The Power of Blockchain - KPMG...Understanding blockchain. Closed, Centralized with greater degree of control on participants and their permissions. Public blockchain. Private blockchain.

The Power of BlockchainIt’s Not Just About Crypto

May 2019

The Power of BlockchainIt’s Not Just About Crypto

May 2019David R. JarczykPartner,

InnovationKPMG LLP

3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The material contained herein is current as of the date produced.Furthermore, information discussed herein are based on proposed regulations, as issued by Treasury on October 19, 2018, which are subject to change.

Notice


Multiple data sources to inventory and reconcile: (ERP, databases, data lakes, etc.)

No auditability to source data

Need to automate certain “tasks”

Maximize my SME impact

Client Pain Points


Understanding blockchainA

Why blockchain?A

Case studiesA

Blockchain and dataA

Table of contents

Understanding blockchain

6


When should you consider blockchain?

Multiple data sources to inventory and reconcile: (ERP, databases, data lakes, etc.)

Connect disparate data sets into single ledger of truth

Provenance

Automate specific transaction logic (business, finance and tax)

No auditability to source data

Need to automate certain “tasks”

(Near) Real time analytics, modeling, impact analysis, and reporting

BlockchainClient Pain Points

Maximize my SME impact


Distributed ledger technology and blockchainUnderstanding blockchain

A distributed ledger is replicated, shared, and synchronized digital data that resides across multiple computer devices, across locations or regions.

Distributed Ledger

Technology

A data model that captures the current state of the ledger

Blockchain +

Smart Contracts

A logic-based set of rules to initiate and fulfill a transaction

A protocol to build consensus amongst the parties


So, how does blockchain work?Understanding blockchain

One party requests a transaction

Once the block is added to an existing chain, transactions are complete and permanent

Requested transactions are pushed to individual computers (nodes)

Individual nodes receive the request and validate the transaction using the logic embedded in the smart contract

Approved transactions are represented as blocks and added to a public or private ledger

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Public (or permission-less), private (or permissioned) or hybrid blockchains are being explored dependent on the needs of the company.

Public vs. Private blockchainUnderstanding blockchain

Closed, Centralized with greater degree of control on

participants and their permissions

Public blockchain

Private blockchain

Open, Anonymous and Decentralized

Category Public blockchains Private blockchainsParticipation Not restricted – anyone in the world can participate Read Write permissions can be restrictedPermission(Permission-less model)

Write: AnyoneRead: Anyone

Write: Operators control who can submit transactionsRead: Public or restricted

Transparency and trust

Transactions are publically recorded. Trust established through node replication and consensus mechanisms.

Limited Transparency (not all data is exposed). Trust dependent on a central authority

Valid transactions 51% of participating nodes Based on pre-defined validatorsMining & consensus process

Anyone can mine (validate), Proof of Work is primary consensus mechanism

Only permitted nodes are allowed to validate, various consensus mechanisms can be deployed

Privacy Transaction details are public. Transaction participantsremain anonymous or pseudonymous. ZK-Snarks –allows one to verify transactions while protecting users’ privacy

Participants are known central authority/operator on private blockchain. Privacy and security controls keep identities private. Transaction details only revealed to participants with permissions to view those transactions.

Cost Relatively Low Transaction cost (depends on the amount of data being processed & current cost of crypto-currency.

May be lower than public due to less computing power required

Control Neutral and Decentralized (Can not be influenced by single authority)

Centralized

Currency Available Crypto-currency (e.g., bitcoin) Proprietary currencyPerformance Generally slower. Dependent on number of participating

nodes and computational powersGenerally faster since consensus can be limited to pre-define validators

Advantages Open, Greater chances for adoption, no single authority controls or governs

Greater degree of control, faster, greater degree of scalability (transaction volumes), privacy controls


Smart contracts are self-executing protocols that work with a distributed ledger to enforce performance of transactions with certainty and resilience. Triggered by an event, the code embedded in the smart contract automatically executes the fulfilment of a previously agreed arrangement.Eliminates the risk of delays and reliance on middlemen to follow through on their commitmentsInformation sharing is transparent, time-stamped, and irreversible.

What is a smart contract?

Smart Contract

Replicated, shared ledger

Contract Logic

Receives values after the contract approves

and executes the contract

Initiates transaction request and sends values required to execute contract

Understanding blockchain


How do smart contracts work?Understanding blockchain

Business logic

Tax logic

Legal logic

1

What goes into a smart contract?The logic of an

agreement is coded into the smart contract (what triggers the event, who are the parties, which assets are transferred,

etc.)

2

How the smart contract is sent out?

The smart contract sits on each code and is

executed according to the agreed terms when a

transaction that meets the requirements is

initiated.

How it is processed?A blockchain node

receives a transaction request and its type is

identified. If the transaction is valid, the

smart contract will execute and the network

will update the distributed ledgers with

the transaction outcomes

3


A&J A&J A&J A&J A&J A&J A&J

E&J E&J E&J E&J E&J E&J E&J E&J E&J E&J

H&I H&I H&I H&I H&I H&I H&I

B&E B&E B&E B&E B&E B&E B&E B&E B&E B&E

B&C B&C B&C B&C B&C B&C B&C B&C B&C B&C

F&G F&G F&G F&G F&G F&G F&G

F&I F&I F&I F&I F&I F&I F&I

A&B A&B A&B A&B A&B A&B A&B

B&C B&C B&C B&C B&C B&C B&C B&C B&C B&C

A&B A&B A&B A&B A&B A&B A&B

Transacting parties Party recordingsTr

ansa

ctio

ns

A B C D E F G H I J A B C D E F G H I J

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2

1

A “Block”A

“Blo

ckch

ain”

A “Ledger”

Party

Business & Tax Logic

Restricted Access

Legend

Client Dashboard

What is a distributed ledger or “blockchain”?

Blockchain and data

14


HousingBanking

Benefits

Government

Host payroll

Is blockchain a data issue?Blockchain and data

Travel

Finance

Human resources

Home payroll

Talent and onboarding

Relocation

Tax

Employment company

Immigration

Suppliers

Legend

Internal departments and technologies

External vendors and other technology systems


How does blockchain impact data management?Blockchain and data

Real-time analytics

Single source of truth

Automation of certain automation tasks

Merging of multiple data sources

Tick and tie to source data0504

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How blockchain changes the technology we have now?Blockchain and data

Traditional LedgerPresent— Ledgers record business activities

such as transactions and contracts,today each party owns individualledgers

— This solution is well established andworking, but inefficient, expensiveand fraud vulnerable

Digital, Distributed LedgerFuture— Decentralized system building one

digital, encrypted, public/privateledger, distributed across the network

— No possibility of changinginformation in the ledger withoutconsensus of the whole network

TrustedParty

Party B

Party ACompany A

Company BParty C

Benefits of Digital, Distributed Ledgers— Trust between all engaged

business partners— Increase Efficiency through usage

of a distributed ledger— Quality and Integrity of stored data

Company

SupplierA SupplierB

Merchant A Merchant B

Bank A Bank B

DistributedLedger

Why blockchain?

18


What blockchain is not?Why blockchain?

CryptocurrencyBlockchain goes beyond cryptocurrency to solve client data pain points.

A replacement for legacy ERP systems, databases, etc.Blockchain creates single source of truth for transaction, which can then be used to perform tax services.

The full solutionFinance and tax departments should be aware of any blockchain implementations in-house, and its impact on finance and tax.


When should you not consider blockchain?Why blockchain?

Need high performance (millisecond) transactions

Negative indicators, anti-patterns

Small organization (no business network)

Seeking a database replacement

Seeking a messaging replacement

Process and metrics are not clear within the ecosystem

Value, velocity and/or variability are not present


Secure, business-based logic and storageWhy blockchain?

Business rules govern operationAllows the blockchain to be built on your specific governance rules and processes

SecureAll records are individually encrypted allowing for the use of data that

today cannot or is not used by mobility or providers for services

OwnershipSince you own your own node and authenticate through others in the

blockchain, there is no question of ownership


The future with blockchainWhy blockchain?

Single digital ledgerAll network members have a full copy of the

ledger for full transparency

Machine learning/AIData is structured and cleaned allowing for ML/AI

processing

AnalyticsTax specific data models

Data visualizationConnect data visualization tools

Existing system integrationConnect existing systems together

SecureAll records are individually encrypted

ProgrammableCode specific tax logic into each transaction

Custom appsUse the blockchain APIs to create custom applications

STPStraight-Through-Processing benefits (Automation)


Data visualizationWhy blockchain?

PredictUse historic data to predict future trends in real time

Multiple sources, one dashboardBlocked data from multiple places can be rendered in a single location


Blockchain and value

Improve traceability, accuracy and efficiency

Reduced costs for IT infrastructure, application and maintenance

Operational efficiencies due to inherent automation and reduction of reconciliations

Transparency of history of events with auditable trail.

Reduced settlement time

Counterparty and settlement risks addressed in permissioned systems

Self-executing smart contracts with better customer service, reduced fraud risk, etc.

Lower costs for compliance and regulatory obligations, and risk management

Blockchain’s value comes from the ability to initiate new data and connect disparate existing data to create a holistic picture of the business’s transactions. This new paradigm can help companies drive better decisions and even experiment with new business models. Potential benefits include:

Why blockchain?

Use cases

25


Where is blockchain being applied?

EnergyCreating a shared marketplace

to trade energy on a power system

ConsumerTracing food through the

supply chain to locate source of outbreaks

HealthcareAuthenticating drug

manufacturers to prevent counterfeit drugs

AirlinesUsing miles from airlines at

multiple vendors

Supply ChainReducing errors in customs/port

documentation to accelerate transportation of goods

Real EstateBuy or sell a home easier by making

and accepting offers online

Use cases


Business Transaction Implications?

Finance• Managing Cash

• Valuation• Calculate ROI

Tax• Effective Tax Rate

• Compliance• Risk Mitigation

Accounting• Auditable Analytics• Tax Adjustments

• Reporting

Intellectual Property• IP Inventory

• Royalty Tracking

Economics• Transfer Pricing

• Valuation for Tax Purposes

Law• Monitor contract terms

• Identify Risk & Compliance Issues

Use cases

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 839905

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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The Power of Blockchain - KPMG...Understanding blockchain. Closed, Centralized with greater degree of control on participants and their permissions. Public blockchain. Private blockchain.

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