Blockchain Basics (Hot Topics)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Chris Cahill – Lowis & Gellen LLP
Panelists:
Michael Baumert – Barnes & Thornburg LLP
Jordan Fishfeld – CFX Markets
John Servidio – Goodwin Procter LLP
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ABOUT THIS WEBINAR:
Blockchain Basics
Blockchain is a very tactile name for a certain assortment of code -- which is credited by some as the
gathering place of a revolution in finance (and beyond). Blockchain was created to solve the
problem of establishing a stable crypto-currency system that does not rely on banks or central
parties to keep the ledger of transactions and accounts. Instead the ledger is distributed among
network participants. A single consensus-driven and immutable ledger facilitates rapid settlement
of transactions because all parties have the same view of the information. No bank? No custodian?
No title company? No trusted intermediary? The implications are broad. But what is block and what
is chain? And is the thing secure? We offer an introductory discussion.
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ABOUT THIS SERIES:
Hot Topics 2019
You know that weed has gone mainstream when bright-faced MBAs and JDs euphemize
ganja with its scientific name of “cannabis.” Mary Jane will likely become legal throughout
the US before consumers fully adopt blockchain-based cryptocurrencies as means of
obscuring their purchases of bud. By then, digital assets that go way beyond
cryptocurrencies, such as “coins” and “tokens” (which also reside on blockchain), and
which represent unregistered or even registered securities in, say, Thai stick, may diversify
a standard G-man’s investment portfolio. Is this the dawning of the Age of Aquarius?
Maybe. This webinar series introduces blockchain, cannabis, and digital assets as new
realities and opportunities.
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EPISODES IN THIS SERIES
7/25/19 Episode #1:
Blockchain Basics
8/22/19 Episode #2:
Making Cash with Cannabis
9/26/19 Episode #3:
Digital Assets
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #1:
Blockchain Basics
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WHAT IS BLOCKCHAIN?
• a ledger
• not stored in any one place
• composed of a decentralized network of nodes
• new data on the blockchain must be verified by a majority of nodes
• verification occurs by executing energy-intensive cryptographic
calculations
• once validated, a block of data is added to the chain
• blocks may never be removed or edited
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WHAT IS BLOCKCHAIN?
• Decentralized – data on the blockchain is not stored in any single
place but distributed across many nodes
• Immutable – once data is added to the blockchain, it cannot be
removed, edited or backdated
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TYPES OF BLOCKCHAINS
• Public Blockchains (permission-less)
• Private Blockchains (permissioned)
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FROM CENTRALIZED LEDGER TO
DECENTRALIZED
Blockchain establishes a decentralized ledger, by contrast to the familiar
centralized ledger, with a custodian or administrator being trusted to process
monetary transactions and manage the transfer of property
See the two diagram on the following pages, from David Sneyd, “Blockchain
solutions to ESG problems” (BMO Global Asset Management, Oct. 2018)
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TITLE
Content
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HOW DOES BLOCKCHIAN ESTABLISH
A DECENTRALIZED LEDGER?
Participant makes an entry, i.e., creates a new block
Proposed transaction is broadcast to each participant on the network
Validity of the new block is subject to pre-set criteria and a complex algorithm
called “proof of work”
A majority of miners conclude that transaction is valid
New block is created and time-stamped
All are provided with an updated version of the ledger:
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SOME COMPONENTS OF A BLOCKCHAIN
Each block contains:
-- a “hash,” which is a digital fingerprint or unique identifier
-- time-stamped batches of recent valid transactions
-- and the hash of the previous block
The previous block hash links the blocks together and prevents the past
form being altered or rewritten
Each subsequent block strengthens the verification of previous blocks
(and the entire blockchain)
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SOME COMPONENTS OF A
BLOCKCHAIN, 2
Proof of work requires high computational capacity, provided by “miners”
Miners supply the network with computing power, to allow the updating of the database
A majority of mining power must be able to confirm the new blocks by decrypting the data
Once a “block” (a record of a purchases and sales created by miners by solving
a mathematical puzzle that validates the transactions) is added to the network
ledger of older transaction (the “chain”), such record on the blockchain can’t
be changed or reversed (i.e., the transaction is immutable)
Thus a blockchain, to be non-falsifiable, must not have any operator holding at any time
more than half of the computational power of the chain
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SO WHAT IS GAINED BY GOING FROM A
CENTRALIZED TO A DECENTRALIZED
LEDGER?
If a bank or credit card company keeping a centralized ledger is hacked,
then other participants lose access to their data
With a decentralized ledger, all participants keep a copy of the data
With a decentralized ledger, there is no extra cost of (or litigation from)
efforts to synchronize records kept by counterparties to a transaction
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SMART CONTRACTS
Smart contracts are “self-executing contracts with the terms of the agreement
between [a] buyer and seller being directly written into lines of code. Once a smart
contract has been created, computer transaction protocols will execute the terms of
a contract automatically based on a set of conditions.” Rensel v. Centra Tech, Inc.,
2018 WL 4410110 at *10 (S.D. Fla. June 14, 2018). The promise re smart contracts:
*self-executing
*additional parties not needed to monitor the transactions
*greater cost efficiency and faster transaction speed
To determine whether contractual conditions are met, smart contracts use “oracles,”
which are agreed-upon real-tme data providers which confirm triggering events
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USES OF BLOCKCHAIN
SUPPLY CHAIN TRACKING: can help trace sources and status of component
supplies, can trace provenance (labor conditions, mining or logging legalities) –
Walmart has reduced lettuce tracking time from 6 days to 2 seconds
SUPPLY CHAIN PROVENANCE (environmental, labor, social issues): e.g.,
Sourcemap (https://www.sourcemap.com/) offers traceability from raw materials
to finished goods; note that California and UK require retailers and manufacturers
to disclose efforts to eradicate slavery and human trafficking
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USES OF BLOCKCHAIN, 2
LAND REGISTRATION: per the World Bank, 70% of the world’s population is deprived of secure
and legally registered land title by poor and venal governance, failure to maintain paper records,
and natural disasters. The Republic of Georgia, for one, is considering the use of blockchain tech in
administering land. The Honduran regime strangled a similar effort there
DIRECT OWNERSHIP OF PUBLIC EQUITIES: Cede & Co. owns your publicly-traded equity
securities. Cede is the nominee of Depository Trust Co., which holds securities for broker-dealers
and banks. Did you know that? Cede owns the master certificate. Transactions are recorded as
debits and credits to DTC members’ securities accounts. You own a contractual right against your
broker. Transaction settlements are complicated and slowed. Inititiatives of Delaware and other
states are aimed at issuers issuing shares directly to owners, using distributed ledger technology to
keep track
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USES OF BLOCKCHAIN, 3
DISTRIBUTED CONTRACTING NETWORK: Developed in connection with
Microsoft Xbox, a tracking and calculation of royalties owed to content creators of
games by publishers around the world
MARINE INSURANCE: e.g., Insurwave and Guardtime, which use historical data
and standard estimates to quantify insurance coverage of ships (drawing on many
factors, including perils of a given route)
INSTITUTIONAL INVESTMENT: Northern Trust automates the multi-contractual
processes of pensions and endowments investing in privates equity, and auditing
firm PWC audits the ledger in real time
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INITIAL COIN OFFERS: TO BUILD A
SKYSCRAPER
The emission of new cryptocurrency (by contrast to equity shares) for the purpose of raising
cash to develop a project, say the building of a skyscraper (example borrowed from Lexi
Sokolin’s Future of Finance column):
* Cost is $100 million
* So, issue Skyscraper Coin and distribute tokens tp 100,000 small investors for $1,000 each
* Issuer commits to buy back the tokens in 2 years at $1,500 IF at least 85% of the apartments
have been sold – that promise will be executed via smart contracts
* *With an ICO, issuer gains thousands of funders easily – fulfilling the failed promise of the
2012 JOBS Act
* **Of course fraud, but this is how it could conceivably work
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WILL BLOCKCHAIN ADD VALUE?
WTO: Blockchain will add US $3th to international trade by 2030 (See
Emmanuelle Ganne, “Can Blockchain Revolutionize International Trade?” (WTO
2018)), with the value coming from removal of barriers in trade finance, customs
clearance, logistics, and transportation
Inter-operability and standardization among blockchains an issue – all banks must
be connected to remove all barriers
Some trade finance banks are working on a Universal Trade Network – a network
of blockchain networks
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BLOCKCHAIN AND SECURITY (WATCH
THOSE SMART CONTRACTS)
In 2016, $55 million of ether was stolen through a smart contract created by DAO
and executed on the Ethereum network
Does the exchange one use have the right safety protocols?
The Chamber of Digital Commerce has set up a Smart Contracts Alliance to guide
best practices in building of smart contracts:
https://digitalchamber.org/initiatives/smart-contracts-alliance/
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BLOCKCHAIN AND SECURITY OF IMMUTABILITY:
THE 51% OR “DOUBLE SPEND” ATTACK
Even though blockchain technology is immutable, the technology is not without certain risks, e.g., a “51%” or
“double spend” attack:
•In a “51%” or “double spend” attack, malicious miners on a distributed ledger network can use a proof-of-work
consensus mechanism to secretly attach new blocks to the blockchain
•In a distributed ledger network, the version of the blockchain with the most blocks will generally be recognized
by other nodes as the correct blockchain in which the miners add new blocks
•If a miner (or miners) has more than 51% of the network hashing power (the computing power to solve the
mathematical puzzles that validate transaction), such miner(s) could (without notifying the other miners) add
duplicate blocks in order to create a forked copy of the blockchain
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BLOCKCHAIN AND SECURITY OF IMMUTABILITY:
THE 51% OR “DOUBLE SPEND” ATTACK, PART 2
•If a malicious minor (with >51% of computing power) secretly added more new blocks that the existing chain
contained, the network could be tricked into accepting the new (duplicative) chain as the correct chain since it
contains more blocks
•The duplicate chain could enable the malicious actor to “double spend” the same digital assets by sending
tokens to one recipient on the real chain and an equal amount of tokens to another recipient (or himself)
•“51%” or “double spend” attacks are only possible on a proof-of-work consensus blockchains (such as Bitcoin),
but would be very difficult on a widely distributed network like Bitcoin
•Proof-of-stake networks (like Ethereum) are susceptible to similar risks, but are usually designed to reduce the
risk of 51% or double spend attacks.
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OTHER CAVILS AGAINST
BLOCKCHAIN ADOPTION
• High energy use
• Lack of internationally recognized standards
• Relatively slow (applications need to process the entire history of the
blockchain each time a change is made): Bitcoin handles 7
transactions per second; Mastercard handles 44,000
• Many data privacy laws to comply with, like EU’s “right to be
forgotten” law
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ABOUT THE FACULTY
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Chris Cahill – ccahill@lowis-gellen.com
Mr. Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen
LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’
committees, potential purchasers and others through bankruptcy cases, out-of-court
workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has
substantial mega-case experience representing very large debtors, and counsels and
litigates on behalf of manufacturers and secured lenders in large and middle-market cases.
Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency
issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition
(Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2019) and is
the host of Financial Poise Radio, a periodic broadcast for investors and other curious
persons, on www.financialpoise.com.
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Jordan Fishfeld – Jfishfeld@gmail.com
Jordan is the co-founder and CEO of CFX Markets, an online trading platform for non-public
investments that is transforming how people view and hold alternative asset positions. CFX
Markets is venture-backed with offices in Chicago, New York and California. As an early innovator
in the crowdfunding space, Jordan assisted on the rule development of many online capital and
crowdfunding rules in a number of different states and federally. Jordan is also the elected
Treasurer of the Crowdfunding Professional Association (CfPA), and continues to advocate and
educate on behalf of the crowdfunding industry. Additionally, Jordan is a board member of the
young professional real estate division of the Jewish United Fund and a Board Member of UpStart,
a San Fransisco based accelerator focused on Jewish engagement and innovation. As a result of
Jordan’s passion for working with the Jewish Community, he was also named by Oy Chicago and
the Young Leadership Division of the JUF as one of Jewish Community’s 36 under 36. Prior to that,
Jordan worked as a finance attorney for Katten Muchin Rosenman, LLP, where he assisted on more
than $1 billion worth of syndicated loan transactions.
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Michael Baumert – mbaumert@btlaw.com
Michael Baumert is an associate in Barnes & Thornburg’s Chicago office. As a member of
the Intellectual Property Department and Corporate Department, Michael focuses on
technology-driven transactions, sourcing, cloud computing, and data privacy and security.
Michael has earned a Certified Information Privacy Professional/United States (CIPP/US)
certification offered by the International Association of Privacy Professionals (IAPP).
Michael also counsels clients in technology and intellectual property transactions, and has
developed a focus on blockchain and distributed ledger technologies, autonomous vehicles,
machine learning, and other artificial intelligence-related concepts. Prior to becoming an
attorney, he worked as a software engineer designing and developing business intelligence,
warehousing, and customer relationship management software.
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John Servidio – JServidio@goodwinlaw.com
John Servidio is a partner in Goodwin’s Real Estate Industry group and a member of its Capital
Markets practice. Mr. Servidio represents banks, investment funds and issuers in structuring corporate
derivative, equity and equity-linked capital market transactions. He assists clients with hedging
structures involving equity, interest rate, foreign currency, energy and commodity derivatives. He also
advises dealers, asset managers and corporate clients on resolving issues related to the Dodd-Frank Act,
as well as Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission
(SEC) rules and regulations. In addition to transactions involving traditional securities and derivatives,
Mr. Servidio advises clients on structuring investments in digital asset (cryptocurrency), distributed
ledger (blockchain) and other financial technologies.
Prior to joining Goodwin in 2018, Mr. Servidio was a partner at Winston & Strawn. His previous
industry experience includes serving as assistant general counsel at a major bank and as an attorney in
the legal department of another large investment banking firm. Before law school, Mr. Servidio was an
analyst in the real estate group at a large commercial bank. He is a frequent author and speaker on swaps,
derivatives and regulatory challenges facing banks and other financial institutions.
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QUESTIONS OR COMMENTS?
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
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