A lecture of Mr. Gordon Kerr - Founder and CEO of Cobden Partners, senior investment advisor to OS.UNIVERSITY. Sofia Business School 2018.

1. “Blockchain, sorting the wheat from the chaff –
sensible commercial applications of blockchain technology”
June 2018
Sofia Business School
Gordon Kerr
A lecture from OS.UNIVERSITY’s Senior Investment Advisor

2. Distributed ledgers and Cryptocurrency Systems
• Distributed ledgers and cryptocurrency systems are fundamentally different.
• Validation Differences: Bitcoin uses pseudonymous and anonymous nodes to
validate transactions whereas distributed ledgers require legal identities –
permissioned nodes to validate transactions.
• DLs can therefore ledgers legally host off-chain assets: owing to authenticated,
permissioned approach to validation.
• Bitcoin and other permissionless systems cannot.
[source T Swanson, Consensus as a Service 2015]

3. CryptoWorld and Blockchain
CryptoWorld and Blockchain – Scam or Transformative Revolution?
Easier to understand if we separate the 3 Different phenomena:
1) Cryptocurrency – networks that secure Value transfer (Jury is out)
2) Blockchain – networks can collectively reach consensus re data
3) CryptoAssets – tokens can be financialized and traded (discuss at end)
[source K Werbach – Blockchain isn’t a Revolution]

4. Cryptocurrencies, Looking Beyond the Hype; BIS -
17 June 2018
“Cryptocurrencies promise to replace trusted institutions with distributed ledger
technology. Yet, looking beyond the hype, it is hard to identify a specific economic
problem which they currently solve. Transactions are slow and costly, prone to
congestion, and cannot scale with demand. The decentralised consensus behind the
technology is also fragile and consumes vast amounts of energy.”

5. Key Characteristics of Money
Key Characteristics of Money
OBVIOUS:
- Medium of Exchange
- Unit of Account
- Store of Value
LESS OBVIOUS FEATURES
- Institutions,
- Issuing Entity controlling Issuance, Deissuance
- Balance Sheet – Assets and Liabilities

6. Payment Issues
Payments: A Complex Area. Current key issues:
- Speed
- Finality of Settlement
- Ability to contest transactions that have been incorrectly executed
The potential for irreversibility of payments in BTC without legal recourse or
accountability means it is a sub-optimal solution for off-chain assets

7. Cryptocurrencies, Common Features
• Set of Rules (Protocol)
• Transaction Ledger
• Decentralised Network Updating the Ledger
BUT (Waldman “Anti-Discretionary Blockchain”)
- A) Nodes Lack Identity
- B) Forks need resolving
- C) All nodes have incentives to behave

8. Bitcoin – Validator (miner) compensation, from White Paper

9. Discretionary Blockchain (Waldman)
What is the point of building a product with smart contracts
tracking off-chain assets if it cannot be enforced in the real
world?
• Nodes are Identifiable
• Forks = disagreement. This is permitted for a time
• Outsiders may interact, a mechanism exists to force
consensus

10. The Pitfalls of Centralized Ledgers (Sams)
1. Sin of Commission – Forgery
2. Sin of Omission – Censorship
3. Sin of Deletion – Reversal
101

11. Shortfalls of Permissionless Blockchains
A DL of off-chain assets CANNOT be both censorship proof AND always valid,
because of interaction with the real world, eg legal systems and regulations;
For instance, the attributes of a permissionless blockchain (e.g., Bitcoin) as they
exist today include:
• Censorship resistant
• Reversals possible (though originally intended to be irreversible)
• Arguably only suitable for on-chain assets
[Source Swanson ibid]

12. USE CASES FOR BLOCKCHAIN - 1
Examples:
• World Food Programme (Highlighted by BIS) Payment of sovereign
currency, for food aid serving Syrian refugees in Jordan; (Permissioned
use case)
• Provenance (eg Tuna Fish)
• Land Title Registers (eg Georgia, Sweden)
• Supply Chains

13. Provenance - Tuna Fish (Source Edex)

14. USE CASES FOR BLOCKCHAIN - 2
Cannibalisation of existing Online Business – Example US CRE Brokerage
BiProxi.com
• Cannibalisation of online market leader TenX
• Mid Market US CRE (Up to $25m)
• Sales fees inefficiency (4% vs 1.2%)
Aims to :
- increase sell through rates
- Shorten deal time 300 to 75 days

15. Cryptoeconomics and Token Value Appreciation
Cryptoeconomics and Token Value Appreciation
- Why was 2017 such a good year for TVA
- Will this continue?
- Introducing Ripple’s XRP – Fintech Use Case

16. Possible ICO Exploitation – Ripple XRP
- Ripple aims to outcompete SWIFT; but SWIFT very low cost. Efficiencies?
- Own currency XRP – not clear on need
- 100 billion XRP created at inception; 20% “Gifted” by users to Ripple founders, remaining
80% retained by Ripple;
- Class Action Suit filed May 2018, Ripple funding via never ending ICO

17. Regulation
Present Confusion among US Regulators:
1) SEC’s Clayton – All ICOs are securities, but cryptocurrencies are not;
2) CFTC (Commodity Futures Trading Commission) – cryptos are commodities
3) Fin Cen (Financial Crimes Enforcement Agency) Tokens may fall under Money
Services regulations
4) IRS – crypto assets and currencies are property, hence tax

18. Expected New Regulations
- Some ICOs look like IPOs securities regulation
- Some ICOs generate Utility Tokens (eg Open Source University) consumer
payment protection regulation
These should be encouraged; smart contracts and credentials validation seem
admirable use cases
- ‘Nationless’ nature of crypto-activity likely to result in globally co-ordinated
regulation

19. Trading of CryptoAssets
Permissioned Blockchains to support tokenized assets, perhaps eventually including
sovereign currencies (jury very much out). Here the goal will be tracking, not trading;
CryptoAssets, divorce the exchange function of tokens from the utility function; important
because as of now many ICOs fuse these two criteria, the tokens and the assets.