Chapter 2 Blockchain and Financial services

Question 1

Why is a distributed ledger different from centralised networks? Name 2 reasons.

Answer 1

1. Information is stored on a network of machines, with changes to the ledger
   reflected simultaneously for all holders of the ledger.
2. The information is authenticated by a cryptographic signature.

Question 2

What is one of the most well-known uses of DLT?

Answer 2

Blockchain

Question 3

Bitcoin aside, what can blockchain be used for? Name 3 examples.

Answer 3

1. To document the transfer of any digital asset;
2. Record the ownership of physical and intellectual property;
3. Establish rights through smart contracts.

Question 4

Explain the concept of a distributed database.

Answer 4

Each entity on a blockchain can access records on the entire database, but no single entity controls the data or the information.

Question 5

Explain the concept of peer-based communication

Answer 5

Communication is not through a central party, but occurs directly between peers. Each participant on the network (‘node’) stores and forwards information to all other nodes.

Question 6

Explain the concept of transparency in blockchain

Answer 6

All transactions and associated values are visible to anyone with access to the system. However, each user can choose to provide their identity to others or remain anonymous.

Question 7

Explain the concept of permanent records on the blockchain

Answer 7

Once a transaction is entered, the records cannot be altered as they are linked to every transaction record that came before them in the ‘chain’.

Question 8

Conform C. Baker & K Werbach, what are 5 advantages of blockchain-based solutions?

Answer 8

1. Security
2. Real-time settlement
3. Removal of intermediaries
4. Automation
5. Auditability

Question 9

What are other examples of advantages of blockchain technology? (Name 3)

Answer 9

1. Reduction of costs
2. Reduced rise of information inconsistency
3. Enhanced transparency

Question 10

What are 5 challenges of blockchain? Name the article as well.

Answer 10

PISA

1. Blockchain does not improve the reliability of the input
2. Often requires adding layers of complex encryption systems to control who can see what
3. Private key management make scalability difficult
4. With respect to digital ID, the system still relies on trusted third parties to provide the certifications stored in each person’s digital wallet and store the data on which those claims are based.
5. With respect to supply chain, the need to assign a unique identity to each product in the supply chain requires a high degree of coordination around a set of standards.

Question 11

Name 4 common use cases for blockchain technology in the financial industry

Answer 11

1. Trading, clearing & settlement
2. Identification and customer due diligence
3. Payments
4. Trade finance

Question 12

What are legal and regulatory challenges imposed by blockchain? (Name 4 with an example each)

Answer 12

1. Jurisdiction - How to determine the governing law with a transaction verified in different jurisdictions by different nodes?
2. Liability - Who is responsible of the performance of the blockchain?
3. Data-privacy - Can data sharing occur anonymously?
4. Competition/anti-trust: Could the gating effect for participating in a permissioned blockchain be seen as potentially excluding competitors?