0McKinsey & Company

Introduction to blockchaininReal Estate

ULI

Boston, October 2018

Matt Higginson

1McKinsey & Company

Blockchain – the emerging story

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• Experimentation with this relatively immature tech-

nology continues, especially outside financial services

• We are as inundated as ever with requests to advise

on current and future state of blockchain, crypto-assets

• However, perspectives are changing – early POCs are not

showing all the benefits that were promised

• Investors are becoming more circumspect and demanding

clearer evidence of benefits (revenue, cost, CX)

• From lessons learned, we are clearer on the more convincing

applications that truly demand the distinctive properties of blockchain

• We are also clearer on what you have to believe for blockchain to be a

success – or not

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What is so innovative about blockchain?1

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First ever solution to the double spending problem / data conflict resolution that doesn’t require a central administrator or clearing agent

Core innovation

Decentralized, unbroken historical record of all data transactions

Decentralized solution

The randomness of verification agent selection is imperative to maintain the database integrity

Process integrity

Messaging system with read/ write access protected by cryptographic keys

Data security Valuable Redundancy

Multiple copies of the same data across a large network increases resistance to malicious attack

Blockchain is a cryptographic or encoded distributed ledger, comprising a

digital log of transactions that is shared across a public or private network

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But blockchain is not a silver bullet and should be employed only under certain conditions and requirements

5 key criteria for

blockchain

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2

Distributedledger

1

Remote independentwriters

2

Existence in absence of trust

3Causingdisinter-mediation

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Economicbenefit for participants

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4McKinsey & Company

Blockchain technology is applicable across multiple use case categories as a static store of secure information or dynamic store of tradeable information

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4McKinsey & Company

Needs addressed by blockchain Real world example applicationsDescription

Transactions

Registry of tradeable information

• Manage registry of asset ownership • Provide automation of

specific assets

• Land title• Gift card ownership • Chain of custody

Identity• Securely store, confirm and

distribute identity-related info• Revise personal / other data

• Store bank/ digital personal identity info on blockchain to enable user to easily access proof of identity

Static

Registry

Smart

contracts

• Insurance claim payouts• Cash equity trading• Escrow payment services

• Create and execute semi-autonomous contracts on distributed digital platform

• Streamlined low transaction settlements to address liquidity mismatches in loan funds

• Exchange of physical and digital assets on a digital platform

Payments

infrastructure

• Peer-to-peer lending through the Bitcoin blockchain, dis-intermediating banks

• Efficient payment transfers with lower friction, improved record keeping

Dynamic

registry

Verifiable

data

• Secondary market for event tickets• Registry of independent artists’ work • Protection of Intellectual property

• Store of information and easy access to secure, dynamic information

Record keeping

Stores of static

information

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5

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5McKinsey & Company

…but in many situations blockchain is a technology still seeking a successful business model and faces multiple headwinds, including lack of clarity of purpose

Operational

challenges

▪ Development of governing protocol

terms requires broad collaboration

▪ Need for consensus imparts

privileges on bookkeepers (miners)

Cultural

resistance,

mis-

understanding

▪ Operations heads fear disruption of

current revenue streams

▪ Senior decision makers’ mis-

understanding of benefits and maturity

hinder informed decision making

Hurdle Example

Cost

▪ Short-term expense pressures (12-24 mos)

conspire against implementation of

wholesale transformation program

▪ Tough to justify lead developer costs

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6McKinsey & Company

More than 60 real use cases (excluding Bitcoin) exist across multiple industries with a focus on financial services and cost reduction

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Number of use cases1, % by category

1 Blockchain solutions excluding solutions that are purely related to Bitcoin; 2 Includes insurance, real estate, automotive, energy, social sector, etc.;

3 In many instances use cases have a secondary intention; 4 Annual revenues >US$1m

68

18

15 Revenue

Risk

Cost

PRIMARY INTENTION³

27

27

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27 Idea stage

In development (no output yet)

Tested but not yet commercialized

Commercialized -Not scaled

Commercialized -Scaled

LIFECYCLE

422

614

118

38

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17 Payments

Register of Ownership

Identity

Securities

Healthcare

Consumer

Public Sector

Arts & Entertainment

Other²

INDUSTRY

Financial

Services

(~40%)

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7McKinsey & Company

Established corporations, startups, nonprofits, and governments are beginning to actively experiment with blockchains, often combined with crypto-assets

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Supply chainA

Capital marketsB

InsuranceC

HealthcareE

AutomotiveF

Public sectorG

Real estateD

Social sectorH

ExamplesKey value proposition

• Trading and post-trade settlement, compliance

reporting, collateral management, and contract

management

• Claims processing, back office efficiencies, product

development and distribution, information security

• Patient ownership of data, interoperability between

health systems, verification of credentials, and

supply chain controls

• Provenance of auto parts, data sharing for

autonomous vehicle research, supply chain

efficiency, and secure communications

• Securely storing citizen data, enhancing

transparency of public funds, using smart contracts

to reduce compliance costs

• Smart contracts for cash flow management,

ownership management (fraction or leasing),

property and identity due diligence

• Track & trace supplies, decrease costs by

consolidating data systems

• Traceability of donated funds, reduced transaction

costs, reduced administrative costs, new

fundraising opportunities

Stakeholders involved

• Retailers, CPG companies, manufacturers,

technology, certificate authorities, financiers, etc.

• Exchanges, market data providers, banks, clearing

houses, investors, issuers, and regulators

• Insurance carriers, IoT companies, forensic

engineering companies, agents and producers, and

3rd party administrators

• Healthcare startups, health systems, medical

suppliers, and IT infrastructure providers

• Autonomous vehicle researchers, automotive

suppliers, automotive OEMs, future mobility

services (e.g., ridesharing)

• All levels of government (national to local),

foundations, IT infrastructure providers, and

startups

• Mortgage providers, online marketplaces, property

managers, brokers, facilities service companies

• Established nonprofits, crypto-asset funding

platforms, companies issuing caused-based crypto-

assets

8McKinsey & Company

Real estate could be transformed by lowering cost of sale /due diligence, title registration and enabling easier fractional ownership

NON-EXHAUSTIVE

Property search

and due diligence

process

High costs of

sale and leasing

Property and cash

flow management

Tokenization of

fractional

ownership

Details of the problem Cryptoasset or blockchain solution and benefits

▪ Lack of standardization in MLS systems

▪ Manual due diligence with physical documents

▪ Secure blockchain provides a single source of property documentation

▪ Validity of property data is ensured and audited by trustless system

▪ High transaction fees, especially cross-border

▪ Intermediaries demand high commissions

▪ Misleading fake reviews and forged ratings

▪ Blockchain transparency makes many intermediaries obsolete

▪ Owners can transfer title quickly without 3rd party verification

▪ Proof-of-Stake protocol used to incentivize fair judgements

▪ Manual supervision of property

administration and cash flow management

▪ Smart contracts can automate tasks such as paying taxes, escrow

▪ Smart contracts can enable automatic payments to contractors

▪ Investment requires large capital commitment

▪ Traditional pooling vehicles come with high fees

▪ Blockchain allows the tokenization of real world property assets

▪ Allows investors to buy and own fractions of a property

▪ Tokenization simplifies the distribution of profits to owners

▪ Listing on public exchanges facilitates efficient price discovery

SOURCE: Expert interviews; newsweek.com; cointelegraph.com; Forbes.com; ATLANT website; techrepublic.com

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9McKinsey & Company

More broadly, several challenges need to be resolved for DLT to deliver benefits and be adopted more widely over the next 3-5 yrs8

Challenges to widespread adoption

Immature technology and protocols

Slow progress to commercial deployment

Resolving the ‘co-opetition paradox’

requiring a lead investor creating

benefit for a whole industry

What needs to happen to drive adoption

Tech needs to evolve and improve

Killer applications evolve with a

convincing business case

Powerful authority or majority

player commits to pioneering and

accelerating adoption

National regulators should allow and encourage distributed ledger

technologies to evolve while adhering to “do no harm” policies

Need for dematerialization of paper records

Benefits from alternative technologies