Blockchain What Is It And How Does It

Blockchain: What Is It? And How Does It Impact Corporate Governance? Society for Corporate Governance, Mid Atlantic Chapter – Fall Conference Scott Kimpel Mayme Donohue Hunton Andrews Kurth LLP Elizabeth Maiellano Broadridge Financial Solutions

Agenda 1. What is Blockchain? 2. How Does Blockchain Work? 3. What is Cryptocurrency? Smart Contracts? Digital Tokens? 4. Overview of the Regulatory Landscape 5. When to Consider Blockchain? 6. Blockchain’s Practical Applications 7. Challenges to Implementation & Issue Spotting 8. Questions? 2

What is Blockchain? Ø Understanding what blockchain can do is more important than understanding what blockchain is Ø We are entirely dependent on the Internet even though most of us aren’t entirely sure what the Internet actually is or how it works 3

What is Blockchain? Ø Generally, blockchain is a distributed ledger that: • records transactions (arranged in “blocks” - “chained” together); • is replicated across a peer-to-peer network in real-time; • uses cryptography to prove identity and control access; and • is immutable (i. e. , it’s difficult to change historical records). The practical consequence [. . . is. . . ] for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate. Marc Andreessen, entrepreneur, investor and software engineer and current or former director of Facebook, e. Bay and Hewlett Packard Enterprise 4

What is Blockchain? CRYPTOGRAPHIC IDENTITY (Public Key & Private Key) DISTRIBUTED LEDGER (Decentralized Record of Transactions) NETWORK SERVICING PROTOCOL (Rules Governing the System) Updates P 2 P in real time Bitcoin Ethereum Hyperledger Public Private Consortium Proof of Work Proof of Stake Proof of Authority 5

How Blockchain Works? Ø A blockchain network is comprised of many nodes, each with a unique public/private key combination to validate and prove its identity Ø A node is a computer or device connected to the blockchain network using a client that performs the task of validating and relaying transactions Ø Each node gets a copy of the blockchain, which updates as each new block of transactions is added to the chain Ø A blockchain has no single point of failure and cannot be controlled by any single node 6

How Blockchain Works? Each new transaction is checked against the decentralized record of every transaction that has ever taken place. Valid transactions are settled and recorded. 7

How Blockchain Works? Ø Blockchain uses cryptographic hash functions to create a unique hash of each block • One-way function: input cannot be derived from output, but output can be verified if input is known • Small changes in input result in changes to output that are (generally) impossible to predict Ø Each block’s hash is included in the subsequent block of data. This means one small change to any transaction would change that block’s hash, rendering the record virtually tamper-proof Ø The process of forming new blocks of transactions and verifying the ledger is “mining” Hash Tx Tx Tx Nonce Block X+1 Hash Tx Tx Tx Nonce Block X+2 Hash Tx Tx Tx Nonce Block X+3 8

Types of Blockchains – Benefits Blockchain lives in code and can be designed to meet the specific goals of a particular network. Public/Permissionless • Completely open and anyone can join and participate in the network • Typically has an incentivizing mechanism to encourage more participants to join the network • Bitcoin is one of the largest public blockchain networks in production today • Decentralized control over the network Private/Permissioned • Requires an invitation and approval to join the network • Used for business enterprise solutions – like the IBM Food Safety Blockchain • Like a company’s intranet site vs. its public internet site • Centralized control over the network 9

What is Cryptocurrency? Ø AKA “Digital Currency” and “Virtual Currency” Ø IRS/CFTC definition: • A digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value Ø Bitcoin is one example of a virtual currency • Over 1, 500 different cryptocurrencies Ø A “stablecoin” is a cryptocurrency for which the price is pegged to a real-world asset like gold, the dollar or euro 10

What is a Digital Token? Ø Tokenization is the process of creating a digital representation, or “token, ” of the rights to an asset. • Tokenized assets can exist and be traded on a blockchain. • You get all the benefits of blockchain (immutability, transparency, immediacy, trust, fractional ownership). • But, tokenizing a physical asset is imperfect. For example, what happens if the physical asset is destroyed but the digital token is immutable? Ø There are many types of tokens: Utility Tokens; Security Tokens; Currency Tokens; Asset Tokens… 11

What are Smart Contracts? Ø Computer code that automatically executes certain transactions triggered by predetermined inputs Ø Distinct from traditional legal contracts (i. e. offer, acceptance, consideration) Ø Can’t automatically execute transactions requiring discretion 12

Overview of the Regulatory Landscape Ø SEC – applies the Howey test to determine if digital tokens are securities; Bitcoin and Ether are not securities; enforcement actions against bad actors Ø CFTC – digital tokens may be commodities or derivatives Ø Fin. CEN – ICOs and crytpo-exchanges must register as Money Services Businesses – 2019 Joint Statement with the CFTC and SEC on AML/BSA obligations Ø FTC – enforcement actions against fraudsters; formed the FTC Blockchain Working Group in March 2018 Ø IRS – October 2019 updated guidance - virtual currency transactions are taxable as property Ø States – regulation varies depending on state law – Delaware Blockchain Initiative Ø Congress – Committee hearings; 2019 bipartisan Blockchain Bill February 8, 2018 13

When to Consider Blockchain? Factors to consider: Ø Are there multiple writers? Ø Trust: • Are all writers known? • Are all writers fully trusted? Ø Technical considerations: • Amount of data • Speed Just because you can, doesn’t mean you should… 14

Practical Applications of Blockchain Ø Initial blockchain applications were developed for finance and banking, but financial transactions are just one type of transaction that can be recorded and settled using blockchain Ø Combination of smart contracts operating on a blockchain permanently record and secure the automated transactions “What the Internet did for communications, I think blockchain will do for trusted transactions. ” Ginni Rometty Chair, President and CEO of IBM 15

Supply Chain Management Ø Permanent record of the journey of Ø Timestamped for real-time tracking the assets of assets Ø Shared among all network participants Ø Smart contracts can automate approvals, paperwork and payments Source: Resolve Solution Partners 16

Issuing Digital Shares Ø In June 2019, Overstock. com announced it will issue shareholders a dividend of its Digital Voting Series A -1 Preferred Stock traded on its blockchain platform, t. ZERO Ø The dividend of digital securities has been delayed to restructure it to make the digital stock freely tradable upon issuance 17

Issuing Digital Bonds Ø In August 2018, the World Bank issued $110 million AUD of the world’s first bond to be created, allocated, transferred and managed through its life cycle using blockchain • • The Bond-i (blockchain operated new debt instrument) was issued in connection with Commonwealth Bank of Australia In August 2019, the World Bank issued another $50 million AUD of Bond-i Ø There have been other bond issuances using blockchain • • • In 2017, Daimler used a blockchain to issue a 100 million euro Schuldscheindarlehen, a financial instrument likea corporate bond In 2017, a Japanese company issued a small bond offering using bitcoin In 2018, Russian telecommunications firm MTS privately placed bonds on a blockchain with buyer Sberbank 18

Government and Administrative Ø Register Title to Real Property Assets • Cook County Recorder of Deeds Blockchain Pilot Program – “designed a blockchain real estate conveyance software workflow that can be a framework for the first legal blockchain conveyance in Illinois (and possibly the US)” Ø UCC Filings and Other Records • Delaware Blockchain Initiative – “smart UCC” filings intended to (1) automate the release or renewal of UCC filings and related collateral, (2) increase the speed of searching UCC records, (3) reduce mistakes and fraud and (4) cut cost Ø Other applications like voting and ID verification 19

Proxy Plumbing 20

Potential of Blockchain for Securities Trading Ø Recombine beneficial and record ownership of securities Ø Replace securities trading and clearance intermediaries with self-executing stock registration and transfer mechanism Ø Generate accurate and complete list of shareholders entitled to vote Ø Streamline proxy voting, proxy distribution and shareholder communications Ø Count and record votes in an accurate and timely manner Ø Lower cost of trading and expedite transfers of ownership Ø Decrease frequency of insider trading once trades can be traced to individual insiders 21

Challenges to Implementation Scalability Upfront Cap. Ex Data Migration: Garbage In, Garbage Out Enterprise Blockchain Governance Lag in Regulation Competition vs. Cooperation …Other? 22

Legal Issue Spotting Issue Considerations Immutability • One of blockchain’s biggest advantages also makes it extremely difficult to correct an erroneous record. • Method in place to detect/correct errors? • Safeguards to ensure veracity of the record? Decentralization • How do you manage/oversee each entity in the network? • Separate agreements with parties able to add to the record? Governance • Two levels of governance: (1) the rules of the system and (2) how the rules of the system are created/enforced. • What level of control does your business require? Backup • What happens in a system failure? • How easy is it to gain access to the record? Accountability • When no single player is in control, who is held accountable for failures and losses? Regulations • How will existing regulations in your industry treat a blockchain-based system? 23

Broadridge: At the Heart of the Global Proxy Ecosystem 1000+ 40 k+ Banks and broker dealers rely on us for proxy processing Corporate issuers connected by our global network 5. 5 k+ 58 k General meetings processed annually Institutional investors use our global proxy solutions DATA CLASSIFICATION: CONFIDENTIAL 24

Why is Blockchain Interesting? § Uses strong cryptography to create transactions that are impervious to fraud and establishes a shared truth § Eliminates reconciliations and disputes § Simplifies a lot of processes that involve multiple participants § Reduces transaction times to near real time processing which can be processed at anytime Integrity Secure Traceability Inherent blockchain benefits Speed Privacy DATA CLASSIFICATION: CONFIDENTIAL Scalable 25

General Meetings: Driving improvements in vote processing 1 2 “Golden Agenda” § Single meeting agenda provided to the market through single entry by issuer/agent directly to the chain and received by all participants at the same time § Lengthens voting period for investor 3 Reconciles entitlements (which shareholders can vote & how many shares) and the votes themselves § 4 Quorum Tracking § Real Time Reconciliations Issuer has access to real time activity (not vote details) End-to End Vote Confirmation § Affirmative confirmation that shares were counted in the final tabulation DATA CLASSIFICATION: CONFIDENTIAL 26

Broadridge’s Proxy Blockchain Journey Shadow AGM April 2017 Proxy Season 2017 US Companies Banco Santander AGM 2017 • Demonstrated process efficiency through DLT; improved timeliness and access to data Test Meeting Nov 2017 Repsol AGM 2017 Test • Transparency achieved through DLT; both voting and access to point in time data Shadow AGM Mar 2018 Banco Santander AGM 2018 Shadow AGM Nov 2018 Broadridge AGM 2018 • Full market participation of end -to-end DLT proxy process DATA CLASSIFICATION: CONFIDENTIAL Japan Proxy Processing POC Nov 2018 • Demonstrated benefits of DLT to Japan proxy processing 27

Leveraging our Blockchain Technology Our Distributed Ledger Technology enables us to deliver clarity and transparency for all participants in the communications chain. Multiple parties share data Multiple parties update data Requirement for verification Intermediaries add complexity Interactions are time-sensitive Transactions interact DATA CLASSIFICATION: CONFIDENTIAL 28

Shareholder Disclosure: Efficient Reconciliation of Intermediary Accounts SRD II aims to increase the accuracy and transparency of communications between issuers and investors – facilitating more active shareholder engagement The Broadridge Shareholder Disclosure Hub Issuer Agent Intermediary Intermediar y DATA CLASSIFICATION: CONFIDENTIAL Intermediary outside the Broadridge hub 29

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Questions? Stay up-to-date on notable legal and regulatory developments in the blockchain space at Hunton Andrews Kurth’s blog, Blockchain Legal Resource. https: //www. blockchainlegalresource. com/ 31