BlockchainFinancial Services - Opportunities and Challenges

www.pwc.com

September 2017

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Agenda

Emerging Use Cases2

Barriers and Questions3

Blockchain introduction1

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Blockchain introduction

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What is Blockchain?

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Across all of FinTech, Blockchain technology is attracting the most attention from our clients and the wider market.

Smart contracts – The ability to run additional business logic means that shared agreement on the expected behaviour of financial instruments can be embedded in the Blockchain.

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Distributed ledger creating a single shared view of transactions – Every participant in the network has simultaneous access to a shared view of information.

1Peer-to-Peer Network with no centralised authority. Technology replaces the need for a third party to authorise transactions and manage updates.

2Trusted by use of consensus, verification is achieved by network participants confirming changes with one another in real-time.3

Blockchain’s key features:

“Blockchain Technology will fundamentally alter the way financial institutions do business around the world …. threatens to disintermediate almost every process in financial services” World Economic Forum Report

August 2016

Blockchain, the technology that supports bitcoin, has many other applications

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Why this can be transformationalThe technology has the potential to drive transformational change across multiple industries

Santander estimated that $20bn per annum savings could be achieved globally across securities and FX settlement through the introduction of this technology (Fintech 2.0 2016)

Cost Reduction

Simplification

Clien

t Service

New

Pro

du

ct G

row

th

Data Duplication/Reconciliation Speed of Transaction

Automation Resilience

• One version of the truth• Eliminates duplicated

data entry• Eliminates reconciliation

errors

• Real time access to data• Reduce delays and speed

up execution• Timing of execution held

in tamper proof log

• Automate business rules of transaction

• Automate execution –behaviour is the same for all participants

• Each participant has their own node

• Each node has its’ own copy of the data

• No single point of failure

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2017 Fintech Survey

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Our 2017 Fintech survey highlights growing familiarity with these benefits and the belief that it will be more widely adopted over the next three years

77% of

respondents

Expect to have live blockchain

applications in production by 2020

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If the following conditions apply, then blockchain has strong potential to provide a solution:

1. Multiple Parties Share Data - multiple participants need views of common information

2. Multiple Parties Update Data – multiple participants take actions that need to be recorded and change the data

3. Requirement for Verification – participants need to trust that the actions that are recorded are valid

4. Intermediaries add cost and complexity – removal of “central authority” record keeper intermediaries has the potential to reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)

5. Interactions are time sensitive – reducing delay has business benefit (e.g. reduced settlement risk, enhanced liquidity) or timing of the transaction is crucial

6. Transaction Interaction – transactions created by different participants depend on each other

What business advantages does Blockchain offer?The technology offers the opportunity to drive dramatic changes in business models – it is not the right answer to every possible problem

If you can’t tick 4 out of 6 ask “Why Blockchain ?”

Realising Business Benefit Will Usually Require Cooperation Between Multiple Participants

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Emerging use cases

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Trade Settlement

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Trade settlement has been an area of significant interest in particular for securities where multiple intermediaries exist today

BlockchainBank A

Bank C Registrar

Regulator

Bank B Asset Manager

Example initiatives• Nasdaq launched Linq a blockchain based system

for privately listed firms in late 2015• CLS are targeting early 2018 to launch CLSNet, a

blockchain netting service for 28 currencies• DTCC has successfully tested a solution for the

clearing and settlement of repos

Benefits SoughtReduced Cost• CSD/Custodian/Messaging fees• Operational efficiency

Speed of settlement• Shorter (T-Zero) settlement• Reduced intermediary windowsResilience• No single point of failure• Shared position view if bank failsTransparency• Common reporting repository• Opportunity for regulator node

Considerations• How to achieve DVP certainty in fiat currency• Preserving the benefits of netting• Preserving liquidity – short selling ?• Confidentiality• Scalability and performance

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Process

• Paperwork including contract/LoC captured on chain and shared (one source of terms)

• Different participants can provide updates to data or specific documentation

• Contracts, approval and tracking of goods enhanced

• Release of funds off chain (for now)

BlockchainIssuing Bank

Shipping Firm

Freight Transporter

Advising Bank

Importer Exporter

Trade FinanceTrade Finance has been one of the focus use cases for a number of banks

Benefits SoughtTransparency/Fraud• Avoid fraudulent documentation• Collateral cannot be used twice

Speed of settlement• Trade finance deals executed in

hours not daysIdentity Security• Certainty of identity• Permissions and restrictionsReduced Cost• Reduced manual intervention• No duplicated data entry

Considerations• Scope of processes included in the blockchain• Confidentiality of information • Managing identity• How to deal with complex documents• Extending the chain to other participants e.g.

freight insurers

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Insurance – Claims Management

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Current process involves heavy reliance on intermediary processes

• Smart contract is created to represent a claim that is visible to all nodes on the permissioned chain

• Electronic MRC and claim details are available to all permissioned parties so that policy and claim can be linked eliminating data inconsistencies

• Intermediary function (Xchanging) to act a keeper of the record is removed

• Based on the smart contract and associated business rules, each individual party can automate workflow around claims management building in appropriate authorisation

Current State Future State

The high level potential benefits include:

• Reduction in dispute and error reducing delays in claims

• Eliminates central intermediary reducing the risk of single point of failure / single point of delay

• Reduction in manual processing and data update resulting in reduced cost

• Consistent linkage between policy and claim

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Processing Mortgages on a blockchain

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Putting key actors on a shared blockchain could create many benefits:

• Ability to create shared copies of legal agreements and full electronic audit trail of changes

• Ability to confirm agreement to contracts based on digital identity and defined permissions

• Reduce the complexity and cost (e.g. Legal fees)

• Opportunity to speed up release of funds and reduce the time from contract exchange to completion

• Data is trusted, accurate and secure –no data duplication or reconciliation errors

• Process steps can be automated into smart contracts (e.g. scheduled completion)

Multiple actors need to agree to work in new ways – in this case a group of lenders, panel solicitors and valuers could derive benefit

Buyer’s solicitor

Lender’s valuation firm

Seller’s solicitor

Seller’s lender

Buyer’s lender

Managing the valuation and contracts could reduce delays

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In the newsThese use cases are being explored and progressed

PwC and a group of 10 Luxembourg based asset managers have been working together to research use cases for fund managers. Running on a 10 node private blockchain, the Smart-TA allows the consortium members to simplify funds subscription and redemption processes as well as shares transfers.

Seven European banks, including HSBC, Deutsche Bank and KBC are developing a blockchain trade finance platform that will be live in 2018. It targets the SME market that banks have tended to avoid. The platform brings buyers and sellers together to make trade transactions very transparent from purchase order until payment.

PwC created a working blockchain prototype for the London Market’s Target Operating Model (TOM) Innovation Exchange, which demonstrates how the technology can support claims bordereau management. The application focuses on enhancing interactions among multiple different parties involved in a claims bordereau process and supported claim creation, supporting documents, invoice creation, and approval or rejection of invoices.

The FCA, RBS and one other large UK bank have partnered with R3 CEV to develop a blockchain-based application to improve the regulatory reporting of mortgage transactions. The system enables banks to generate automated delivery receipts for the regulator each time a mortgage is booked. The firms hope that it will reduce the cost of the process and the risk of error.

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Barriers and questions

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Barriers to implementation

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There are business, legal, regulatory and technology hurdles to overcome

Co-operation and establishing standards• Need for agreed business practice, data and technology standards• Need for multiple parties to cooperate to deliver business benefit

Legal framework• Treatment of digital assets and certainty of digital agreements• Treatment of a Distributed Ledger as a “system of record”

Settling cash in fiat currency• Any mainstream application will need settlement certainty in central bank money• There are different solutions but only native CBC provides full efficiency benefits

Scalability, confidentiality and resilience• Transaction capacity - scalable consensus mechanisms exist but are not mature• Concerns around operational resilience and confidentiality will need to be satisfied

Regulatory framework• Regulators will focus on how blockchain achieves their outcomes • Specific local regulations such as bank confidentiality (e.g. Switzerland, Singapore)

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Getting to live

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Large regulated financial institutions will need to ensure rigorous controls and assurance of the new technology

Business Resilience

Legal

Performance Assurance

IT Resilience

Data Assurance

Compliance: Conduct

Cyber and Information Security

1. Blockchain represents a strategic opportunity for Financial Institutions to innovate and become more competitive and efficient.

2. The impact of this disruptive technology will be felt across functions, silos, entities and indeed, entire industries.

3. Most leading Financial Institutions recognise this and are conducting a number of experiments with the technology.

4. Innovation dollars are precious and business transformation is a highly risky venture that requires a careful and comprehensive approach.

5. PwC is the first major consulting firm to launch a global Blockchain services portfolio to help our clients maximise their risk adjusted return on innovation.

Service Performance? Liabilities?

Controls Design and Effectivenes?

Contracts in Place to Operate?

Hacker Safe? Collusion Safe?

SLAs, Failover, Backup…

Governance, Quality, Migration

Systemic Risk?

Incentives? Protections?

Affirmative? Negative?

Compliance: Prudential

Form of Assurance

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Questions to consider

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Potential questions to consider

• For all firms

• Will blockchain disrupt my business and should we adjust our business strategy ?

• Are there opportunities to deploy the technology and reduce cost or improve customer service ?

• Are there already industry initiatives we should join ?

• Are we considering the impact on the markets we operate in and taking these into account in our three year technology plans (or do we risk high levels of regret spend) ?

• For firms exploring blockchain

• Is the purpose of the business application clearly understood and is blockchain the right technology ?

• Who do we need to cooperate with to deliver the benefits case ?

• How do we ensure the technology is resilient, scalable, secure and recoverable ?

• How will a blockchain we participate in be governed and administered and who will control identity, roles and rights ?

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Thank you

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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 LLP, 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. © 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

Steve WebbPartner – FS Blockchain leader

M: +44 (0)7889 645 316steve.webb@uk.pwc.com

@StevewebbPwC