Blockchain

Agenda

Blockchain Technology Overview

Three Levels of Blockchain, Tokens
Alliances and Industry Adoption
Smart Contracts
Identity Management
Criticism and Challenges
Impact on the IT Audit Function
Learning and Engagement
Blockchain Overview

Blockchain technology is a digital innovation

that is poised to significantly alter financial
markets within the next few years, within a
cryptographic ecosystem that has the
potential to also significantly impact trusted
computing activities and therefore
cybersecurity concerns as a whole.
Participant Exposure

How many of you:

Have heard of bitcoins?
Own cryptocurrency?
Feel you understand the underlying blockchain
technology?
Feel you can summarize for us the benefits of the
trust economy?
Are involved in projects that involve blockchain
technology implementation or related activities?
Where It All Started
Blockchain technology was first introduced in a whitepaper
entitled: Bitcoin: A Peer-to-Peer Electronic Cash System, by
Satoshi Nakamoto in 2008.
No reliance on trust
Digital signatures
Peer-to-peer network
Proof-of-work
Public history of transactions
Honest, independent nodes control majority of CPU computing
power
Nodes vote with CPU computing power
Rules and incentives enforced through consensus mechanism
https://bitcoin.org/bitcoin.pdf
Cryptocurrency Summarized

Bitcoin was the first digital, i.e., cryptocurrency

A maximum of 21 million Bitcoins can be generated

Just as with real world mining, energy must be invested

to solve complex mathematical problems by which
systems earn Bitcoins

https://www.cryptocoincharts.info/coins/info claims to
be indexing 4,407 cryptocurrencies

Main coins: Bitcoin/Bitcoin Cash, Ether, Litecoin,

YbCoin
The Technology Behind Bitcoin

Think of Bitcoin as an electronic asset (as well as a digital

currency)

A network of computers keeps track of Bitcoin payments, and

adds them to an ever-growing list of all the Bitcoin payments
that have been made, called The Bitcoin Blockchain

The file that contains data about all the Bitcoin transactions is
often called a ledger

Bitcoin value is created through transaction processing,

referred to as mining, which is performed by distributed
processors called nodes of the peer-to-peer network
A Gentle Introduction to Bitcoin by Antony Lewis, https://bravenewcoin.com/assets/Reference-Papers/A-
Gentle-Introduction/A-Gentle-Introduction-To-Bitcoin-WEB.pdf
Mining Evolution
Mining is the process whereby value is created through
transaction processing that occurs on nodes of the network.
In 2009, one could mine 200 Bitcoins with a personal, home
computer. In 2015, it would take about 98 years to mine just 1
Bitcoin.
Today there is almost no money to be made through traditional
home mining.
ASIC (Application Specific Integrated Circuit) has been designed
strictly for mining Bitcoins.
Groups of miners have formed mining pools, with each being
paid their relative share for their contribution to the work
performed.
My Dirty Little Bitcoin Secrets by Ofir Beigel, www.99bitcoins.com
Three Levels of Blockchain

1. Storage for digital records

2. Exchanging digital assets (called tokens)
3. Executing smart contracts
- Ground rules Terms & conditions recorded in code
- Distributed network executes contract & monitors
compliance
- Outcomes are automatically validated without third party

Tech Trends 2017, The Kenetic Enterprise, Blockchain: Trust economy, Deloitte University Press, 2017
A General Discussion about Tokens
A broader use is supported by the digital infrastructure
introduced through Bitcoin, as represented by tokens.
A token can be defined as a scarce digital asset based on
underlying technology inspired by Bitcoin.
Tokens may use similar codebases but different blockchain
databases.
Ethereum was Bitcoin-inspired but has its own blockchain and is
engineered to be more programmable. Tokens can be issued on
top of the Ethereum blockchain.
Token buyers are buying private keys, which are similar to API
keys, but can be transferred to other parties without consent.
Thoughts on Tokens, Balaji S. Srinivasan and Naval Ravikant
Tokens, continued
Tokens have a value and therefore a price.
Tokens are a new model for technology and can be an
alternative to equity-based financing.
Tokens do not dilute capital. They introduce a huge increase to
buyer base and time-to-liquidity.
Token launches differ from equity sales; however, they can be
issued as a way to share profits.
Tokens can be sold internationally over the internet and are
always open for business.
Tokens decentralize the process of funding technology.
Thoughts on Tokens, Balaji S. Srinivasan and Naval Ravikant
Tokens, continued
Tokens enable a better-than-free new business model.
Tokens will introduce the rise of the tech savvy senior
executive.
Tokens accommodate immediate custody without an
intermediary.
Tokens can be extended to hardware, as part of the internet of
things.

Thoughts on Tokens, Balaji S. Srinivasan and Naval Ravikant

Smart Contracts

Current paper-based
systems drive $18
trillion in transactions
per year.

Consensus protocols are key to determining the sequence of

actions resulting from the contracts code. This enables
peer-to-peer trading of everything from renewable energy to
automated hotel room bookings.

Contracts Get Smarter with Blockchain, CIO Journal, The Wall Street Journal, World Trade Organization,
International Trade Statistics 2015, 2015, p. 41.
Hyperledger

Hyperledger is an open source collaborative effort created to

advance cross-industry blockchain technologies. It is a global
collaboration, hosted by The Linux Foundation, including leaders in
finance, banking, IoT, supply chain, manufacturing, and technology.
Business Blockchain Frameworks are hosted with Hyperledger.

Hyperledger addresses important features for a cross-industry open

standard for distributed ledgers. The Linux Foundation hosts
Hyperledger as a Collaborative Project under the foundation.

To learn more, visit: https://www.hyperledger.org/.

www.hyperledger.org
Hyperledger Projects
A few of the Hyperledger Projects include:

Hyperledger Burrow Permissible smart contract machine

with a modular blockchain client, built in part to the
specification of the Ethereum Virtual Machine (EVM)
Hyperledger Fabric Foundation for developing plug-n-play
solutions within a modular architecture
Hyperledger Iroha Simple and easy blockchain framework
designed to be incorporated into infrastructure projects
requiring distributed ledger technology
Hyperledger Sawtooth A modular platform for building,
deploying, and running distributed ledgers
Ethereum Alliance

Ethereum is a decentralized platform that runs smart

contracts: applications that run exactly as
programmed without any possibility of downtime,
censorship, fraud, or third party interference.

The Ethereum project was bootstrapped via an ether

pre-sale during August 2014 by fans all around the
world. It is developed by the Ethereum Foundation, a
Swiss nonprofit, with contributions from individuals
and organizations across the globe.
www.ethereum.org
Ethereum Tools

Several Ethereum offerings include:

The Ethereum Wallet, which is a gateway to
decentralized applications on the Ethereum blockchain,
allowing users to hold and secure ether and other
crypto-assets built on Ethereum, as well as write,
deploy and use smart contracts
Design and issue your own cryptocurrency/traceable
token
Kickstart a project with Crowdsale
www.ethereum.org
What is Ether?
Ether is the crypto-fuel for the Ethereum network.
Ether is a necessary element a fuel for operating the distributed
application platform Ethereum. It is a form of payment made by the
clients of the platform to the machines executing the requested
operations, functioning as the incentive that ensures that developers
will write quality applications, and that the network remains healthy.
The total supply of ether and its rate of issuance was decided by the
donations gathered on the 2014 presale.
Developers who intend to build apps that will use the Ethereum
blockchain need ether.
Users who want to access and interact with smart contracts on the
Ethereum blockchain also need ether.
www.ethereum.org
Cross-Industry Adoption

Sectors leading the way in blockchain implementation:

Consumer products
Manufacturing
Technology
Media
Telecommunications
Health care
Life sciences
Thirty-nine percent of the senior executives at large U.S.
companies initially surveyed indicate they have little or no
knowledge about blockchain technology. Many deemed it to be
crucial for their companies and industries. Forty-two percent
believe it will disrupt their industries.
Blockchain Adoption Varies by Industry, CIO Journal, The Wall Street Journal
Financial Services Industry

As noted by A. Michael Smith in Creating Assurance in

Blockchain, trust and efficiency are the main value drivers for
any use case. The finance world is driven by technology.

Tracking risk and monitoring compliance with laws and

regulations within an increasingly complex cybersecurity
environment requires considerable time and resources.

The financial services industry immediately saw opportunities

in blockchain and has been investing heavily in its usage,
primarily as a part of private implementations.

Creating Assurance in Blockchain, Volume 2, 2017, by A. Michael Smith

Banking on change: How to respond to new expectations for audit committees by PWC Internal Audit
Foundation, Douglas Anderson, CIA, CRMA, Cassian Joe, and Klaas J. Westerling
Identity Management
The IT audit is broadly concerned with
identity management concerns.
Protecting access to data, and the
systems that are in place to process,
store, and report on that data,
requires ongoing resource dedication.
Multiple solutions are available, all of
which require configuring and
managing multiple identifiers for an
individuals various identities.
Identity management is an area that
will certainly be impacted by
widespread use of private keys to
secure transactions.
Distributed Access Management

Creating an identity on blockchain can give individuals

greater control over who has their personal information
and how they access it

Areas impacted include passports, e-residency, birth

certificates, wedding certificates, IDs, online account
logins, etc

Digital IDs can provide digital watermarks that can be

assigned to every online transaction of any asset

21 Companies Leveraging Blockchain for Identity Management and Authentication by Elena

Mesropyan, https://letstalkpayments.com/22-companies-leveraging-blockchain-for-identity-
management-and-authentication/
Protecting Private Keys

Within the blockchain, trust relies on the safekeeping of

private keys, in support of a truly distributed identity
management

Ultimately, that safekeeping resides with the actions

taken by individuals to secure their private key

For cryptocurrency traders, one frequently sees the

recommendation to write ones private key down on a
piece of paper and put it up for safekeeping in, for
example, a safe deposit box
Digital ID Solutions

May 24, 2017, saw the release of a Digitial ID solution by

Netki, a California blockchain startup
Released at Consensus 2017, this is a highly-anticipated
Digital ID smartphone app that uses Hyperledger
blockchain to provide decentralized, open-source identity
management
Approved by governments, fully Anti-Money Laundering
(AML) and Know Your Customer (KYC) inclusive

https://bravenewcoin.com/news/netki-launches-digital-id-solution-which-bitt-is-using-with-central-banks-in-
the-caribbean/
Criticism and Challenges
Critics have cited the following blockchain challenges:
Nascent technology
Uncertain regulatory status
Large energy consumption
Control, security and privacy
Integration concerns
Cultural adoption
Cost
Challenges associated with audit, taxes, and compliance
Creating Assurance in Blockchain, Volume 2, 2017, by A. Michael Smith
Deloittes Blockchain technology: 9 benefits & 7 challenges,
https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-
challenges.html
Energy Consumption
An area of heavy criticism has to do with the vast amounts of
energy necessary to process and store transactions, especially as
the use of blockchain technology increases
The Bitcoin blockchain networks miners are attempting 450
thousand trillion solutions per second in efforts to validate
transactions, using substantial amounts of computer power
Note that there are also opportunities to decentralize the energy
grid
Demanded resources: Mining Bitcoin demands a huge amount of
energy ($15million/day)
Deloittes Blockchain technology: 9 benefits & 7 challenges,
https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-
challenges.html
Blockchain in the Energy Sector: Institutional Disruption? By Marius Buchmann
http://www.theenergycollective.com/enerquire/2402120/blockchain-energy-sector-institutional-disruption
Impact on the IT Audit Function
Although the technology is still in its infancy, boundless usage
opportunities exist

The identity management landscape is likely to shift

dramatically

There is sure to be evolution within IT audit as various use

cases unfold

Features that create trust could drive unachievable overhead

costs

Compliance burden should eventually be eased as the

technology is adopted, but this requires regulatory updates,
which could take a while
Learning and Engagement

Additional opportunities:

Organizations/alliances that offer the ability to connect with a

spectrum of opinions and perspectives:
- Ethereum Alliance www.ethereum.org
- Hyperledger Community www.hyperledger.org
Offers Working Group Meetings

Join or participate in the cryptocurrency exchange

marketplace.
- https://coinsbank.com/
- https://www.ethereum.org/ether