Document Text Contents
Page 1
CROSS-SECTOR
SECTOR IN-DEPTH
21 July 2016
TABLE OF CONTENTS
Blockchain explained 2
Weighing blockchain's benefits
against key outstanding hurdles 6
Potential use cases abound across
industries and the official sector 7
Blockchain's supporters and adopters
are increasing 9
Appendix 1 - Selected potential
blockchain use cases 11
Appendix 2 - Selected blockchain
projects by rated issuers 17
Appendix 3 - Selected blockchain
support and projects by regulators 25
Moody's related research 27
Key references 27
Analyst Contacts
Nick Caes 212-553-1382
Analyst
[email protected]
Robard Williams 212-553-0592
Senior Vice President
[email protected]
Elena H Duggar 212-553-1911
Associate Managing
Director
[email protected]
Gregory W. Bauer 212-553-1498
Managing Director -
Global Banking
[email protected]
Credit Strategy – Blockchain Technology
Robust, Cost-effective Applications Key
to Unlocking Blockchain's Potential Credit
Benefits
Blockchain technology, originally created as a platform for the Bitcoin ‘cryptocurrency’,
is now being studied and pursued for applications across various transaction-tracking
contexts. Tangible, fully implemented blockchain applications beyond cryptocurrencies
are some distance away, with a range of hurdles still to be cleared, including developing
solutions to systems compatibility issues and questions around regulatory treatment and
legal enforceability. Nevertheless, the potential to provide efficient, fast, secure, reliable and
auditable transactions is driving investment in this technology.
Applications of blockchain technology go far beyond financial services. In this report,
we identify 25 use cases for the technology that could improve existing processes and
capabilities in sectors ranging from capital markets and trade finance, healthcare and energy,
to government taxation.
Many rated issuers are actively pursuing blockchain technology. Issuers are assessing
ways in which blockchain could be applied in their businesses and are actively developing
‘proofs of concept’. Our survey identifies more than 120 ongoing blockchain projects among
Moody’s-rated issuers – spanning investments and partnerships with start-ups, internal
projects, and industry collaborations – and there are likely many others yet to reach the
public domain.
Regulators’ stance is generally supportive but no definitive view on ultimate
treatment. Regulatory bodies across the globe are monitoring developments and potential
applications, with an eye to encouraging innovation while also upholding their fundamental
mandates, be those financial safety and soundness, consumer and investor protection, or
preserving a competitive marketplace. At the same time, a number of agencies have also
noted the potential for blockchain to help improve regulatory oversight processes.
Credit implications will evolve with the rollout of blockchain technology. As the
technology is deployed in various processes, credit implications for rated issuers will depend
on whether the positives in terms of more streamlined processes and reduced costs outweigh
the negatives in terms of the potential to create competitive pressure from incumbents and
new entrants that improve processes by leveraging blockchain technology.
http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=1023913
Page 2
MOODY'S INVESTORS SERVICE CROSS-SECTOR
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
Blockchain explained
Blockchain, as the name suggests, is a “chain of blocks of encrypted information” that form a database or 'ledger'. Each block can be
thought of as record of some transaction between two-or-more parties, which all have real-time access to the shared database. As
encrypted blocks are added to the chain, it becomes prohibitively expensive to alter the record of a particular transaction because every
block added after that particular block must be unencrypted.
Blockchain arrived on the scene over seven years ago when the bitcoin ‘cryptocurrency’ became available as an alternative payment
system that, among other things, eliminated the need for either a trusted middleman or a centralized institution for payment
transactions (so-called decentralized trust).1 To function as designed, bitcoin requires a transfer process that ensures the sender of
a particular asset is the true owner and has sufficient assets to make the transfer; blockchain serves this function. (see Exhibit 3,
“Overview of blockchain technology”, pages 3 and 4 below). Although bitcoin opened horizons for wider adoption of cryptocurrencies,
that outlook has been clouded by regulatory challenges, currency volatility, questions regarding scalability and instances of illegal use.
However, the new money is on alternative applications of blockchain technology
Whatever the future may hold for cryptocurrencies, the underlying transaction-tracking and certifying technology of blockchain2 holds
considerable promise. Cryptocurrencies can theoretically be deployed as an alternative in “any transaction” where a third party is
currently needed to certify the integrity of the transaction. By sharing a real-time ledger among participants and/or removing third
parties from a transaction, blockchain can increase the speed, affordability, security, reliability and/or auditability of various business
processes within and outside of financial services. The technology holds particular promise for the transfer of assets as well as other
services centered around trust and security.
While blockchain start-ups multiply, large diversified companies are actively assessing the technology. Many blockchain start-ups
are attracting venture capital (VC), increasingly from interested corporate investors. As of mid-July 2016, around 149 bitcoin and
blockchain start-ups had raised aggregate VC investments of more than $1.2 billion (Exhibit 1). In addition, over the first quarter of
2016, blockchain and hybrid companies3 raised more VC investment (84%) than cryptocurrency start-ups (16%), as more ‘pure play’
blockchain start-ups launched and existing cryptocurrency start-ups pivoted toward providing broader blockchain solutions (Exhibit 2).
Exhibit 1
Venture Capital Investment in Blockchain and Cryptocurrency
Start-ups Is Growing Rapidly
Exhibit 2
Pure Play Blockchain Companies Taking Venture Capital Share
from Cryptocurrency Companies
Note: Data includes start-ups focusing on both cryptocurrency and non-cryptocurrency
blockchain technology.
Source: Coindesk, Moody’s Investors Service
Note: Hybrid companies include start-ups focusing on both cryptocurrency and non-
cryptocurrency blockchain technology.
Source: Coindesk, Moody’s Investors Service
Page 15
MOODY'S INVESTORS SERVICE CROSS-SECTOR
15 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
– Identities could be verified once, in person, at a government office leveraging official identification documents (e.g., passport,
ID, drivers license, birth certificate, biometrics). Subsequently, a digital verified identity can be created that the user can use in
various secure online environments.
» Voting: votes on a blockchain could provide a history of signed and time-stamped votes, reduce vote duplication, manipulation or
deletion, and allow for easy audit or vote recount.
– Transparency would be greater given that on a blockchain voting can be viewed by the public and an audit or recount can be
easily executed. Fraud could be detected as all manipulations after the elections would have inappropriate timestamps. Any
blockchain solution would have to ensure that privacy of voters is maintained.
» Taxes: a blockchain with a full history of income and sales transactions could allow for automated tax collection, reducing tax
fraud and the administrative tax burden.
– A central bank could issue a government-backed digital currency on a blockchain that is fixed to the traditional fiat currency
and subject to central bank oversight and control. This would provide an immutable history of money transactions and income.
It could also allow for automated tax collection (e.g., sales, value-added or income taxes). A clear history of transactions could
reduce tax fraud and the administrative tax burden. In a survey by the World Economic Forum, 73% of 800 participants expect
that taxes will be collected for the first time via a blockchain by 2023.6
» Government & non-profit transparency: a blockchain could track the use of government funds or non-profit donations and
reduce associated fraud and corruption.
– The use of government funds or non-profit donations remains subject to a high level of corruption in many jurisdictions. While
reviewing how such funds have been spent has been possible, the trustworthiness of the data has been limited since network
participants can manipulate the underlying data ledger.
– The blockchain’s unmutable record with timestamps can provide real-time publicly visible transparency to the community,
making it easy to find traces of corruption and fraud. Additionally, smart contracts could allow raised money to be spent only
on projects linked to the purpose of the original donation.
– Separately, increased use of cryptocurrencies could help lower transaction costs and foreign exchange fees, supporting
increased international donations and reducing costs for international aid organizations.
» Legislation, compliance & regulatory oversight: some legal contracts could be replaced by coded strings of smart contracts.
Regulatory oversight could be enhanced by providing regulators near real-time data in a more secure manner, with automatic
triggers sending out alerts when a company does not meet certain regulatory requirements.
Cross-industry potential blockchain use cases
» Financial management & accounting: blockchain technology could allow multinational companies to more easily transfer
financial assets among their global offices, allowing for a more optimal use of their working capital. Additionally, a blockchain with
all of a company's transactions could automate parts of the accounting and audit process and reduce related errors.
– Blockchain payment systems could allow multinational companies to move financial assets (e.g., cash) more quickly and
cheaply between geographies and offices. This would optimize their use of working capital, reduce transaction fees and
potential foreign exchange impact, and lessen reliance on costly short-term financing. Additionally, corporate finance
departments could better track share ownership.
– Maintaining all transactions on a blockchain would allow the transactions to be aggregated into financial statements, allowing
for real-time accounting and financial analysis. Cryptography could ensure security of confidential data. It would also make
accounting fraud more difficult since illegal transfers or the deletion of transactions would be visible in the ledger history. This
could allow a much more automated audit process.
Page 16
MOODY'S INVESTORS SERVICE CROSS-SECTOR
16 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
» Shareholders’ voting: blockchain technology can improve vote transparency, reduce vote manipulations and allow for online
voting.
– A blockchain of shareholders' votes can provide a transparent track of votes and simplify the participation of shareholders
not physically in the shareholders' meeting by letting them vote online. Additionally, cryptography could provide a secure
unmutable cast of votes without shareholders being able to falsify their identity or duplicate their votes.
» Record management: a blockchain could provide real-time access to company and/or legal records with the latest time stamp
and ownership status and allow for secure data sharing among institutions, while ensuring privacy of confidential information.
– Various company records (e.g., contracts, employee personal records, business transaction records) could be maintained and
managed in a secure and real-time manner, and relevant data shared with particular employees, internal teams or suppliers
(e.g., health insurer, payroll servicer), as appropriate and necessary. Blockchain technology could avoid fraudulent changes to
records and ensure that only employees could make changes to their personal records, with only selected personnel with the
appropriate authority being able to review, though not edit, such information.
– Blockchain technology could support the approval process and maintenance of legal records by storing legal documents and
required signatures with timestamps. The owner of a legal document is the person with the private key linked to the document,
while other network participants could verify if the document was signed according to legal requirements.
» Cybersecurity: a blockchain reduces the risk of a central-point-of-failure. Additionally, a blockchain could monitor unexpected
router activity and illegal software changes.
– While hackers try to control and manipulate companies’ or governments’ routers, a blockchain could be used to monitor if
any illegal or unexpected changes were applied on the network. Using digital signatures and timestamps, a blockchain can
monitor the integrity of digital assets and detect illegal changes in software and configurations. An additional example is cyber-
protecting national infrastructure from potential hacks.
» Big data: a blockchain can improve the quality and security of big data, reduce the risk of central-point-of-failure and allow for
easy data analysis.
– Data quality would be improved by the use of timestamps and increased visibility of data, which limit the possibility for data
manipulation. Data is secured using cryptography and the decentralized character of the network would reduce the risk of
a central-point-of-failure. Additionally, data on a blockchain can be easily gathered and analyzed as it stores a history of all
transactions and is visible by the entire network.
» Data storage: blockchain technology could allow network nodes to share any available storage capacity on their computers and
ensure data security through cryptography.
– A blockchain for data storage could build up cloud storage, reducing the need to rely on large and costly server farms for
storage. Data storage could leverage the blockchain's cryptography to ensure that only the owner can access/modify its data
using its private key. This allows users to remove confidential data from their devices to avoid cyber theft, while accessing data
from the cloud when needed.
» Internet of Things (IoT): blockchain technology can link smart devices, maintain a ledger with the entire history of smart devices’
data exchanges and leverage the collected data to optimize device usage.
– A blockchain could maintain smart devices’ data exchanges with other devices, the internet and people. Data exchanges could
be secured through the blockchain's cryptography, while reducing the risk of a central-point-of-failure.
– Devices on the network could leverage the collected data on a blockchain to optimize device usage, order required resources
and signal operational problems, while also automatically executing software updates if needed. Various sectors could leverage
IoT data in combination with smart contracts (e.g., activation of insurance claims once IoT sensors measure a defect).
CROSS-SECTOR
SECTOR IN-DEPTH
21 July 2016
TABLE OF CONTENTS
Blockchain explained 2
Weighing blockchain's benefits
against key outstanding hurdles 6
Potential use cases abound across
industries and the official sector 7
Blockchain's supporters and adopters
are increasing 9
Appendix 1 - Selected potential
blockchain use cases 11
Appendix 2 - Selected blockchain
projects by rated issuers 17
Appendix 3 - Selected blockchain
support and projects by regulators 25
Moody's related research 27
Key references 27
Analyst Contacts
Nick Caes 212-553-1382
Analyst
[email protected]
Robard Williams 212-553-0592
Senior Vice President
[email protected]
Elena H Duggar 212-553-1911
Associate Managing
Director
[email protected]
Gregory W. Bauer 212-553-1498
Managing Director -
Global Banking
[email protected]
Credit Strategy – Blockchain Technology
Robust, Cost-effective Applications Key
to Unlocking Blockchain's Potential Credit
Benefits
Blockchain technology, originally created as a platform for the Bitcoin ‘cryptocurrency’,
is now being studied and pursued for applications across various transaction-tracking
contexts. Tangible, fully implemented blockchain applications beyond cryptocurrencies
are some distance away, with a range of hurdles still to be cleared, including developing
solutions to systems compatibility issues and questions around regulatory treatment and
legal enforceability. Nevertheless, the potential to provide efficient, fast, secure, reliable and
auditable transactions is driving investment in this technology.
Applications of blockchain technology go far beyond financial services. In this report,
we identify 25 use cases for the technology that could improve existing processes and
capabilities in sectors ranging from capital markets and trade finance, healthcare and energy,
to government taxation.
Many rated issuers are actively pursuing blockchain technology. Issuers are assessing
ways in which blockchain could be applied in their businesses and are actively developing
‘proofs of concept’. Our survey identifies more than 120 ongoing blockchain projects among
Moody’s-rated issuers – spanning investments and partnerships with start-ups, internal
projects, and industry collaborations – and there are likely many others yet to reach the
public domain.
Regulators’ stance is generally supportive but no definitive view on ultimate
treatment. Regulatory bodies across the globe are monitoring developments and potential
applications, with an eye to encouraging innovation while also upholding their fundamental
mandates, be those financial safety and soundness, consumer and investor protection, or
preserving a competitive marketplace. At the same time, a number of agencies have also
noted the potential for blockchain to help improve regulatory oversight processes.
Credit implications will evolve with the rollout of blockchain technology. As the
technology is deployed in various processes, credit implications for rated issuers will depend
on whether the positives in terms of more streamlined processes and reduced costs outweigh
the negatives in terms of the potential to create competitive pressure from incumbents and
new entrants that improve processes by leveraging blockchain technology.
http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=1023913
Page 2
MOODY'S INVESTORS SERVICE CROSS-SECTOR
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
Blockchain explained
Blockchain, as the name suggests, is a “chain of blocks of encrypted information” that form a database or 'ledger'. Each block can be
thought of as record of some transaction between two-or-more parties, which all have real-time access to the shared database. As
encrypted blocks are added to the chain, it becomes prohibitively expensive to alter the record of a particular transaction because every
block added after that particular block must be unencrypted.
Blockchain arrived on the scene over seven years ago when the bitcoin ‘cryptocurrency’ became available as an alternative payment
system that, among other things, eliminated the need for either a trusted middleman or a centralized institution for payment
transactions (so-called decentralized trust).1 To function as designed, bitcoin requires a transfer process that ensures the sender of
a particular asset is the true owner and has sufficient assets to make the transfer; blockchain serves this function. (see Exhibit 3,
“Overview of blockchain technology”, pages 3 and 4 below). Although bitcoin opened horizons for wider adoption of cryptocurrencies,
that outlook has been clouded by regulatory challenges, currency volatility, questions regarding scalability and instances of illegal use.
However, the new money is on alternative applications of blockchain technology
Whatever the future may hold for cryptocurrencies, the underlying transaction-tracking and certifying technology of blockchain2 holds
considerable promise. Cryptocurrencies can theoretically be deployed as an alternative in “any transaction” where a third party is
currently needed to certify the integrity of the transaction. By sharing a real-time ledger among participants and/or removing third
parties from a transaction, blockchain can increase the speed, affordability, security, reliability and/or auditability of various business
processes within and outside of financial services. The technology holds particular promise for the transfer of assets as well as other
services centered around trust and security.
While blockchain start-ups multiply, large diversified companies are actively assessing the technology. Many blockchain start-ups
are attracting venture capital (VC), increasingly from interested corporate investors. As of mid-July 2016, around 149 bitcoin and
blockchain start-ups had raised aggregate VC investments of more than $1.2 billion (Exhibit 1). In addition, over the first quarter of
2016, blockchain and hybrid companies3 raised more VC investment (84%) than cryptocurrency start-ups (16%), as more ‘pure play’
blockchain start-ups launched and existing cryptocurrency start-ups pivoted toward providing broader blockchain solutions (Exhibit 2).
Exhibit 1
Venture Capital Investment in Blockchain and Cryptocurrency
Start-ups Is Growing Rapidly
Exhibit 2
Pure Play Blockchain Companies Taking Venture Capital Share
from Cryptocurrency Companies
Note: Data includes start-ups focusing on both cryptocurrency and non-cryptocurrency
blockchain technology.
Source: Coindesk, Moody’s Investors Service
Note: Hybrid companies include start-ups focusing on both cryptocurrency and non-
cryptocurrency blockchain technology.
Source: Coindesk, Moody’s Investors Service
Page 15
MOODY'S INVESTORS SERVICE CROSS-SECTOR
15 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
– Identities could be verified once, in person, at a government office leveraging official identification documents (e.g., passport,
ID, drivers license, birth certificate, biometrics). Subsequently, a digital verified identity can be created that the user can use in
various secure online environments.
» Voting: votes on a blockchain could provide a history of signed and time-stamped votes, reduce vote duplication, manipulation or
deletion, and allow for easy audit or vote recount.
– Transparency would be greater given that on a blockchain voting can be viewed by the public and an audit or recount can be
easily executed. Fraud could be detected as all manipulations after the elections would have inappropriate timestamps. Any
blockchain solution would have to ensure that privacy of voters is maintained.
» Taxes: a blockchain with a full history of income and sales transactions could allow for automated tax collection, reducing tax
fraud and the administrative tax burden.
– A central bank could issue a government-backed digital currency on a blockchain that is fixed to the traditional fiat currency
and subject to central bank oversight and control. This would provide an immutable history of money transactions and income.
It could also allow for automated tax collection (e.g., sales, value-added or income taxes). A clear history of transactions could
reduce tax fraud and the administrative tax burden. In a survey by the World Economic Forum, 73% of 800 participants expect
that taxes will be collected for the first time via a blockchain by 2023.6
» Government & non-profit transparency: a blockchain could track the use of government funds or non-profit donations and
reduce associated fraud and corruption.
– The use of government funds or non-profit donations remains subject to a high level of corruption in many jurisdictions. While
reviewing how such funds have been spent has been possible, the trustworthiness of the data has been limited since network
participants can manipulate the underlying data ledger.
– The blockchain’s unmutable record with timestamps can provide real-time publicly visible transparency to the community,
making it easy to find traces of corruption and fraud. Additionally, smart contracts could allow raised money to be spent only
on projects linked to the purpose of the original donation.
– Separately, increased use of cryptocurrencies could help lower transaction costs and foreign exchange fees, supporting
increased international donations and reducing costs for international aid organizations.
» Legislation, compliance & regulatory oversight: some legal contracts could be replaced by coded strings of smart contracts.
Regulatory oversight could be enhanced by providing regulators near real-time data in a more secure manner, with automatic
triggers sending out alerts when a company does not meet certain regulatory requirements.
Cross-industry potential blockchain use cases
» Financial management & accounting: blockchain technology could allow multinational companies to more easily transfer
financial assets among their global offices, allowing for a more optimal use of their working capital. Additionally, a blockchain with
all of a company's transactions could automate parts of the accounting and audit process and reduce related errors.
– Blockchain payment systems could allow multinational companies to move financial assets (e.g., cash) more quickly and
cheaply between geographies and offices. This would optimize their use of working capital, reduce transaction fees and
potential foreign exchange impact, and lessen reliance on costly short-term financing. Additionally, corporate finance
departments could better track share ownership.
– Maintaining all transactions on a blockchain would allow the transactions to be aggregated into financial statements, allowing
for real-time accounting and financial analysis. Cryptography could ensure security of confidential data. It would also make
accounting fraud more difficult since illegal transfers or the deletion of transactions would be visible in the ledger history. This
could allow a much more automated audit process.
Page 16
MOODY'S INVESTORS SERVICE CROSS-SECTOR
16 21 July 2016 Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain's Potential Credit Benefits
» Shareholders’ voting: blockchain technology can improve vote transparency, reduce vote manipulations and allow for online
voting.
– A blockchain of shareholders' votes can provide a transparent track of votes and simplify the participation of shareholders
not physically in the shareholders' meeting by letting them vote online. Additionally, cryptography could provide a secure
unmutable cast of votes without shareholders being able to falsify their identity or duplicate their votes.
» Record management: a blockchain could provide real-time access to company and/or legal records with the latest time stamp
and ownership status and allow for secure data sharing among institutions, while ensuring privacy of confidential information.
– Various company records (e.g., contracts, employee personal records, business transaction records) could be maintained and
managed in a secure and real-time manner, and relevant data shared with particular employees, internal teams or suppliers
(e.g., health insurer, payroll servicer), as appropriate and necessary. Blockchain technology could avoid fraudulent changes to
records and ensure that only employees could make changes to their personal records, with only selected personnel with the
appropriate authority being able to review, though not edit, such information.
– Blockchain technology could support the approval process and maintenance of legal records by storing legal documents and
required signatures with timestamps. The owner of a legal document is the person with the private key linked to the document,
while other network participants could verify if the document was signed according to legal requirements.
» Cybersecurity: a blockchain reduces the risk of a central-point-of-failure. Additionally, a blockchain could monitor unexpected
router activity and illegal software changes.
– While hackers try to control and manipulate companies’ or governments’ routers, a blockchain could be used to monitor if
any illegal or unexpected changes were applied on the network. Using digital signatures and timestamps, a blockchain can
monitor the integrity of digital assets and detect illegal changes in software and configurations. An additional example is cyber-
protecting national infrastructure from potential hacks.
» Big data: a blockchain can improve the quality and security of big data, reduce the risk of central-point-of-failure and allow for
easy data analysis.
– Data quality would be improved by the use of timestamps and increased visibility of data, which limit the possibility for data
manipulation. Data is secured using cryptography and the decentralized character of the network would reduce the risk of
a central-point-of-failure. Additionally, data on a blockchain can be easily gathered and analyzed as it stores a history of all
transactions and is visible by the entire network.
» Data storage: blockchain technology could allow network nodes to share any available storage capacity on their computers and
ensure data security through cryptography.
– A blockchain for data storage could build up cloud storage, reducing the need to rely on large and costly server farms for
storage. Data storage could leverage the blockchain's cryptography to ensure that only the owner can access/modify its data
using its private key. This allows users to remove confidential data from their devices to avoid cyber theft, while accessing data
from the cloud when needed.
» Internet of Things (IoT): blockchain technology can link smart devices, maintain a ledger with the entire history of smart devices’
data exchanges and leverage the collected data to optimize device usage.
– A blockchain could maintain smart devices’ data exchanges with other devices, the internet and people. Data exchanges could
be secured through the blockchain's cryptography, while reducing the risk of a central-point-of-failure.
– Devices on the network could leverage the collected data on a blockchain to optimize device usage, order required resources
and signal operational problems, while also automatically executing software updates if needed. Various sectors could leverage
IoT data in combination with smart contracts (e.g., activation of insurance claims once IoT sensors measure a defect).
