Blockchain and DLT Use Cases in a Regulatory

Blockchain - DLT : use cases in a regulatory perspective Contents q Blockchain - DLT components and functions q The Authorities positions: BIS, N. Y. State, Luxembourg, UK FCA q Blockchain -DLT Regulation : comments q Financial use cases: payment and non-payment q Non-financial use cases q Value added roles in Blockchain - DLT services : options 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis

Blockchain - DLT : components & functions The Blockchain - DLT §Digital Unit : a block of files representing the “unit”, i. e. a set of information §Digital Unit Issuer : issues units which may enclose reference to underlying assets/data §Ledgers : distributed/decentralised or centralised where the blocks lay or are registered §Digital Signatures : the claim on ownership on the Digital Unit by the last owner of the e. ID §The Blocks (digital units + signature): allow a change of ownership (e. ID), the “transaction” Ø The owner of the Digital Unit is the Digital Signature in the last block 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis

The Authorities positions : the BIS Report q § § § 2015. 11_CPMI_Digital Currencies_d 137_Report_BIS. CPMI. org Digital Currencies (DC) value determined by supply and demand, similar to commodities Regulated e-money has one or more issuers of value, a liabilities on issuer balance sheet Some decentralised digital currency schemes have no identifiable scheme operator Options for a Regulator’ approach a) Information/moral suasion: towards users, investors , to highlight the relevant risks b) Regulation of specific entities: limited set of rules for specific types of entity (eg enabling interaction between digital currencies and traditional payment instruments, real economy c) Interpretation of existing regulations: applied to digital currencies, their intermediaries d) Broader regulation: functional approach , traditional regulatory obligations also apply to digital currency schemes and intermediaries (eg AML requirements, consumer protection) e) Prohibition: ban digital currency-based financial activities, exchanges, acceptance 2010 Colt Telecom Group Limited. All rights reserved. Ugo© Bechis

Regulatory status : US - NY State Bit License v 2014. 07. 17 - N. Y State DFS Dpt of Financial Services : Virtual Currencies License § Virtual currency : “any type of digital unit used as a medium of exchange or a form of digitally stored value or incorporated into payment system technology. . include. . repository or administrator. . “ § Activity : “ Receiving , holding , buying /selling , Issuing , conversion or exchange of Fiat Currency or other value into Virtual Currency. . Agents should be licensees , “ § Requirements on : “Application , Capital, Custody , Security , Disclosure , Anti-money laundering” Highlights : üLicense is open to any subject , provided requirements are met üNature of Virtual Currency separated from FIAT currencies issued under a national legal tender üLicense includes all functions : issuing , conversion , transmission , holding Focus points ØIt focuses on legitimacy matters, i. e. issuing, custody, intermediation, contracts ØIt leaves the technical, encryption, security matters open 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis

Regulatory status: the Lux License for Snap. Swap - Bitstamp Press release - 12. 10. 2015 Snap. Swap granted a License as Payment Institution by Luxemburg Finance Minister and the Luxembourg Financial Industry Supervisory Commission - CSSF (https: //www. cssf. lu/en/) “first license for a virtual currency operator as a Payment Institution applicable in all EU member states” “The license process includes security reviews, audit by an external company based in Luxembourg” “The Luxembourg's License makes Bitstamp the first regulated and licensed virtual currency exchange in the EU … within an established structure of financial regulation and supervision. . ” How does it work ? “We take cash deposits on one side and bitstamp deposits on the other side of the trade, then we allow our customers to exchange their cash for bitstamp or vice versa” > http: //www. luxembourgforfinance. com/en/news/virtual-currency-operator-snapswap-granted-license-paymentinstitution-luxembourg-finance < https: //www. bitstamp. net/payment-institution-license/ 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis

Regulatory status: FCA - Discussion Paper on DLT (01. 04 - 17. 07. 2017) The FCA describes DLT as: "technological solutions enabling a single, sequenced, standardised, cryptographically secured record of activity to be safely distributed, acted upon by a network of participants. This record could contain for example, transactions, asset holdings or identity data. " Smart contracts “DLT can facilitate greater levels of automation through so-called ‘smart contracts’, which relate chiefly to executing terms of legal contracts digitally … a functionality to execute predetermined commands without further human intervention according to pre-specified rules” “Applications are specifically where a payment is dependent on certain events occurring” The regulatory view • Objectives: Consumer protection, allocation of responsibilities, market integrity • “Buying and selling digital currencies in itself is not a regulated financial product” • “Derivative instruments that reference digital currencies may be regulated financial products” Ugo Bechis - source: 2017. 04. 01_Discussion Paper on Distributed Ledger Technology_FCA_dp 17 -03 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis

Blockchain - DLT Regulation : UB comments Ø The Regulators face two different areas when approaching Blockchain, DLT : a) Legitimacy, i. e. responsibility, consumer protection, financial stability b) Techonology, i. e. encryption, data security v v Technology issues evolve fast; are less stable; require specialized technical know-how Timing is critical, to be up to the state of the art and to respond to cyber threats Ø Waiting for stable international regulations, single initiatives may refer to present rules: i. Identity of Users via the e-ID (e. IDAS Reg. EU) ensuring: legal identification, time stamping, security and reference to encryption protocols ii. Trusted Parties publicly recognized, for data ‘custody’ and traceability of ledgers iii. Digital Units compliant with presently Regulation (financial Derivatives, Certifcates, funds) iv. Reporting to Overseers: AML (e. ID), volumes, value, on-going activity, incidents Ø Technology can refer to Technical codes defined by International Standard Bodies on encryption standards, security for trusted services and physical/cloud data environments (e. g. 2016. 11. 25_Trust Services and e. ID_DSM_EC. europa. eu) Ø Data/Info standard protocols on the ’content’ of Digital Units are proprietorily addressed © 2010 Colt Telecom Group Limited. All rights reserved.

Blockchain - DLT : non-payment use areas bloomberg. com September 1, 2015 “Blythe Masters

Blockchain - DLT : Banks payment cases 2010 Colt Telecom Group Limited. All rights

Blockchain - DLT content : Custody & Settlement > > 2010 Colt Telecom Group

Blockchain - DLT case : NASDAQ Linq - Overstock q NASDAQ Linq platform § Allows private companies to trade their company’s shares , even before pre-IPO. § Blockchain facilitates issuance, cataloging, recording of transfers of shares of privatelyheld companies on the NASDAQ Private Market ; It complements Exact. Equity, NASDAQ Private Market’s cloud-based capitalization management and stock plan administration. It offers increased auditability, governance of issuance, reduce risk, administrative costs § § Trade clearing & settlement time from current equity market standards of 3 days to 10 min, reducing settlement risk exposure by over 99%, lowering capital costs, systemic risk § 07. 2015 : Overstock sale $5 -million digital cryptobond to FNY Managed Accounts LLC § 12. 2015 : NASDAQ Linq first securities transactions using blockchain-based platform. § NASDAQ developed Linq blockchain with Chain. com (powering the platform), Change. Tip, specialist in digital currencies micropayments, Peer. Nova for blockchain ledger, database 2010 Colt Telecom Group Limited. All rights reserved. Ugo© Bechis

Blockchain - DLT content : Assets Trading & Custody > > 2010 Colt Telecom

Blockchain - DLT : non-financial user cases 2010 Colt Telecom Group Limited. All rights

Value added roles in Blockchain - DLT services : options A Bank / Financial Institution can provide: q. A multi purpose wallet service for customers access with identification options: SCA (for payments), e. ID (for Blockchain) q. A Trustee service for data custody related to the ‘contents’ of the Digital Units (assets, certificates) q. A funds repository and custody service funds and fiat currencies payments are involved when A technological solution and service provider q. Advanced encryption and secure cloud based data services q. Their time to market delivery q. A ‘digital native’ approach, both to blockchain and to financial operational processes 2010 Colt Telecom Group Limited. All rights reserved. Ugo©Bechis