Blockchain & Smart Contracts For Entitlements &Transfer Payments

BY MICHAEL NOVAK

DIGITAL TRANSFORMATION PARTNERS

1 9 J U N E 2 0 1 7

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Today’s Agenda• Blockchain Key Design Features

• Smart Contracts - Automata as Authority

• US Government Regulatory Landscape

• Use Cases• Transfer Payments

• Entitlements

• Summary

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Blockchain• A single file containing all transactions in chronological order

• Transactions public; user details kept pseudonymous through use of digital signatures (PKI)

• Transactions never erased. There is no master copy or centralized administrator

• Blockchain Types:

• Permissioned v Permissionless

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Blockchain Key Design Features

Disintermediation of Trust Fault Tolerant - Less risk from single point of failure

Immutability Data Integrity - Less opportunity for fraud or errors

Consensus Prevents bad actors from inserting false transactions

Provenance Fraud Detection - Provides a auditable chain of custody

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* = https://www.niceideas.ch/roller2/badtrash/entry/blockchain-2-0-from-bitcoin

Blockchain Consortia

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Smart Contracts:Automata as Authority

“A set of promises, specified in digital form, including protocols within

which the parties perform on these promises.” - Nick Szabo, 1996

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May include contractual clauses to

make contract breaches expensive or

prohibited

Smart Contracts Spectrum

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US Regulatory Agencies:AML/CFT Enforcement

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AML/CFT = Anti-Money Laundering/Counter the Financing of Terror

Use Case: Digital Identity

Enable individuals to own and control digital identity: reputation, data and digital assets

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Current Challenges Smart Contract Benefits

• KYC / AML expensive, time consuming, and redundant processes

• Individuals own and control personal data

• Verified by various counterparties

• Limited control over data leakage

• Reliance on trusted 3rd parties

• Counterparties do not hold sensitive data

• High liability to safeguard user data

• Single point-of-failure

• Increased compliance, resiliency and interoperability

Use Case: Money Transfer Payments

Current Money Transfer Challenges

• Capital intensive processes

• Duplicate lifecycle maintenance of infrastructure

• Significant human capital/ middleware

• Systems do not always interoperate

• De-risking and de-banking of MTO’s reduces critical revenue sources for countries

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Use Case: Money Transfer Payments

Smart Contract Benefits

• Individuals own and control personal data

• Verified by various counterparties

• Counterparties do not hold sensitive data

• Increased compliance, resiliency, interoperability

• Improved transactional data integrity, transparency - increased market stability

• Accounting systems cost-sharing across organizations

• Improved insight into parties’ capital due to increased financial accessibility

• Improved transactional data integrity, transparency - increased market stability

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Use Case: Entitlements

Current Entitlement Challenges

• KYC / AML regulations expensive, time consuming, and redundant processes

• Limited control over data leakage

• Must rely on one or more trusted 3rd parties

• Accounting systems prone to fraud, errors

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UK Dept. of Work & PensionsWelfare Payments Distribution 6 month trial

• DWP is responsible for welfare, pensions and child maintenance policy, administering the State Pension and a range of working age, disability and ill health benefits

• Serves over 22 M claimants and customers

• Objective is to reduce $1T lost annually due to friction and fraud costs in the distribution of social welfare and aid.

• "Claimants are using an app on their phones through which they are receiving and spending their benefit payments. With their consent, their transactions are being recorded on a distributed ledger to support their financial management."

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Recent Activities: US Federal Government

The Office of the Comptroller of the Currency (OCC)

• 2016 - “Responsible Innovation Framework”, a policy focused on blockchain startups, to improve ability to identify, understand, and respond to financial innovation affecting federal banking system.

US Department of State• 2017 - Blockchain@State working group goal to determine usefulness of research applications and distributed ledger

technologies (DLT) in US foreign policy.

Genera Services Administration (GSA)• 2017 - GSA Technology Transformation Service Emerging Citizen Tech program investigating blockchain pilots. Short-term

goal is to develop a government-wide compliance framework.

• 2017 - GSA Federal Acquisition Service and State Department Office of Global Partnerships will hold a forum

Uniform Law Commission• 2017 - Uniform Regulation of Virtual Currency Businesses Act DRAFT

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Recent Activities: US State & City Governments

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Arizona• HB 2417: any "record or contract" secured by a blockchain would be "considered to

be in an electronic format and to be an electronic record“.

California • Assembly Bill 1123 – counterpart of New York’s BitLicense – proposed. Bill would

prevent a person from engaging with virtual currency businesses unless officially licensed.

Delaware• Moving state archival records to an open distributed ledger.

• Allowing private companies that incorporate in the state to keep track of all equity issued and shareholder rights

Florida • House Bill 1379 regulates and prohibits use of virtual currency for money laundering.

“Virtual currency” term added to “money instruments” legal definition. Bill now with

governor and is expected to be signed soon.

Hawaii• Coinbase and Ethereum to cease offering support due to “impractical” regulatory

policies (e.g., must hold case reserves equivalent to values held by customers). Hawaii now considering digital currencies working group.

Illinois • Dept. of Financial and Professional Regulation (IDFPR) initiative, “Digital Currency

Regulatory Guidance”, focused on regulation of digital currencies activities.

• Chicago Blockchain Center (CBC) set up to help incubate local blockchainstartups, mentor entrepreneurs and students, conduct original research and host a variety of events.

New Hampshire • HB 436: exempt virtual currency users from having to register as money service

businesses, and create a formal definition for "virtual currency“. State officials speaking out against the measure.

Washington State • Bill 5013 clarifies the definition of Cryptocurrency and includes various disclosure

requirements on consumer information. They have also applied heavier cybersecurity frameworks.

Summary:Blockchain / Smart Contract Strengths

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Decentralized No central authority. All nodes have entire blockchain providing redundancy

Consensus New transactions are added only after participant nodes agree that they are valid

Authentication Cryptography and digital signatures prove participants identity

Immutability Data that exists earlier in a blockchain cannot be altered

Uniqueness Transactions are time-stamped, making it possible to audit and verify information

Programmable Smart contract instructions embedded within blocks allow actions to be carried out when conditions are met

Summary:Blockchain / Smart Challenges

No customer protection after verification Both parties must agree to reverse transactions

Scalability, Size Bitcoin handles 7 tps. VISA network handles 2k/tps, peak of 10k/tps

Blockchain size 126GB, Bitcoin nodes 17k (March 2017)

51% issue If mining pool operator has 51% of network, they would always have “longest blockchain”; decides all new bitcoin destinations.

Govt. Regulation Customary tracking, auditing points to trace consumption of goods and services needs to change.

Regulators (e.g., SEC for public offerings) need to accept, approve blockchain’s use for securitization such as entering, verifying, and protecting data methods

Immaturity Technology still evolving rapidly

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Upcoming Local Events

Focus: Finance, Technology, and Financial Services 28 July 2017, GWU, Washington, DC

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State of Investing and Risk Mitigation under Congress & Trump Administration6 Nov 2017, The National Press Club, Washington, DC

Focus: Identity Management 21 August 2017, Arlington, VA

Thank You

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Michael NovakDigital Transformation Partners

E-Mail: iotmnovak@gmail.com

Twitter: @misternova

Phone: 703-988-1841