1 The Rise of Fintech An Impact Analysis and Blockchain Case StudyModerator Caragh Landry, Integreon Panelists Isabelle Corbette, R3 Ingrid Busson-Hall, PayPal Jason Mark Anderman, American Express

2 Agenda •Development of Blockchain Technology•Smart Contracts and Change Management •Distributed Ledger Technology: Impact on middle- and back-office operations •Key Benefits & Pain Point Potential: AML/KYC obligations •Adoption Challenges: Regulatory, cybersecurity & operational risks for in-house counsel

3 Development of Blockchain Technology – Smart Contracts What If Both Parties Had 100% Certainty In: Every Word + Every Signature In Every Contract Instantaneously Signed? 21,997 Hours

4 Development of Blockchain Technology – Smart ContractsLedger + Consensus Like Excel Perfect Copies By Each Point of Presence (Nodes) Consensus Engine: Common Algorithms Ensure Each Copy Identical Updates Each Node with Each New Smart Contract Build Smart Contract “Wet Contract” Final Draft Integrate Wet Contract Into Smart Contract Code “Dual Integration” Functionality Possible (Trigger Payment) Digitally Sign Each Smart Contract Has Public Key Each Party Signs with Private Key All Execution Data Coded Into Smart Contract E-Sign Compliance Achievable Broadcast Smart Contract Sent to All Ledger Nodes Functionality Triggered Bundle Blocks Smart Contracts Grouped Into a Block Blocks Immutably Linked Each Block References the Previous Block Mathematically Via a “Hash” Integrity: Can’t Change a Block or Cascade to All Blocks 21,997 Hours

5 Network Effect and Forking Provider Liability/InsuranceDevelopment of Blockchain Technology – Smart Contracts Risks APIs (application protocol interface) Key Exchange Network Effect and Forking Provider Liability/Insurance Cryptography is vulnerable to weak encryption or poor key management Network Effect ensures system integrity, insufficient size jeopardizes integrity Shared ledger has permissions for right parties, but what if a party is compromised? Technology Providers make all of this happen, how strong is your oversight and insurance coverage? APIs drive functionality (payments), but whose data are you relying on?

6 Adoption Challenge – Change ManagementDevelopment of Blockchain Technology – Smart Contracts Adoption Challenge – Change Management Change Management for lawyers is challenging, consider: Document Assembly not widely adopted now and could drive great productivity improvements Electronic Data Interchange not widely adopted now but could already facilitate some smart contract functionality Technology Expertise may not be sufficient for the legal industry to appreciate the value Imposed on from outside – will technology providers force the legal field to change?

7 Development of Blockchain TechnologyE What Is Encryption and How Does It Work?

8 Development of Blockchain Technology - EncryptionK What Is a Key? WHITE -> W = Z, P, L, W, Repeat

9 Development of Blockchain Technology – Encryption In a Country with a Corrupted Postal Service: How Can Alice Send Bob a Secure Message? How Can Bob Respond? Brainstorm a Solution – Half the Table Alice + Half Bob Alice Bob

10 Development of Blockchain Technology – Encryption ❶ Alice Padlocks a Lockbox Holding Message ❷ Bob Receives Lockbox, Adds His Padlock, Sends Back ❸ Alice Unlocks Her Padlock, Sends to Bob ❹ Bob Unlocks His Padlock, Reads Message Alice Bob

11 Development of Blockchain Technology – EncryptionKey Insight – You Can Decode a Message the Sender’s Key Public Message Private

12 Development of Blockchain Technology – Encryption7 8 9 You Can Also Use a Key With Numbers. 5 = 7 KEY: MESSAGE: I A M D O N E CYPHER TEXT:

13 Development of Blockchain Technology – Encryption What If Eve Wants the Key?One Way Function No Key? Eve Decrypts Stop Decryption?

14 Development of Blockchain Technology – Encryption MWhat Is a One Way Function? Think Modular

15 Development of Blockchain Technology – Encryption What Is 9 + 6Development of Blockchain Technology – Encryption What Is 9 + 6? Now, What Is 9 + 6?

16 Development of Blockchain Technology – Encryption = 3 (In Modular Arithmetic) = 3 (mod 12)

17 Development of Blockchain Technology – Encryption Imagine a 13 Hour Clock You Can Also Multiply and Divide ❶ 11 x 9 = 99 ❷ 99/13 = 7 Remainder 8 ❸ 11 x 9 = 8 (mod 13) 13 Hours

18 Development of Blockchain Technology – Encryption Big Numbers Are Hard to Figure Out If You Know It’s a 12 Hour Clock, And Numbers Are Small Easy to Decrypt 13 Hours

19 Development of Blockchain Technology – Encryption But Imagine a 21,997 Hour Clock Now, What Is 4532 (mod 21,997)? One Way Function – Hard to Reverse! 21,997 Hours

20 Development of Blockchain Technology – Encryption What If Eve Doesn’t Have All the Information? Just 453x (mod 21,997)? With Even Larger Numbers, Eve Can’t Decrypt 21,997 Hours

21 Development of Blockchain Technology – EncryptionAlice A = Alice Secret # (2-9) α = What Is 7A (mod 11)? Alice Sends Bob α What Is βA (mod 11)? Bob B = Bob Secret # (2-9) β = What Is 7B (mod 11)? Bob Sends Alice β What Is αB (mod 11)? ❶ Half Table Alice + Half Bob ❷ Do the Math (Search Engines Are Your Friend) ❸ Do Final Numbers Match? This Is the Key! Use It to Encrypt Your Message 21,997 Hours

22 Development of Blockchain Technology – EncryptionAlice A = Alice Secret # (5) α = What Is 7A (mod 11)? Alice Sends Bob α (10) What Is βA (mod 11)? (1) Bob B = Bob Secret # (3) β = What Is 7B (mod 11)? Bob Sends Alice β (2) What Is αB (mod 11)? (1) ❶ Half Table Alice + Half Bob ❷ Do the Math (Search Engines Are Your Friend) ❸ KEY: 1 = 7 MESSAGE: A CYPHER TEXT: 7 21,997 Hours

23 Key Questions 1. What benefits does a peer to peer, decentralized payment verification system provide users? 2. What distinguishes permissionless and permissioned systems? 3. What is the current regulatory landscape for virtual currencies, Blockchain/DLT? 4. How are non-US regulators responding to this new technology? 5. Is there a risk of stifling innovation by prematurely regulating emerging players with old laws?

24 The DLT Journey Distributed ledgers: From bitcoin to today

25 R3’s mission is to redefine the foundations of finance by harnessing the power of collaborative networks The R3 consortium is the world’s largest alliance committed to delivering the next generation of financial infrastructure based on distributed ledger technology (DLT)

26 About R3 An innovation firm focused on building & empowering distributed ledger solutions for use across the global financial services marketplace R3 is a financial technology company with the primary purpose of designing and building truly transformative, collaborative financial services applications We leverage our Members’ decades of experience and deep networks within the financial services community to empower innovators, promote industry collaboration, affect positive market transformation and design/build robust commercial products for use on a global scale Independent, objective and agile, we focus on exploring and developing revolutionary technologies that will serve as the new standard for the next years of financial services Fast growing team of 100 professionals in offices in New York and London, with additional presence in San Francisco, Singapore, Zurich, Sydney, Washington DC, Seoul and soon, Tokyo R3 is deeply integrated within the global crypto-technology ecosystem and is the founder and leader of the world largest distributed ledger consortium of 75+ global financial institutions Focused on intelligent applications of cryptographic and distributed ledger technologies to transform the current financial services industry operating model across many lines of business Delivering improved security, controlled transparency, accessibility to both customer and regulators globally, while also substantially reducing costs and complexity for participating clients

27 Our Global Reach What began as an exploratory exercise by a small group of investment banks, has developed into a world wide connected consortium spanning finance, banking, insurance, and payments 100+ R3 professionals combined with the DLT teams from over 77 members resulting in an unparalleled team of over 1100 people across 22 countries dedicated to DLT collaboration

28 In the beginning… Cryptocurrency Proof-of-work Blockchain Mining

29 Cryptography to ensure identity authentication for each transactionDistributed Ledgers at a Glance Ledgers Distributed Ledgers Blockchains Cryptocurrency Cryptography to ensure identity authentication for each transaction Non-repudiation/immutability to preserve integrity of data and create an audit trail Smart contracts for the automatic execution of business logic when certain criteria are met Shared ledger so each participant sees the same view of the same data, updated in real time, subject to permissioning Distributed consensus to ensure the state of the ledger represents the agreed-upon truth of all stakeholders

30 “Blockchain” - The Dirty SecretThe dirty secret of the industry is that public “blockchain” technology doesn’t work for industry: Proof of Work isn’t sustainable / burns tons of electricity Blockchains are typically controlled by organisations from one country Probabilistic settlement finality only (forking) State-of-the-art smart contracts are 3x more buggy1 than average software – programming them is too hard Remember. They will have to support billions of dollars of value! DAO attack is case in point (Ethereum) Doesn’t satisfy financial services non-functional requirements Privacy, scalability, etc. We have to fix all of the above to make this useful for Financial Services 1

31 Evolution from blockchain to DLTHyperledger Project Linux Open Source Interoperability Identity Scalability Privacy / Security Upgradability Smart Contracts and dApps Bitcoin Release Answering the hard questions “Blockchain Agnostic” 2009 2015 Today Meta Protocols, Colored Coins, and Tokenization Altcoin Rush Consortium Growth Blockchain Inspired Technology Enterprise Production Level Financial Shared Ledger

32 Distributed ledgers at a glanceRecords of agreement (consensus), A secure (cryptographic) audit trail, Maintained and validated by several separate computers (network nodes). Consensus Agreement mechanisms evaluate information provided by participants to ensure consent among all relevant parties in an entry Visibility When a transaction is added to the ledger, the network is almost-instantly privy to this new version Distributed ledgers leave behind a cryptographically assured audit trail and timestamp All parties in the network keep a copy of their view of the ledger

33 The Significant Evolutionary Step of DLT

34 I know that what I see is what you see…

35 Where is this going? Current State Highly fragmented Transactions take days to confirm and validate Failures occur Liquidity risk is pervasive Regulatory reporting is onerous and suffers from human error Future State Unified by one ledger Transactions validated in near-real time Regulators can use the cryptographically assured audit trail made by the ledger passively Future+ State Automated business logic Reduced need for siloed business processes Assurance that what’s meant to happen will happen Smart contract logic Distributed ledgers can replace legacy networks by validating, registering & tracking complex transactions in a dynamic, virtual and near real-time marketplace

36 Financial InstitutionsIllustrative Use Cases Leveraging DL Technology Distributed ledger technology has a myriad of potential use cases Financial Institutions Four of the high-potential FI use cases could alone generate $60-80bn in cost savings Source: McKinsey 2016 Findings From Research Into Distributed Ledger Technology

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38 R3’s Platform Vision We will revolutionise outdated infrastructures to create shared truths that enable anyone to contract seamlessly and without error for any purpose. We will do this by building and operating R3Net, a fundamental underpinning to the next generation of financial services: reducing cost, simplifying infrastructure and supporting new products and services. R3Net will utilise Corda to provide a new generation of shared business logic, shared data and shared operations, enabling seamless interoperability.

39 Key Questions 1. Which use cases present the greatest potential?In Financial Services AML/KYC Regulatory Reporting across numerous obligations Other industries Healthcare Manufacturing – supply chain Property – land, art 2. What businesses are developing around virtual currencies? 3. What are cryptocurrencies? 4. What’s the difference between the Bitcoin Blockchain and Distributed Ledgers? 5. There seem to labs, pilots, proofs of concept of every kind and variety reported in the press. What are some key impediments to mainstream industry adoption? 6. Are we witnessing the end of money and banking, i.e., is this a revolution or evolution for financial services? What are your predictions for the future of the Blockchain/DLT?

40 Appendix – Blockchain-Related Legal Resources•Regulatory Rulings and Guidance California Consumer Advisory CPMI-Digital Currencies CSBS Draft Model Regulatory Framework for Virtual Currency https://www.csbs.org/regulatory/ep/Documents/CSBS%20Draft%20Model%20Regulatory%20Framework%20for%20Virtual%20Currency%20Proposal%20--%20Dec.%2016% pdf FATF-Virtual Currencies FinCen Rulings – Miners, Exchanges and Processors https://www.fincen.gov/sites/default/files/shared/FIN-2014-R011.pdf https://www.fincen.gov/sites/default/files/shared/FIN-2014-R012.pdf FINRA-Bitcoin IRS-Virtual Currency as Property IR , March, 2014 https://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance   NY Dept. Fin. Services-Virtual Currencies Rules SEC Alert-Virtual Currency https://www.sec.gov/oiea/investor-alerts-bulletins/investoralertsia_bitcoin.html SEC Approval-Overstock Share Issuance Via Blockchain https://www.sec.gov/Archives/edgar/data/ / /a _9fwp.htm •Case Law CFTC-Bitcoin Derivatives Trading Mt. Gox Class Action-Breached Bitcoin Exchange https://cdn.arstechnica.net/wp-content/uploads/2014/03/Greene-MtGox-1st-Amend-Complaint.pdf SEC v. Chen-Unregistered Securities SEC v. Garza https://www.sec.gov/litigation/complaints/2015/comp23415.pdf SEC v. Shavers-Virtual Currencies as Securities https://www.sec.gov/litigation/complaints/2013/comp-pr pdf Mason v. Machine Learning (Gambling) US v. Faiella and Schrem-Unlicensed Money Transmitter •Adoption Challenges: Regulatory, cybersecurity & operational risks for in-house counsel