Provides initial reflections on the potential of blockchain to transform the end-to-end retail investments industry

1. Blockchain
and the
investment
industry stack
Some reflections
March 2016

2. Evolving from Bitcoin to Distributed Ledger
Bitcoin
• A de-centralised, globally distributed cryptocurrency devised in 2008 and
launched in 2009 introducing Blockchain technology to the world
• Bitcoin Public Blockchain uses computationally expensive mining with
rewards and proof of work processing to maintain system integrity amongst
anonymous counterparties (trustless)
Distributed Ledger
• Rebranded from “Blockchain” to distance from Bitcoin reputation
• Known counterparties, no mining or proof of work (trusted)
• Suitable for regulated institutions and existing legal frameworks
• Smart contracts automate business rules and industry standards

3. Seven characteristics of Distributed Ledger
# Characteristic Description
1 Decentralised All participants (nodes) have own copy of all data in the system. No central authority. No
single point of vulnerability or failure
2 Distributed Standard network protocol ensures every node receives every transaction in near real-time
and applies same rules. Transactions are grouped into blocks for processing
3 Consensus Mechanism to ensure all nodes agree on the integrity of transaction data in the system,
replacing the need for a trusted third party with technology
4 Traceable Every transaction block is immutably and verifiably linked to the previous block. A full history
can always be reconstructed right back to the beginning (the genesis block)
5 Scripting Every transaction has standardised scripted rules built-in to enforce rules and conditions.
Sophisticated “Turing complete” scripting is currently referred to as “Smart Contracts”
6 Security Encryption with Public Key Cryptography. Anonymous Public Key stored with every
transaction on ledger. Matching Private Key required for authority to access that transaction
7 Accessible On Permissionless (No Trust) systems eg Bitcoin, anyone can install software and participate.
On Permissioned (Trusted) systems, participation is restricted and governed.
Levels of access between these two extremes. e.g. read/write or read-only access.

4. • Inefficiency and waste in the
investment industry stack
• Multiple and duplicated processes
and systems
• Drive for cost transparency
• Poor investment returns
• Pressure on margins
• Regulatory action: MIFID2, charge
caps, FCA thematic reviews
The industry stack: inefficiencies & duplications

5. • Transformation of financial services industry infrastructures
• Counterparties share unbreakable copy of same digital record
• Changes updated in near real-time
• Industry market practices captured in code and automated as ‘smart contracts’
on distributed ledgers
• A new trusted industry fabric for financial services
• Fostering ever closer industry collaboration and transparency
• Reduction of the industry stack by removal of trusted third parties
• Certain organisations must reinvent or risk disintermediation
The potential

6. Opportunities: possible use cases
Screening criteria
• Multiple databases and parties recording their view of common data
• Lack of complete trust between those parties (competitors)
• Non-synchronised processes
• Troublesome, expensive reconciliations
• Lots of offline interactions
• Activities where greater standardisation would be beneficial

7. Use Case 1: adviser CRM/ platforms: now
Input Process Output
Adviser
CRM
Customer data
Customer authorisations/approvals
Adviser data eg authorisations
Updates from fund admin
Money in
Customer marketing and onboarding
Fact finding and risk profiling
Cashflow planning
Tax planning
Recommendations investments, decumulation strategy
Portfolio servicing
Adviser business management
Adviser professional development
Illustrations
Investment portfolio buy/sell requests
Reports
Event prompts & triggers, e.g. reviews
Client comms and reports
Money out
FCA data updates e.g. Gabriel
Platform/
Product
Provider
Investment buy/sell requests
Data from fund managers/fund admin,
e.g. factsheets, prices
Money in
Process investment buy/sell requests
Deduct adviser and platform remuneration
Administer tax wrappers (pension, ISA, onshore & offshore
bonds)
Administer payroll (for drawdown)
Monitor accounts (individual and nominee)
Reconciliations
Investment buy/sell orders
Illustrations
Tax reporting
Adviser comms
End-customer comms
Money out
Investment buy/sell confirmations
Fund
Admin
Buy/sell orders from platforms & product
providers
Data from financial data vendors and
share registrars, e.g. corporate actions
Process buy/sell orders
Manage suppliers e.g. brokers, custodians
Collect income
Administer fund accounts
Administer corporate actions
Maintain registers
Monitor accounts (individual and nominee)
Reconciliations
Confirm buy/sell orders
Reports to fund managers
Data to platforms

8. Use Case 1: adviser CRM / platforms: de-duplication
Input Process Output
Adviser
CRM
Customer data
Customer
authorisations/approvals
Adviser data eg authorisations
Data from fund managers/fund
admin, e.g. factsheets, prices
Money in
Buy/sell confirmations
Customer marketing and onboarding
Fact finding and risk profiling
Cashflow planning
Tax planning
Recommendations investments, decumulation strategy
Portfolio servicing
Administer tax wrappers (pension, ISA, onshore &
offshore bonds)
Administer payroll (for drawdown)
Adviser business management and remuneration
Adviser professional development
Illustrations
Investment portfolio buy/sell
orders
Reports
Event prompts & triggers, e.g.
reviews
Client comms and reports
Money out
Tax reporting
FCA data updates e.g. Gabriel
Industry Distributed Ledgers for Product and Fund Registers
Fund
Admin
Buy/sell orders from Advisers
Data from financial data
vendors and share registrars,
e.g. corporate actions
Process buy/sell orders
Manage suppliers e.g. brokers, custodians
Collect income
Administer fund accounts
Administer corporate actions
Update registers
Monitor accounts (individual and nominee)
Confirm buy/sell orders
Reports to fund managers
• Single record
• Re-use of data
• No reconciliations
• Straight-through-
processing
• Realtime
transparency
• Fewer systems
• Less risk
• Lower costs

9. Use Case 2: Funds settlement on industry distributed ledger
• No reconciliation, lower costs
• APIs ISO20022-compatible
• Fewer mismatches
• No net payment authorisation
• Real-time transparency
• Settlement period 0 to 2 days
• Reduced:
• Counterparty risk
• Counterparty infrastructure
• Investor out-of-market risk
• Investor costs (lower
charges)

10. The UK Government is
concerned about proliferation of
pension pots as people change
jobs every two years….
A consumer “dashboard” that
can find and report on all of an
individual’s pension pots will
provide vital information and
encourage pensions saving
Use Case 3: UK pension dashboard

11. • Immature technology that currently does not meet the non-functional
requirements of very large systems ie transaction capacity/ scalability
• Development tools and environments are also immature
• Does not permit high speed data searching equivalent to modern databases
• Being immutable, existing transactions cannot be directly cancelled or reversed to
meet legal/ contractual obligations
• Regulators are supportive but may be slow to catch up
• Collaborative business models and agreement of standards
• Open Source software development, legal risks and management
The challenges

12. Implications
Some possible first steps
• Work on new services / processes rather
than legacy
• Choose non-critical applications first
• Engage and experiment with the new
technology
• Build coalitions of the willing
• Consider how to help less capable
counterparties with “on- and off-ramps”
Implications for incumbents
• Existing business models under threat
• Current industry infrastructure providers are
well-placed
• Disruptive new entrants may struggle to
build consensus
• Legal and business challenges are at least as
significant as tech issues:
• Collaboration, governance, legal framework,
security, market practices, standards, SLAs
• An effective response will require:
• Horizon-scanning and open-mindedness
• Consensus-building
• A readiness to experiment

13. People are doing discovery projects
Discovery tasks
• Select scope of processes / stack layers to be addressed
• Identify organisations, systems, resources involved
• Assemble and analyse current performance data:
Cost, timeliness, waste / rework, risk management
• Involve representative players
• Confirm processes offering best potential
• Identify use case(s) and indicative costs & benefits
• Assess major barriers to adoption e.g.
Lack of collaboration, no common standards, scalability,
data security and privacy concerns
• Identify potential coalition of the willing
Discovery outputs
• Assessment of potential for Distributed Ledger:
• Scope of potential use case(s)
• Business case for each major type of player
• Revenues, costs, risks
• Potential benefits of auditable chain of transactions
• Template and proposal for collaborative Proof of Concept:
• Basis for collaboration: shared interests
• Parties to collaborate: representative players
• Governance arrangements
• Identify emerging legal / regulatory implications
• Funding

14. Discussions held with…
• Transaction automation provider
• Institutional payment & settlement blockchain
infrastructure provider
• Global systems integrator involved in multiple
blockchain proofs of concept
• Transfer agent
• Investment admin software provider
• Tech legal firm
• Industry standards body
Recent forums …
• Ethereum DEVCON1, London, November 2015
• SWIFT Sibos15, Singapore
Recent reports studied …
• UK Government Office for Science, Blackett
report, January 2016
• DTCC Report, January 2016
• Euroclear Report, February 2016
Recent developments examined…
• Ethereum Homestead Release
• Microsoft Azure “Blockchain as a Service”
• Linux Foundation, Hyperledger Project
A note on our methods so far….

15. Alan Sherriff, MD
www.cboxx.com
alan.sherriff@cboxx.com
+44 7939 222 354
@CBoxxLtd
David Taylor, Partner
www.ocp.co.uk
david.taylor@ocp.co.uk
+44 7768 077 796
@rdavidtaylor
Contact us to discuss Distributed Ledger discovery projects …
O C P♦ ♦