The Power of Blockchain - KPMG...Understanding blockchain. Closed, Centralized with greater degree...
Transcript of The Power of Blockchain - KPMG...Understanding blockchain. Closed, Centralized with greater degree...
The Power of BlockchainIt’s Not Just About Crypto
May 2019
The Power of BlockchainIt’s Not Just About Crypto
May 2019David R. JarczykPartner,
InnovationKPMG LLP
3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The material contained herein is current as of the date produced.Furthermore, information discussed herein are based on proposed regulations, as issued by Treasury on October 19, 2018, which are subject to change.
Notice
4© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Multiple data sources to inventory and reconcile: (ERP, databases, data lakes, etc.)
No auditability to source data
Need to automate certain “tasks”
Maximize my SME impact
Client Pain Points
5© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Understanding blockchainA
Why blockchain?A
Case studiesA
Blockchain and dataA
Table of contents
Understanding blockchain
6
7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
When should you consider blockchain?
Multiple data sources to inventory and reconcile: (ERP, databases, data lakes, etc.)
Connect disparate data sets into single ledger of truth
Provenance
Automate specific transaction logic (business, finance and tax)
No auditability to source data
Need to automate certain “tasks”
(Near) Real time analytics, modeling, impact analysis, and reporting
BlockchainClient Pain Points
Maximize my SME impact
8© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Distributed ledger technology and blockchainUnderstanding blockchain
A distributed ledger is replicated, shared, and synchronized digital data that resides across multiple computer devices, across locations or regions.
Distributed Ledger
Technology
A data model that captures the current state of the ledger
Blockchain +
Smart Contracts
A logic-based set of rules to initiate and fulfill a transaction
A protocol to build consensus amongst the parties
9© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
So, how does blockchain work?Understanding blockchain
One party requests a transaction
Once the block is added to an existing chain, transactions are complete and permanent
Requested transactions are pushed to individual computers (nodes)
Individual nodes receive the request and validate the transaction using the logic embedded in the smart contract
Approved transactions are represented as blocks and added to a public or private ledger
N
N
N
N
NN
N
T
10© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Public (or permission-less), private (or permissioned) or hybrid blockchains are being explored dependent on the needs of the company.
Public vs. Private blockchainUnderstanding blockchain
Closed, Centralized with greater degree of control on
participants and their permissions
Public blockchain
Private blockchain
Open, Anonymous and Decentralized
Category Public blockchains Private blockchainsParticipation Not restricted – anyone in the world can participate Read Write permissions can be restrictedPermission(Permission-less model)
Write: AnyoneRead: Anyone
Write: Operators control who can submit transactionsRead: Public or restricted
Transparency and trust
Transactions are publically recorded. Trust established through node replication and consensus mechanisms.
Limited Transparency (not all data is exposed). Trust dependent on a central authority
Valid transactions 51% of participating nodes Based on pre-defined validatorsMining & consensus process
Anyone can mine (validate), Proof of Work is primary consensus mechanism
Only permitted nodes are allowed to validate, various consensus mechanisms can be deployed
Privacy Transaction details are public. Transaction participantsremain anonymous or pseudonymous. ZK-Snarks –allows one to verify transactions while protecting users’ privacy
Participants are known central authority/operator on private blockchain. Privacy and security controls keep identities private. Transaction details only revealed to participants with permissions to view those transactions.
Cost Relatively Low Transaction cost (depends on the amount of data being processed & current cost of crypto-currency.
May be lower than public due to less computing power required
Control Neutral and Decentralized (Can not be influenced by single authority)
Centralized
Currency Available Crypto-currency (e.g., bitcoin) Proprietary currencyPerformance Generally slower. Dependent on number of participating
nodes and computational powersGenerally faster since consensus can be limited to pre-define validators
Advantages Open, Greater chances for adoption, no single authority controls or governs
Greater degree of control, faster, greater degree of scalability (transaction volumes), privacy controls
11© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Smart contracts are self-executing protocols that work with a distributed ledger to enforce performance of transactions with certainty and resilience. Triggered by an event, the code embedded in the smart contract automatically executes the fulfilment of a previously agreed arrangement.Eliminates the risk of delays and reliance on middlemen to follow through on their commitmentsInformation sharing is transparent, time-stamped, and irreversible.
What is a smart contract?
Smart Contract
Replicated, shared ledger
Contract Logic
Receives values after the contract approves
and executes the contract
Initiates transaction request and sends values required to execute contract
Understanding blockchain
12© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
How do smart contracts work?Understanding blockchain
Business logic
Tax logic
Legal logic
1
What goes into a smart contract?The logic of an
agreement is coded into the smart contract (what triggers the event, who are the parties, which assets are transferred,
etc.)
2
How the smart contract is sent out?
The smart contract sits on each code and is
executed according to the agreed terms when a
transaction that meets the requirements is
initiated.
How it is processed?A blockchain node
receives a transaction request and its type is
identified. If the transaction is valid, the
smart contract will execute and the network
will update the distributed ledgers with
the transaction outcomes
3
13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
A&J A&J A&J A&J A&J A&J A&J
E&J E&J E&J E&J E&J E&J E&J E&J E&J E&J
H&I H&I H&I H&I H&I H&I H&I
B&E B&E B&E B&E B&E B&E B&E B&E B&E B&E
B&C B&C B&C B&C B&C B&C B&C B&C B&C B&C
F&G F&G F&G F&G F&G F&G F&G
F&I F&I F&I F&I F&I F&I F&I
A&B A&B A&B A&B A&B A&B A&B
B&C B&C B&C B&C B&C B&C B&C B&C B&C B&C
A&B A&B A&B A&B A&B A&B A&B
Transacting parties Party recordingsTr
ansa
ctio
ns
A B C D E F G H I J A B C D E F G H I J
10
9
8
7
6
5
4
3
2
1
A “Block”A
“Blo
ckch
ain”
A “Ledger”
Party
Business & Tax Logic
Restricted Access
Legend
Client Dashboard
What is a distributed ledger or “blockchain”?
Blockchain and data
14
15© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
HousingBanking
Benefits
Government
Host payroll
Is blockchain a data issue?Blockchain and data
Travel
Finance
Human resources
Home payroll
Talent and onboarding
Relocation
Tax
Employment company
Immigration
Suppliers
Legend
Internal departments and technologies
External vendors and other technology systems
16© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
How does blockchain impact data management?Blockchain and data
Real-time analytics
Single source of truth
Automation of certain automation tasks
Merging of multiple data sources
Tick and tie to source data0504
0302
01
17© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
How blockchain changes the technology we have now?Blockchain and data
Traditional LedgerPresent— Ledgers record business activities
such as transactions and contracts,today each party owns individualledgers
— This solution is well established andworking, but inefficient, expensiveand fraud vulnerable
Digital, Distributed LedgerFuture— Decentralized system building one
digital, encrypted, public/privateledger, distributed across the network
— No possibility of changinginformation in the ledger withoutconsensus of the whole network
TrustedParty
Party B
Party ACompany A
Company BParty C
Benefits of Digital, Distributed Ledgers— Trust between all engaged
business partners— Increase Efficiency through usage
of a distributed ledger— Quality and Integrity of stored data
Company
SupplierA SupplierB
Merchant A Merchant B
Bank A Bank B
DistributedLedger
Why blockchain?
18
19© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
What blockchain is not?Why blockchain?
CryptocurrencyBlockchain goes beyond cryptocurrency to solve client data pain points.
A replacement for legacy ERP systems, databases, etc.Blockchain creates single source of truth for transaction, which can then be used to perform tax services.
The full solutionFinance and tax departments should be aware of any blockchain implementations in-house, and its impact on finance and tax.
20© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
When should you not consider blockchain?Why blockchain?
Need high performance (millisecond) transactions
Negative indicators, anti-patterns
Small organization (no business network)
Seeking a database replacement
Seeking a messaging replacement
Process and metrics are not clear within the ecosystem
Value, velocity and/or variability are not present
21© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Secure, business-based logic and storageWhy blockchain?
Business rules govern operationAllows the blockchain to be built on your specific governance rules and processes
SecureAll records are individually encrypted allowing for the use of data that
today cannot or is not used by mobility or providers for services
OwnershipSince you own your own node and authenticate through others in the
blockchain, there is no question of ownership
22© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
The future with blockchainWhy blockchain?
Single digital ledgerAll network members have a full copy of the
ledger for full transparency
Machine learning/AIData is structured and cleaned allowing for ML/AI
processing
AnalyticsTax specific data models
Data visualizationConnect data visualization tools
Existing system integrationConnect existing systems together
SecureAll records are individually encrypted
ProgrammableCode specific tax logic into each transaction
Custom appsUse the blockchain APIs to create custom applications
STPStraight-Through-Processing benefits (Automation)
23© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Data visualizationWhy blockchain?
PredictUse historic data to predict future trends in real time
Multiple sources, one dashboardBlocked data from multiple places can be rendered in a single location
24© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Blockchain and value
Improve traceability, accuracy and efficiency
Reduced costs for IT infrastructure, application and maintenance
Operational efficiencies due to inherent automation and reduction of reconciliations
Transparency of history of events with auditable trail.
Reduced settlement time
Counterparty and settlement risks addressed in permissioned systems
Self-executing smart contracts with better customer service, reduced fraud risk, etc.
Lower costs for compliance and regulatory obligations, and risk management
Blockchain’s value comes from the ability to initiate new data and connect disparate existing data to create a holistic picture of the business’s transactions. This new paradigm can help companies drive better decisions and even experiment with new business models. Potential benefits include:
Why blockchain?
Use cases
25
26© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Where is blockchain being applied?
EnergyCreating a shared marketplace
to trade energy on a power system
ConsumerTracing food through the
supply chain to locate source of outbreaks
HealthcareAuthenticating drug
manufacturers to prevent counterfeit drugs
AirlinesUsing miles from airlines at
multiple vendors
Supply ChainReducing errors in customs/port
documentation to accelerate transportation of goods
Real EstateBuy or sell a home easier by making
and accepting offers online
Use cases
27© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
Business Transaction Implications?
Finance• Managing Cash
• Valuation• Calculate ROI
Tax• Effective Tax Rate
• Compliance• Risk Mitigation
Accounting• Auditable Analytics• Tax Adjustments
• Reporting
Intellectual Property• IP Inventory
• Royalty Tracking
Economics• Transfer Pricing
• Valuation for Tax Purposes
Law• Monitor contract terms
• Identify Risk & Compliance Issues
Use cases
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
kpmg.com/socialmedia
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.