We have implemented a solution for the OTC trade based on Ethereum and IPFS, covering the regulations of Mifid 2 and Finfrag. OTC is an abbreviation of Over-the-Counter (trading). It has always been an important pillar of activity for financial institutions. Bilateral OTC trading is attractive, because transactions can be kept more private than when trading via a market exchange (a central counterparty CPP), and there are less fees to be paid. We have set out to build a Blockchain-based Clearing and Settlement system that fixes the deficiencies of OTC trading, without scarifying the advantages. Blockchain technology is ideal to achieve this.

1. Consulting. Design. Agile Projects. Products. Innovation Hosting.
Swiss OTC BlockchainInformation about the Swiss OTC Blockchain
Michele Forte, michele.forte@ti8m.ch
Walter Strametz, CTO, walter.strametz@ti8m.ch

2. 24.02.2017 2
SWISS OTC CHAIN
For people who believe in enterprises, not in institutions.

3. 24.02.2017 3
Konsumenten haben keine direkten Zugriff auf den Markt und können keine Anteile halten.
OTC – Der Ablauf heute ist der von gestern
Buyer
Assets
Capital
Emittent
(Buy)
Broker
(Sell)
Broker
Central
Compliance
Aktienbuch
Bank Bank
Orders
Seller

4. 24.02.2017 4
… die Swiss OTC Blockchain kommt theoretisch ohne Broker und Custodians!!!
OTC – Ablauf mit der Blockchain
Shared
Database
Smart
Contract
Smart
Contract
Smart
Contract
Smart
Contract
Smart
Contract
Swiss OTC
Blockchain
Broker
Seller
Buyer
Smart
Contract
Read access
according to
authorization
Share
Registrar
Custodian
Regulatory/
Central
Counterparty
Payment
disruptive!
buy & sell

5. 24.02.2017 5
Manueller Prozess kann weitgehend automatisiert werden
OTC – Automatisierte Compliance
planning
scope
Transactions
Overview
Blockchain
Vorteile
- Transparenz, keine Zeitverzögerung
- Automatisierbarer Review
- Niedrigere Fehlerquote
- Compliance durch Smart Contract durchsetzbar
- Neue Services – Steuer, Nationalbank u.a.
Kritische Bedingungen:
- Kann nur durch gemeinsame Anstrengung erreich werden
- Lokale Datenhaltung erst am Anfang
- Effiziente Systeme müssen abgelöst werden – Kostenfaktor

6. 24.02.2017 6
OTC – Ablauf mit der Blockchain
Custodian Bank
Broker
Share registry
manager
FINMA
- Order entry mask / API
- Trade entry mask / API
- Trade confirmation mask / API
- Trade registering mask / API
- Settled trades
- Trades registered in share registry
- Orders to be filled
- Trades to be confirmed
- Trades to be registered
- MIFID II Report
UI & Tools Information

7. 24.02.2017 7
OTC – Von OTC über ICO bis zu Derivativen
Architektur der OTC Post-Trade
Capturing ist Basis für einen
komplett dezentralisierten
Markt aus Basis
Blockchain.
Post Trade
Capturing
and Smart
Contracts as
derivatives
Order book
and market
making
(matching)
on the chain
and
Remove
central
exchange
institution
KYC and
decentral
orderbook
Fully
decentralized
ledger
 Automatisiert: Derivative werden durch «Smart Contracts» abgebildet.
Transaktionen werden direkt auf der Blockchain ausgeführt. Kein
Paperwork oder Verwaltungsaufwand.
 Peer-to-peer: Die Blockchain übernimmt die Funktion des Marktes,
bringt Angebot und Nachfrage zusammen.
 Verteilt: Zustand der Derivative ist jederzeit für alle einsehbar – oder je
nach Inhalt des Smart Contracts – auch für alle änderbar.
 Compliance und Anforderungen und Reports an eine «Central
Counterparty» werden automatisch durchgeführt, neue Anforderungen
durch Updates automatisch propagiert.
 Betrieb der «Börse» ist hoch flexibel – z.B. können die Betriebskosten
durch das «Mining» abgedeckt werden; Switching Cost: 0.
 Neue Marktfelder durch deutlich geringere Kosten.
 OTC & ICO
 Derivatives
 KYC Services
 Compliance

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OTC – Detaillierter Ablauf auf der Blockchain
KYC database
Custodian Bank S
Blockchain ID
(uPort)
PPK / SK
infrastructure
IPFS
Ethereum
Blockchain
Legacy order
management
SIC payment
system
Share registry
management
Broker S Custodian Bank BBroker B SIX Share
registrar
FINMA
Order / Trade entry
masks
2
4 8
17
15
18a
19
23
24
21a 21b
25
28
29
16
20b20a 26
3
1
5
6
7
9
10
11
2
412
3
1
5
6
7
18b
22
27
13
14

9. 24.02.2017 9
OTC – Detaillierter Ablauf auf der Blockchain
Steps Step Description Interfaces
1 Custodian Bank customer is represented on
Blockchain (has unique Blockchain Address). This
address will be part of a Blockchain ID system in
the future, but not yet in this stage of
development.
Blockchain
2 Customer ID is linked to KYC database / legacy
system of Custodian bank, and can be retrieved.
Legacy KYC system/
DB
3 Custodian Bank retrieves customer ID, and
encrypts it with public keys of itself, of registry
manager, and of regulation authority
Encryption
infrastructure
4 Custodian bank creates order file with Asset and
quantity to be traded.
Custodian bank also includes info about
execution broker and the 3 encrypted Customer
ID copies into order file
Order entry mask.
Interface to Valoren-
Nb DB (Standardized
ID of companies)
5 Order file is encrypted with keys from Custodian
Bank and Execution Broker
Encryption
infrastructure
6 Both encrypted order file copies are saved in
IPFS
IPFS
7 IPFS order files are hashed, and hash stored on
Blockchain.
Attribute “pending” is set.
Execution Brokers are notified about new Orders
that are entered for execution
Ethereum Blockchain
8 Broker S creates trade file, after having off-chain
executed the trade with buyer broker.
To do so, Broker S indicates the file of a specific
sell order, which was executed.
Hash of sell order file is saved in trade file.
The order details (Asset, quantity,, side
(buy|sell), ordertype (at market | limit),limit
price, currency (always CHF), Broker S, Custodian
S, and encrypted ID of Seller) are automatically
filled in with the info from the order file
The broker S adds the following information:
Price, fee, broker B.
Trade entry mask
Order overview GUI
for broker
9 A copy of the trade file is encrypted respectively
with Public key of Seller broker S and buyer broker
B
Encryption
infrastructure
10 Encrypted trade files are saved in IPFS. IPFS
11 IPFS trade files are hashed, and hash stored on
Blockchain.
Trade attribute is set to “open”
Sell order attribute is set to “processing”
Buyer broker (trade counterparty) is notified about
new trade to be confirmed
Ethereum Blockchain
12 Broker B confirms trade in entry
mask.
To do so, Broker B indicates the file of a specific buy
order, which was executed.
The trade entry mask double checks info about
Asset, q, and adds the 3 encrypted Customer B IDs
from the buy order file.
Buy order file hash is saved in trade file.
Broker B double-checks price of trade.
Trade entry mask link
to order file
13 A copy of the trade file is encrypted respectively
with Public key of Seller broker S and buyer broker
B, share registry manager, SIC, and of regulation
authority (5 copies)
Encryption
infrastructure
14 Encrypted trade files are saved in IPFS. IPFS
15 IPFS trade files are hashed, and the previous hash
of the trade replaced on Blockchain.
Trade attribute is set to “confirmed”
Buy order attribute is set to “processing”
Ethereum Blockchain
16 SIC is notified about a confirmed trade that needs
payment processing
Ethereum Blockchain
17 SIC reads file of confirmed trade and executes
required payments:
 Payment from Custodian bank B to
Broker B
 Payment from Broker B to Broker S
 Payment from Broker S to Custodian
Bank S
Interface SIC -
Blockchain
18a
18 b
18 c
18 d
SIC Account of Custodian Bank B is debited with the transaction
Amount
SIC Account of Broker B shows net zero (debit and credit offset)
SIC Account of Broker S shows net zero (debit and credit offset)
SIC account of Custodian Bank S is credited with transaction
amount
-
19 SIC confirms payment and sets Trade record attribute to “paid”
SIC sets Sell order attribute (as identified by order file hash in
trade file) to “filled”
SIC sets Buy order attribute (as identified by order file hash in
trade file) to “filled”
Ethereum Blockchain
20a
20b
Custodian Bank S gets notified by Ethereum Blockchain about
new trade that has settled, and updates positions in securities
accounts correspondingly
Custodian Bank B gets notified by Ethereum Blockchain about
new trade that has settled, and updates positions in securities
accounts correspondingly
Ethereum Blockchain
Custodian Bank legacy
system
21a
21b
(Optional, once Customer has ID and PPK):
Custodian Bank S saves the trade transaction hash to Blockchain
ID file of Seller.
Custodian Bank B saves the trade transaction hash to Blockchain
ID file of Seller.
Ethereum Blockchain
Functionality to update
Customer ID file
22 Share registrar is informed about new trades that need
processing
GUI / Interface to
Blockchain system
23 Share registrar unlocks IPFS trade file with Private Key IPFS
24 Share registrar updates share registry with info from trade file.
For shares that need approval, it reaches out to company and
gets decision about registering of the shares
-
25 Share registrar updates status of trade record on Ethereum
Trade Attribute is set to “Registered”, or: “Rejected”
Interface to Ethereum
with write rights
26 Custodian B gets notified by Blockchain about trade registration,
and updates its Database with the registration status of
customer B.
GUI / Interface to
Blockchain system
27 Finma identifies suspect via Blockchain ID Interface to Blockchain
28 Finma unlocks all trade transactions GUI / Interface to
Blockchain system
29 Finma filters all transactions according to suspect Blockchain ID,
and compiles report
GUI / Interface to
Blockchain system
Steps Step Description Interfaces Steps Step Description Interfaces

10. 24.02.2017 10
Die Unveränderbarkeit der Smart Contracts treibt das Design!
OTC – Design Pattern Ethereum Smart Contracts
BusinessLogic V2
Robustness
AccessControl
DataStorage
LibraryN
Library1
Library2
BusinessLogic V1
DAO

11. 24.02.2017 11
Daten sind «öffentlich» aber nicht für alle lesbar.
OTC – Design Pattern Ethereum Smart Contracts

12. 24.02.2017 12
Swiss OTC Blockchain is designed to be a public shared ledger!
OTC – 100 % disruptive architecture of the Swiss OTC Blockchain
The “Shared Ledger Vision” is, where participants collaborate to maintain a
shared record, assured to be consistent between them, consuming the
services of existing and new service providers and market infrastructure
providers on an open and competitive basis.
Source: Corda non-technical white paper

13. Slide
ti&m – Vielen Dank
Wir digitalisieren Ihr Unternehmen.
Consulting. Design. Agile Projects. Products. Innovation Hosting. ti&m Garage.
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