What do Blockchain and cryptocurrency really mean and what are the opportunities? What about the risks that

come with such wholesale change to business processes. Learn this and more as you look beyond the hype and walks through these new technologies in a business

setting.

Jason Wood, CA CISA CPA (US) CIA

Triple Ledger Limited, Managing Director

Techemy Limited, Head of Compliance & Audit

The State of Blockchain and Its Impact on Finance Profession

“Blockchain is an accounting technology. It is concerned with the

transfer of ownership of assets, and maintaining a ledger of

accurate financial information. The accounting profession is

broadly concerned with the measurement and communication of

financial information, and the analysis of said information. Much of

the profession is concerned with ascertaining or measuring rights

and obligations over property, or planning how to best allocate

financial resources. For accountants, using blockchain provides

clarity over ownership of assets and existence of obligations, and

could dramatically improve efficiency.”

Source: https://www.icaew.com/technical/technology/blockchain/blockchain-articles/blockchain-and-the-accounting-

perspective

02

Crowd Polling Question

03

A: Yes, we have or our clients have already started using the technology!

B: Yes, we have or our clients have already started thinking about the technology!

C: No, we have not nor have our clients even considered this technology!

D: Unsure, I do not know what this technology is!

Have you or your businesses/clients started to use or are thinking

about the potential use of blockchain technologies or cryptocurrency?

What do we mean by

Blockchain and

cryptocurrencies?

04

distributed ledger technology (DLT) and blockchaindisruptive technology

05

what do we mean

Think about a technology that facilitates transactions

and is a custodian of records.

This could be payment systems, identity management,

transfer of legal ownership of assets, etc.

This can be on “private” ledgers; “public” ledgers; or

“hybrid” ledgers.

DLT and blockchain is much more than

cryptocurrency.

how can I be affectedCompanies are already exploring how to use the

technology; and the use cases affect the processing of

financial and operational information. Therefore, as a

finance and accounting business partner, you need to

stay abreast of the technology so you know how to

evolve the business processes and get comfortable with

the underlying technology processing the information.

So what is Blockchain?

06

“…a digital, distributed transaction ledger with identical

copies maintained on each of the network’s members’

computers. All parties can review previous entries and

record new ones. Transactions are grouped in blocks,

recorded one after the other in a chain of blocks (the

‘blockchain’). The links between blocks and their content are

protected by cryptography, so previous transactions cannot

be destroyed or forged. This means that the ledger and the

transaction network are trusted without a central authority –

a ‘middleman’.”

Source: https://www2.deloitte.com/nl/nl/pages/financial-services/articles/blockchain-technology-speeding-

up-and-simplifying-cross-border-payments.html

What are the characteristics of Blockchain?

07

✓ Decentralised/Distributed – You can conduct transactions directly peer to peer. You do not have to rely on a

centralised network or authority.

✓ Immutability— Once transactions data has been recorded on the blockchain it is impossible to tamper with it. The data

become incorruptible and non-expirable.

✓ Transparency— Blockchain by definition is a network of computers used to power it. Any node in the network or

anyone who interacts with it has full access to every piece of data recorded in real time.

✓ Autonomy — Individuals who use blockchain technology are in full control over their assets, they are also responsible

for their security and storage.

✓ Permissioned/Permissionless – depending on the blockchain, it may require that you are permissioned to join the

private blockchain; or permissionless meaning anyone can join the public blockchain.

✓ Censorship resistance— Since blockchain technology is a gigantic network of computers located around the world, it

makes it by design practically impossible for regulators to interfere with this technology due to its spread out global

nature.

Source for some information: https://medium.com/@SmartTaylorApp/why-blockchain-technology-and-cryptocurrencies-are-the-future-of-finance-fccdf25eef35

Graphic Representation of Blockchain

08

Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html

Graphic Representation of Blockchain (continued)

09

Image Source: http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html

CryptocurrenciesBroad Categories

010

Utility Tokens

A business uses these tokens to help

facilitate transactions, such as an

Exchange using their own token for

payment of transaction fees.

dAppsUse Ethereum blockchain to build

decentralized applications – basically

a user interface on a decentralized

protocol.

Example: Crypto Kitties

Currency Coins

Use the word currency cautiously as it

depends on the jurisdiction. However, these

coins essentially facilitate the exchange of

value for products and services.

Example: Bitcoin

Source: https://medium.com/predict/do-you-

know-the-5-different-types-of-

cryptocurrency-medium-29298d1fad2f

Privacy Coins

Facilitate anonymous transactions without an

identifiable trail. Transactions cannot be

traced.

Examples: Monero, Zcash

Supply Chain

ProtocolsEnabling track and trace,

inventory management, and

the facilitation of the supply

chain between trading partners.

Example: VeChain

CryptocurrenciesDid you know?

011

There are over 2,100 cryptocurrencies out there! The top 3 are:

Source: https://coinmarketcap.com/all/views/all/

What is Bitcoin (BTC)?

012

“Bitcoin was created in 2009 as an open-source

software (Satoshi Nakamoto).

How does Bitcoin work?

Using blockchain technology, Bitcoin allows users to

make transparent peer-to-peer transactions. All users

can view these transactions; however, they are

secured through the algorithm within the blockchain.

Only the owner of that Bitcoin can decrypt it with a

“private key” that is given to each owner.”

Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin-

ethereum-other-cryptocurrencies.html

What is Ethereum (ETH)?

013

“Created in 2015, Ethereum is a type of

cryptocurrency that is an open source platform

based on blockchain technology. While

tracking ownership of digital currency

transactions, Ethereum blockchain also

focuses on running the programming code of

any decentralized application, allowing it to be

used by application developers to pay for

transaction fees and services on the Ethereum

network.”

Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin-

ethereum-other-cryptocurrencies.html

What is Ripple (XRP)?

014

“Ripple was released in 2012 that acts as both a

cryptocurrency and a digital payment network for financial

transactions. It’s a global settlement network that is

designed to create a fast, secure and low-cost method of

transferring money.

Ripple allows for any type of currency to be exchanged,

from USD and Bitcoin to gold and EUR and connects to

banks, unlike other currencies. Ripple also differs from

other types of digital currencies because its primary focus

is not for person-to-person transactions, rather for moving

sums of money.”

Source: https://www.trustetc.com/blog/September-2018/types-of-cryptocurrency

Image Source: https://www.visualcapitalist.com/wp-content/uploads/2017/09/bitcoin-

ethereum-other-cryptocurrencies.html

What are the

opportunities for the

business and

finance team?

015

Is Blockchain for real?

016

Image Source:https://hackernoon.com/how-is-blockchain-revolutionizing-banking-and-

financial-markets-9241df07c18b

Source: https://www.accountingtoday.com/opinion/blockchain-is-already-changing-accounting

Amounts in $USD

Blockchain Illustrative Use Cases Finance and Accounting

page

017

Accept Crypto and

Cross-border paymentsInstead of using traditional banks (and

currencies) to send money around the world,

blockchain can make money remittance

more affordable and faster.

As a finance and accounting function, how

will you “account” for these transactions from

a book and tax standpoint?

Reduce costs of

maintaining and

reconciling ledgers

Investments and Share

Trading (Digital Assets)Instead of using traditional brokers and

stock exchange, stocks could be traded with

faster settlement and transaction validation.

As a finance and accounting function, how

will you treat the investments in crypto

shares; or what if your own company’s

shares were tokenized?

You could also do capital raising!

Smart ContractsContractual arrangements could be

programmed to self execute when

certain conditions have been satisfied.

As a finance and accounting function,

how will you work with legal to ensure

that the right accounting standards are

programmed?

Improve auditability and

fraud detection

(Governance/Compliance)Accounting applications will be able to

evidence that transactions between parties

were legitimate and a joint register with a

trading partner will show the entire debits and

credits on both sides of the transaction. Is this

too much transparency?

Pay Employees Employees could be paid in crypto

or part of their retirement funds

could be linked with crypto

investments..

Blockchain could help accountants

focus on planning rather than

recordkeeping. The accountant

could focus on the value of the

data. What would you do with the

extra time?

What can I do?Business and Finance

page

018

02Gain an understanding of how

the technology is being

considered within your

organisation or at your clients.

03Be involved from the

beginning, identify the risks,

and help add value to your

organisation or clients.

01Continue to learn more about

distributed ledger

(blockchain) and

cryptocurrency technologies.

Finance and accounting need to do the following:

➢ Be involved with any blockchain project from the beginning.

➢ Perform a detailed analysis of the technical architecture of the

blockchain from an accounting and finance perspective.

➢ Develop strategies for maintaining a sufficient level of

transparency and verifying that the blockchain applications are

performing as intended from a finance and accounting

perspective.

➢ Use professional skepticism and ask questions including:

➢ How is data security and account/wallet security maintained?

➢ How do we ensure that the smart contracts’ code is error

free?

➢ How are existing policies and procedures updated to reflect

the usage of blockchain?

➢ How do we manage access and permissions with the

blockchain?

➢ Keep Governance and Risk Management top of mind.

Finance as a Business Partner

Let’s explore the

opportunity in

capital assets

The information in the following slides are from Techemy Capital and have been granted

permission to present at the conference but you cannot further share this information. Please

contact me directly if you would like more information about Techemy Capital.

019

Security Token Offering (STO) is an alternative to private

equity and VC financing. Security tokens represent financial

instruments, and have legal rights similar to traditional assets.

Evolution of Capital Formation

➢ Bitcoin has disrupted money and gold

➢ Ethereum has disrupted capital by creating a new crowdfunding model (ICO)

➢ Tokenisation is disrupting transferability of capital – anything can be securitised, digitised and tokenised

(STO)

Initial Coin Offering (ICO) is a new funding model, offering

funding through crowdsourcing, without a proven product. ICOs

are enabled by the token economy, which implies the use of a

proprietary utility token.

Purple Securities are value-adding tokenised securities that

have no real-life analogues. They will contain a mixture of

traditional security features and utility token features.

TRADITIONAL ASSETS ARE MOVING ONTO BLOCKCHAIN

LEGACY ASSET

Gold

Stocks

Funds

Real Estate

Commodities

CRYPTO EXPRESSION

Store of Value

Digital Utility

Blockchain Protocols

Digitised Equity

Fractional Ownership of Assets

CRYPTO ASSET

Bitcoin

Ethereum

Cryptocurrencies

Security Tokens

Security Tokens

EVOLUTION OF CAPITAL FORMATION

CAPITAL MARKETS

CRYPTO CURRENCIES

ICO’s STO’sPURPLE

SECURITIES

Price Appreciation

Dividends

Revenue Share

Value for

Issuing

Entity

(Highly Efficient

Fundraising Model)

Value for

Investors

(Highly Liquid

Investment Asset)

STO VALUE FLOW

Liquidity

Premium(More Attractive)

Global

Reach(Greater

Demand)

Automated

Complianc

e(Lower Costs)

A Financial Security includes any financialinvestment that derives its value from an underlyingasset. It can be a tradable financial asset of any kind,broadly categorised into debt, equity and derivatives,although this may vary slightly between jurisdictions.

A Security Token Offering (STO) is a compliantprivate offering made on blockchain. It is a digitisedfinancial security that can be backed by assets, profitsor revenue of a company, and can offer legal rightssuch as voting or dividend distribution. STOs are anemerging alternative to private equity and VCfinancing as they allow for businesses to lock in fundswithout locking investors. An STO may create a non-dilutive way of financing a company’s portfolio,allowing it to raise funds without having to sell equityin its portfolio companies, but instead tokenise itscash-flows.

Security Tokens don’t change the fundamentals of afinancial security, but shift an asset’s ownership ontoblockchain’s distributed ledger, which is immutable.This is done by digitasing an asset and representingits value and allocation of shares in the form of acryptographic asset (a security token). Therefore,security tokens are an investment contract similar totraditional financial instruments, aimed to rewardinvestors through such means as: revenue share,dividends, and favourable price movements.

Breakdown of Security Token Offerings

44.9B

2018

TRADITIONAL IPO MARKET IN US$ BILLIONS

53.3B

2020

63.4B

2022

CRYPTO VS TRADITIONAL MARKETS IN US$

2018 2020 2022

700M

560B

Over 5T

SECURITY TOKEN MARKET SIZE IN US$

Security Token Market Opportunity to 2022

THE GLOBAL SECURITY TOKEN MARKET IS SET TO GROW EXPONENTIALLY OVER THE NEXT 2 YEARS,

POTENTIALLY GROWING TO OVER US$ 5 TRILLIONS BY YE 2022

Sources: BraveNewCoin Techemy Capital The World Bank “Market Capitalisation” SIFMA “Bonds Outstanding” Bank of International Settlements “Global Derivatives” Savills “Global Real Estate Value” BP “Statistical Review of World Energy”

Bloomberg Markets “Global Debt” SEC “Capital Raising in the US”

BLOCKCHAIN LEDGER Automated Clearance& Settlement

UndisputedOwnership

Contract terms and conditions,agreed by all relevant parties,are programmed into tokens.These may include paymentcurrency, dividend schedule,interest rate, and variousconditions for execution.

TERMS & CONDITION

S

When a triggering eventoccurs, the contract executesitself as per the pre-programmed terms. Eventsmay include expiration date,dividend distribution, newtransaction, etc.

EXECUTION TRIGGERS

Clearance and settlement ofcrypto assets is automated onblockchain due to their digitalnature. Exchange of physicalassets (e.g. stocks, fiat) isrecorded on the ledger afterphysical clearance andsettlement are complete.

SETTLEMENT PROCESS

Mechanics of Smart Contracts

BUYER

VALUE TRANSFER

based on terms & conditions

SELLER

Smart contracts are an algorithmic softwarecode that verifies terms and conditions in aconflict- and human-free manner. They allowfor security tokens to be flexibly programmableto streamline or automate key investmentfeatures.

Rights and obligations can be programmedinto the tokens via these smart contracts.Automation of such functions as dividendsdistribution allows reduction of costs andincreased efficiencies. Similarly, smartcontracts can ensure cross-jurisdictionalcompliance of KYC & AML requirements, thusprotecting both investors and issuers.

As a general rule, smart contracts areimmutable - once written, they cannot bechanged. However, there are blockchainplatforms that allow for such functionality, forexample Stellar (as opposed to Ethereum).Therefore, smart contracts can be quite flexibleto reflect requirements of the parties involvedin an investment.

Smart Contracts

What are the

potential risks?

025

Example Blockchain Risks

026

✓ Legal risks

✓ Shift from known party to unknown party on public blockchain

✓ Legal liability to mitigate loss from a smart contract code being hacked

✓ Settlement risk

✓ When is a financial transaction complete (private blockchains may have ability to

make changes due to centralised control)

✓ Financial risk

✓ Blockchain will enable real-time or near real-time transaction settlement, which

reduces credit exposure and frees up liquidity that may be otherwise tied up as

collateral.

✓ Operational risk

✓ Risk gets shifted to end points in a blockchain model where the end users are

responsible for managing their own digital assets.

✓ Key management risk

✓ Mismanaging private keys and resulting hacks usually come from a failure to back

up the keys and store them in a safe or other appropriate method.

Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html

Example Blockchain Risks (continued)

027

✓ Code and cryptography risk

✓ Current cryptographic methods can be broken with more sophisticated technology,

like quantum computing, or that those methods can't be improved and

implemented in time to thwart an attack.

✓ Forks and chain-split risks

✓ Forking and chain-split risk may adversely affect the assets, liquidity,

creditworthiness, and solvency of participants because of the time and resources

it takes to work through the change. Finance professionals must anticipate and

hedge the new realm of risks that arise with blockchains.

✓ Consensus and governance risks

✓ Consensus and governance risks are the risks that developers or other

responsible stakeholders can't agree on a timely change to a protocol or that a

protocol change is enacted that adversely affects a party similarly to blockchain

forks. It also encompasses the risk that settlement can't be relied upon as a

legally defined moment because of the possibility that a transaction, block of

transactions, or the blockchain ledger is eventually rewritten.

Source: https://www.fm-magazine.com/issues/2018/aug/blockchain-risks-and-rewards.html

Potential Blockchain Security Vulnerabilities

028

✓ Endpoint Vulnerabilities

✓ The reason comes down to the credentials that are required to access a shared distributed ledger,

and how those credentials can be exposed by security weaknesses at the endpoints.

✓ Public and Private Key Security

✓ Anytime blockchain keys are entered, displayed, or stored unencrypted on such devices, the

prying eyes of hackers can capture them.

✓ Vendor Risks

✓ Weak security on their own systems, flawed code, and even personnel vulnerabilities can expose

their clients’ blockchain credentials and data to unauthorized persons.

✓ Untested at Full Scale

✓ blockchains could be susceptible to fraud, if a significant number of participants conspire against

the rest of the participants. Known as a majority attack, or as the 51% problem, this theoretical

threat could materialize, considering that a large number of mining farms are built in nations where

electrical power is cheap, and oversight questionable.

✓ Lack of Standards and Regulation

✓ standards and regulations is more complex than that of most of the technical issues.

✓ Untested Code

✓ attacker exploiting vulnerabilities in the code.Source: https://igniteoutsourcing.com/blockchain/blockchain-security-vulnerabilities-risks/

Manage the risksBusiness and Finance

page

029

02Identity mitigations and

controls to manage the risks.

03 Monitor the risk management.

01Think about risks broadly

across your organisation. How

will your processes change?

The Blockchain has additional risks such as:

➢ “51% attack” where one group or entity gains control of more than half the computing

power of the blockchain network.

➢ Quantum computing could compromise existing cryptography solutions, so ensure that

the solution used is quantum-proof.

➢ What Information is stored – how much information do you want stored on the

blockchain?

➢ How keys are stored – don’t store your private keys on servers that could be

compromised?

Blockchain Risk Management Framework

➢ Source: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-risk-blockchain-risk-management.pdf

technology does not waitare you ready?

right nowtake action!

ourcontacts

031

address

Level 27, 188 Quay Street

Auckland, NZ 1010

Come visit us!

phones

Office +64-9-363-2717

Mobile +64-27-403-9587

Call us!

online

tripleledger.com

info@tripleledger.com

www.linkedin.com/in/woodcpa/

thank you.