The State of and Its Impact on Finance Profession What do Blockchain and cryptocurrency really mean and what are the opportunities? What about the risks that come with such wholesale change to business processes. Learn this and more as you look beyond the hype and walks through these new technologies in a business setting.

Jason Wood, CA CISA CPA (US) CIA Triple Ledger Limited, Managing Director Techemy Limited, Head of Compliance & Audit “Blockchain is an accounting technology. It is concerned with the transfer of ownership of assets, and maintaining a ledger of accurate financial information. The accounting profession is broadly concerned with the measurement and communication of financial information, and the analysis of said information. Much of the profession is concerned with ascertaining or measuring rights and obligations over property, or planning how to best allocate financial resources. For accountants, using blockchain provides clarity over ownership of assets and existence of obligations, and could dramatically improve efficiency.”

Source: https://www.icaew.com/technical/technology/blockchain/blockchain-articles/blockchain-and-the-accounting- perspective

02 Crowd Polling Question

Have you or your businesses/clients started to use or are thinking about the potential use of blockchain technologies or cryptocurrency?

A: Yes, we have or our clients have already started using the technology!

B: Yes, we have or our clients have already started thinking about the technology!

C: No, we have not nor have our clients even considered this technology!

D: Unsure, I do not know what this technology is!

03 What do we mean by Blockchain and cryptocurrencies?

04 distributed ledger technology (DLT) and blockchain disruptive technology what do we mean

Think about a technology that facilitates transactions and is a custodian of records.

This could be payment systems, identity management, transfer of legal ownership of assets, etc.

This can be on “private” ledgers; “public” ledgers; or “hybrid” ledgers.

DLT and blockchain is much more than cryptocurrency. how can I be affected Companies are already exploring how to use the technology; and the use cases affect the processing of financial and operational information. Therefore, as a finance and accounting business partner, you need to stay abreast of the technology so you know how to evolve the business processes and get comfortable with the underlying technology processing the information.

05 So what is Blockchain?

“…a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’ computers. All parties can review previous entries and record new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks (the ‘blockchain’). The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority – a ‘middleman’.”

Source: https://www2.deloitte.com/nl/nl/pages/financial-services/articles/blockchain-technology-speeding- up-and-simplifying-cross-border-payments.html

06 What are the characteristics of Blockchain? ✓ Decentralised/Distributed – You can conduct transactions directly peer to peer. You do not have to rely on a centralised network or authority.

✓ Immutability— Once transactions data has been recorded on the blockchain it is impossible to tamper with it. The data become incorruptible and non-expirable.

✓ Transparency— Blockchain by definition is a network of computers used to power it. Any node in the network or anyone who interacts with it has full access to every piece of data recorded in real time.

✓ Autonomy — Individuals who use blockchain technology are in full control over their assets, they are also responsible for their and storage.

✓ Permissioned/Permissionless – depending on the blockchain, it may require that you are permissioned to join the private blockchain; or permissionless meaning anyone can join the public blockchain.

✓ Censorship resistance— Since blockchain technology is a gigantic network of computers located around the world, it makes it by design practically impossible for regulators to interfere with this technology due to its spread out global nature.

Source for some information: https://medium.com/@SmartTaylorApp/why-blockchain-technology-and-cryptocurrencies-are-the-future-of-finance-fccdf25eef35

07 Graphic Representation of Blockchain

Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html

08 Graphic Representation of Blockchain (continued)

Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html

09 Cryptocurrencies Broad Categories

dApps Utility Tokens Use blockchain to build A business uses these tokens to help decentralized applications – basically facilitate transactions, such as an a user interface on a decentralized Exchange using their own token for protocol. payment of transaction fees. Example: Crypto Kitties Currency Coins

Privacy Coins Use the word currency cautiously as it depends on the jurisdiction. However, these Facilitate anonymous transactions without an coins essentially facilitate the exchange of identifiable trail. Transactions cannot be value for products and services. traced. Supply Chain Example: Examples: Monero, Zcash Protocols Enabling track and trace, Source: https://medium.com/predict/do-you- inventory management, and know-the-5-different-types-of- the facilitation of the supply cryptocurrency-medium-29298d1fad2f chain between trading partners.

Example: VeChain 010 Cryptocurrencies Did you know?

There are over 2,100 cryptocurrencies out there! The top 3 are:

Source: https://coinmarketcap.com/all/views/all/

011 What is Bitcoin (BTC)? “Bitcoin was created in 2009 as an open-source software (Satoshi Nakamoto).

How does Bitcoin work?

Using blockchain technology, Bitcoin allows users to make transparent peer-to-peer transactions. All users can view these transactions; however, they are secured through the algorithm within the blockchain. Only the owner of that Bitcoin can decrypt it with a “private key” that is given to each owner.”

Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency ethereum-other-cryptocurrencies.html

012 What is Ethereum (ETH)? “Created in 2015, Ethereum is a type of cryptocurrency that is an open source platform based on blockchain technology. While tracking ownership of digital currency transactions, Ethereum blockchain also focuses on running the programming code of any decentralized application, allowing it to be used by application developers to pay for transaction fees and services on the Ethereum network.”

Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- ethereum-other-cryptocurrencies.html

013 What is Ripple (XRP)? “Ripple was released in 2012 that acts as both a cryptocurrency and a digital payment network for financial transactions. It’s a global settlement network that is designed to create a fast, secure and low-cost method of transferring money.

Ripple allows for any type of currency to be exchanged, from USD and Bitcoin to gold and EUR and connects to banks, unlike other currencies. Ripple also differs from other types of digital currencies because its primary focus is not for person-to-person transactions, rather for moving sums of money.”

Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin- ethereum-other-cryptocurrencies.html Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency

014 What are the opportunities for the business and finance team?

015 Is Blockchain for real?

Source: https://www.accountingtoday.com/opinion/blockchain-is-already-changing-accounting Image Source:https://hackernoon.com/how-is-blockchain-revolutionizing-banking-and- financial-markets-9241df07c18b Amounts in $USD

016 Blockchain Illustrative Use Cases Finance and Accounting Reduce costs of Investments and Share Accept Crypto and maintaining and Trading (Digital Assets) reconciling ledgers Cross-border payments Instead of using traditional brokers and Instead of using traditional banks (and , stocks could be traded with Blockchain could help accountants currencies) to send money around the world, faster settlement and transaction validation. focus on planning rather than blockchain can make money remittance recordkeeping. The accountant more affordable and faster. As a finance and accounting function, how could focus on the value of the As a finance and accounting function, how will you treat the investments in crypto data. What would you do with the will you “account” for these transactions from shares; or what if your own company’s extra time? a book and tax standpoint? shares were tokenized?

You could also do capital raising! Improve auditability and Smart Contracts fraud detection Pay Employees Contractual arrangements could be (Governance/Compliance) programmed to self execute when Employees could be paid in crypto Accounting applications will be able to certain conditions have been satisfied. or part of their retirement funds evidence that transactions between parties As a finance and accounting function, could be linked with crypto were legitimate and a joint register with a how will you work with legal to ensure investments.. trading partner will show the entire debits and that the right accounting standards are credits on both sides of the transaction. Is this programmed? too much transparency? page 017 What can I do? Business and Finance Finance as a Business Partner

Finance and accounting need to do the following: Continue to learn more about ➢ Be involved with any blockchain project from the beginning. distributed ledger 01 (blockchain) and ➢ Perform a detailed analysis of the technical architecture of the cryptocurrency technologies. blockchain from an accounting and finance perspective. ➢ Develop strategies for maintaining a sufficient level of transparency and verifying that the blockchain applications are performing as intended from a finance and accounting Gain an understanding of how the technology is being perspective. considered within your 02 ➢ Use professional skepticism and ask questions including: organisation or at your clients. ➢ How is data security and account/wallet security maintained? ➢ How do we ensure that the smart contracts’ code is error free?

Be involved from the ➢ How are existing policies and procedures updated to reflect beginning, identify the risks, the usage of blockchain? 03 and help add value to your ➢ How do we manage access and permissions with the organisation or clients. blockchain? ➢ Keep Governance and Risk Management top of mind. page 018 Let’s explore the opportunity in capital assets

The information in the following slides are from Techemy Capital and have been granted permission to present at the conference but you cannot further share this information. Please contact me directly if you would like more information about Techemy Capital.

019

Evolution of Capital Formation

EVOLUTION OF CAPITAL FORMATION

CAPITAL CRYPTO PURPLE ICO’s STO’s MARKETS CURRENCIES SECURITIES

➢ Bitcoin has disrupted money and gold

➢ Ethereum has disrupted capital by creating a new crowdfunding model (ICO)

➢ Tokenisation is disrupting transferability of capital – anything can be securitised, digitised and tokenised (STO) TRADITIONAL ASSETS ARE MOVING ONTO BLOCKCHAIN

LEGACY ASSET CRYPTO EXPRESSION CRYPTO ASSET

Gold Store of Value Bitcoin

Stocks Digital Utility Ethereum

Funds Blockchain Protocols Cryptocurrencies

Real Estate Digitised Equity Security Tokens

Commodities Fractional Ownership of Assets Security Tokens

Initial Coin Offering (ICO) is a new funding model, offering Security Token Offering (STO) is an alternative to private Purple Securities are value-adding tokenised securities that funding through crowdsourcing, without a proven product. ICOs equity and VC financing. Security tokens represent financial have no real-life analogues. They will contain a mixture of are enabled by the token economy, which implies the use of a instruments, and have legal rights similar to traditional assets. traditional security features and utility token features. proprietary utility token. Breakdown of Security Token Offerings

A Financial Security includes any financial STO VALUE FLOW investment that derives its value from an underlying asset. It can be a tradable financial asset of any kind, broadly categorised into debt, equity and derivatives, although this may vary slightly between jurisdictions. Liquidity Premium A Security Token Offering (STO) is a compliant (More Attractive) private offering made on blockchain. It is a digitised financial security that can be backed by assets, profits or revenue of a company, and can offer legal rights such as voting or dividend distribution. STOs are an emerging alternative to private equity and VC financing as they allow for businesses to lock in funds Value for Value for without locking investors. An STO may create a non- Issuing Price Appreciation dilutive way of financing a company’s portfolio, Investors allowing it to raise funds without having to sell equity Entity Revenue Share in its portfolio companies, but instead tokenise its cash-flows. (Highly Liquid Dividends (Highly Efficient Investment Asset) Security Tokens don’t change the fundamentals of a Fundraising Model) financial security, but shift an asset’s ownership onto blockchain’s distributed ledger, which is immutable. This is done by digitasing an asset and representing Global Automated its value and allocation of shares in the form of a Reach Complianc cryptographic asset (a security token). Therefore, (Greater e security tokens are an investment contract similar to Demand) (Lower Costs) traditional financial instruments, aimed to reward investors through such means as: revenue share, dividends, and favourable price movements. Security Token Market Opportunity to 2022 Over 5T

THE GLOBAL SECURITY TOKEN MARKET IS SET TO GROW EXPONENTIALLY OVER THE NEXT 2 YEARS, POTENTIALLY GROWING TO OVER US$ 5 TRILLIONS BY YE 2022

560B

CRYPTO VS TRADITIONAL MARKETS IN US$ 700M

2018 2020 2022

SECURITY TOKEN MARKET SIZE IN US$

TRADITIONAL IPO MARKET IN US$ BILLIONS

44.9B 53.3B 63.4B

2018 2020 2022

Sources: BraveNewCoin Techemy Capital The World Bank “Market Capitalisation” SIFMA “Bonds Outstanding” Bank of International Settlements “Global Derivatives” Savills “Global Real Estate Value” BP “Statistical Review of World Energy” Bloomberg Markets “Global Debt” SEC “Capital Raising in the US” Smart Contracts Mechanics of Smart Contracts Smart contracts are an algorithmic software code that verifies terms and conditions in a conflict- and human-free manner. They allow VALUE TRANSFER for security tokens to be flexibly programmable based on terms & conditions to streamline or automate key investment BUYER SELLER features.

Rights and obligations can be programmed into the tokens via these smart contracts. Automation of such functions as dividends Undisputed BLOCKCHAIN LEDGER Automated Clearance distribution allows reduction of costs and Ownership & Settlement increased efficiencies. Similarly, smart contracts can ensure cross-jurisdictional compliance of KYC & AML requirements, thus protecting both investors and issuers.

As a general rule, smart contracts are TERMS & immutable - once written, they cannot be EXECUTION SETTLEMENT CONDITION TRIGGERS PROCESS changed. However, there are blockchain S platforms that allow for such functionality, for Clearance and settlement of Contract terms and conditions, When a triggering event example Stellar (as opposed to Ethereum). crypto assets is automated on agreed by all relevant parties, occurs, the contract executes blockchain due to their digital Therefore, smart contracts can be quite flexible are programmed into tokens. itself as per the pre- nature. Exchange of physical These may include payment programmed terms. Events to reflect requirements of the parties involved assets (e.g. stocks, fiat) is currency, dividend schedule, may include expiration date, recorded on the ledger after in an investment. interest rate, and various dividend distribution, new physical clearance and conditions for execution. transaction, etc. settlement are complete. What are the potential risks?

025 Example Blockchain Risks ✓ Legal risks ✓ Shift from known party to unknown party on public blockchain ✓ Legal liability to mitigate loss from a smart contract code being hacked ✓ Settlement risk ✓ When is a financial transaction complete (private may have ability to make changes due to centralised control) ✓ Financial risk ✓ Blockchain will enable real-time or near real-time transaction settlement, which reduces credit exposure and frees up liquidity that may be otherwise tied up as collateral. ✓ Operational risk ✓ Risk gets shifted to end points in a blockchain model where the end users are responsible for managing their own digital assets. ✓ Key management risk ✓ Mismanaging private keys and resulting hacks usually come from a failure to back up the keys and store them in a safe or other appropriate method.

Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html

026 Example Blockchain Risks (continued) ✓ Code and cryptography risk ✓ Current cryptographic methods can be broken with more sophisticated technology, like quantum computing, or that those methods can't be improved and implemented in time to thwart an attack. ✓ Forks and chain-split risks ✓ Forking and chain-split risk may adversely affect the assets, liquidity, creditworthiness, and solvency of participants because of the time and resources it takes to work through the change. Finance professionals must anticipate and hedge the new realm of risks that arise with blockchains. ✓ Consensus and governance risks ✓ Consensus and governance risks are the risks that developers or other responsible stakeholders can't agree on a timely change to a protocol or that a protocol change is enacted that adversely affects a party similarly to blockchain forks. It also encompasses the risk that settlement can't be relied upon as a legally defined moment because of the possibility that a transaction, block of transactions, or the blockchain ledger is eventually rewritten.

Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html

027 Potential Blockchain Security Vulnerabilities ✓ Endpoint Vulnerabilities ✓ The reason comes down to the credentials that are required to access a shared distributed ledger, and how those credentials can be exposed by security weaknesses at the endpoints. ✓ Public and Private Key Security ✓ Anytime blockchain keys are entered, displayed, or stored unencrypted on such devices, the prying eyes of hackers can capture them. ✓ Vendor Risks ✓ Weak security on their own systems, flawed code, and even personnel vulnerabilities can expose their clients’ blockchain credentials and data to unauthorized persons. ✓ Untested at Full Scale ✓ blockchains could be susceptible to fraud, if a significant number of participants conspire against the rest of the participants. Known as a majority attack, or as the 51% problem, this theoretical threat could materialize, considering that a large number of mining farms are built in nations where electrical power is cheap, and oversight questionable. ✓ Lack of Standards and Regulation ✓ standards and regulations is more complex than that of most of the technical issues. ✓ Untested Code ✓ attacker exploiting vulnerabilities in the code. Source: https://igniteoutsourcing.com/blockchain/blockchain-security-vulnerabilities-risks/ 028 Manage the risks Business and Finance Blockchain Risk Management Framework

The Blockchain has additional risks such as: Think about risks broadly ➢ “51% attack” where one group or entity gains control of more than half the computing across your organisation. How power of the blockchain network. 01 will your processes change? ➢ Quantum computing could compromise existing cryptography solutions, so ensure that the solution used is quantum-proof. ➢ What Information is stored – how much information do you want stored on the blockchain? ➢ How keys are stored – don’t store your private keys on servers that could be compromised? Identity mitigations and controls to manage the risks. 02

03 Monitor the risk management.

➢ Source: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-risk-blockchain-risk-management.pdf page 029 take right now action!

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