The Blockchain (R)evolution – The Swiss Perspective White Paper Februar y 2017 Proposal title goes here | Section title goes here
03 The Blockchain (R)evolution – The Swiss Perspective
Contents
Summary 06 1. What is Blockchain? 07 1.1 Technology on trend 08 1.2 The value of trust 08 1.3 Sample applications 09 1.3.1 Bitcoin 09 1.3.2 Smart contracts 11 2. Blockchain and the path to innovation 12 2.1 The technology-driven business innovation model 12 2.1.1 Early development phase 13 2.1.2 Standardisation phase 13 2.1.3 Value creation phase 13 2.2 Impact on key sectors of the Swiss economy 14 3. Switzerland’s positioning 17 3.1 Identification of business opportunities 20 3.2 Supportive legal environment 23 3.3 Controlled business process costs 24 3.4 Coordinated standardisation 24 3.5 Security and encryption 24 3.6 Controlling operational risks and vulnerabilities 26 3.7 Diverse stakeholder map 27 4. A look into the future 29 5. Appendix 31 High potential use cases II - Trading & Settlement 35 High potential use cases IV - Loyalty 37 6. Authors and main contacts 39
04 The Blockchain (R)evolution – The Swiss Perspective
05 White Paper: The Blockchain (R)evolution – The Swiss Perspective
Dear Blockchain enthusiasts,
Blockchain technology is very much a trending topic, and Deloitte Switzerland is pleased to be able to give you an insight into it with this publication. We herein focus on how Blockchain is seen by the Swiss market, which offers the Blockchain community huge potential as a place in which this technology can be developed and used, of which the prominence of Zug’s Crypto Valley provides the most convincing evidence.
Rapid technological development, constantly changing customer behaviour and ongoing regulatory amendments are forcing companies and organisations worldwide to conduct a critical review of their business models and business processes. Blockchain technology presents a great opportunity to all Swiss companies needing to do this, as its distinctive characteristics – such as decentralisation, irreversibility and smart contracts – mean it provides considerable support to this transformation.
We are seeking, by means of this White Paper, to help promote the development of Blockchain in Switzerland and to encourage dialogue between entrepreneurs, service providers and all other parties with an interest in Blockchain.
You can find further perspectives on the topic of Blockchain on the Deloitte Innovations website where we regularly post information about the latest developments on the Swiss market. We will be offering further articles by experts and their insights into technological innovations, examples of real-life practice and regulatory issues, thus covering a wide and varied selection of subjects. We look forward to receiving your feedback and suggestions.
Yours sincerely
Dr. Daniel Kobler Markus Koch Jan Seffinga Partner, Head of Partner, Head of Strategic Partner, Blockchain Leader Banking Innovation Development C&IP Deloitte Switzerland
1) https://www2.deloitte.com/ch/de/pages/innovation/solutions/blockchain-practice.html 06 The Blockchain (R)evolution – The Swiss Perspective
What is Blockchain?
Technological innovations such as robotics, The World Economic Forum defines artificial intelligence, cloud technology and Blockchain technology as follows: “Blockchain will not only be the mobile economy have established Blockchain or distributed ledger technology themselves very quickly over the last few (DLT) is a technological protocol that a new disruptive database years through developments like social enables data to be exchanged directly technology. Over time, media and digital identities, and have now between different contracting parties become a key element of the commercial within a network without the need for Blockchain solutions will and social economy (e.g. sharing economy, intermediaries. The network participants also be implemented in crowdfunding). It is therefore important interact with encrypted identities for companies to understand the impact (anonymously); each transaction is then financial software upgrade of these technological advances on their added to an immutable transaction chain cycles. In ‘restricted business models so that they can adapt and distributed to all network nodes. themselves to new circumstances. The areas’ at first, then in ability to change is now a necessary if not As a result, Blockchain is expected to more comprehensive vital skill that companies must possess offer enormous potential for bringing if they are to defend or expand existing about radical change in a wide range of applications.” competitive advantages and market industries, business models and operating shares. These adjustments result in a processes such as payment settlement, Thomas Ankenbrand, transformation strategy that makes the accounting or the use of customer and Lucerne University of Applied difference between success and failure. In loyalty cards. Please refer to the use case Sciences and Arts recent years the world has demonstrated boxes throughout the text as well as the on numerous occasions how former appendix for detailed discussions. In view market leaders such as Kodak1or Nokia2 of the technical complexity and the lack of have continuously lost market share due acceptance of these far-reaching changes to a lack of transformation strategies and in the private, public and commercial ultimately exited the market. To prevent sectors, this new technology will in all this, companies must examine these probability only catch on gradually and innovative technologies on an ongoing depending on how it develops over the basis and evaluate whether and what coming months and years. It is therefore change they could bring about. less a question of whether Blockchain will establish itself and more a question of If people such as Don Tapscott, the author when and in what areas. of the book “Blockchain Revolution”, or the news networks and newspapers are to be believed, we are on the verge of a “decentralisation revolution”. Driven by Blockchain technology, there is a level of hype similar to that seen prior to the first commercial use of the Internet.
07 1) http://www.spiegel.de/netzwelt/gadgets/fotokonzern-am-ende-wie-kodak-aus-unserem-leben-verschwand-a-810043.html 2) http://tablet.fuw.ch/article/wer-hat-das-ende-des-nokia-handys-besiegelt/ The Blockchain (R)evolution – The Swiss Perspective
1.1 Technology on trend underpins it. Organisations and companies In a recently published report3, Deloitte are conducting extensive research and analysed the eight most important development into Blockchain. This new technological trends and their potential technology represents a promising impact on business, as well as their alternative to the current organisational effectiveness and development. A lot is and technical infrastructure, one that expected of Blockchain, particularly in is needed to rebuild the trust between conjunction with other technologies such organisations, companies and private as the Internet of Things. These and other individuals. A significant portion of trends may be very helpful to companies Blockchain’s potential lies in the simple, and organisations over the next two to technology-driven way in which the five years with regard to transformation. required trust and security platform and Blockchain is unique in this regard, as structures can be developed in order to the technology is geared specifically to facilitate efficient business activity. For “The technology behind the reliance on trust between market many organisations, this trust element is participants. a strong argument in favour of exploring Bitcoin could transform Blockchain. how the economy 1.2 The value of trust Trust is an integral part of any dealings Another key factor in Blockchain’s future works.” between two or more contracting parties. success will be the technological progress This trust is generally created by involving made with regard to scalability. The Economist, 31 October 2015 organisations or specific groups of people as intermediaries. Ongoing globalisation The current high energy requirement and and the growing complexity and volume verification (mining) of new transactions of global transactions are making this due to proof of work usage means approach increasingly difficult, as it is Blockchain is reaching its limits in terms of becoming ever more time-consuming, scalability. Blockchain technology requires costly and thus inefficient. Furthermore, each new transaction to be matched the events of the last financial crisis showed with the global register of existing parts that this intermediary-based system is of the Blockchain by means of a “hash”. highly vulnerable. This led to a huge loss New transactions first have to be verified of confidence in the prevailing system by the “miners”, resulting in a time delay and a shift towards the development of of around ten minutes. Research teams alternatives, which in turn gave rise to are already working on reducing the Bitcoin4. transaction time and memory size. The technological challenges could also be Experts have now recognised the potential overcome in future through higher server not only of bitcoin but in particular and broadband capacities. that of the Blockchain technology that
3) Deloitte Digital, Tech Trends 2016: Innovation in the digital era 08 4) Satoshi Nakamoto, 2008, Bitcoin: A Peer to Peer Electronic Cash System The Blockchain (R)evolution – The Swiss Perspective
1.3 Sample applications 1.3.1 Bitcoin 01. The digital currency bitcoin is probably the Transaction best known application of Blockchain and A transaction involves two contracting parties exchanging is even better known than the Blockchain a given digitally recordable asset such as data, contracts or technology on which it is based. Bitcoin money between themselves. highlighted the potential of DLT and identified other practical applications of the technology. The way in which Blockchain technology works is explained below using 02. bitcoin as an example. Verification The transaction is either executed immediately PENDING or transcribed in the protocol and added to the The cryptocurrency, a digital payment outstanding transactions. method based on cryptographic principles, is generated via a large number of Internet-linked computers with the aid of a mathematical formula and recorded in 03. Structure a database that is managed decentrally BLOCK N BLOCK N + 1 BLOCK N +2 Each newly verified block receives a numerical code for by all participants. The currency can be identification, known as a hash, which also contains a reference transferred directly by means of a special to the preceding block. peer-to-peer application, in other words without an intermediary. Encryption technologies ensure anonymity and 04. ownership structures in the Blockchain. Validation Each block must first be validated before being added to the Blockchain. Blocks in the bitcoin Blockchain are validated BLOCK N according to the “proof of work” concept.
05. Blockchain mining 06. The chain
BLOCK N The “proof of work” solution is found by After being validated successfully, the making changes to one variable until the block is added to the chain at each node. network accepts the solution. This is carried out by miners.
07. Integrated protection The security mechanism makes it impossible for nodes in the network to alter blocks that have already been validated.
Figure 1: Bitcoin as an example of how Blockchain works (Source: Deloitte University Press, Tech Trends 2016: Innovating in the digital era)
09 The BlockchainProposal (R)evolutiontitle goes here – The| Section Swiss title Perspective goes here
10 The Blockchain (R)evolution – The Swiss Perspective
1.3.2 Smart contracts automatically and assets (e.g. fiat money, “A smart contract One interesting application of Blockchain digital currency, title of property, data) is the smart contract. A smart contract is are exchanged between the contracting is an agreement an agreement between two parties that is parties. The transaction is then replicated between two stored in the Blockchain. and validated on the Blockchain. Such agreements may be concluded Smart contracts make it possible to parties that is between two people, in other words exchange an asset without third parties peer-to-peer (P2P), person-to-organisation being aware of the transfer. This opens stored in the (P2O) or person-to-machine (P2M)5. It can up the possibility of disintermediating the thus be specified that as soon as a given entire legal system and creating a new form Blockchain.” condition is met (e.g. sale of goods “1” on of virtual agreements. exchange “2”), the contract is executed
Blockchain-based electronic health data
Numerous industries are examining the potential applications of these digital contracts. For example, healthcare companies such as Novartis and Pfizer have recognised the added value offered by these contracts. In particular, tests are being conducted on the use of Blockchain-based electronic medical records(EMRs)(1). Personal health records can be stored and managed via the Blockchain in an EMR system. Personal health records are coded as digital assets and stored securely in the Blockchain under a pseudonym (e.g. digital address and not a coded name). Users can allow doctors and other parties to view their medical records as required with their private key. The records might contain information from a fitness tracker, vaccination status, prescriptions, previous treatments, doctors’ recommendations and proof of insurance. This anonymised health data will open up new sources of income for drug development for pharmaceutical companies.
Source: 1) http://www.cio.com/article/3042158/health/how-to-monetize-healthcare-using-blockchain.html
11 5) https://www.linkedin.com/pulse/blockchain-smart-contracts-health-booz-allen-hamilton-tori-adams The Blockchain (R)evolution – The Swiss Perspective
Blockchain and the path to innovation 2.1 The technology-driven business innovation model
Expectations/venture capital expenses
1 Early development 2 Standardization phase 3 Value creation phase Hype
Blockchain in Q4 2016
1.1 1.2 2.1 2.2 3
Technology Technology Business Business Business White Papering Prototyping Prototyping Innovation Value Generation
Technological Technological Technological Technological Technological ideation design concept variation standardisation applications
Time
Technology supply Technology demand
Risk capital Technology supply Turning point Technology demand
Figure 2: Technology-driven business innovation model (prepared by the Deloitte Switzerland Blockchain Team for this publication)
The start of innovation development is was intended, as it later transpired, to expectations (phase 1.2) were converted driven by a hype initiated by very high revolutionise communication between into realistic development progress (phase expectations that the technology can people who were a long distance apart, with 2.1). This turning point in the standardisation solve human problems. The Internet also the Internet itself serving merely as a means phase is also characterised by the balanced went through this development process, to an end. Over the course of the three- interaction between the supply of and for example. In part, this technology phase maturity process these initially high demand for the new technology.
12 The Blockchain (R)evolution – The Swiss Perspective
For example, the Internet developed Peer Electronic Cash System6” and thus the respective capabilities on their own from the hype into a value-creating entered the first phase, known as early in order to claim the full added value for innovation with increasing experience and development. This was the trigger for themselves. acceptance in the deployment and use of three years of hype, although the public the new technology by customers. From at large did not recognise the potential of The cooperation between technological the almost endless variety of ideas, more Blockchain technology until five years later supply and demand (turning point) targeted potential applications, known as (2013). promotes standardisation and makes it use cases, are pursued in more detail in more likely that the technology will gain phase 2.2. These use cases are the result This hype boosts risk appetite, financed by broad acceptance. The active involvement of prioritising ideas with the greatest funds from venture capital companies. This of authorities, supervisory bodies and possible potential for offering social and in turn allows companies to push ahead politicians is crucial during this phase. economic added value. Concentrating on with the development of technological Blockchain technology has recently moved use cases means that capital can be spent prototypes. out of the hype phase and is currently at in a more targeted manner and reduces the start of the standardisation phase the risk for companies. The Internet only 2.1.2 Standardisation phase in the business innovation model. The revealed its added value for users with the The level of venture capital companies’ proof of this is twofold: companies are advent of a growing number of applications investment in new technologies reflects increasingly taking on a participatory role, and business models, thus taking it into market interest and the potential of the and there are also signs of growing interest the fifth phase of this model. The key technology. Companies also monitor among authorities and politicians. factors in the development of innovative which technologies attract investments so technologies such as Blockchain are the they can adapt their strategy accordingly 2.1.3 Value creation phase opportunities that the technology offers and focus on those offering the greatest Driven by standardisation and the first for creating long-term added value and potential. Companies initially take on an successful use of the technology, the who the beneficiaries of these are. The observational role (passive), which develops value creation phase gives rise to renewed example of the Internet showed that user over time into a participatory one (active). euphoria, albeit watered down. Companies confidence coupled with economic benefit The decision to take an active role in the develop a greater risk appetite regarding is fundamentally important for a successful further development of the technology investment in the technology, resulting business model innovation, although other comes when a company concludes that the in economies of scale for technology factors such as security and robustness technology has an impact (be it positive or providers and growing acceptance in the also have a role to play. negative) on earnings in the entire industry wider society. in which it operates. To reduce their risk 2.1.1 Early development phase exposure, some companies decide to The successful use of the technology leads Every technology evolves in the way shown enter into a collaboration (consortium) to it being combined with established and in Figure 2. Blockchain technology was with technology service providers, industry new technological trends with the aim of launched in 2008 with the publication peers and/or start-ups. Companies with a creating new entrepreneurial value. The of the white paper “Bitcoin: A Peer to strong capital base often decide to develop nature of the technology and the impact on the value creation mechanism also
13 6) Satoshi Nakamoto, 2008, Bitcoin: A Peer to Peer Electronic Cash System The Blockchain (R)evolution – The Swiss Perspective
has a significant influence on the extent spectacular success with the iPad. horizontal axis measures the impact on of the change. The use of technological As for Blockchain, it is realistic to assume costs and earnings. Sample questions in this innovations in the design of new values and that the technology will only deliver long- respect include “What opportunities does service offerings, such as Uber or AirBnB term success when there is lasting positive this technology open up? Is there scope in the sharing economy, has thus triggered confirmation of the perceived benefits, for new sources of income? Does it create major value distortions in the industries economic and regulatory conditions and risk potential for cost savings?” The vertical axis concerned, while other technologies appetite of the players involved during the measures the transformative impact in each have had a rather minor impact on value hype period. Other external factors such sector. Transformative in this context refers creation. Blockchain is expected to have as the positioning of competing developers to the impact of the technology on how a substantial impact and that the ways in in both the public (other countries business is conducted and on corporate which DLT may change the value creation courting FinTech firms) and private sectors strategy. One sample question in this regard process in traditional industries are not yet (companies experimenting with Blockchain is “Does Blockchain influence or change fully clear. on both the supply and demand side) also the execution of internal and external core have a significant impact and increase the processes and procedures?” This is underlined by the fact that complexity of development. Blockchain is trusted to offer the potential to create new and comprehensive The current focus of Blockchain technology transaction platforms and therefore is primarily on using the Blockchain to change the core of current value creation in validate, execute and store transactions, established companies such as banks and which is why development is being driven insurers. In the following section we will mainly by companies in the financial examine how going through these phases industry. However, the transformational is likely to affect Swiss firms in particular, impact of Blockchain, as calculated by and how Switzerland can evolve in a way us and presented in the matrix below, that enables it to take on the role of a stretches to all sectors of the Swiss progressive innovator. economy, albeit to varying extents.
2.2 Impact on key sectors of the The positioning calculated for an industry Swiss economy in this matrix distinguishes between four The success of an innovation depends on different groups (observers, experimenters, a diverse range of factors and the interplay opportunists and pioneers) and calls between them. Seemingly simple factors for different approaches for Swiss firms such as the timing of the launch can be depending on which quadrant they fall into. unexpectedly critical. Microsoft launched some early tablets that never made the The impact of Blockchain technology is breakthrough, whereas Apple achieved identified on the basis of two criteria. The
14 The Blockchain (R)evolution – The Swiss Perspective
Transformational impact of Blockchain technology on strategy and operating processes
Experimenters Pioneers
Financial services high
Logistics Insurance
Pharma Healthcare Mechanical engineering and electronics Public administration
Observers Opportunists
Tourism low
Construction
Financial impact of Blockchain technology low high (revenues/costs)
Figure 3: Technology impact analysis matrix (prepared by the Deloitte Switzerland Blockchain Team for this publication)
15 The Blockchain (R)evolution – The Swiss Perspective
These two decision criteria give rise to This efficiency gain results in considerable two fundamental strategies, the “pioneer” cost savings, reduces the risk for the Methodology strategy and the “observer” strategy. parties involved and means that the capital The impact matrix for the key in question is available almost immediately industries in the Swiss economy The “observers” are sectors or companies and can feed back into new business and is based on a structured method in which the operational impact of transactions. The pioneer strategy should that distinguishes between two Blockchain technology can be classified also be pursued if using the technology dimensions and ten parameters to as low. The impact on or threat to these offers considerable strategic competitive enable the current positioning to sectors from Blockchain technology advantages or has the potential to be evaluated. (as things stand) is low, and market significantly impact operational business competitors will not gain a decisive processes. Experimenters are under little The data for this were obtained competitive advantage by using the pressure to focus more closely on the through interviews with Deloitte technology. Another indication that the technology due to the limited impact on experts from these industries. observer strategy should be preferred is net profit in the short term. However, they This provides a snapshot, with if using Blockchain technology has only a could nevertheless decide to engage with the volatility of the assessment minor impact on a company’s costs and the technology in order to secure long-term taken into account by highlighting earnings. benefits like those sought by pioneers. One the currently visible trend in each such example would be companies from industry. The detailed results By contrast, the pioneer strategy is the Engineering industry, who are already can be found in Figures 7 and characterised by a high strategic and experimenting with the technology since it 8 in the appendix. The matrix operational impact coupled with a similarly could lead to synergies with their current compares the operational impact major impact on costs and earnings. priorities such as the Internet of Things or of Blockchain technology with the Blockchain technology allows pioneers to robotics. impact on revenues and costs. The realise enormous savings on the cost side. individual parameters for each A primary example would be the clearing By contrast, opportunists identify industry are evaluated on a scale and settlement of a financial services short-term impacts on their finances from 0.0 (low) to 3.0 (high) and provider’s securities transactions, a very from selected effects that are not part aggregated to determine the final labour-intensive and time-consuming of their core business. One possibility cumulative value (more detailed task within a bank that currently takes for opportunists would be to enter into evaluations and derivations can three days to complete. Using Blockchain a partnership with other companies or be found in the appendix). The technology reduces the workload to a conduct small-scale feasibility studies in resulting matrix is a key indicator minimum, allowing transactions to be order to familiarise themselves with the of the impact that Blockchain will settled and completed in minutes technology. have on the various industries. (currently around ten minutes).
16 The Blockchain (R)evolution – The Swiss Perspective
Switzerland’s positioning
Blockchain technology will continue to develop, characterised above all by increasing maturity and a growing number of participants contributing ideas, prototypes and initiatives to this evolution. It is therefore important for Switzerland to conduct a critical appraisal of its own position, examine its strengths and weaknesses and define a clear positioning strategy. As the most competitive country in the world7 and the leader in numerous economic sectors, due in no small part to its strong position as a driver of innovation, Switzerland possesses characteristics that make it a suitable candidate to press ahead with the further development of Blockchain. The Swiss Confederation should aim to become the central global contact for Blockchain opinion leaders, start-ups and related firms at the cutting edge of Blockchain innovations. The diagram below illustrates Switzerland’s innovative qualities.
Switzerland’s special position as a global innovation centre
• Sophisticated network infrastructure • Global links • High broadband & Internet coverage • High-speed network
FinTech infrastructure
• Advanced data governance & regulation • High proportion of SMEs • Modern data storage Data security & • Very competitive economy at infrastructure protection Innovation global level • High global server security rating centre • Good access to equity & • First-class local data encryption venture capital providers • Very attractive for start-ups Swiss Ecosystem
• Leading technical universities • Modern democracy • First-class patent agencies • Respected legal system • Leading industry supervisory Knowledge • Reliable protection of private Laws & institutions headquartered here hub and intellectual property Regulations • Widely recognised European • Leading international knowledge hub standardisation organisation Economic wealth & headquartered here social structure
• Continuous economic growth • High standard of living • Respected democracy • World-class welfare system
Figure 4: Swiss Blockchain ecosystem (prepared by the Deloitte Switzerland Blockchain Team for this publication) The diagram shows that a wide range of aspects and stakeholders have an impact on Blockchain technology and conversely are also affected by the change that this technology entails, from consumers and producers to lawyers, government representatives and regulators. We call this the Blockchain ecosystem for stakeholders. It is vitally important that all interest groups are involved in the dialogue at local, cantonal and federal level and pursue a common goal.
17 7) http://www.swissinfo.ch/ger/wirtschaft/wef-berich_schweiz-bleibt-wettbewerbsfaehigstes-land-der-welt/42479270 The Blockchain (R)evolution – The Swiss Perspective
The most recent communiqué8 from the to build “trust in the code”. Blockchain Federal Council is already a clear move in eliminates the intermediaries from the “Switzerland has always this direction, as it announced plans to relax transaction process, creating a gap in FinTech legislation and give firms greater business transactions that must be filled been open to blockchain freedom in line with the UK. by developing new settlement processes technology and crypto- in the digital world. Swiss legislators and Government representatives and regulators must lay the foundations for currencies. There are no regulators will play a key role in establishing establishing Switzerland as a Blockchain Blockchain as a fundamental enabler of alternative locations that hub, while other interest groups change in the Swiss economy and must must nonetheless also work to drive offer these opportunities encourage and drive open debate. Their development and remove obstacles in role will be less that of an innovator and in the same way.” order to achieve this objective. more that of an intermediary promoting the usability and acceptance of the Taylor Gerring, , Director We have identified a total of seven focal technology in day-to-day transactions. of Technology, Ethereum points for the country’s positioning going Foundation This intermediary role can extend to forward, which will give Switzerland various tasks: the maximum opportunity to assume international leadership over the long term 1. Educating the population about the by ensuring that all players in the Swiss potential applications of Blockchain and ecosystem pull together. the benefits of the technology both for individual companies and for the Swiss economy as a whole
2. Steering open debate through Identification of business opportunities forums with company and industry representatives Supportive legal environment 3. Working with representatives from the legal profession to adapt and issue laws Controlled business process costs and regulations to promote this new technology. Coordinated standardisation
The promotion and acceptance of Blockchain technology by legislators Strong security and encryption and regulators will be a key factor in its speed of development and distribution Focus on controlling operational risks and vulnerabilities in the Swiss economy. Legislators and regulators must also take on a leading Diverse stakeholder map role in the development of the concepts and frameworks that will be needed Figure 5: External influences and recommendations for action (prepared by the Deloitte Switzerland Blockchain Team for this publication)
8) https://www.newsd.admin.ch/newsd/message/attachments/45936.pdf 18 The Blockchain (R)evolution – The Swiss Perspective
19
19 The Blockchain (R)evolution – The Swiss Perspective
3.1 Identification of business insurance, for example, as automated The following specific sample applications opportunities Blockchain processes assisted by smart are currently being examined by Swiss Swiss firms can take advantage of contracts can issue improved expert players. Following a two-year experimental Switzerland’s security, neutrality and opinions based on historic claims and phase with Blockchain technology, UBS is reputation to underline the competitiveness reduce the potential for fraudulent claims9. planning to implement a DLT-based trade of the location with regard to Blockchain finance system for rationalising import- technology. Resident companies must utilise Pilot Blockchain projects are also being export transactions at a global level.11 this advantage and quickly identify areas conducted in other industries such as where Blockchain can be used, enabling utilities, however. Some are focusing on the Another use case is the redesign of the them to position themselves accordingly at creation of DLT-based trading platforms for process for settling over-the-counter a global level. distributing solar energy between various equities with the aid of Blockchain parties, with transactions authenticated technology.12 This is being investigated The financial and insurance sectors, in which automatically and invoicing carried out by a consortium comprising the Lucerne Switzerland is excellently positioned, offer by the technology. Others are working University of Applied Sciences and Arts, a particularly large number of possible DLT on solutions for integrating Blockchain Zürcher Kantonalbank, SIX, Swisscom and applications, as do the energy sector and technology into smart urban innovations in other players. the services sector. Claims management order to optimise energy management in can be simplified in property and casualty cities10.
Increasing the efficiency and reducing the risk of financial transactions through Blockchain
The vision shared by UBS, Deutsche Bank, BNY Mellon and other financial institutions is to develop a digital currency that is linked to central bank accounts and tied directly to a fiat currency(1). They created the Utility Settlement Coin (USC), a series of cash cryptocurrencies with a version for each of the major real currencies such as the US dollar, euro or Swiss franc(2). Blockchain technology enables transactions to be settled quickly and integrated into regular markets such as Switzerland.
By automating processes, a coin such as this has the potential to reduce risk factors such as counterparty, settlement and market risk and improve capital efficiency while at the same time reducing costs(3). This will revolutionise, speed up and significantly improve the payment and processing of trading transactions between financial institutions. It will also reduce the capital-intensive loan collateral requirements for banks by avoiding short-term liquidity bottlenecks in real currencies. This means banks can increase the frequency of their trading activities and make better use of their capital. The high level of transparency and auditability of the Blockchain also offers considerable advantages for regulatory authorities such as the Swiss Financial Market Supervisory Authority. As soon as the regulators can be convinced about the concept, the USC will be tested under real market conditions. This underlines the desire but also the need for financial institutions to review and recast their current approach.
Sources: 1) http://www.nzz.ch/finanzen/fonds/utility-settlement-coin-ohne-eigenleben-usc-die-anti-bitcoin-ist-da-ld.112819 2) http://www.coindesk.com/utilities-settlement-all-about-banks-not-blockchain/ 3) https://www.ft.com/content/1a962c16-6952-11e6-ae5b-a7cc5dd5a28c
9) http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf 10) https://www.indigoadvisorygroup.com/blog/2016/10/7/utilities-piloting-blockchain-application-globally?utm_content=buffera9fd3&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer 11) http://www.nzz.ch/finanzen/fonds/utility-settlement-coin-ohne-eigenleben-usc-die-anti-bitcoin-ist-da-ld.112819 12) https://www.hslu.ch/de-ch/hochschule-luzern/ueber-uns/medien/medienmitteilungen/2016/09/08/blockchain-als-basis-fuer-ausserboerslich-gehandelte-aktien/ 20 The Blockchain (R)evolution – The Swiss Perspective
Blockchain-based platform for over-the-counter equity trading
The consortium’s goal is to develop an open system standard for the Swiss financial centre to simplify the settlement of over-the-counter trading(1). ). Trading in unlisted Swiss securities is currently conducted bilaterally between financial institutions, making it frequently complex, risky and time-consuming. Redesigning the process with DLT speeds up the delivery and payment of the securities. In the best case scenario this even occurs in real time. Using Blockchain technology could also significantly reduce the costs and risks involved in settling over-the-counter securities transactions.
In addition to the consortium, the standard is also to be made available to all other interested financial institutions and the supervisory authorities. The high level of transparency would give regulators better oversight of the legal compliance of over-the-counter trading(2).
Sources: 1) https://www.hslu.ch/de-ch/hochschule-luzern/ueber-uns/medien/medienmitteilungen/2016/09/08/blockchain-als-basis-fuer-ausserboerslich-gehandelte-aktien/ 2) http://www.finanzen.ch/nachrichten/aktien/Blockchain-fuer-ausserboerslichen-Aktienhandel-Forschungsprojekt-der-Uni-Luzern-1001388896
These and other concrete applications start-ups are focusing on Blockchain that offer huge potential for to identify better solutions for current “Blockchain technology is an simplification and efficiency gains market challenges14, for instance in through Blockchain are characterised wealth management, land register excellent fit for Switzerland by the existence of one or more management, adaptive data intelligence and for typical Swiss values intermediaries and interdependencies. for digital identity and decentralised Other characteristics include the autonomous emerging reporting such as security and involvement of several parties with systems, and thus optimise their own democracy. It is important a certain degree of mutual mistrust business or that of their customers and the shared use of an information through the use of Blockchain to take advantage of the store13. Swiss companies, irrespective technology. solid basis that currently of their industry, need to understand which applications can generate Some established Swiss companies are exists for Blockchain and added value for themselves and considering working with start-ups to establish Switzerland as a their customers and should make analyse the impact of DLT on existing appropriate levels of human resources business. Based on this, the key is to Blockchain location over the and investment capital available. draw the right conclusions to ensure long term.” sustainable growth. In addition to established companies, Daniel Grassinger, Co-Founder, it is young start-ups in particular which Many start-ups, which are proactively nexussquared are using disruptive technologies to shaping the rapid development of fundamentally change industries. Many Blockchain applications for redesigning
21 13) http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf 14) http://dapps.ethercasts.com/ The Blockchain (R)evolution – The Swiss Perspective
transaction processes have already In addition, everyone must actively set up operations in Zug. The city in promote and advocate Blockchain central Switzerland has already been technology within their own sphere of dubbed “Crypto Valley Zug”. For example, influence. bitcoin is already accepted in Zug as a payment method for fees up to CHF In many cases these market challenges 20015. Furthermore, in mid-November force companies to tackle regulatory the SBB launched the sale of bitcoin requirements that negatively impact the at all ticket machines16. Start-ups and costs and functionality of their solutions. established companies, but also cantons This underlines how important it is that all and municipalities, must be prepared to players in Switzerland join the Blockchain invest in test landscapes in order to carry network in order to reach mutually efficient out feasibility studies to identify potential agreements and ensure that the needs of business areas. all stakeholders are met.
The SBB sells bitcoin at all ticket machines
The SBB, Switzerland’s largest rail company, believes in the future of bitcoin and started selling the online currency in November 2016. The SBB allows its customers to withdraw bitcoin at any of the more than 1000 ticket machines throughout the country(1). To purchase the digital currency, which is based on DLT, customers need a Swiss mobile phone number, a security code for identification and a bitcoin wallet(2).
The SBB, one of the biggest public sector companies, has thus created Europe’s largest network of ATMs for bitcoin withdrawals(3). The extensive network offers permanent and rapid access to the digital currency. By selling bitcoin, the SBB has strategically expanded its service portfolio and taken up a pioneering role in the digital age. To secure this position over the long term the rail company should not only sell bitcoin but also integrate blockchain technology more heavily in its service offering and combine it with existing services. The obvious move towards paying for travel tickets or other SBB products directly via a bitcoin wallet offers enormous potential. The payment process could also be coordinated with numerous partners such as Snow ’n Rail, while the supply chain could be completely revolutionised through the use of smart contracts.
Sources: 1) http://www.handelszeitung.ch/unternehmen/die-sbb-wagt-den-schritt-die-welt-der-bitcoins-1246341XX 2) http://www.nzz.ch/wirtschaft/internetwaehrung-sbb-fahren-auf-bitcoin-ab-ld.124937?_sm_au_=iQV6pMspvjpWr1Pr 3) https://www.bitcoinnews.ch/4909/das-groesste-bitcoin-atm-netzwerk-europas-sbb-billettautomaten/
15) http://www.nzz.ch/schweiz/crypto-valley-zukunftsmodell-oder-marketing-gag-ld.22911 22 16) http://www.sbb.ch/bahnhof-services/dienstleistungen/weitere-dienstleistungen/bitcoin.marketingurl_$$$bitcoin.html The Blockchain (R)evolution – The Swiss Perspective
3.2 Supportive legal environment tax conditions for start-up companies to Legal certainty is a key non-technical create incentives for them and for investors “The introduction of factor that is vitally important if a new and to encourage Blockchain companies Blockchain will have technology is to become permanently (or FinTech companies in general) to locate established. This applies in connection in the canton. Such financial or material a bigger impact in with both the political stability of the incentives from cantons or municipalities, developing countries than economic environment and a binding legal supported by new rules and laws at federal framework. The applicable legal framework level, are important for convincing as in Switzerland, as they may be generally restrictive or liberal many start-ups as possible to locate in have less mature systems, depending on the prevailing political, social Switzerland. and macroeconomic conditions. In the case for example in the area of FinTech in general and Blockchain in Accompanying initiatives such as of payment settlement. particular, numerous experts have already digitalswitzerland19 must also be widely highlighted the importance of support supported in the Swiss economy and Switzerland already has very 17 from the relevant bodies , without which actively promoted by representatives from stable systems, meaning Switzerland will be unable to steal a march politics and business in order to create on other major Blockchain centres such as an impressive image of Switzerland as a that the pressure and Singapore or London. forward-looking Blockchain centre beyond opportunity for conversion its own borders. Options for Switzerland to position itself is lower.” as a supporter of the legal environment for Blockchain call above all for the courage to Thomas Ankenbrand, Lucerne be innovative and creative. One example University of Applied Sciences that has already caught on in financial and Arts centres is the provision of a regulatory sandbox18. Through this and similar schemes, a country can give a clear signal to up-and-coming Blockchain companies and those that are attempting to introduce the technology in their business that they are welcome and can count on support.
Comparable recommendations can be derived for Switzerland, possibly building on the pioneering role being played by the city of Zug. Like other cantons, the canton of Zurich has already adjusted the
17) http://oliverbussmann.com/best-fintech-accelerator-your-regulator/?utm_content=buffer0a65b&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer 23 18) http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-Proposes-a-Regulatory-Sandbox-for-FinTech-Experiments.aspx 19) http://digitalswitzerland.com/ The Blockchain (R)evolution – The Swiss Perspective
3.3 Controlled business 3.4 Coordinated standardisation links to Blockchain should therefore be process costs Technological innovations, particularly efforts towards the active shaping and The dynamic nature of their activities those that become established over a rapid adoption of a uniform standard. means that Blockchain companies, long period and impact numerous players especially start-ups that are still in their in various sectors, rarely appear in a 3.5 Security and encryption infancy, have to maintain rigid controls standardised form. One example from One proverbial key element of Blockchain on their finances. For Switzerland, which the not all too distant past is the battle with a special connection to Switzerland is known globally as a high-cost country, between Blu-ray and HD DVD, which ended is encryption in particular and security in this presents a challenge in respect of its when the former established itself as the general. The best known application of positioning in the Blockchain environment, de facto standard in 200820. Blockchain technology – as the basis for as it means that these companies are cryptocurrencies such as bitcoin – has extremely analytical regarding investment The absence of a uniform industry attracted a great deal of attention due to its in separate infrastructures and any mid or standard can delay the operational security-related features, and this means back office functions. They will only choose implementation of an innovation or even that Switzerland, with its tradition as a Switzerland as a location if these outgoings prevent it entirely, as private sector players neutral and stable location offering strong are offset by appropriate added value in attach risk profiles to their investments protection for personal and economic other areas. and would struggle to justify committing rights, is excellently positioned to establish capital and human resources under itself as a global Blockchain hub. The resulting recommendations for such circumstances. It is therefore in the action are therefore on two levels: firstly, interests of all parties to reach agreement Many investment firms have Switzerland (in the form of representative as quickly as possible so that development already recognised the potential of institutions at communal, cantonal and of the technology can continue through to cryptocurrencies and made a significant federal level) must demonstrate that it integration into actual day-to-day business. portion of their investments in Switzerland, is willing to help develop a Blockchain to the extent that the term “Crypto cluster by maintaining and expanding For Switzerland this means once again Valley Zug” is now long established in the excellent framework conditions in the that it must actively seek to become part industry jargon22. It is for precisely these financial sector too (such as the availability of this development process. The recently reasons that these companies which are of venture capital, cooperations between announcement by the International experimenting with Blockchain technology universities and companies). Secondly, Organisation for Standardisation (ISO) of opt for Switzerland as their domicile23. these locational advantages that are the establishment of a technical committee relevant for Blockchain companies (chiefly for the development of Blockchain One security risk, for example, is the loss excellent infrastructure, high level of standards offers a good example of of the private Blockchain key. The public education, good network of international this; Australia was rewarded for its and private key approach is a standardised contacts) must be aggressively emphasised pioneering role to date with the chair of feature of Blockchain implementations. and reiterated on a regular basis by means the committee, while Switzerland is only of specifically tailored media releases. involved as an observer21. One area of The public key is not secret and known focus for all Swiss-domiciled players with to outsiders, but the private key belongs
20) https://www.engadget.com/2008/02/20/two-years-of-battle-between-hd-dvd-and-blu-ray-a-retrospective/ 21) http://www.iso.org/iso/home/standards_development/list_of_iso_technical_committees/iso_technical_committee.htm?commid=6266604 22) http://fintechnews.ch/blockchain_bitcoin/crypto-valley-zug-7-companies-you-might-not-have-heard-about/3131/ 24 23) https://xapo.com/resources/switzerland/ The Blockchain (R)evolution – The Swiss Perspective
“On one side you have the visible public Blockchain with a valuable network in terms of transparency and security...”
exclusively to its creator. Best practice for side you have the visible public Blockchain avoiding this risk is to store the key locally with a valuable network in terms of offline so that unauthorised persons are transparency and security, while on the unable to access it, and Switzerland offers other are the private Blockchain solutions optimal conditions for this. One such that offer greater flexibility with regard to example is xapo, which offers local offline data protection and access. Within this storage in a military bunker in the canton entire spectrum of public and private of Uri24. Blockchains lies the solution of centralised data challenges, audits and analysis. The combination of preventive measures like this and specific examples of active With possibilities such as the ability to cases from the financial world such as compare accounting entries between cum-ex fraud25 clearly demonstrates that two trading partners (without sacrificing companies must attach great importance data protection), this approach promises to the security and auditability of their to significantly reduce the auditing work Blockchain activities. Switzerland offers a required for financial transactions. We locational advantage over other countries expect this to have a substantial impact on in terms of security. Cum-ex trades are a the role of the Chief Information Security good application, as a Blockchain solution Officer (CISO) in companies, as a growing would in all probability have prevented the number of technology decisions will need underlying practice of multiple tax refunds, to be taken on the basis of security factors since the chain would have highlighted and risk tolerance. refunds that had already been made and rejected any other repayments. This gives rise to various concrete recommendations for action for In this context, specific system security Switzerland. It makes sense to aggressively documentation and audit standards emphasise the country’s history of strong become vital elements for further protection for law and security in external Blockchain adoption. communication. It is also important to During development there is a definitive understand the specific requirements of need for public accountability. On one potential companies which are interested in basing their headquarters in Switzerland,
25 24) http://www.finews.ch/news/finanzplatz/18313-bitcoin-xapo-aufbewahrungsstaette-virtuelle-waehrung-kryptowaehrung-monetas-bitcoin-suisse-attinghausen 25) http://www.mondaq.com/germany/x/471646/Financial+Services/German+CumExTrades+Enhanced+Risks+and+IndustryWide+Challenges The Blockchain (R)evolution – The Swiss Perspective
“This gives rise to various concrete recommendations for action for Switzerland..”
and show them how this can be achieved. Swiss companies are therefore advised The secure storage facilities in central to familiarise themselves as soon as Switzerland are a perfect example to use possible with ongoing decentralisation for this. and its implications for day-to-day business. Incidents such as the hack of the 3.6 Controlling operational risks Decentralised Autonomous Organisation and vulnerabilities (DAO)27 show that there are a host of The preceding sections have already dealt unforeseen but potential risks that with various risk types connected to the companies can only tackle by training technology-driven business innovation and deploying employees who are alert model. Another important factor that to these risks and equipped with the can also hinder the spread of DLT are necessary tools. individuals and their proprietary views on the operational implementation of Blockchain technology.
High operational risks and payment default risks (Lehmann Brothers being a prominent example26) across the board call for strong mitigation measures. By contrast, a classic structure such as that encountered today whereby a central party assumes the role of a risk-mitigating trust figure involves a high degree of centralisation. This runs counter to a decentralised structure (see Chapter 1.2: The value of trust) in which the distributed infrastructure makes it possible to control the trust factor. Here risks are mitigated by the almost real- time authentication and verification of transactions and the elimination of an individual central weak point.
26) http://www.finance-magazin.de/risiko-it/hedging/risiko-adressenausfall-1223331/ 26 27) http://www.coindesk.com/understanding-dao-hack-journalists/ The Blockchain (R)evolution – The Swiss Perspective
3.7 Diverse stakeholder map in the process. While the questions that Given the range of challenges involved, Technological advancement and all players need to answer and their the successful long-term positioning technology adoption are defined to a common goal are identical – to ensure required to ensure that players are able large degree by the number and type that Switzerland is positively positioned in to respond to even the most detailed of stakeholders in the environments the global Blockchain environment – the questions concerning growing data concerned. The map of parties with procedure is not necessarily coordinated. volumes, data types, transaction details relevance to Blockchain has become The cantons and the federal government and nodes can only be secured through an disparately more complex than previously, pursue different interests, for example institutionalised round table. The issues for example during the Internet’s regarding the location of certain regulatory that need to be resolved include whether development into a mass medium. The bodies, while the trade associations of regulators or consortia define standards diagram below shows the groups that various industries may disagree on the best for the various industries and who takes are relevant for Switzerland with regard approach for attracting new Blockchain- responsibility for the execution of smart to Blockchain and need to be involved based firms. contracts.
A coordinated group with the ability to conduct critical discussions characterised by agile decision making and Previous responses by the implementation and involving all relevant Swiss government: Public sector Digital Swiss 2025, (e-governance, digital stakeholders would send out an extremely parliamentary identity, etc.) positive signal that Switzerland can be a group for digital sustainability, etc. global leader in Blockchain and offers a reliable environment for companies in this o er e t P li se tor field.
Swiss regulators Governmental bodies (FINMA, etc.) Many start-ups have chosen to base their