tech" phenomenon
  20. 20. 9 March 2018 PwC PropTech / Real Estate Tech 3.1 PropTech / Real Estate Tech blockchain-REAL 20 3.1 Software tools and platforms used by participants in the real estate industry, including brokers, investors, mortgage lenders, property owners, and managers.
  21. 21. 9 March 2018 PwC The PropTech industry verticals 3.1 PropTech / Real Estate Tech blockchain-REAL 21 Real estate FinTech Smart real estate Shared economy Exogenous tech PropTech FinTech • The real estate industry appears to take pride in keeping several aspects of its operations secret, such as comparable lease rental rates or property prices to create a possible competitive advantage. • In response to greater demand for transparency, technology advancements and the disintermediation by startups, property-related information is increasingly available in digital and paper form.
  22. 22. 9 March 2018 PwC Real Estate Tech annual global financing 2013 – Q1’17 3.1 PropTech / Real Estate Tech blockchain-REAL 22 $451 $1,159 $1,991 $2,698 $733 114 186 250 61 (Full-YearProjection) 2013 2014 2015 2016 2017 • 61 deals were completed in Q1’17. • At the current run-rate investment activity is on track to reach $2.9B invested across 247 deals. • This would represent an 11% decrease in deal activity, but a 10% increase in funding. 277 247 Source: CBInsights $2,973M (Full-YearProjection) Disclosed Funding ($M) Deals
  23. 23. 9 March 2018 PwC The relation between PropTech and Blockchain Why consider blockchain for real estate leasing? 3.1 PropTech / Real Estate Tech blockchain-REAL 23 Transaction dependence: Many leasing and property management transactions are correlated and part of the same database. For instance, in case of a net lease structure, the tenant pays a base rent amount to the landlord and maintenance expenses directly to the vendor. Lack of trust among entities: Many times, different participants in the leasing lifecycle do not have pre-existing relationships, which results in mistrust. Need for a common database: Shared databases are critical for leasing transactions. One of the key examples is a multiple listing service, which collates property-level information from private databases of brokers and agents. Multiple entities can modify database: Managing real estate properties involves several entities, such as owners, tenants, operators, and service providers, who provide, access, and modify a variety of information. Opportunity for disintermediation: Trusted intermediaries in real estate, such as notaries, can be disintermediated through blockchain, as transactions can be independently verified and automatically reconciled.
  24. 24. 9 March 2018 PwC The relation between PropTech and Blockchain How to streamline pre-lease due diligence? 3.1 PropTech / Real Estate Tech blockchain-REAL 24 • In a real estate lease transaction, significant time is spent on due diligence activities, due to using physical documents for proof of identity. • For a property, these are documents supporting the history of ownership, tenants, repairs, and maintenance activities. • Using physical documents related to financial and legal review also limits the flexibility to customize such documents to suit various needs. • This inefficient manual verification process increases administrative tasks and is prone to loss of information and errors. • Due to involvement of numerous third-party service providers, the due diligence process tends to be elongated. • Real estate market participants should consider developing digital identities for a property to keep pace with the growing preference for digital transactions. • A digital identity with respect to a real estate property implies a digital identifier that consolidates information, such as vacancy, tenant profile, financial and legal status, and performance metrics in digital form. • Digital identities of properties linked to the digital identities of owners/tenants can create valuable online records for the property, improve lease information management and greatly ease the due diligence process. • Digital identity allows financial institutions to perform critical activities more accurately and to streamline and automate many processes. • This may have a powerful impact on reducing current deficiencies and inaccuracies. Existing challenge: Time consuming, paper-driven, predominantly offline due diligence process The blockchain opportunity: Drive efficiency and accuracy in due diligence process
  25. 25. 9 March 2018 PwC New regulatory developments 4 New regulatory developments blockchain-REAL 25 New regulatory developments
  26. 26. 9 March 2018 PwC FinTech policy and regulation The EU’s vision of a digital single market 26 blockchain-REAL 4 New regulatory developments The Strategy paper of the EU Commission from May 2015 has since resulted in 35 legislative proposals on the topic, especially within Telecom Network legislation Agenda for the creation of a “digital single market” The European Commission published a public consultation on FinTech legislation in March 2017 which ended in June. FinTech regulation has not previously been an explicit legislative goal, however this might be subject to change in the near future
  27. 27. 9 March 2018 PwC FinTech policy and regulation Local FinTech-regulation as a factor for business decisions 27 blockchain-REAL 4 New regulatory developments § The emergence of a FinTech industry is a digital challenge for legislators and regulators § Traditional bodies of rules and regulatory concepts are coming up against their limits, and are therefore being reformed around the world:  Creation of “FinTech”-specific laws • Digitization of regulatory law • FCA and Hong Kong SFC FinTech Co-Op Agreement • New regulatory categories (“sandbox” of the FCA in the UK)  Application for cohort stage 4 was open until 31st January 2018 § Initial attempts at concrete regulation in some small areas only, e.g.: • E-Money Directive (EMD) • Payment Services Directive (PSD II)
  28. 28. 9 March 2018 PwC Distributed ledger technologies (DLTs) Position of ESMA 28 blockchain-REAL 4 New regulatory developments ESMA Report “Distributed Ledger Technology Applied to Securities Markets” dated 7 February 2017 Applicability of pertinent EU directives • European Market Infrastructure Regulation (EMIR) • Settlement Finality Directive (SFD) • Central Securities Depositories Regulation (CSDR) ESMA's observations • DLT was originally developed for virtual currencies (Bitcoin) in the form of “blockchains” • Increased use for traditional financial services (post-trading activities, e.g., clearing and settlement in particular)
  29. 29. 9 March 2018 PwC “Virtual currencies” in the EU 29 blockchain-REAL 4 New regulatory developments • Identification of 70 risks in connection with virtual currencies (including money laundering, consumer protection, fiscal and currency policy) • These risks stem from the following factors in particular:  Anyone can create a virtual currency system or alter the function of one  The parties involved (including the “miners”) remain anonymous  The EBA is proposing the creation of a single regulatory framework, which is therefore likely to take some time EBA opinion on Virtual Currency – July 2014 EBA welcomed the Commission's proposal to bring virtual currency exchange platforms and custodian wallet providers within the scope of the 4th Anti-Money Laundering Directive. • National sanction powers as proposed in the EC's amendments should be retained, while transactions in virtual currencies should remain outside of the scope of the Payment Services Directive. • Virtual exchange platforms and custodian wallet providers should be implemented in order to avoid risks of misrepresentation, including whether these entities should be allowed to carry out regulated financial activities at the same time as carrying out virtual currency transactions. EBA opinion to bring Virtual Currencies into the Scope of 4AMLD – August 2016
  30. 30. 9 March 2018 PwC “Virtual currencies” Treatment of ICOs in different jurisdictions 30 blockchain-REAL 4 New regulatory developments Treat token as Regulations Non-monetary digital assetSecurities Cryptocurrency & Exchanges: • PBoC imposed a nationwide ban on cryptocurrency exchanges in Sep 2017 • Early Oct 2017, government hinted possible resumption of cryptocurrency trading through implementation of a licensing program with stringent AML requirements Cryptocurrency & Exchange: • 50 states can have their own regulations (e.g. BitLicense) • CFTC regulates cryptocurrency derivatives • FinCEN requires all exchanges to register Attitude towards cryptocurrencies Implications • Expected to resume ICO market eventually but with regulatory framework • Many US entrepreneurs going overseas to conduct their ICO ChinaUnited States Asset, not a security Cryptocurrency & Exchange: • No special FINMA license required for a cryptocurrency exchange • Favorable treatment under Swiss Anti-Money Laundering Act • Favored choice for many ICOs, especially EU based projects • Swiss Financial Market Supervisory Authority (FINMA) began investigating ICO practices, to determine whether regulatory provisions have been breached (cf. FINMA Guidance 04/2017) • Zug known as “Crypto Valley” with established ecosystem Switzerland ICOs: • Definition of security very broad (e.g. Howey Test) • SEC recently created a cyber unit dedicated to policing “violations involving DLT technology and ICOs” ICOs: • PBoC announced a ban on ICOs on 4 Sep 2017 & mandatory repayment ICOs:
  31. 31. 9 March 2018 PwC Contract 5 Contract blockchain-REAL 31 Regulatory roadmap for Asset & Wealth Managers – In a nutshellContact
  32. 32. PwC 9 March 2018 Contact 32 blockchain-REAL 5 Contract Dr. iur. Guenther Dobrauz-Saldapenna, MBA Partner, Leader PwC Legal Services Switzerland PricewaterhouseCoopers AG Birchstrasse 160 8050 Zurich Tel.: +41 58 792 14 97 Mobile: +41 79 894 58 73 Email: guenther.dobrauz@ch.pwc.com Web: www.pwclegal.ch
  33. 33. PwC 9 March 2018 PwC Regulatory Radar 33 blockchain-REAL 5 Contract www.pwc.ch/regulatoryradar
  34. 34. PwC This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2018 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Thank you for your attention!
  35. 35. 9 March 2018 PwC Appendix 6 Appendix blockchain-REAL 35 Regulatory roadmap for Asset & Wealth Managers – In a nutshellAppendix
  36. 36. PwC 9 March 2018 Blockchain technologies EtherScript – The language of the protocol 36 blockchain-REAL 6 Appendix An Etheruem smart contract to sell websites for “5000 by March” First, store buyer’s Ethereum address 6af267736363738ghgs7726337373737 Then, store seller’s Ethereum address April 1, 2014 is 13929839948 in “computer time” 16365437465 note When t then … then designate the buyer as the new website admin and pay the seller 6af267736363738ghgs7726337373737 and t transaction If the agreed amount is received on time… put note put note put note note in storage slot Buyer in storage slot Seller in storage t slot Deadline value t ≥ t 5000 ether transaction timestamp t ≤ t storage t Deadline put note storage t slot Buyer in storage t slot Website_Admin contract balance t to storage t slot Seller
  37. 37. PwC 9 March 2018 Blockchain is changing distribution models 37 blockchain-REAL 6 Appendix Status quo • Currently each transaction involves different companies, ranging from transfer agents to asset managers that have often to input the same information, which is time-consuming and can be prone to errors. • The costs of redundancy are ultimately being paid by the end investors. Cost savings • Blockchain could save the asset management industry several billions of dollars a year, if manual practices were streamlined via online ledger technologies. • Based on daily trade volumes of funds in the UK, IRL, LUX, HK, SGP, TWN and AUS, $2.7bn in savings was possible. Industry insight • Calastone has successfully used blockchain to buy and sell mutual funds (test case). • BNP Paribas AM has completed a full end-to-end fund transaction using blockchain technology (test case). • The UK government recently set out an ambition to create a blockchain-enabled digital fund. Process innovation • Process innovation is possible by stripping out iterative processes that are traditionally incurred during the buying, selling, clearing and settlement of transactions and moving to blockchain technologies. Investor Blockchain distribution model • Distributed Ledgers Asset Manager
  38. 38. PwC 9 March 2018 Autonomous e-commerce 38 blockchain-REAL 6 Appendix A fleet of self-driving trucks delivers goods to distribution centers. The robots at the distribution center sort and move those goods. An end consumer, meanwhile, has some returns to make (such as shoes that don’t fit). An end consumer also can act as a seller and put out new smart packages for delivery to the distribution. Autonomous delivery drones then make deliveries to end consumers. 31 2 4 5
  39. 39. PwC 9 March 2018 Blockchain Start-ups 39 blockchain-REAL 6 Appendix PresentPast Future Cloud storage Smart Contracts Social Networking Digital Identity Art & Ownership Prediction Markets Internet of Things Supply Chain Anti-Counterfeiting Governance
  40. 40. PwC 9 March 2018 Understanding a Bitcoin transaction How blockchain technology powers Bitcoin 40 blockchain-REAL 6 Appendix Transaction request Verifying & block placing Append block to chain Checkpoints Approval of payment Receive payment 1 2 3 4 5 6 Alice wants to send Bob two Bitcoins She sends a TRANS- ACTION REQUEST to the Bitcoin block- chain, a distributed database running on thousands of com- puters globally Send Bob REQUEST Computers known as MINERS verify this transaction (e.g. check Alice’s balance) And compete to place it into a BLOCK with other transactions To append a block to the chain of prior blocks (hence: “blockchain”), miners solve a MATH PUZZLE that requires a lot of computational power to solve All this computational power PROTECTS THE BLOCKCHAIN against hackers – it would be difficult and expensive to falsify transactions or attack the network Others in the network check the miner’s work Once the answer is VERIFIED – when a majority of miners in the network approve the block – the miner who solved the puzzle gets paid in Bitcoin BLOCK 105 105 Bob receives two Bitcoins Alice’s transaction gets ADDED TO THE BLOCKCHAIN along with the others LEDGER 105 102 103 104
  41. 41. PwC 9 March 2018 Traditional Contracts 41 blockchain-REAL 6 Appendix Verify the deal  A trusted third party is required for verification, in order to officially transfer the ownership of the car, the terms of the contract have to be met  The process differs from country to country, but always involves one or more trusted third parties: motor vehicle registration authority, in combination with a notary and/or insurance company  It’s a complicated and lengthy process  Middle man fees apply Bob wants to sell a car Alice wants to buy a car Paper contract  Alice agrees to pay CHF 20’000 for the car  Once Bob gets the deposit, he will transfer the car ownership to Alice, by handing her over the car documents and car keys
  42. 42. PwC 9 March 2018 Smart Contracts 42 blockchain-REAL 6 Appendix  Bob wants to sell a car.  He identifies himself with his blockchain address (public key) 757582, uses a smart contract to define the terms of the sale, signing with his private key  Alice wants to buy a car.  She finds Bob’s car listed on the internet.  She signs the contract with her private key transferring CHF 20’000 from her blockchain address (public key) 389157 to Bob’s blockchain address 757382  Bob leaves his car and car key in a garage locked with a smart contract controlled smart lock  The car has it’s own blockchain address (public key) 738492, stored on the blockchain 2 Alice can now pick up her car by unlocking the smart lock with her private key The smart contract is verified by each mode in the Blockchain Network, to see if Bob is the owner of the car and if Alice has enough money to pay Bob  If the network agrees, that both conditions are true, Alice automatically gets the access code to the smart lock for the garage  The blockchain registers Alice as the new owner of the car, Bob has CHF 20’000 more on his account, and Alice CHF 20’000 less Smart contract 4 6 5 2 1 3
  43. 43. PwC 9 March 2018 Why can I trust a Smart Contract? 43 blockchain-REAL 6 Appendix C  Since every transaction is stored on the public blockchain, everyone can inspect it  The owner of the unique car ID with the Blockchain address 738492 is A, not C Random person «Alice owns the car!” C steals the car and claims ownership of Alice’s car
  44. 44. PwC 9 March 2018 Smart Contracts Simple to complex 44 blockchain-REAL 6 Appendix Use case examples Digital value exchange A family member sends some bitcoin to another family member Smart right and obligation Consumer buys a digital content stream Basic smart contract Landlord remotely locks nonpaying tenant out of apartment Multi-party smart contract Sellers lends buyer funds to buy a house Distributed autonomous business unit Unit of a corporations issues its own bonds, and buyers monitor payments via a shared ledger Distributed autonomous organization Self-driving trucks make P2P deliveries, pay local toll road fees, and buy local electricity Distributed autonomous government Settlers of a previously uninhabited area code their own self-enforcing government services Distributed autonomous society Groups of settlers from different areas establish self-enforcing trade agreements Smart contracts – simple to complex Simple Complex
  45. 45. PwC 9 March 2018 Sectors and industries affected by Smart Contracts 45 blockchain-REAL 6 Appendix Supply Chain eGovernment Gaming & Gambling Banks & Insurances Energy sector IoT Creative Industry IT Services Industry Legal tech Mobility Accounting & Auditing Digital Identity Smart Contracts & Blockchain
  46. 46. PwC 9 March 2018 ICO Raises by industry [$mm] 46 blockchain-REAL 6 Appendix 1.8 2.4 183.1 18.9 22.8 1,108.9 7.5 0.5 8.6 366.8 7.5 652.2 166 282.3 6 631.4 5.3 386.9 5.5 262.6 0.4 12.1 395.7 2014 2015 2016 2017 Cryptocurrency Core Tech Cloud Finance: Banking & Payments Finance: Investments Finance: Markets Internet of Things & People Gaming & Gambling Media & Social 26 8 231 4,270
  47. 47. PwC 9 March 2018 Initial Coin Offerings (ICOs) vs. Venture Capital Involved parties at an ICO 47 blockchain-REAL 6 Appendix Project / Code Token purchasersIssues token Use the token to participate in the ecosystem Crypto Exchange Trade token Founders and management team Issues whitepaper and project information Provides funding & oversees project R&D Receive “Founder Tokens” Manage the Token issuance entity Private Company (for-profit) Token issuing entity Pays in crypto(e.g. ETH, BTC, USD)
  48. 48. PwC 9 March 2018 Initial Coin Offerings (ICOs) High-level process overview 48 blockchain-REAL 6 Appendix Sales Execution Regulatory Clearance Token Utility and Economy Design Business Strategy • Selection of marketing/PR firm • Define sale strategy (target segment, pricing strategy, etc.) • Define token sale timeline (presale, public sale) and related marketing plan • Legal documentation, drafting and review • Account planning and budgeting • Operational framework design • Governance framework design • Strategic alliances Actions Business Execution • Design and refine token utility and economic model • Sale Mechanics • Token Economy • Incorporation of legal entity • Start of bank account opening process • Launch of website • Launch of select marketing Examples of Deliverables High level timeline • Project Overview/ FAQ • Issuance of sale documents • KYC and AML process finalized 4 – 12 weeks 4 weeks • Whitepaper • Project Strategy • Business Model • Understand market landscape and industry pain points • Design and refine business and operating model • Key team buildout • Selection of profession al advisors • Selection of business/toke n advisors • Legal & tax advice • FINMA ruling
  49. 49. 9 March 2018 PwC A PropTech business case Using blockchain technology in a real estate lease agreement (1/2) 6 Appendix blockchain-REAL 49 2 Property visit and inspection 1 Property search through blockchain-enabled MLS MLS 3 Negotiation and signing of the letter of intent LOI 4 Pre-lease due diligence by using smart identities • The lessor and the lessee or their respective brokers list their requirements on the multiple-listing services (MLS). • A transparent MLS system enables all parties to view the available listings based on their requirements. • The brokers discuss their clients’ requirements and arrange for property visits and inspections. • Both sides negotiate the terms and value of the deal. • The lessee sends the letter of intent (LOI) to the lessor, expressing interest in the property. • Using blockchain- based digital identities of individuals and assets, the lessor conducts a background check on the lessee and the lessee checks the prior transaction and liens on the property.
  50. 50. 9 March 2018 PwC A PropTech business case Using blockchain technology in a real estate lease agreement (2/2) 6 Appendix blockchain-REAL 50 5 Preparation of the heads of agreement 6 Lease agreement using smart contracts 7 Automated payments and cash flow management using the smart contract 8 Real-time data analysis • The heads of agreement, containing all the clauses and terms agreed between the two sides, is prepared and verified by the accounts and legal teams on both sides. • The key terms of the agreement are recorded on the blockchain and this becomes the smart contract. • The smart contract initiates payment of security deposit/advance rent. • The lessor then transfers the possession of the property to the lessee. • The transaction agreement is officially recorded. • Based on the terms of the agreement, the smart contract initiates the regular lease payments from the lessee to the lessor, after paying the outstanding maintenance expenses to the contractors. • On completion of the lease term, the smart contract initiates the transfer of the security deposit to the lessor. • As several payments and transactions are recorded on the blockchain along with the digital identities of individuals, properties, and organizations, the lessor can perform real-time data analysis using appropriate analytics.
  51. 51. 9 March 2018 PwC An industry overview of PropTech start-ups Residential RE & Mortgage Lending 6 Appendix blockchain-REAL 51 Commercial RE Source: CBInsights
  52. 52. 9 March 2018 PwC Robo Advice – International context 52 blockchain-REAL 6 Appendix • RA is prohibited without prior approval by BaFin (§ 32 KWG). Qualifies as investment advice if the intermediary provides client with specific advice concerning particular security (ISIN-level). • Information about industries without reference to individual securities are not in scope. • Furthermore, RA could qualify as investment brokerage (Abschluss- oder Anlagevermittlung) • Open question: Who drafts the advisory protocol? DE • “Advice Gap” with respect to clients due to prohibition of commissions according to RDR. • March 2016: FAMR-Report by FCA (Financial Advice Market Review) • FCA welcomes and endorses FCA; however, currently increased regulatory uncertainty UK • December 2015: Joint Discussion Paper of ESAs (EBA, ESMA, EIOPA). • Focus on investment advice • Problem: Different understanding of Notion of “advice” across banking sector (e.g. MCD), securities- sector (e.g. MiFID II) and insurance sector (e.g. IDD) EU • The biggest obstacle in connection with Robo Advice (RA) is the increased regulatory uncertainty in various countries. • It is unclear for providers if their services are subject to licensing obligations. This can be crucial in particular in a cross-border context. • March 2016: FINRA-Report on Digital Investment Advice • Identified issues: • Client-profiling • Suitability & Appropriateness Testing USA
  53. 53. 9 March 2018 PwC Crowdfunding regulation in the EU Position of ESMA and the Commission (1/2) 53 blockchain-REAL 6 Appendix ESMA • Communication issued by the Commission regarding unleashing the potential of crowdfunding in the EU, dated 27 March 2015 • Initial scenario: Absence of an EU-wide regulatory concept - Fragmentation – differing national concepts - No regulatory interoperability or coherence between local regulatory regimes - Consequence: No cross-border or Europe- wide activity is discernible – crowdfunding can only be promoted at a local level • Following an empirical analysis, the ESMA has come to the conclusion that most of the pertinent EU directives (MiFID, AIFMD, Prospectus Directive) are generally not applicable in practice Commission • Report on crowdfunding in the capital markets union dated 3 May 2016 • Market analysis - EU market still relatively small - Volume in 2015: EUR 4.2 billion - 510 platforms in the EU at the end of 2014 (market leader: UK) - Cross-border activities low, local phenomenon • Regulation - National approaches to regulation in some cases - The Commission wants to promote growth throughout the union by means of the future capital markets union
  54. 54. 9 March 2018 PwC Crowdfunding regulation in the EU Position of ESMA and the Commission (2/2) 54 blockchain-REAL 6 Appendix ESMA • ESMA response to the Commission Consultation Paper on FinTech dated 7 June 2017 • ESMA reiterates its call for a specific crowdfunding EU-level regime, which would ensure investors across the EU are equally protected and which would enable crowdfunding platforms to operate cross- border based on a common regulatory framework Commission • Final report on: assessing the potential for crowdfunding dated 4 May 2017 • An assessment of whether alternative finance can help Europe address the problem of access to finance for innovative companies. • The results of the final report are: 1. an estimation of the size of the alternative market for research and innovation; 2. an analysis of the European alternative finance landscape; 3. an analysis of the challenges limiting development of the alternative finance; 4. an assessment of policy options addressing those challenges; 5. a final recommendation of priority action at EU and national level.

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