MONASH

BUSINESS

Blockchain and Distributed Ledgers

BFW3120: FINTECH AND ITS IMPACT ON GLOBAL

FINANCE AND BANKING

Prepared by:
Dr. Mirzet SeHo

Accredited by: Advanced Signatory:

OUTLINE

1. Why Blockchain?

2. What is Blockchain?

3. How does Blockchain work?

4. Types of Blockchain

5. Advantages and benefits of Blockchain

6. What can Blockchain do?

7. When is Blockchain the right solution?

8. What is holding Blockchain back?

9. Summary
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WHY BLOCKCHAIN?

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WHY BLOCKCHAIN?
CURRENT STATE: GLOBAL FINANCIAL SYSTEM

 Serves billions of people

• 3.8 (1.7) billion people – 69% of adults – are (un)banked (World Bank)

 Moves trillions of dollars daily

• Global payments revenue in 2020 was $1.9 trillion (McKinsey) – where does this
revenue come from? From the fees that we pay.

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WHY BLOCKCHAIN?
CURRENT STATE: GLOBAL FINANCIAL SYSTEM

 Adds cost through fees

• Is transferring money through banks free? What about transferring overseas?

• How about a letter of credit?

• What about loan processing?

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WHY BLOCKCHAIN?
CURRENT STATE: GLOBAL FINANCIAL SYSTEM

 Delays transactions
• How long does it take to transfer money? Locally? Overseas?

• How long does it take to clear a cheque?

• How long does it take to get a mortgage loan?

 Booking fee receipt
 Personal documents such as proof of income and salary slips
 Deposit receipt from the seller’s lawyer (for subsale properties)
 Basic check on the buyer’s Central Credit Reference Information System (CCRIS)
 Valuation of the property
 And others
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WHY BLOCKCHAIN?
CURRENT STATE: GLOBAL FINANCIAL SYSTEM

 Creates friction through redundant and onerous paperwork

• How many papers do you need just to open a bank account?

• How many papers do you need to get a personal loan? A credit card? Car loan?

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WHY BLOCKCHAIN?
CURRENT STATE: GLOBAL FINANCIAL SYSTEM

 Prone to fraud and crime

• 45% of financial intermediaries suffer from economic crime every year
 Higher than other sectors: entire economy 37%; professional services 20%, technology
sectors 27%.
 1MDB – involved few banks;
 Wells Fargo created millions of fake accounts
 Deutsche Bank, Bank of America commodity price fixing scandal
 How much in penalties had to be paid? How does that compare to the profit that they have
made from these fraudulent and criminal activities?

• As a result, regulatory costs continue to climb and remain top concern for bankers
 Who bears the burden? – Who else? – the consumers! MONASH
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WHY BLOCKCHAIN?
CURRENT STATE: BOOKKEEPING AND ACCOUNTING

 Double entry (Luca Pacioli, 1494) = double work

 Accounting records are almost always post-transaction

 Multiple individual ledgers

• Everyone has their own ‘truth’

 Humans are prone to errors

 Reconciliation needed
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WHY BLOCKCHAIN?
CURRENT STATE: BOOKKEEPING AND ACCOUNTING

 How long does it take to record a transaction? How much paper is needed?

 How long does it take to get a company’s audited financial statements?

 Malaysia aims to produce 60,000 accountants by 2020. Imagine what is the

cost of accountants on the economy?

 Estimated 2.1 million certified/chartered accountants in the world as of 2017

• How many of those who work in accounting but are not certified/chartered

• ALL THIS ADDS TO COSTS – WHO BEARS THESE COSTS? CONSUMERS!

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WHY BLOCKCHAIN?
CURRENT STATE: BOOKKEEPING AND ACCOUNTING

 Fraudulent accounting activities

• Enron scandal (2001) – reported to be worth more than it is

• WorldCom scandal (2002) – inflated assets by $11 billion

• Freddie Mac (2003) – $5 billion in earnings were misstated

• AIG scandal (2005) – accounting fraud of $3.9 billion

• Lehman Brothers (2008) – hid over $50 billion in loans disguised as sales

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WHY BLOCKCHAIN?
CURRENT STATE: PERSONAL IDENTIFICATION/ONBOARDING

 How many documents (hard copy) did you have to submit when you
applied for MUM?

 How many of them did you have to verify by a third party?

• Commissioner of Oath perhaps?

• If you are a foreign student, most likely you have to verify your credentials in the
Ministry of Education and the Ministry of Foreign Affairs

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WHY BLOCKCHAIN?
CURRENT STATE: PERSONAL IDENTIFICATION/ONBOARDING

 Whether you open a bank account, sign up for insurance, buy a car, apply
for a university, etc. you almost always have to bring certain documents for
them to verify who you are.
• At times, you don’t know what documents they require or you simply forget one of
the required documents – you have to get the document and come back – ISN’T
THIS WASTE OF TIME?

 WHAT IF YOU HAD A DIGITAL IDENTITY ON YOUR PHONE WHICH

YOU COULD USE FOR ALL OF THE ABOVE?

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WHY BLOCKCHAIN?
CURRENT STATE: OTHER SECTORS

 What about other sectors of the economy?

• Insurance?

• Healthcare?

• Supply Chain Management?

• Public services?

• Voting?

• Others?

They are all plagued by similar deficiencies like the sectors discussed in the
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previous slides, i.e. inefficiency, manual work prone to errors, etc. BUSINESS
WHY BLOCKCHAIN?
INTERNET OF INFORMATION

 Transformed the way how we work, learn, communicate, play, etc.

 Impacted the industries like newspapers, brick and mortar retail, and
others

 Created new industries such as social media and online dating

 Reinvented other industries like how we use and manage our money
• But has not solved the double-spending problem

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WHY BLOCKCHAIN?
INTERNET OF VALUE

 Solves the double-spending problem

 Eliminates middlemen/intermediaries

 Transacts in real-time

 With almost absolute security and trust

BLOCKCHAIN DOES ALL OF THESE AND CAN REVOLUTIONIZE THE MONASH

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WAY WE EXCHANGE VALUES, ASSETS, ETC.
WHAT IS BLOCKCHAIN?
A BIT OF HISTORY

 The first work on a cryptographically secured chain of blocks was

described in 1991 by Stuart Haber and W. Scott Stornetta

 The first blockchain was conceptualized by a person (or a group of people)

known as Satoshi Nakamoto in his white paper: “
Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008.

 Bitcoin was implemented in January 2009.

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WHAT IS BLOCKCHAIN?
BLOCKCHAIN ≠ BITCOIN

“To understand the power of blockchain systems, and the things they can do,
it is important to distinguish between three things that are commonly
muddled up, namely the Bitcoin currency, the specific blockchain that
underpins it and the idea of blockchains in general.”

The Trust Machine, The Economist, Oct. 31, 2015

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WHAT IS BLOCKCHAIN?
DEFINITION

“A vast, globally distributed ledger running on millions of devices, it is

capable of recording anything of value. Money, equities, bonds, titles,
deeds, contracts, and virtually all other kinds of assets can be moved and
stored securely, privately, and from peer to peer, because trust is
established not by powerful intermediaries like banks and governments, but
by network consensus, cryptography, collaboration, and clever code.”

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WHAT IS BLOCKCHAIN?
DEFINITION

“A Blockchain is a digital, immutable, distributed ledger that

chronologically records transactions in near real time. The prerequisite for
each subsequent transaction to be added to the ledger is the respective
consensus of the network participants (called nodes), thereby creating a
continuous mechanism of control regarding manipulation, errors, and data
quality“

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WHAT IS BLOCKCHAIN?
DEFINITION

Blockchain technology is a way to structure data without the need for a central
authority. A Blockchain is a distributed database that hosts a continuously
growing number of records. The database stores records in blocks rather than
collating them in a single file. Each block is then “chained” to the next block, in
linear, chronological order, using a cryptographic signature; as a result,
records cannot be revised, and any attempted changes are visible to all
participants. This process allows blockchains to be used as ledgers, which can
be shared and corroborated by anyone with the appropriate permissions. These
distributed ledgers can be spread across multiple sites, countries or
institutions.
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WHAT IS BLOCKCHAIN?
KEY CHARACTERISTICS

• All info is digitized 1.Digital • Nodes transact with

each other directly
2.Peer-to-peer
• Everyone has the same • Updates across all nodes
copy of information 3.Distributed ledger are in near real time
• No centralized
authority needed 4.Updated in near real time • Blocks are
cryptographically sealed
5.Operates trustless in a chain
• No trusted intermediary • Near impossible to
is needed 6.Immutable & irreversible delete, edit, reverse or
copy created blocks
• Marks the time of each 7. Chronological & timestamped
transaction on the
Blockchain 8. Auditable • Easily auditable MONASH
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WHAT IS BLOCKCHAIN?
WHAT IS A DISTRIBUTED LEDGER?

Client 1 Peer 1

Peer 5 Peer 2
Client 4 BANK Client 2

Client 3 Peer 4 Peer 3

 Multiple ledgers, but Bank holds the “golden record”  There is one shared ledger. All participants
have access to the same ledger.
 Clients must reconcile their ledgers against that of
Bank, and convince Bank of the “true state” if  No central authority or a mediator. Updates
discrepancies arise. to the records in the ledger are governed and MONASH
agreed by the consensus of the participants. BUSINESS
HOW DOES BLOCKCHAIN WORK?
A STEP-BY-STEP VIEW

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HOW DOES BLOCKCHAIN WORK?
REQUIRED COMPONENTS/FUNCTIONS

Initiation and Broadcasting • Private/Public keys

of Transaction • Digital signatures

• Proof of work
Validation of Transaction • Proof of stake
• Others

Chaining Blocks • Hash function

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HOW DOES BLOCKCHAIN WORK?
PRIVATE/PUBLIC KEY AND DIGITAL SIGNATURE

 Private/Public Key:
• Created with the initiation of the first-ever transaction

• a long string of alphanumeric characters

• The public key is generated from the private key (but the process cannot be
reversed)

 Digital signatures:
• a digital code (generated and authenticated by public key encryption) which is
attached to an electronically transmitted document to verify its contents and the
sender's identity. MONASH
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HOW DOES BLOCKCHAIN WORK?
PRIVATE/PUBLIC KEY AND DIGITAL SIGNATURE

 When a transaction is initiated by a user to send, say bitcoins, to another

person, the transaction has to be broadcasted to the network
where distributed nodes confirm the validity of the transaction before finalizing
it and recording it on the blockchain.

 Before the transaction is broadcasted, it is digitally signed using the private

key. The signature proves ownership of the private key, although it does not
divulge the details of the private key to anyone. Since a public key is
fashioned from the private key, the user’s public key is used to prove that the
digital signature came from his private key. Once the transaction has been
verified as valid, the funds are sent to the recipient’s public address. MONASH
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HOW DOES BLOCKCHAIN WORK?
VALIDATION OF TRANSACTION

Used to confirm transactions and add new blocks to the chain. To do this,
miners need to solve mathematical problems.

 Proof of Work
• The amount of work done by a particular miner determines his/her possibility of
mining a block and getting the reward.

 Proof of Stake
• states that a person can mine or validate block transactions according to how many
coins he or she holds.

 Others: Delegated Proof of Stake, Proof of Authority, Proof of Activity, Proof of MONASH
Capacity, etc. BUSINESS
HOW DOES BLOCKCHAIN WORK?
WHAT CONSTITUTES A BLOCKCHAIN?

 Each block has the following key components: data, hash, previous hash, and
metadata (timestamp, block number)
 Hash is a unique identifier for a block and is analogous to a fingerprint for a
human
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• Calculated by cryptographic algorithms employed in the blockchain BUSINESS
TYPES OF BLOCKCHAIN

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TYPES OF BLOCKCHAIN
CLASSIFICATION CRITERIA

• Public – Permissionless
• Private – Permissioned
Accessibility • Consortium/Federated – Permissioned
• Hybrid – Permissioned

• Generic
Application/Use • Specific

• Proof of Work
Consensus Model • Proof of Stake
• Others

Smart contracts • Availability of smart contract functionality

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Cryptocurrency • Has its native cryptocurrency or not BUSINESS
ADVANTAGES AND BENEFITS OF BLOCKCHAIN
Consistent Transparent

Records a history of all transactions within it; all users All transactions are transparent and visible to everyone
have an identical copy of the record/ledger on the network, but yet anonymity is guaranteed.

Reliable and secure Quick update

No single point of failure, cryptography protects data, Provides unbroken and timely record of information in
thus resilient to attacks near real time

Immutable and irrevocable Saves cost

Nearly impossible to make changes without detection,

Eliminates middlemen or third party, thus cuts down costs
increases accuracy, thus reduces fraud
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ADVANTAGES AND BENEFITS OF BLOCKCHAIN
Trustless Democratic

No central authority; the network agrees on and governs

No trusted third party or intermediary needed
the rules for its use

Intelligent Auditable

All transactions are transparent, unaltered, and in

Enables creation of smart contracts
chronological order; therefore, easily auditable

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WHAT CAN BLOCKCHAIN DO?
CURRENT STATE

 Most current blockchain products and applications fall into three buckets:
• The clearing, payments, and settlement functions in financial services companies
(e.g., banks, asset managers),

• Creation and use of a digital identity within an enterprise, and

• Smart contracts

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WHAT CAN BLOCKCHAIN DO?
POTENTIAL

 Financial services
• Several stock exchanges around the world are piloting a blockchain platform that
enables the issuance and transfer of private securities. Additionally, multiple groups
of banks are considering use cases for trade finance, cross-border payments, and
other banking processes.

 Consumer and industrial products

• Companies in the consumer and industrial industries are exploring the use of
blockchain to digitize and track the origins and history of transactions in various
commodities.
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WHAT CAN BLOCKCHAIN DO?
POTENTIAL

 Life sciences and healthcare

• Healthcare organizations are exploring the use of blockchain to secure the integrity
of electronic medical records, medical billing, claims, and other records.

 Public sector
• Governments are exploring blockchain to support asset registries such as land and
corporate shares.

 Energy and resources

• Ethereum is being used to establish smart-grid technology that would allow for
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surplus energy to be used as tradable digital assets among consumers. BUSINESS
WHEN IS BLOCKCHAIN THE RIGHT SOLUTION?
BLOCKCHAIN FIT ASSESSMENT FRAMEWORK
For a process or a use-case to
classify as Blockchain-fit,
majority of the questions
provided in the framework
need to be answered in the
affirmative.

Cost-benefit analysis
is crucial before
deciding.

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Source:
WHEN IS BLOCKCHAIN THE RIGHT SOLUTION?
BLOCKCHAIN FIT ASSESSMENT FRAMEWORK

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Source:
WHAT IS HOLDING BLOCKCHAIN BACK?
BLOCKCHAIN EVOLUTION TIMELINE
Phase 1 – Infancy In which phase is
 Consortiums form
Blockchain currently?
 Blockchain pilots

Phase 2 – Adolescence
 Valuable business cases are identified and permissioned ledgers are deployed
 New revenue opportunities are developed

Phase 3 – Advancing
 Permissioned ledgers move towards interoperability on public distributed ledgers
 New revenue opportunities are fully implemented
 New decentralized business models are identified
Phase 4 – Full Maturity
 Decentralized business models are developed and deployed
 Mature decentralized autonomous organizations (DAOs) and the Internet of
Things (IoT) emerge. MONASH
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WHAT IS HOLDING BLOCKCHAIN BACK?
MAIN BARRIERS FOR DIGITAL TRANSFORMATION

Inability to experiment quickly

Legacy systems
Inability to work across silos
Inadequate collaboration between IT and lines of business
Risk-averse culture
Change management capabilities
Lack of a corporate vision for digital
Lack of talent/skills required
Insufficient budget
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WHAT IS HOLDING BLOCKCHAIN BACK?
TOP 3 BARRIERS TO BLOCKCHAIN ADOPTION – PWC SURVEY

Which of the
following will be the
biggest barriers to
Blockchain adoption
in your industry in
the next three to five
years?

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Source: PwC Global Blockchain Survey, 2018
WHAT IS HOLDING BLOCKCHAIN BACK?
LIMITATIONS

 Scalability
• Low transactions per second - Blockchain platforms are still far behind the traditional
players (Bitcoin 7 TPS v Visa 1,700 TPS)

 Power Use
• Most of the current successfully running blockchain networks run on the concept of
proof-of-work mechanism in which the network participants are rewarded based on
how quickly they solve the equation to add a new block to the network. While this
keeps the network working smoothly, it also increases the consumption of energy in
enormous amounts in the form of computational work.

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WHAT IS HOLDING BLOCKCHAIN BACK?
LIMITATIONS

 Encryption:
• Private keys are the essential elements of a Blockchain as they play a significant
role in securing the data of an individual on the Blockchain. However, a private key
generated once has to be kept very securely as once it is misplaced or lost, there’s
no way to get it back.

 Uncertain regulatory status

• Legislators are yet to define a legal framework within which Blockchain technology
can be used effectively

 History of use in illicit activities

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SUMMARY
POINTS TO REMEMBER

 A Blockchain is a type of ledger or spreadsheet containing information about

transactions.

 Transactions are entered in the order in which they occurred. Order is very
important.

 If a transaction is approved by a majority of the nodes then it is written into a

block.

 The Blockchain is distributed among all nodes, which transact directly with
one another

 A Blockchain is effective as it is spread over many computers, each of which

has a copy of the Blockchain.
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SUMMARY
POINTS TO REMEMBER

 No one or several nodes control the Blockchain.

 All nodes are able to validate a transaction.
 All communication on the Blockchain is P2P.
 Anyone using a Blockchain is anonymous if that is what they wish.
 All transactions occurring on a Blockchain are recorded there, so the
transactions of any person using the network are public and completely
transparent, even though they may be anonymous.

 Once a transaction is recorded on the Blockchain and the Blockchain has

updated, then that transaction cannot be altered.
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THANK YOU

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