Whitepaper On Distributed Ledger Technology

11 Nov 2016

1. Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

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2. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Introduction to distributed ledger technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.1 Basic building blocks and mode of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.2 A detailed walk-through illustration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.3 The Disruptive Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

3.4 Smart contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

4. Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

4.1 Protecting information integrity through design: a “macro” perspective . . . . . . . . . . . . . . . . . . . 18

4.2 Protecting information integrity with cryptographic technology: a “micro” perspective . . . . . . 23

4.3 Smart Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

5. Deployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

5.1 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

5.2 Interoperability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

6. DLT Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

6.1 Bitcoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

6.2 Ethereum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

6.3 Hyperledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

6.4 Corda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

6.5 Ripple . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

7. Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

7.1 Rule-Making Processes undertaken by Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

7.2 Defining roles and responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

7.3 Conflict Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

8. Risk Management and Regulatory Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

8.1 Operational Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

8.2 Identity Theft Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

8.3 Conduct Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

8.4 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

9. Security and Privacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

9.1 Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

9.2 Privacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

9.3 Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

10. Legal considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Distributed Ledger Technology Will Drive Legal Innovation (by Professor Carla L. Reyes) . . . . . . . . . . . . 58

11. Proof-of-Concept Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

11.1 Proof-of-Concept – Mortgage Loan Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

11.1.1 Sub use case (1): The property valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Review of the prototype integration experience (by the working group) . . . . . . . . . . . . . . . . . . . . . . . . 65

11.1.2 Sub use case (2): Property ownership verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

11.1.3 Sub use case (3): Mortgage count. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

11.1.4 Conclusions – Benefits and challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

11.2 Proof-of-Concept – Trade Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

11.2.1 Smart contract in Open Account Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

11.2.2 Tracking the status of trade transactions: flows of Goods & Funds. . . . . . . . . . . . . . . . . . . . 80

11.2.3 Information matching of Invoices with Purchase orders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

11.2.4 Benefits of and possible challenges to DLT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

11.3 Proof-of-Concept – Digital Identity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Appendix 1 – Use case – Mortgage-Backed Securities (by R3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Appendix 2 – Blockchain for Trade Finance (by Vishal Batra, IBM Research, India) . . . . . . . . . . . . . . . . . . . . 87

Technical note (I) – the Merkle tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Technical note (II) – Illustration: Proof-of-work mining using the SHA256 hash algorithm . . . . . . . . . . . . . . 92

Technical note (III) – Considerations on the Deployment of Platforms and Applications . . . . . . . . . . . . . . . 93

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

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Whitepaper 2.0 on Distributed Ledger Technology

Whitepaper_Chapters 1-8

Whitepaper_Annex

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Table of Contents

1

Foreword

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5

2

Executive Summary

......................................................................

7

3

Introduction

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12

3.1

Background and history

.............................................................

13

3.2

Purpose and scope of the second Whitepaper

.........................................

13

3.3

Structure of the second Whitepaper

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14

3.4

Ways forward

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14

4

Technology Update

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15

4.1

DLT platforms

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16

4.1.1

Hyperledger

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16

4.1.2

Corda

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17

4.1.3

Bitcoin

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18

4.1.4

Ethereum

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20

4.2

Unpermissioned DLT technology extension for enterprises

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20

4.2.1

Quorum

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20

4.2.2

Enterprise Ethereum Alliance

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21

4.2.3

Microsoft Enterprise DLT Framework

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21

4.3

Off-chain services technology for DLT

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23

4.3.1

Lightning Network on Bitcoin

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23

4.3.2

The Raiden Network on Ethereum

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24

4.3.3

Plasma on Ethereum

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24

5

Compliance Issues

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25

5.1

Background

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26

5.2

Anti-money laundering (AML) and counter-financing of terrorism (CFT) issues

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26

5.3

Systemic risk

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27

5.4

Technology and operational risks

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28

5.5

Reporting and transparency

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28

5.6

Governance and controls, cybersecurity and legal risks

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28

5.7

Conclusion

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28

6

Governance and Control

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29

6.1

Background

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30

6.2

Governance

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30

6.2.1

Governance structure

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30

6.2.2

Membership on-boarding and ongoing operation

................................

31

6.2.3

Technology audit

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32

6.3

Security management

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32

6.3.1

Information protection

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32

6.3.2

Data privacy from a governance point of view

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33

6.3.3

Authentication and access control (key management)

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33

6.3.4

Security administration and monitoring

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34

6.3.5

Physical security

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34

6.4

System development and change management

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35

6.4.1

System development

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35

6.4.2

Portability and compatibility

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36

6.4.3

Change management

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36

6.5

Information processing

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37

6.5.1

Disaster recovery and resilience

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37

6.5.2

Minimum viable number of validating nodes

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38

6.6

Communication networks

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38

6.6.1

Security and network connectivity among nodes

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38

6.7

Outsourcing

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39

6.8

Other considerations

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39

6.9

Conclusion

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40

7

Legal Issues

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41

7.1

Background

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42

7.2

Legal basis

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42

7.3

Data protection and privacy

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42

7.4

Cross-border and localisation issues

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44

7.5

Smart contracts

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44

7.6

Liability

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45

7.7

Competition/Anti-trust

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45

7.8

Specific applications

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45

7.9

Conclusion

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48

8

Proof-of-Concept Work

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49

8.1

Background

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50

8.2

General observations and lessons learned

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50

8.2.1

Trade finance

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50

8.2.2

Digital identity management

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52

8.2.3

Mortgage loan application

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55

8.3

Conclusion

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56

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