June 2016

Capitalizing on the Wide-Ranging Impact of Blockchain Technology Part 3 in a Series: Breaking Down Blockchain

Authored by: Erik A. Swords and Scott Canning Key Highlights Blockchain technology has the potential to massively disrupt several industries. Financial Services: Transactions are expected to be safe and secure while allowing shared access. It could also eliminate the need for a central authority to maintain records. Health Care: Personal medical records could become part of a Healthchain that would be readily accessible to healthcare providers across the U.S. Real Estate: The technology can help eliminate fraud and expedite the transfer of asset ownership. Consumer: It could connect geographically diverse consumers more securely with the products they buy. Blockchain’s success or failure is likely contingent upon how firms navigate global regulators.

Foreword: Thoughts from the COO “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” — Richard Buckminster “Bucky” Fuller, American inventor

This quote is the perfect setup for thinking about Blockchain and its far-reaching potential applications. What started as the underpinning of a libertarian way of exchanging value for goods and services without central government intervention has led to the beginning of another technological revolution. I remember first hearing about Bitcoin a few years ago, while reading about the arrest of Ross Ulbricht and his Silk Road black-market activities.1 At the time, I laughed it off as a digital currency that would only be used by a very small, nefarious population. My next detailed exposure occurred when Mt.Gox collapsed and its online users lost hundreds of millions of dollars.2 I was blown away by the amount of money involved and the level of transaction volumes — just for a single exchange. Having recently read Nathaniel Popper’s book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, I realized how many investors are looking at different aspects of the technology. (The book ends with the Gates Foundation shifting from complete dismissal of the idea to remaining “open to the possibility that the whole thing wasn’t, at least, entirely crazy.”) As I have done more research, I found that Bitcoin was not the most compelling part of the story, but merely a player in the more interesting underlying coding of Blockchain, which is the real game-changer. After evolving from laughing at Bitcoin to grasping the vast long-term implications of Blockchain, I believe this whitepaper — and the two that preceded it3 — will help readers make a similar transition. While the technology’s most obvious application is in the financial industry, this paper, written by a collection of The Boston Company’s analysts, not only highlights uses and issues specific to financial services, but also explores how Blockchain can be used in industries such as health care, real estate and consumer/retail and describes regulatory impacts. Keep an open mind and you may see how this new model could make the existing one obsolete, just as Bucky Fuller described. — Adam B. Joffe, CFA, Executive Vice President, Chief Operating Officer, The Boston Company Asset Management

Introduction

Blockchain — the distributed digital database that is poised to disrupt the way enterprises manage, share and secure sensitive information — continues to command the interest of global investors. As the technology’s strategic advantages over existing commercial systems have become more apparent, the race to be a first mover has gotten crowded, led by substantial investments from large financial institutions. Even beyond Wall Street, Blockchain is gaining recognition across a range of industries from health care to real estate management, which are similarly bound to inefficient and non–standardized back-office infrastructure in a progressively digital but fragmented world.

In the first two papers of our three-part series, we began by introducing the most wellknown Blockchain usage in “Bitcoin: The New Smart Money,” and then took a deeper dive into the underlying digital ledger itself in “The Transformation Toward Digital Liquidity”. Our main intent was to provide a linear primer to this compelling technology by following its path from supporting a successful but misunderstood cryptocurrency to becoming a part of regular strategic discussions across corporate America. In this paper, we will provide some perspectives on where Blockchain’s utility is most likely to be recognized as well as some of the companies at the forefront of development. Although many firms are aggressively pursuing tangible applications, others are more reactionary in an effort to avoid being left behind, so we also consider the companies potentially at risk from widespread Blockchain adoption. We also share our thoughts on what Blockchain means from a regulatory perspective.

Sector Spotlight: Financial Services

Blockchain technology is garnering attention from many financial-services companies and investors. In the normal course of conducting fundamental analysis, we meet with hundreds of management teams each year, listen to countless quarterly earnings calls and attend industry conferences. Changes at the margin are almost always noteworthy and deserve further analysis. One such change is the amount of time and attention that both companies and investors are giving to Blockchain technology. For example, at a well-known firm’s 2016 financial-services conference, the keynote speakers were Blockchain experts, and the afternoon schedule was dominated by meetings with private financial technology, or fintech, companies. A year ago, the same conference’s schedule allocated no time at all to Blockchain technology companies. Why the sudden increase in attention? The bottom line is that Blockchain technology has the potential to be massively disruptive for many financial-services business functions. The following quote from Blythe Masters, a leading Blockchain pioneer and expert, illustrates the magnitude of this technology; “You should be taking this technology as seriously as you should have been taking the development of the Internet in the early 1990s. It’s analogous to email for money.”4 In a recent article in The Wall Street Journal, Blockchain is defined as “a technology underpinning the bitcoin digital currency that is emerging as a way to let companies make and verify transactions on a permanent ledger without a central authority.”5 Blockchain technology stands to threaten financial-services business practices that have been in place for many decades. Therefore, it behooves financial-services firms to investigate, embrace and invest in this technology as the risks of losing market share as a result of ignoring it are too great. 2

Several key characteristics underpin Blockchain’s appeal. First, by virtue of a distributed ledger and immutable records, transactions using Blockchain are expected to be safe and secure while allowing shared access. In addition, because the data/record is immutable, it could eliminate the need for a central authority to maintain records or a database, making it attractive to counterparties, regulators and tax authorities. Successful implementation of Blockchain technology could lead to cost and process efficiencies, faster settlement or processing times and/or lower cash and capital commitments to current and legacy business practices. Below, we analyze several Blockchain case studies that embody the impact, risks and benefits. Right now, actual use cases for Blockchain are few and far between as most applications still require proof of concept. Even so, we believe Blockchain technology will likely have wide-ranging impacts throughout financial services. Although most of the impacts are still theoretical, we believe the following areas will see the biggest potential disruption. ■■ Capital markets: securities settlement and custody, asset servicing, asset documentation ■■ Payments: remittance, business–to–business payments, cards

Capital Markets

The clearest areas for Blockchain adoption center on security settlement and custody. Securities encompass many asset classes, including cash equities, derivatives, syndicated loans and Treasury repurchase agreements. Reducing settlement times or better netting of positions/exposures would reduce collateral requirements and counterparty risk, which, in turn, would reduce banks’ and customers’ requirements for capital and liquidity. This is especially true in derivatives transactions and syndicated loans. As indicated in Exhibit 1, the settlement period for syndicated loans has experienced gradual improvement – however, as regulatory pressure mounts for further acceleration, Blockchain and its ability to expedite the transfer of ownership from days to minutes could represent the ultimate solution and the next platform to facilitate future trading in these securities. Exhibit 1: Any Day Now... $200B

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Notional NotionalAmount Amount T+ Avg. Business Days Average

$150B

Secondary trades of syndicated loans are settling faster — but they still take weeks

$100B

20

$50B

$0B

2011

2012

2013

2014

2015

2016

15

Source: Markit Loan Settlement, as of March 31, 2016.

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Securities custody could be helped by greater transparency of holdings and more simplified custody (think single versus multiple layers). Blockchain could be used to maintain a registry of asset/security ownership. This would then be updated as part of any settlement process. Use of the Blockchain could reduce error and speed up the process of security issuance/transfer and ownership tracking. In addition, smart contracts could be helpful in asset servicing and contracted payments. In asset servicing, distributions could be structured based on specific contract terms — e.g., the amount of payment for dividends or interest, stock splits, conversion rights, call features, etc. Within contracted payments, the initial and variation margin requirements for derivatives, as well as net swap payments, could be settled by tapping into a cash escrow or collateral ledger. In addition, it could be possible to issue a bond coupon payment via a series of instructions based on the date and coupon due. Exhibit 2: Using the Bitcoin Blockchain for Smart Contracts

Public Companies Impacted ■■ JPMorgan Chase ■■ Goldman Sachs ■■ Morgan Stanley ■■ Deutsche Bank ■■ Credit Suisse ■■ Bank of America Merrill Lynch

■■ UBS Blockchain Companies ■■ Chain ■■ Digital Asset Holdings ■■ Symbiont ■■ TradeBlock ■■ T0/Overstock

Source: Deloitte University Press. https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/ financial-services/deloitte-nl-fsi-blockchain-enigma-paradox-opportunity-report.pdf

Payments

This is a very broad area within Financials, so we look at it from a consumer and commercial perspective. From the consumer side, the existing system (mostly credit and debit cards) is already universally accepted and works well. One area where Blockchain could have an impact is to reduce settlement time. However, it’s not clear how Blockchain could disintermediate the card networks as a trusted third party and allow banks to connect directly with merchant acquirers. Where we see more potential disruption is on the commercial side, specifically in international remittance and cross-border payments. Both carry higher costs and greater times required for processing and settlement. In the case of international remittance, which can be used on a consumer or commercial basis, Blockchain could significantly reduce transaction cost and timeframe to complete. Exhibit 3 depicts the sheer magnitude and expected growth of remittance flows on a global basis, giving a tangible sense of one large market where Blockchain could add meaningful value. While there is no mechanism to provide liquidity for currency conversion, options could include a Bitcoin or alternative currency in lieu of cash.

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Exhibit 3: Global Remittance Flows 800 700

($ billion)

600 500 400 300 200 100

2017f

2016f

2014

2015e

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

Sources: World Bank Staff calculations, World Development Indicators, OECD. Private debt includes international bonds and borrowing through commercial banks. Dilip Ratha, Supriyo De, Sonia Plaza, Kirsten Schuettler, William Shaw, Hanspeter Wyss, Soonhwa Yi 2016 “Migration and Remittances – Recent Developments and Outlook” Migration and Development Brief 26, April 2016, World Bank, Washington, DC. Doi: 10.1596/ 978-1-4648-0913-2 License: Creative Commons Attribution CC BY 3.0 IGO. This is an adaptation of an original work by The World Bank. Responsibility for the views and opinions expressed in the adaptation rests solely with the author or authors of the adaptation and are not endorsed by The World Bank.

In cross-border payments, there are several intermediaries, all of whom collect a fee, as well as several touchpoints, which add to the risk for errors or delays. This could all be simplified via Blockchain as the distributed ledger could sit on top of existing bank infrastructures and allow them to interact directly, eliminating the need for correspondent banking and bank accounts. If settlement occurs close to real-time, it would also free up capital requirements. Exhibit 4: Payment Systems Powered by Distributed Ledgers

Current

CENTRAL BANK

BANK 1

BANK 1

BANK 2

BANK 2

Source: Bernstein analysis, June 12, 2015.

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Public Companies Impacted ■■ Visa ■■ MasterCard ■■ American Express ■■ Discover Financial ■■ Western Union ■■ PayPal Blockchain Companies ■■ Align Commerce ■■ Coins.ph ■■ Ripple Labs ■■ Clearmatics ■■ Abra ■■ Earthport

Other Areas

We don’t expect much impact within insurance initially. Blockchain could potentially help with issuance of home or auto insurance if used to register the ownership of assets like cars, buildings and art. In addition, as the application of the Internet of Things broadens, Blockchain could be used as a communication platform.

Use Cases

The following instances within financial services represent actual use cases or groups/ joint ventures that bear watching. ■■ Nasdaq Linq: permissioned Blockchain that allows private companies to issue, catalog and record the trading of shares ■■ ASX: partnered with Digital Asset Holdings to possibly replace its cash equities clearing and settlement system ■■ Symbiont and Ipreo: joint venture focused on trying to reduce settlement times for syndicated loans ■■ R3: consortium of 42 member banks that are working to develop base architecture for a global financial-grade ledger ■■ Post-Trade Distributed Ledger Working Group: working group of exchanges, clearinghouses and some investment banks to determine how to use Blockchain for transaction settlement

Issues and Risks

Although Blockchain has many potential uses and benefits, there are also several hurdles to consider. First, Blockchain’s scalability and throughput capacity may not meet the industry’s needs, especially when some transactions, like trading, occur in milliseconds. Currently, it takes about 10 minutes to settle a Blockchain transaction and the maximum block size is 1MB. Once these size and capacity constraints are surpassed, settlement times are likely to increase exponentially if this is not addressed. Whether this speed can be accelerated remains a key question. It doesn’t help that many areas within financial services require a significant amount of processing and throughput.

Second, the interoperability of technology and systems must be considered as Blockchain will likely need to work with existing systems and/or other Blockchains. This may be difficult as each financial institution has its own legacy systems, which may prove too costly or time-consuming to integrate. In addition, the industry would have to agree on a common structure (i.e., open vs. permission-based) and standards for interacting with the Blockchain ledger. Third, regulators will need to be comfortable with the safety and security of Blockchain applications, especially since the technology’s anonymity makes the know-yourcustomer requirement difficult. In addition, from a legal perspective, the issues of legal transfer and settlement of an asset must be determined.

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Finally, there must be a determination of who is responsible for running and maintaining the technology. In addition, the industry must determine how Blockchains will be managed and improved once implemented. We don’t view this as insurmountable and there is the possibility that government entitied may actually advocate Blockchain usage.

Sector Spotlight: Health Care

For decades, health-care IT spending lagged many other industries. In the battle for capital spending budgets at hospitals, new surgical or oncology systems often showed a much higher return on investment than an upgraded administration system. Doctors, who have significant influence on capital spending at hospitals, are more interested in the latest treatment technology than how a billing or medical records system works. As a result, as recently as six years ago, many U.S. hospitals were operating with antiquated administrative systems and had yet to embrace electronic medical records (EMR). Not until the Health Information Technology for Economic and Clinical Health (HITECH) Act (part of the American Recovery and Reinvestment Act of 2009) provided significant tax incentives did we see a meaningful increase in health-care IT spending and more widespread adoption of EMR. Blockchain could even further enhance EMR adoption. Rather than having personal medical records reside with primary care physicians and their associated hospitals, the data could become part of a Healthchain that would be more readily accessible to healthcare providers across the country. The most obvious benefit from this structure would be the speed to access pertinent information during medical emergencies. For example, if someone were to collapse on the street, first responders would be able to request the person’s medical records based upon an ID or even a wearable fitness device. The patient’s emergency contacts would automatically be contacted, and if validated, the responders would have access to potentially lifesaving information. Exhibit 5: Example of Electronic Medical Records on a Blockchain

EMR

7

The creation of a Healthchain would also offer the opportunity to better standardize EMRs, which still reside within several different operating systems from various vendors. Although some standards were implemented to allow for interoperability, many providers complain about the challenges of bringing over a medical record from one system to another. A clear goal of a new Healthchain would be to improve the standardization of data or, even better, remove the costly burden of maintaining a patient’s medical records and have it outsourced to the Healthchain. Of high importance would be ensuring compliance with the Health Insurance Portability and Accountability Act (HIPAA), which requires the protection and confidentiality of individuals’ medical records. While upfront work is needed, Blockchain’s added level of security would be a benefit in this regard. As highlighted earlier, financial services is one of the most obvious beneficiaries of Blockchain technology — perhaps even more so in managing claims in health care services. The claims adjudication process for health-care insurance is complicated, slow and inefficient. Billing systems vary among providers and insurers, and a significant number of claims are rejected for coding reasons. Also complicating the system is doctors’ and patients’ desire to know what is covered under an existing health plan. While some companies have focused on improving the efficiency of health-care payment processing, surprisingly little progress has been made. A shared ledger system, however, could dramatically speed up this process and reduce the number of rejected claims. We are not hearing about major initiatives at established health-care IT companies to develop Blockchain technology, but there have been some efforts at smaller private companies. Blockchain-based company Factom recently announced a partnership with Healthnautica, a provider of software used for medical procedure ordering and billing. These smaller partnerships should be tracked to demonstrate the proof of concept of what Blockchain can offer health-care services companies. Although the rationale for a Blockchain system is compelling, we remain somewhat cautious on the pace of adoption, given the complexity and scope of establishing a national Healthchain and the tendency for health-care companies to underspend on information technology.

Sector Spotlight: Real Estate

To the real estate market, Blockchain’s emergence carries three key prospects: 1. Elimination of fraud 2. Expediting the transfer of ownership between parties 3. Massively dis-intermediating large parts of the property transfer value chain

Elimination of fraud

Given the lack of controls and centralization of records, the real estate industry has historically been ripe for fraud and manipulation. In the U.S., verification of property records is delegated down to the county level. With no standardized process to record ownership across more than 3,000 U.S. counties, massive inefficiencies exist in recording and verifying property records, and such localized land ownership exists across much of the world.

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Enter Blockchain, which has an indisputable set of property verification on a single, fully transparent distributed ledger. In light of the existing inefficient process and the enormous personal and financial role of real estate in people’s everyday lives, real estate appears to be a prime candidate for disruption. Change is already starting to happen. In early March, peer-to-peer transfer agent Ubiquity announced the release of its Blockchain-powered real estate platform, which is being rolled out slowly in the U.S., but more aggressively in other parts of the world. The government of Honduras is partnering with Texas-based Blockchain tech companies Factom and Epigraph to create a secure land title record system. According to the Factom CEO, “The country’s database was basically hacked, so bureaucrats could get in there and they could get themselves beachfront properties.”6 The benefits to this fully transparent ledger in the real estate market will only become more obvious as some of these initial efforts gain traction.

Expediting the transfer of ownership between parties

Facilitating a more seamless transfer of asset ownership between buyers and sellers is another way in which Blockchain could benefit the real estate market. Because of extensive contracts, a typical closing on a residential home sale can take four to ten weeks. As most existing property records are maintained at a local level, they have a wide dispersion in quality and technological know-how. Validating these records is a major portion of the delay in home ownership transfer. Having all of the data in a distributed ledger would significantly reduce the verification exercise that now slows down the process. In one scenario, every single piece of data on the property could be recorded in this ledger, and banks and other lenders could use it to provide full bids on mortgages. If homeowners want to refinance their mortgages, they need to contact a bank, which will then run a credit check and perform exhaustive research on the actual property. If much of that data were housed in a distributed database, the necessary information would all be available immediately.

A home or apartment could establish its own digital identity, allowing full transparency into past and current ownership, taxes, utilities paid, adjustments to the structure, etc. This full visibility would create a much more transparent and efficient market for real estate.

Massively dis-intermediating large parts of the property transfer value chain

This increase in efficiency should translate into lower transaction costs for buying and selling a home, and this is no better illustrated than with title insurance. Title insurance is a one-time, up-front item based on the purchase price of the home. Traditionally, title insurance insures you against the risk of any claims of ownership on the property after you close. As a home is a deeply personal purchase and most families’ largest asset, the risks to ownership are high enough to justify the peace of mind purchased with a title insurance policy. Blockchain can conceivably completely remove the need to have this insurance, as all records will be held in a transparent, distributable ledger.

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Sector Spotlight: Consumer

By connecting geographically diverse consumers more closely and securely with the products they buy and companies with which they interact, the potential impact of Blockchain technology on global retail could be profound.

Exhibit 6: Universal Digital Ledger Examples Shared Economy

Registration of new device

Authentification of remote users

Contract to barter power with other appliances

Checklist for automobile safety

Source: IBM.

The plausible use cases now being explored in the consumer domain are expansive, ranging from secure micropayments, intellectual-property management (e.g., music rights) and product smart tags to connections among the developing world’s “underbanked” and more fortified consumer protection. In the new sharing economy and the related Internet of Things, reputation and trust matter, drawing the interest of ratingsdependent services like Airbnb, which recently hired Blockchain experts to begin exploring ways to integrate, manage, and leverage user-specific profiles.7 Micropayments, or very small e-commerce financial transactions, have the ability to bridge the gap between subscription-based content and ad-based content. As Blockchain investor and Pantera Capital CEO Dan Morehead points out, “Monetizing content right now is incredibly inefficient on the Internet. You can only get it either by a subscription where you pay a lot of money to get the whole enchilada or some kind of annoying ad.”8 Historically, attempts to create micropayment systems failed as the transaction costs remained too high relative to the small individual transactions. Efficiencies provided by Blockchain’s distributed network, however, could provide a robust infrastructure for very small secure payments at a high frequency and lower cost, allowing content providers to move away from holistic pay walls that prevent the sale of individual articles or videos. Alone, the higher sales are a compelling use case to increase per-unit revenues, but the subsequent data stream from this new consumption model would give authors, developers and businesses even more insight into the behavior of their clientele. The concept of giving content creators a greater understanding of their end users and more direct control over the monetization of their work is even being explored by musicians. For example, Peertracks MUSE Blockchain is a peer-to-peer network created for the tracking of intellectual property and the payment of usage rights. Its intent

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is to simplify the licensing of music for artists, making their work more accessible to fans and their success less reliant on major recording contracts.9 In a different consumer market, luxury products are easier than ever to counterfeit, and the black market for these items disrupts the relationship between consumers and the respective enterprises. Chronicled, a Silicon Valley-based start-up, is developing a registry for designer duds that assigns a smart tag to each unit. Once items are authenticated by the company, the smart tag microchips are installed and link the item to a digital record stored on a Blockchain ledger. To check the authenticity of an item, a smartphone owner simply scans its tag.10 In a world where counterfeits are becoming increasingly difficult to distinguish from the real thing, this Blockchain-backed system would be an obvious means for enterprises to dis-incentivize the manufacturing of fake merchandise and regain their customers’ trust. On the other end of the consumer spectrum, a significant portion of the undeveloped population is without regular financial services, preventing them from securely saving and transferring funds, obtaining a loan, building credit and participating in other forms of consumption that the developed world takes for granted. The encompassing inefficiency is known as being either unbanked or under-banked, both implying that large institutional money centers see these markets as unfit to enter or scale business. Blockchain’s unique security characteristics and distributed network could solve this problem. Exhibit 7 provides a visualization of the relative participation in basic banking on a country-bycountry basis, based on age of account, and illustrates the vast opportunity within Africa and the Middle East to improve financial inclusion. Firms involved in connecting these future consumers include Abra, coins.ph and Align Commerce. Exhibit 7: Financial Inclusion as Represented by Account Age Key ■■ No Data ■■ 0 - 20.0 ■■ 20.0 - 39.0 ■■ 39.0 - 63.2 ■■ 63.2 - 87.5 ■■ 87.5 - 100.0 Source: 2014 data. World Bank, 2016. Indicator: Account at a financial institution (% age 15+) [ts].

As people increasingly turn to their computers, tablets and smartphones to make purchases, they are more likely to provide personal data and expose themselves to potential fraud. Blockchain’s ability to process transactions and record immutable personal credit information and itemized receipts provides online retailers and their

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end users with a more secure option. Alipay, the 400 million-user payment service of parent Alibaba, is one of the platforms looking to integrate the digital ledger technology in futures offerings.11

Regulation Spotlight: A Chief Compliance Officer’s Perspective

Jennifer Cassedy, Esq., Managing Director, Chief Compliance Officer, The Boston Company Asset Management

With Blockchain development rapidly progressing, specifically within financial services, we believe it is as important, if not more so, to monitor the opinions and expectations of those who will eventually be tasked with its governance. In other words, Blockchain’s success or failure is likely contingent upon how firms navigate the myriad global regulators who have historically been reticent of collaborative efforts, are prone to nearsightedness and infrequently exhibit agility. From an alternative perspective, however, we believe the distributed ledger technology offers regulators greater clarity into global transactions, incentivizing the creation of a categorically new and higher standard in transparency and security, ultimately becoming a tailwind for the technology’s adoption. Blockchain could help regulators and market participants in mutually beneficial ways. Because the ledger could be shared by trading institutions to speed direct asset settlement and simultaneously be viewed holistically by regulators, oversight authorities could gain real-time, asymmetric insight into the movement of financial assets, giving them a leg up on any abnormal activity, e.g. breaches of anti-money-laundering laws and know-your-customer regulations. Also, the immutability of records immediately improves data integrity, establishing universal trust between market participants and regulators and increasing overall confidence in a system whose stability depends on it. Furthermore, by operating a shared database, regulators would be relieved of resource-intensive requests and investigations, as all pertinent information would be readily accessible in the ledger’s full history. Instances of money laundering and fraud could be identified early on instead of years down the road, when much of the harm has already been done. Regulatory examinations could largely be done from afar and more efficiently, saving both taxpayers and shareholders money. From the operational and compliance perspective of an asset manager like The Boston Company, the realized benefits depend on each application, but all effectively improve internal controls and translate into cost reductions. For example, a Blockchain that supports trade processing would alleviate the expensive layers of transaction auditing as well as the monitoring of mandate-specific constraints, as all of these details would be automated and controlled within the rule structure of a digital ledger. Timely audits of positioning and risk exposures would be simplified as the data would exist digitally, instantly available to the accountants and regulators, and provide peace of mind that it is unchanged and authenticated by the network as absolutely accurate. As with any financial product and infrastructure development, industry watchdogs will need to stay abreast of potential risks that Blockchain presents to the marketplace, crafting regulations to keep the marketplace safe while being mindful not to slow the progress of a technology that stands to make them more effective at their jobs. Global regulators, such as the U.K.’s Financial Conduct Authority and the Australian Securities and Investments Commission have already engaged with the industry, and

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we anticipate this trend will continue. On a more encompassing level, a push is being made for the International Organization of Standardization to consider a global standard for Blockchain, giving the technology credibility and interoperability within financial and other marketplaces.12 As more exchanges and financial institutions discover economically viable Blockchain applications, we similarly expect regulators to embrace the shared ledger’s clear benefits over the vulnerabilities of current systems, bolstering the technological leap forward.

Conclusion

Timing is everything. The success of any technology’s introduction to the marketplace hinges on the delicate intersection of a technical advancement and public perceptiveness – with the latter, embodied by society’s willingness to recognize an innovation’s utility, being equally important as the former. This tenuous alignment is often complicated by varying crosswinds, including natural market forces, regulatory pressures, corporate lobbying and, least predictable, an educational lag on the demand side, whereby businesses and consumers are broadly unaware of the technology’s practical uses and potentially reluctant to learn them. Widespread adoption typically involves several efforts, requiring varying degrees of experimentation, before the proverbial stars align and economically viable applications for an innovative product or idea begin adding value to our lives, replacing the technology that came before. Emerging from Bitcoin’s monetary roots, Blockchain’s early applications have and will continue to revolve around financial transactions. Within the financial services industry, Blockchain offers a new, streamlined approach to managing data and addressing inefficiencies. At maturity, the technology could eliminate the need for a neutral central intermediary to prove ownership and clear a transaction. This naturally creates a more efficient financial system with large amounts of trust and speed to settlement. The promise of lowering costs (funding and operational), increasing transparency and diminishing systemic risk has created a nascent Blockchain industry targeting financial services. However complex the transition and costly the development, the financial-services industry will play a central role in Blockchain adoption because of its tremendous potential to improve the current system. Given its potential to disrupt the existing banking, payments and transactional exchanges of the industry, participants are actively working to understand its promise. We are monitoring the growing number of collaborations among industry giants, taking note of brash and disruptive start-ups and paying attention to policymakers’ views on Blockchain. In fact, we believe regulatory agencies hold the key to unlocking Blockchain’s full potential. We think that the governmental bodies tasked with monitoring financial markets have the most to gain from the technology, motivating them to spur an inflection towards industrywide adoption. A government-led catalyst may be required for necessary standardization in financial services and importantly would lend credibility to the technology. While we are unable to predict Blockchain’s future, we believe it will disrupt companies that rely on fragmented, non-standardized networks and outmoded back-office operations.

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Instead of forecasting the precise market-share percentage that Blockchain technology will capture, we are focusing on educating the investment community about Blockchain, starting conversations and raising awareness of the technology’s disruptive potential. Financial services represents the largest opportunity for the technology, however, we are ever cognizant of peripheral industries with operations appropriately positioned for creative destruction.

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End Notes 1.

See http://www.forbes.com/sites/ryanmac/2013/10/02/who-is-ross-ulbricht-piecing-together-the-lifeof-the-alleged-libertarian-mastermind-behind-silk-road/#70235e0d22e9

2.

See http://www.wired.com/2014/03/bitcoin-exchange/

3.

See http://www.thebostoncompany.com/web/tbc/literature-detail?literatureId=196097 and http:// www.thebostoncompany.com/web/tbc/literature-detail?literatureId=190122

4.

Edward Robinson and Matthew Leising, “Blythe Masters Tells Banks the Blockchain Changes Everything,” Bloomberg, Aug. 31, 2015. http://www.bloomberg.com/news/features/2015-09-01/ blythe-masters-tells-banks-the-blockchain-changes-everything

5.

Rachel Witkowski, “Regulator Moves to Create New Fintech Framework,” The Wall Street Journal,

March

28,

2016.

http://www.wsj.com/articles/regulator-moves-to-create-new-fintech-

framework-1459157401 6.

Laura Shin, “Republic of Georgia to Pilot Land Titling on Blockchain with Economist Hernando De Soto, BitFury,” Forbes, April 21, 2016. http://www.forbes.com/sites/laurashin/2016/04/21/republic-ofgeorgia-to-pilot-land-titling-on-blockchain-with-economist-hernando-de-soto-bitfury/#7cf74ab96550

7.

Cassie Werber, “Airbnb just acquired a team of bitcoin and Blockchain experts,” Quartz, April 12, 2016. http://qz.com/682669/these-companies-now-run-on-100-renewable-power/

8.

Kyle Torpey, “The Economics of Bitcoin Micropayments for Digital Content,” Blockchain Agenda/Inside Bitcoins, Nov. 23, 2015. http://insidebitcoins.com/news/the-economics-of-bitcoin-micropayments-fordigital-content/35980

9.

PeerTracks FAQ. http://peertracks.com/faq.php

10. Chronicled FAQ. http://www.chronicled.com/faq.html 11. Joseph Young, “Chinese E-Commerce Giant Alibaba Explores Blockchain-based Cloud Service Platform,” Bitcoin Magazine, Feb.

1, 2016. https://bitcoinmagazine.com/articles/chinese-e-

commerce-giant-alibaba-explores-blockchain-based-cloud-service-platform-1454360796?q=&hPP= 5&idx=articles&p=0&is_v=1 12. “Australia Calls for Global ISO Blockchain Standards,” CryptoCoinsNews, April 13, 2016. https:// www.cryptocoinsnews.com/australia-calls-global-iso-blockchain-standards/

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About the Authors

Erik A. Swords | Director, Senior Research Analyst

Erik is a senior research analyst on The Boston Company’s Global Research team, primarily covering the software and IT services industries. In addition, he serves as a portfolio manager of the Core Research Technology Sector Equity strategy. His previous positions include technology analyst at Exis Capital; senior analyst at Pilgrim Baxter and Associates, covering the software, IT services and Internet industries; and research analyst at Credit Suisse First Boston, covering the enterprise software industry. Erik earned a B.S. in finance from Lehigh University.

Scott Canning | Research Associate

Scott is a research associate on The Boston Company’s Global Research team, working on a variety of projects in support of our financial, healthcare, energy, and materials analysts. Prior to this role, he was a client service analyst, helping to facilitate portfolio reporting for our clients, consultants and internal partners and providing analytics. Before joining The Boston Company, he worked for an Ameriprise Financial wealth advisory practice. Scott earned a B.S. in business administration from Saint Michael’s College and is a 2016 Level III CFA® candidate.

Sector Contributors Finanical Services

Brian C. Ferguson

Senior Managing Director, Senior Portfolio Manager Brian is the senior portfolio manager on The Boston Company’s Dynamic Large Cap Value strategy, a position he has held since 2003. He also functions as the team analyst responsible for the health care and financials sectors. Brian has been with the firm since 1997. Brian joined The Boston Company as a research analyst on the Small and Mid Cap Opportunistic Value team, focusing on financial services and consumer-related stocks. In 2000, he became a portfolio manager of the firm’s Mid Cap Value strategy at the time of its successful launch. Before joining the firm, he was a research analyst on the Vanguard Windsor Fund at Wellington Management. Prior to that, he was an assistant director of General Electric Capital Corp.’s corporate treasury group and graduated from GE’s Financial Management Program. Brian received a B.A. in economics and international relations from Bucknell University and an M.B.A. with a concentration in finance from Columbia Business School.

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Connie F. DeBoever, CFA, CPA Director, Senior Research Analyst

Connie is a senior research analyst on The Boston Company’s Global Research team, covering the financials sector, specifically insurance, credit cards and exchanges. Prior to joining The Boston Company, Connie was an equity research associate at Bear, Stearns & Co., responsible for conducting fundamental research on the telecommunications software and equipment industries. Previously, she was employed at Jefferies & Co. as an equity research associate, covering the telecommunications industry. Before that, Connie was a staff auditor at PriceWaterhouse, where she was responsible for planning and executing audits of various sizes, primarily focusing on technology and financial companies. Connie earned a B.S. in economics with a dual concentration in accounting and management from the University of Pennsylvania’s Wharton School of Business. She holds the Chartered Financial Analyst® designation and is a Certified Public Accountant.

James M. Boyd, CFA

Managing Director, Senior Research Analyst James joined The Boston Company in 2005 and is a managing director. Prior to joining The Boston Company, he was a senior equity research analyst at State Street Global Advisors, specializing in U.S. and international financial-service companies. Earlier in his career, James was an assistant portfolio manager and a senior research analyst covering the energy and financials sectors at Harbor Capital Management. Additional investment experience includes co-portfolio manager duties of the John Hancock Special Opportunities Fund and the John Hancock Financial Industries Fund. As a financial-services analyst at John Hancock, he received three years of detailed income statement and balance sheet analysis training from a former FDIC bank examiner. James received a master’s degree in finance from Boston College and graduated magna cum laude from Colgate University with a B.A. in economics and history.

Consumer

Leigh N. Todd, CFA

Managing Director, Senior Research Analyst Leigh is a senior research analyst on The Boston Company’s Global Research team, covering the consumer sector, and the portfolio manager of the Focused Large Cap Growth Equity strategy. Before joining The Boston Company, Leigh was a member of the US Large Capitalization portfolio-management team at State Street Global Advisors in the Global Fundamental Strategies group. Prior to that, she was a member of the Small and Mid Capitalization Investment team, where she was responsible for the technology, consumer staples and transportation sectors. She holds a B.S. in economics from Lehigh University and the Chartered Financial Analyst® designation. She is a member of the Association for Investment Management and Research and the Boston Security Analysts Society. 17

Katherine Kelly

Research Associate Katherine is a research associate on The Boston Company’s Global Research team, working on a variety of projects in support of our consumer, technology and industrial analysts. Previously, she worked as an intern at Marketfield Asset Management in New York City, pitching equity investment ideas and conducting macro-specific research. Katherine earned a bachelor’s degree from Wellesley College, where she majored in political science and minored in economics.

Health Care

Sean P. Fitzgibon, CFA

Senior Managing Director, Senior Portfolio Manager Sean is the lead portfolio manager for The Boston Company’s Emerging Markets Equity strategies and head of the Quantitative Research and Strategies team. Before joining The Boston Company in 2003, Sean served as vice president at our affiliate Standish Mellon Asset Management, leading the US Large Core Equity team and guiding portfolio strategy and stock selection. His equity coverage responsibilities have included health care, consumer discretionary, consumer staples, financials and utilities. Sean received a B.S. in economics from Northeastern University and an M.B.A. from Babson College. He holds the Chartered Financial Analyst® designation and is a member of the Boston Security Analysts Society and the CFA Institute.

Real Estate

James A. Lydotes, CFA

Managing Director, Portfolio Manager Jim is the lead portfolio manager of the Global Focused Income Equity and Global Healthcare REIT strategies and a senior research analyst on The Boston Company’s Global Equity team, primarily focused on the International Equity and International Small Cap Equity strategies. He is responsible for research coverage of the non-U.S. health care, utilities, technology and telecommunication services sectors, in addition to assisting in the development and enhancement of the team’s quantitative stock-selection models. Before joining the firm, Jim served as a fixedincome business analyst at Wellington Management Co. Jim received a B.A. in economics from Syracuse University, holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the Boston Security Analysts Society.

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Other Contributors

Adam B. Joffe, CFA

Executive Vice President, Chief Operating Officer Adam is the chief operating officer of The Boston Company Asset Management, LLC. His managerial responsibilities include Trading, Compliance, Alternatives, Product Management, Client Service and Administration. He is a shareholder of the firm and serves as a member of The Boston Company’s Management, Product and Investment committees, among others. Additional responsibilities include oversight of operations and technology. With more than 20 years of industry experience, Adam joined The Boston Company in 2012 as director of alternatives and chief administrative officer. Before that, Adam was senior vice president and chief financial officer at First Eagle Investment Management. In that role, he was responsible for all financial aspects of the firm, board and regulatory reporting and new product development. Previously, Adam spent 10 years at Deutsche Bank in various roles. His most recent position was COO of Hedge Funds and Fund of Funds and head of U.S. Business Management. He was a member of the Hedge Fund Investment Oversight Committee, the Hedge Fund Infrastructure Committee, the Fund of Funds Operational Due Diligence Committee and several others. Prior to this, he was controller and chief financial officer of Bolger and O’Hearn Inc., a textile chemical manufacturer. Previously, he was a senior accountant at Rooney, Plotkin and Willey LLC, a CPA firm. Adam earned a bachelor’s degree in finance and an M.B.A. in accounting from Bryant University. Additionally, he holds the Chartered Financial Analyst® designation and is a member of the CFA Institute. Adam was a CPA in the state of Rhode Island.

Jennifer Cassedy, Esq.

Managing Director, Chief Complience Officer Jennifer heads The Boston Company’s Compliance department and is the chief compliance officer at the firm. Her responsibilities include overseeing the compliance program and advising The Boston Company on compliance and regulatory issues relating to the Investment Advisers Act, the Employee Retirement Income Securities Act (ERISA), the Investment Company Act and other applicable laws. Previously at The Boston Company, Jennifer was a compliance officer, responsible for all legal and regulatory filings, including Form ADV and state Blue Sky Laws for two SEC-registered investment advisors. She negotiated advisory contracts, monitored associates’ personal securities trading and reviewed directed brokerage arrangements. She also dealt with the various regulatory issues that arose with wrap accounts, mutual funds, separately managed accounts, collective investment funds and Delaware Statutory Trusts. Jennifer received a B.A. from Merrimack College and a Juris Doctorate from Suffolk University Law School. She is a member of the Massachusetts Bar.

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Disclosure Any statements of opinion constitute only current opinions of The Boston Company Asset Management, LLC (TBCAM), which are subject to change and which TBCAM does not undertake to update. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors. This publication or any portion thereof may not be copied or distributed without prior written approval from TBCAM. Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Listed securities are being presented for illustrative purposes only. This is not a recommendation to buy, sell, or hold these securities. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. The use of logos in this presentation is for illustrative purposes only and rights to any logos, trademarks or servicemarks are owned by their respective entities. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. For more market perspectives and insights from our teams, please visit, http://www.thebostoncompany.com/web/tbc/literature

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