Term Paper Kachko A.S. Prospects of decentralized solution for financial institutions. The case of blockchain technology


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Lomonosov Moscow State University

Business School



Master’s Degree Programme

“International Business and Strategy”




Term Paper

on the topic of:


“Prospects of decentrali
z
ed solution for financial
institutions. The case of blockchain technology”



Executed by:

Kachko Aleksei

Family name and first name


Scientific supervisor:

C.E.S. Zaverskiy S.M.

Academic degree and title, family name, initials


















Moscow

201
7



Abstract

The main goal of the research is to define how the blockchain technology could be integrated
within the financial system.
Financial institutions face an external tremendous overhaul in their
operations
aware of arising
decentralized solutions

popularity
.

M
oreover, all internal and
external banking functions are under scrutiny and sooner or later would be released on the
blockchain platforms using decentralized applications while traditional operational segments like
remittance, transactions, investing and t
rading platforms are in danger because of appearance
new payment systems, customer digital wallets, cryptocurrency exchange platforms and arise of
investing opportunities for different funds.

In the critical literature review, the idea of the
blockchain, m
odels and key concepts will be defined. The analysis of the blockchain industry
will be executed including most recent equity investments, while most valuable cases and
initiatives already constructed by different entities will be considered. Along with op
portunities
including market entry barriers, drivers and its future benefits, the segments for future integration
with financial institutions would be identified. Thus, classification of the blockchain further
appliance as a multiplicity of its
functions

w
ill be presented including its possible ways of usage
in financial industry
.


Table of contents


Abstract

................................
................................
................................
.....................

2

Introduction.

................................
................................
................................
..............

4

Chapter 1. What is the blockchain, why it should be used and how?

.......................

6

What is the Blockchain?

................................
................................
........................

7

What is the bitcoin blockchain?

................................
................................
..........

7

Why blockchain should be used?

................................
................................
.........

15

Benefits of using blockchain.

................................
................................
............

16

How the blockchain could be used?

................................
................................
.....

17

What actually blockchain can do?

................................
................................
....

17

10 characteristics of the blockchain.

................................
................................
.

18


................................
................................
.....

21

Conclusion of Chapter 1.

................................
................................
.....................

26

Chapter 2. Financial revolution.

................................
................................
..............

27

Blockchain:

The

new

innovation

for

financial

services
................................
.......

27

-
2017.

................................
................................

28

What

are

blockchain

use

cases

and

initiatives

taken

by

financial

services

industry?

................................
................................
................................
...............

33

Blockchain

various

concepts.

................................
................................
...........

33

Financial

and

non
-
financial

use

cases

of

blockchain.

................................
.......

35

Conclusion of Chapter 2.

................................
................................
.....................

39

Conclusion.

................................
................................
................................
..............

40

List of
References

................................
................................
................................
....

42

Appendix 1. Blockchain use cases.

................................
................................
.........

47

Appendix

2.

ICO

Tracker

................................
................................
........................

48




Introduction.


Each day we hear about
b
lockchain and its ability to transform business industry. Although most
articles focus on
b
itcoin,
c
ryptocurrency,
m
ining, however banking and financial institutions
should carefully follow the development of this breakthrough
technology and consider potential
ben
efits and impacts of b
lockchain on their business models. As such, they demonstrate that
once
b
lockchain becomes reality, it will definitely transform the IT infrastructure and service
offerings of all financial institu
tions.

T
he first era of the digital economy
brought up
computing
and communications technologies

and

this

second era would be powered by a clever
combination of computer engineering,

mathematics, cryptography, and behavioural economics.

Today, the
b
lockcha
in is in an emergent and immature phase that is going to transform many
businesses. It becomes a part of the history of the Internet and able to make it more
decentralized, more open, more secure, more private, more equitable, and more accessible.

At its
c
ore, the b
lockchain is a technology that permanently records transactions in a way that cannot
be later erased but can only be sequentially updated, in essence keeping a never
-
ending historical
trail or a ledger. The understanding of this idea may modify m
odern paradigm on

creating

among individuals. This technology is a catalyst
for dramatic changes in our way of life, traditional corporate models, society and global
institutions. It challenges governance a
nd centrally controlled ways of enforcing transactions.

Blockchain promises
decentralization of trust, value flow without intermediaries that changes
traditional patterns on the idea of trust, central forces and security matters. Individuals who
believe in

this opportunity consider that trust should be free
,
and not in the hands of central
forces that tax it, or control it in one form or another. They believe that trust can be and should
be part of peer
-
to
-
peer relationships, facilitated by technology that
can enforce it. Trust can be
coded up, and it can be computed to be true or false by way of mathematically backed certainty,
that is enforced by powerful encryption to cement it. In essence, trust is replaced by
cryptographic proofs, and trust is maintaine
d by a network of
trusted computers

that ensure its
security, as contrasted with single entities who create overhead or unnecessary bureaucracy
around it.

Thus, the network once launched, never go down.

At the moment the blockchain is about replacing inter
mediaries as the Internet once has already
done. In this situation the key managerial problem appears for current intermediaries, especially
banking and financial industries. They will need to find out how their functionality will be
affected and how could

they use all of these structural changes for their advantage, thus they will
be the main consumers of the research results. On this way blockchain brings us new terms such
as smart contracts, distributed ledgers, digital wallets, transaction blocks, etc.



Chapter 1.

What is the
b
lockchain
, why it should be used
and how
?


The blockchain technology could possibly be the next global disruptive trend and new
worldwide informational paradigm after Internet breakthrough and mobile networking,
enhancing the
potential to transform all human common activities
.
The Internet brought us e
-
mail, the World Wide Web, dot
-
coms, social media, the mobile Web, big data, cloud computing,
and the early days of the Internet of Things. It has significantly refused the costs
of searching,
collaborating, and exchanging information and also has lowered the barriers to entry for new
media and entertainment, new forms of retailing and organizing work, and unprecedented digital
ventures.

The political, economic, social, technologic
al and legal systems started making it clear
that blockchain could have capacity to transform all aspects of society and its activities.

T
he Internet
has brought about
many positive changes

but it still
has serious limitations for
business and economic ac
tivity

and one of the main issue is that

we still

can
not

reliably establish
one another’s identities or trust one another to transact and

exchange money


without
validation from a third party like a bank or a government.


By the definition of
Pric
e Waterhouse Coopers,
the blockchain technology
is a distributed,
decentrali
z
ed transaction ledger
,
not currently regulated, complex and difficult to understand

which is one of the barriers to the speed of adoption
. However, there are many factors and expert
views
that blockchain will blast its expansion even more rapidly.

All that we able to do now is to embrace blockchain or ignore it believing it is a financial
pyramid or just a geek hype. What is interesting for

me is that banks, financial institutions and
now even governments create working groups pretending they are doing blockchain stuff in a
panic not to lose the track of the market trend. While insurers
are

still asleep as another
technology revolution passe
s by,

others
like c
apital
m
arkets

and a
m
anagement

businesses
mostly interesting for me

should make

momentous decision
, realizing doing nothing is not an
option.

Starting my analysis there are more questions than answers, it would be much more interest
ing to
find out all them. In this chapter I should find out what is the blockchain technology, why it
should be used and how it could be used for especially in financial services.


What is the Blockchain?



The richest one percent of this country owns half our country's wealth, five trillion dollars. One
third of that comes from hard work, two thirds comes from inheritance, and what I do, stock and
real estate speculation. You got ninety percent of the Americ
an public out there with little or no
net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine,
upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out
there wondering how we did it. N
ow you're not naive enough to think we're living in a
democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer
instinct. Stick around pal, I've still got a lot to teach you.



Gordon Gekko, Wall Street, 1987


We liv
e in a fast
-
paced environment where mostly everyone trying to cut the piece of a cake
while some of them just want to make the world better.

That unknown group of people or an
individual with unclear motives transform the economic power grid for the better

life.
Technology is everywhere in this digital age collecting our data and invading our privacy thus
security and storage of data and records

problems arises by itself.


What is the bitcoin blockchain?

The blockchain was firstly mentioned by an anonymous person or a group of people known as
Satoshi Naka
mato in
2008 paper, “Bitcoin: A Peer
-
to
-
Peer Electronic Cash

System.


He outlined
a new protocol for a peer
-
to
-
peer electronic cash system using a cryptoc
urrency called bitcoin
where it serves as a global distributed digital ledger (a blockchain) for all transactions executed
without a trusted third party. Vinay Gupta in an article “A brief history of blockchain” for
Harvard Business Review defines blockcha
in as “a distributed database that maintains a
continuously growing list of ordered records called, “blocks,” which are linked and secured
using cryptography.” The idea of the technology was better explained by
Gavin Andresen
,
the
former lead maintainer of

Bitcoin Core, bitc
oin's dominant software project: “
The practical
consequence […is…] for the first time, a way for one Internet user to transfer a unique piece of
digital property to another Internet user, such that the transfer is guaranteed to be safe a
nd
secure, everyone knows that the transfer has taken place, and nobody can challenge the
legitimacy of the transfer. The consequences of this bre
akthrough are hard to overstate.
The use
of blockchain for bitcoin
made it the first digital currency to solve

the double spending problem
without re
quiring a trusted third party. This was a starting point of a new era of digital economy.
Satoshi
’s
paper’s abstract
defines the notion of bitcoin’s foundation and

explains its
basic
principles:



“A purely
peer
-
to
-
peer
version of electronic cash would allow online payments to be sent
directly from one party to another without going through a financial institution
.”



“A

trusted third party is not required
to prevent double
-
spending.”



T
he double
-
spending proble
m
could be solved by
using a peer
-
to
-
peer network
.




T
he network timestamps transactions
by hashing them into an ongoing chain of hash
-
based proof
-
of
-
work, forming
a record that cannot be changed without redoing the proof
-
of
-
work
.





The longest chain not on
ly serves as proof of the sequence of events witnessed, but
proof that it came from the largest pool of CPU power. As long as
a majority of CPU
power is controlled by nodes that are not cooperating to attack the network
, they’ll
generate the longest chain
and outpace attackers.





The network itself requires minimal structure. Messages are broadcast on a best
-
effort
basis, and
nodes can leave and re
-
join the network at will, accepting the longest proof
-
of
-
work chain as proof of what happened while they were
gone
.


Satoshi’s incentives were mainly provoked by high transaction costs, limits and many absences
unsolvable by financial institutions who act like a trusted third party, an intermediary to process
electronic payments between sides based on the trust mo
del. However, that model did not allow
non
-
reversible transactions

because of intermediaries’ involvement, thus providing a chance for
cybercrimes enhancing lots of displeasure among Internet users. Traditional
reversible model

means that if a customer buys goods online via mostly any credit card, if the goods never
arrive
,
a customer

can complain to the credit card company

and after an investigation in case of ripping
off they refund money back to the customer. For this service

credit card companies charge
merchants a few percentage points on
each

transaction.

This model accepts a certain amount of
fraud as unavoidable and at that time there was not any mechanism to provide transactions
without a trusted third party. While third

parties could be a money transfer service (Western
union, Qiwi), a commercial bank (Goldman Sachs, Open Bank), government body (
The Federal
Reserve Board of Governors
,
The Central Bank of the Russian Federation
), a credit card
company (Visa, MasterCard) t
hey execute a role of intermediary and their settlements can take
huge time delays.

Satoshi’s vision was limited to money matters not to some greater extent of setting up new
Internet. His proposition was to create
a new electronic payment system

based on

cryptographic
proof instead of trust, allowing parties to transact directly with each other, herein
peer
-
to
-
peer

(p2p)
, without the need for intermediaries.
In his opinion transactions that are impossible to
reverse would protects
users

from fraud.

As an
asset of exchange was chosen
an electronic coin

called bitcoin (BTC)

defined as a chain of digital signatures, firstly signed
by the

payee
who
verif
ies

the signatures to verify the

ownership
, shown in Figure 1.
In traditional fiat money
systems

money are printed by governments while bitcoin is discovered by
miners

(n
etwork
participants who run fully

operating bitcoin nodes
) competing with each other. Bitcoin is
represented by transactions (blocks) recorded in a blockchain


a global ledger of bl
ocks,
distributed among many computers of miners (CPUs) among the world, diversifying the risk of
hacking attack because there is no central database. When a new block is created miners apply a
mathematical calculation using hardware to turn information fr
om the block into
a hash

(a kind
of unique fingerprint for a text or a data file.)

A
ccording to Dino Mark Angaritis

m
iners are

to find

a hash that meets the target

and

statistically
it

occur
s

every ten minutes

because it is a random process and c
an take

. He explains
that m
iners

gather all the pending transactions that they find on the network and run the data
through a cryptographic digest function called the secure hash algorithm (SHA
-
256), which
outputs a 32
-
by
te hash value. If the hash value is below a certain target (set by the network and
adjusted every 2,016 blocks), then the miner has found the answer to the puzzle and has ‘solved’
the block. Unfortunately for the miner, finding the right hash value is very

difficult. If the hash
value is wrong, the miner adjusts the input data slightly and tries again. Each attempt results in
an entirely different hash value. Miners have to try many times to find the right answer. As of
November 2015, the number of hash att
empts is on average 350 million trillion. That’s a lot of
work!”
When someone finally creates a new hash, he gets a reward of a bitcoin amount and
everybody knows about it.

E
arly adopters

received 50 bitcoins for each block

when e
very four
years the reward

per

block would
halve
: 25 BTC, 12.5 BTC,

etc
.
This is a Satoshi’s incentive
to

ensure the platform’s long
-
term success, buying the best

equipment to run mining operations,
spending energy as efficiently as possible,

and maintaining the ledger.

By the idea
, every coin
could be transferred by digitally signing
a hash

of the previous transaction and the public key of
the next owner to the end of the coin proposing a solution to the double
-
spending issue.


Figure
1

The transaction pro
cess of new electronic payment system. (Satoshi Nakamato,
“Bitcoin: A Peer
-
to
-
Peer
Electronic Cash System.”

2008)

The double
-
spending problem

occurs when the same single digital coin can be spent more than
once in case of duplication or falsification, provoking inflation, diminishing users’ trust and
retention of the currency. Thus,
a solution to the double
-
spending problem
was proposed by
Sato
shi by introducing a trusted central authority (mint) that checks every transaction for double
spending by using
a consensus mechanism
. Here we go again, that is the same problem as
appears with the traditional payment model while
the fate of the entire
money system depends on
the

organization

running the mint,
when

every transaction ha
s

to go through
a mint
,
the same as

a
bank.


in his “Ethereum blog”

that
r
eaching consensus is the main idea for

blockchain’s processes

because it allows
eliminating

the
ambiguity
,
conflicting interpretations

and financial frictions

of what happened

so “
Let the
network reach consensus algorithmically on what

happened and record it cryptographically on
the blockchain
.
” He adds that, p
eer
-
to
-
peer networks

based on

the consensus algorithm
provide
the
right to update the status of the network

transferred among the miners
who constitute an
economic se
t which is securely distributed not allowing a single member or a cartel

to overtake
majority. In order t
o achieve consensus

Satoshi has proposed
a proof
-
o
f
-

work

(PoW)
mechanism

that is described below
.

Technologically Satoshi proposed to use a mint based model while it is aware of all transactions
and decides which arrive fi
rst without use of one specific database to rule transaction validity,
thus confirming the absence of previous transactions possibly made by the owner of the coin.
This was only possible if there would be a single history of the orders (a unique chain or a

ledger) supported by publicly announcing proof at the time of each transaction (recording a
block), thus nodes (users,

participants) agreed it was the first made, transferring authority and
trust to a decentralized network.

The process of mining, assembli
ng blocks, spending resources,
reaching consensus, maintaining the ledger makes the bitcoin blockchain a public utility that
require public support like the Internet

Next a timestamp server walks onto the scene. Satoshi declares that, “it works by
taking
a

hash
of a block of items
,
timestamp
ing it

and widely publishing the hash, such as in a

newspaper
,” as
shown in Figure 2. That means everyone witnessing that

the data have existed at the particular
time. Technologically e
ach timestamp includes the
previous timestamp in

its hash,

thus a chain
(ledger) been forming
, with each additional timestamp reinforcing the

previous one
.

Indeed,
the
network timestamps the
very
first transaction

where a particular coin
was spent thus
reject
ing

subsequent spends of

the

coin

hence

eliminating a double spend.

Satoshi states: “
Nodes always
consider the longest chain to be the correct one and will keep working on extending it. If two
nodes broadcast different versions of the next block simultaneously, some nodes may rec
eive
one or the other first. In that case, they work on the first one they received, but save the other
branch in case it becomes longer. The tie will be broken when the next proof
-
of
-
work is found
and one branch becomes longer; the nodes that were working

on the other branch will then
switch to the longer one.



Figure
2

Timestamping server processing hash. (Satoshi Nakamato,
“Bitcoin: A Peer
-
to
-
Peer Electronic Cash
System.”
2008)

In order to use a timestamp server on a peer
-
to
-
pe
er basis, Satoshi proposes to use a proof
-
of
-
work (PoW) mechanism. This mechanism is like a puzzle that is hard to solve because it takes a
lot of works but easy to verify because everyone can check the answer very quickly because of
transparency.
This may

sound
very
complicated but the idea is

very

simple.

Don and Alex
Tapscott in their book “Blockchain Revolution. How the technology behind bitcoin is changing
money,
business and the world” describe PoW

mechanism as an agreement among miners
whoever solves the problem by finding
the right hash first gets to create a new block chained
with previous blocks.
The block cannot be changed without redoing the work rapidly decreasing
the probability for attacker
s to modify it because they have to modify the block and all blocks
after it. While miners spend resources (computing hardware, electricity and time) to find the
right hash they receive bitcoin as a reward that makes it possible for a muted agreement of tr
ust
among the community that a lot of work went into producing while supporting PoW mechanism.
Another
great
feature of the proof
-
of
-
work system is essentially based on the one CPU
-
one
-
vote
principle thus solving the problem of determining representation i
n majority decision making. If
the majority were based on

one

IP

address

has only
one

vote

principle, anyone who able to
allocate as many IPs
could subverted

it
.

Summarizing all the information about what is the blockchain Satoshi proposes the steps or ru
les
how to run the network and they are as follows:

1)

New transactions are broadcast to all nodes.

2)

Each node collects new transactions into a block.

3)

Each node works on finding a difficult proof
-
of
-
work for its block.

4)

When a node finds a proof
-
of
-
work, it bro
adcasts the block to all nodes.

5)

Nodes accept the block only if all transactions in it are valid and not already spent.

6)

Nodes express their acceptance of the block by working on creating the next block in the
chain, using the hash of the accepted block as t
he previous hash.

The header of the block contents the information about version of the block, hash of the previous
(parental) block, timestamp, bits and nonce which describes the difficulty target behind the
block, number of transactions in the block, th
erefore transactions does not take part in hashing.
They are put in Merkle Tree with only the root included in the block’s hash shown in Figure 3.
This is a structure of data also known as a binary tree of hashes. The process of calculation
continues till
the moment when a unique hash is created that is called a Merkle Root.


Figure
3

Merkle Tree structure
. (Satoshi Nakamato,
“Bitcoin: A Peer
-
to
-
Peer Electronic Cash System.”
, 2008)

One of the main points
about

the Trust Protocol
consider an issue of privacy. While the
traditional reversible model
achieves a level of privacy by limiting access to information

the
obligation to announce
all transactions publicly

. At the same time privacy
is maintained by keeping

public keys anonymous. This is an example how stock exchange
operates


everyone can see the time and size of trades making it public however market players
do not know who the parties were. Satoshi declares: “
The public can see that someone is sending

an

amount to someone else, but without information linking the transaction to anyone.



Summing up the idea of bitcoin
-

it

is digital cash or a currency, in which encryption techniques
or cryptography are used to regulate the generation

of

coins

and verify
the transfer of funds,
operating independently of

trusted third parties

like
central bank
s

and other intermediaries.

I
t is a
new form of money that combines peer
-
to
-
peer file sharing with public key cryptography.

Bitcoins are created as a reward for comput
ational processing work, known as mining, in which
miners

offer their computing power to verify and record payments into the public ledger



the
bitcoin blockchain
.

As the blockchain is the public ledger of all bitcoin transactions that have
ever been exec
uted, it is constantly growing as miners add new blocks to it to record the most
recent transactions. These blocks are added to the blockchain in a linear, chronological order.
Every computer connected to the network using a client that performs the task o
f validating and
relaying transactions has a copy of the blockchain, which is downloaded automatically when the
from the very first transactions ever executed (th
e genesis block) to the most recently completed
block.

Bitcoins could be obtained in exchange for fiat money (traditional currencies), products,
and services like any currency. Users can send and receive bitcoins electronically for an optional
transaction

A very interesting example
provided by Tapscott brothers in their book “Blockchain Revolution”
illustrates the difference of ideas between execution of traditional and blo
ckchain transactions.
Imagine you have opened a bank account and now you are provided with an illusion of access
and activity visibility on it. It is really an access to a database record owned by the bank holding
the higher authority that says you have su
ch amount of money. Every time you want to move
money, pay someone or deposit money, the bank is giving you explicit access because you gave
them implicit trust over your affair. On the other hand, blockchain transaction allows users to
send any type of in
formation or resources, in our case


money, to another user, via a special
wallet, and the blockchain network does the authentication, validation and transfer, typically
within 10 minutes, with or without a cryptocurrency exchange in the middle. There is
no
intermediary who takes the authority and controls the process.


Indeed, validating peer
-
to
-
peer transactions
is

possible by

allowing

the network perform a

decentralized

trust
process
, without
third party
. In other words
, blockchain provides p
eer
-
to
-
peer
electronic transactions
without

financial institutions

using c
ryptographic proof instead of central
trust

p
ut
ting

trust in the network instead of in a central institution
. It allows users to trust the
system because it uses
“trustless” proof me
chanism

(Trust Protocol) for

all

of

the transactions on
the network

and
store

the information

worldwide on many different decentralized nodes
maintained by miners

rather than
third
-
party intermediary
.

Making it clear about the blockchain it became known to

the wide public because of the bitcoin
expansion and this is true that existence of that particular cryptocurrency depends on this pioneer
technology basically the Trust Protocol. However, it is not only about digital money and mining.
William Mougayar



35 years of experience in the technology sector

believes that the blockchain
is slightly reminds the Web
. He considers that the b
lockchain is not just any new technology. It
is a type of technology that challenges other existing software technologies, beca
use it has the
potential to replace or supplement existing practices

like
TCP/IP, the Internet network protocol
.
According to Mougayar i
t is more of a new protocol that sits on top of the Internet, just as the
World Wide Web sits on top of the Internet via

its own technology standards.

There
are lots of different definitions

of what the blockchain technology is, however by my
opinion, William Mougayar
states in a best way three
capabilities or definitions

for the
blockchain technology
: technological,
business, legal
.



Technically, the blockchain is a back
-
end database that maintains a distributed ledger that
can be inspected openly.



From business point of view, the blockchain is an exchange network for moving
ithout the assistance of intermediaries.



Legally, the blockchain validates transactions as a mechanism, replacing previously
trusted entities, not requiring intermediary assistance.

The implication of blockchain is priceless. For the first time we have a T
rust Protocol that
ensures trusted transactions directly between two or more parties, authenticated by mass
collaboration and powered by collective self
-
interest and records information without a risk of
divergent behaviour of third parties (large corporat
ions motivated by profit increasing costs for
users.)

Also, that is a platform where everyone knows what is true according to
structured
recorded information. Another feature is that it is an open source code: anyone can download it
for free, run it, and u
se it to develop new ideas for managing transactions online and many other
functions. As a matter of fact, blockchain technology has the potential to flood the market with
countless new applications and to transform current paradigm of life.


Why blockchai
n should be used?

Why blockchain disrupts the economy, what
are

the driver
s
?

Blockchain is a revolutionary paradigm for the human world
. By the opinion of
Melanie Swan,

the f
ounder of the Institute for Blockchain Studies

and the author of “Blockchain.

The blueprint
for a new economy,” our world could be understood
through computing paradigms. Firstly,
personal computer and Internet changed everything, then mobile and social networking flooded
the users. The connected world of computing including wearab
le computing, “Internet
-
of
-
Things”, smartphones, smart home, etc. relying on blockchain cryptography emerges and allows
the transfer of information and the effective allocation of resources.
She states that t
he
blockchain could be used by several categorie
s of users: web users, mobile phone users, website
owners and any “thing” that gain benefit from being connected. Hence

the

blockchain brings
expectation of value exchange functionality and will not have a need to find new clients.

The blockchain is like

a new feature or an application which could run on
the existing Internet
protocols,
providing a possibility
to the Internet to enable economic transactions, immediate
digital currency payments and more complicated financial contracts. Any currency, financ
ial
the

blockchain.

Melanie Swan
supposes that
the blockchain may be used not just for transactions
, it is like an accounting system
for registering, tracking, monitoring and transacting
exchange, including every area of finance, economics,

money
,

hard assets (physical property)

on a global scale
. Swan
considers that t
h
e economy that the blockchain enables is not
only about
money

movement
,
however; it is the transfer of information and the effective allocation of resources in the
economy.
She highlights that w
ith revolutionary potential equal to that of the Internet,
blo
ckchain technology could be deployed and adopted much more quickly than the Internet was
.
While there are many complaints that blockchain technology is new and too complicated for
mainstream adoption, William Mougayar states that
the same was true of the I
nternet, and more
generally at the beginning of any new technology era, the technical details of “what it is” and
“how it works” are of interest to a popular audience.
He determines that it is not a real entry
barrier because “
it is not necessary to know h
ow TCP/IP works in order to send an email, and
new technology applications pass into public use without much further consideration of the
technical details as long as appropriate, usable, trustable frontend applications are developed.


Thus, the blockchain

could easily spread among users across the globe at a very short period of
time and the it
could become the technological underlay for payments, decentralized exchange,
coins

ontract
issuance and
execution.

In the same way that billions of people around the world are currently connected to the Web,
millions, and then billions of people, will be connected to blockchains. We should not be
surprised if the total amount of blockchain users

surpasses the historical Web users’ growth.

According to the Internet World Stats, b
y

June
-
30,
201
7
,
51.7
% of the world’s 7.
5

billion
population had an Internet
connection

that

is about 3.9 billion of users
.

In 1995, that number was
less than 1%. It took
until 2005 to reach one billion. As for websites
, in September 2017 their
total amount is 1.8 billion, according to Netcraft “Web Server Survey”.


Benefits of using blockchain
.

Blockchain technology is a new disruptive economy where entrepreneurs, start
-
u
ps and
enterprises of every size able to find new opportunities for their future success, new businesses
and solutions for existing issues. As large companies were not ready for interruption they want to
replace existing solutions with new ones because the
y are at risk of lagging behind new
blockchain
-
based companies. The blockchain
is very useful for developers helping them to solve
technical problems when the end
-
users
want a simple solution to work

and does not care who
invented
a particular technologica
l novelty

and how it works
. Business stakeholders know that
problems cost them money, and they
support

the solutions that address these problems.
William
Mougayar states
, the blockchain’s benefits can be examined on a long list:



Cost savings: direct or indirect.



Speed: removing time delays.



Transparency: providing the right information to the right people.



Better privacy: protecting consumers, businesses via more granular controls.



Lower risk: better visibility, less exposure, less fraud, less tampering.



Access: more equitable access.



Productivity: more work output.



Efficiency: faster processing or reporting.



Quality: less errors or more satisfaction.



Outcomes: profits and growt
h.

We can see that the b
lockchain
has strong and deep benefits and opportunities for redesigning
current entrepreneurial world
rather to invent new ones.
Small
-
to
-
Medium business, especially
start
-
ups over the globe
see it as a solution to everything, whe
reas big companies see it as

a
challenge because it attacks inner processes
.

The blockchain will redefine the role of existing
intermediaries while creating new
intermediaries,

therefore it will disrupt the traditional
boundaries of value.


How the blockch
ain could be used?

What actually blockchain can do?

According to Mougayar, the b
lockchain has

three successive layers of architecture:



Infrastructure and Protocols



Middleware and Services



End
-
User Applications

He explains, f
irst, there is a wide set of

infrastructures medium as a foundation. For the Internet,
it was TCP/IP, HTTP, SMTP

while f
or the blockchain, it will be the different versions of
blockchain protocols being
set up
as

a basis

infrastructure. Then, there is a number of
middleware software
and services that will be built or delivered on top of the infrastructure
elements.
They will
extend the functionality of the infrastructure elements and make it easier to
build applications. Finally, thousands of applications will

be built on top of
the i
nfrastructure and
middleware software and services
. With the development of basis layers, the development of
applications will become easier.
As an overlay on top of the Internet, blockchains can take many
forms of implementations.

In essence,
Mougayar sta
tes that “
it is
the
technology that changes
other techn
ology
.”


10 characteristics of the blockchain
.


In his book,
William Mougayar represents 10
characteristics

of the blockchain, which could be
used further as a multiplicity of its functions
,
and they
all need to be

understood in a holistic
manner
:

1.

Cryptocurrency

2.

Computing Infrastructure

3.

Transaction Platform

4.

Decentralized Database

5.

Distributed Accounting Ledger

6.

Development Platform

7.

Open Source Software

8.

Financial Services Marketplace

9.

Peer
-
to
-
Peer Network

10.

Trust Services Layer

Let me describe each of them as the first step for the future understanding of the blockchain
technology and how it could be applied by
the world of finance
.

1.

Digital Cryptocurrency

The digital currency function is the most famous use
case of blockchain
. The total market
capitalization of cryptocurrencies is about $200 billion while

the market leaders Bitcoin (BTC)
,
54.05% market dominance

, 15.07%

has a total capitalization of
108.1

and
30.4

billion of dollars respect
ively as at 13
th

November, 2017, and now there are over
9
00
cryptocurrencies traded worldwide
, according to the Coinmarketcap.com
. They could be traded
on exchanges, buy or sell goods and services however still there some frictions every time it
crosses in
to the real world of fiat currency.

2.

Decentralized Computing Infrastructure

The blockchain consists of many CPUs linked to the global ledger thus trust is transferring from
centralized organization to computers and decentralized organizations
via an underly
ing
blockchain
-
based decentralized consensus protocol that
manages

its delivery.

As contrasted with
the Web where an HTTP (Hypertext Transfer Protocol) request is sent to the server, with
blockchain apps,
the network makes a request to the blockchain
.
With

the new paradigm the
blockchain will serve that trust function without dependence on central intermediaries.


3.

Transaction Platform

The blockchain is a giant transaction processing platform. Every time a consensus is reached
, a
transaction is recorded on a

block so the blockchain
timestamps this
transaction

on a ledger.
Blockchain and other transaction platforms could be estimated

by the processing
throughput
measured in transactions per second (TPS). As of 2016, the Bitcoin blockchain hover
ed

at 5
-
7
TPS,
but with prospects of future advances in sidechain technology and expected increases in the
started with 10 TPS in 2015, increas
ed

towards 50
-
100 TPS in 2017
, and ta
rgeting 50,000
-
100,000 TPS by 2019. Private
blockchains
are even faster because they have less security
requirements

with the speed of
1,000

10,000 TPS in 2016,
increasing
to 2,000
-
15,000 TPS in
2017

with a potential to break the limits
.
The
speed cut the
transaction costs and provides

time
efficiency.

4.

Decentralized Database

The blockchain
allows
storing

any data semi
-
publicly in
a block.
Anyone verif
ies

you have
placed that information, because the
block
has your signature on it, but only you can unlock what
is inside the
block
, because only you hold the private key to that data.
Thus, a header is public
however private information the fulfilment of the block is secured and private.

5.

Shared, Distributed Ac
counting Ledger

The blockchain is a global distributed digital ledger for all transactions executed without a
trusted third party
allowing a user’s computer to verify the validity of each transaction

providing

a solution to the double
-
spending issue
.
This ledger
is shared globally thus there is no central
database, decreasing the chance for fatal attack
and
by its form
it can be private, public, or semi
-
private.

6.

Software Development Platform

For developers, a blockchain is
a
set of software
technologies includ
ing

technologies for building
a new breed of applications

which are
decentralized and cryptographically secure.
Thus,
blockchains are a new way to build applications.

7.

Open Source Software

Mostly all of the robust blockchains are open sourced. Therefore,
the source of the software is
public

allowing

innovation
to
happen in a collaborative way, on top of the core software.
In case
of t
he fact that

the

blockchain software is
opening

source
d
th
e stronger the ecosystem around it
will become.

8.

Financial Services Marketplace

The b
lockchain

technology

offer
s

an incredible innovation environment for the next generation
of financial services.
When
cryptocurrency volatilities subside
,

cryptocurrency
-
bas
ed
blockchains

will be treated like fiat currencies providing all the chances to become
part
s

of
financial instruments
, leading to the development of new financial products. Derivatives,
options, swaps, synthetic instruments, investments, loans, and many o
ther traditional instruments
will have their cryptocurrency version, therefore creating a new financial services trading
marketplace.

9.

Peer
-
to
-
Peer Network

T
he blockchain is a peer
-
to
-
peer network, where any user can reach and transact with
one
another

directly

without intermediaries

increasing resource efficiency. Blockchain is a pioneer of
new economic model where any participant of the network
is allowed to offer services based on
their knowledge of transactions, creating their own distributed econom
ies

of different
sizes and
vibrancy.

10.

Trust Services Layer

The blockchain redefines our commonly accepted beliefs around trust (reliance, predictability,
confidence, truth, assurance, credence, certainty, certitude, responsibility, and dependence)

and
disru
pts existing economics of trust because the costs of delivering that trust are now distributed.

Blockchains offers truth and transparency as a base layer

while most

trusted institutions do not
offer
them.

While t
rust is always needed

the blockchain
changes

how trust is delivered and how
it is earned. Whoever earns the trust earns the relationship and that includes trusting a
blockchain.

attached to it: transactions, data, s
ervices, processes, identity, business logic, terms of an
agreement, or physical objects
, etc
.

After describing and considering these powerful features and characteristics we can start imagine
the incredible enabling powers of blockchains.

Therefore, the
blockchain could be used as a
“state machine”
-

allows
keeping

track of records of these changes representing the transactions between the
current block and previous blocks in each block.



Financial technologies including bitcoin, cryptocurrencies and blockchains since the very
begi
nning faced of plenty of scepticism before gaining recognition among the market
participants. The blockchain will meet resistance until it is widely accepted. To overcome the
resistance the barriers should be found in order to tackle the solutions. The bar
riers could be split
into groups of challenges: technological challenges, business challenges and regulatory barriers.

1.

Technological challenges:

There is a weak ecosystem of participants not providing fast adaptation and development
processes. As majority
of business have not a glue about what is the blockchain, mass market as
users may
not even know there is a blockchain behind their usage.

For future progressions first
of all
,

the blockchain needs infrastructure,
middleware, and software applications
.
In
fact, it
takes time for new applications to emerge when new foundational technology appears

especially
when there is shortage in developers
.

Accord
ing to Daxx and Quora
there are over 21 million of
developers in the world

while by the end of
201
6
, there we
re approximately
7.5
00 developers
dedicated to writing software for cryptocurrency,
b
itcoin, or blockchains
.
Therefore the
b
lockchain middleware is like the glue between blockchain infrastructure and the building of
applications

while software
development
tools facilitate the overall software development
projects.

On this hand start
-
ups may take the leading role in creating

new products and fostering
new markets

while anyone may study open source code with help of community and previous
background. In order

to improve the number of people and total awareness about the blockchain,
there more than 450 p
ayment events and conferences including summits, workshops
, t
raining
programs by the blockchain providers

and

hackathons

performed around the globe also there is
an a
vailability of formal academic degrees that specialize in this field, such as the Master of
Science in Digital Currency, offered by the University of Nicosia in Cyprus.

Funders, venture
capitalists, developers,

disruptors, influencers
,

analysts, supporters and users have to nurture a
new mindset to develop and use appropriate ecosystem.

Another issue is about s
calability of blockchains
. This

is an issue
concerning many argues

and
the latest example is the denoun
c
e of SegWit2x

a hard fork
was
scheduled for block 494,784 to
increase the Bitcoin block size from 1 MB to 2 MB.

The
hard fork has divided the
b
itcoin
community
and has already
result
ed

in a chain split.

After the denounce, Tom Zander, a release
manager of

Bitcoin Classic has stated “
In at most 6 months I'm sure we'll just drop the "Cash"
and call it "Bitcoin
.
"

That happened because the community has not
reached

the consensus rather
than the decentralized ledger itself. (
https://bitcoinclassic.com/news/clos
ing.html
). It shows ever
again that s
caling technical systems is a never
-
ending challenge.
William Mougayar declares that
more than 30 years after
invention of the Internet,
we are still designing and refining the
Internet’s own scalability.

T
he size of th
e network has grown significantly

and already crossed
3.8 billion of users and still looking forward. However, this would be tackled by the community
while another challenge arises
. T
he balance between a

decentralized network

and security creates

a

new

eco
nomic model

that has not been attempted before.

Integration with existing applications

and finding trade
-
offs with a use of databases for
storing
blockchain data for transactional, historical, analytical, and compliance reporting requirement
s is
another g
reat issue to be solved.

Therefore, it might be easier to develop
new
projects outside
of
the
existing
legacy
because
it cuts integrational processes thus reducing costs and time.

2.

Business challenges
:

There are several

macro
-
r
elated

issues and
organization
-
wide challenges which are important for
business to concern about. First of all, business should understand the idea of blockchains and
possible outcomes for their own processes. However, it is very common that many organizations
do not have any problems
within their organization making them blind to innovate their own
business models. They got a very

a short sighted and limited view of what is possible.

On the
other hand, there are lots of examples how blockchains attack the core proposition of many
finan
cial intermediaries for example clearinghouses. These companies have to reconsider their
business model and develop new value proposition elements as soon as possible or they will be
out of the game.

In order to develop the ecosystem many start
-
ups will s
et up to skim and gain their unique niche.
Either most of them will not succeed they will move forward the community producing
experienced entrepreneurs

and flooding new assumptions to challenge.
However current

business
leaders have a
lack of a comprehens
ive understanding of the basic capabilities

and potential
value of blockchains. The other
part amplified with limited executive vision is

afraid of learning
how to use the blockchain in order to reengineer their business processes. While changes are
near t
heir houses they will have to learn and understand how to manage them in most appropriate
way despite the difficulty of change management. Therefore, venture capitalists are ready to fund

the incubation, production, and acceleration of innovation around th
e application of blockchain
technology

around the world pouring money into the ecosystem for its future development
. In
addition to venture capital

another risky financing option is available. This is a
crowdfunding

approach
Initial Crypto Offering (ICO),

which issues
cryptocurrency or crypto
-
tokens
with lower
external regulation. First

blockchain applications may not have the best user

experience and
would provide low returns. The business task is to align and involve stakeholders into a value
chain as qui
ck as possible by creating “killer apps” like Amazon, eBay, Uber or Airbnb to
present proof points that a viable business can be built on the blockchain thus increasing market
adoption.

Finally, c
ryptocurrency
has a huge
volatility

at the market with day s
wings up
to

100% for
alternative coins. Business

is

still underperforming while rushed with information overload
trying to find the roots how to start using all of this stuff. It is expected that volatility will
stabilize with increased maturity and market

adoption. According to Bittrex, the next
-
generation
digital currency exchange, the average monthly swings of leading coins is less than 30% for the
q3, 2017. As total market capitalization of digital money increases speculators will have lower
chances to
mace impacts to the market.

3.

Regulatory barriers:

Blockchain is a new robust technology with rising popularity affecting many spheres and

industries while regulators among different countries respond with various speed and directions.
However, they will come to blockchains, but better late than early. From the past experience
with
the rise of the Internet it was left alone till resolutions

a
nd frameworks

were implemented,
thus the modern community opt to wait for maturity of the blockchain itself preventing
governments and other authorities to disturb penetration process.

Eventually, regulators have to
adjust their vision of regulating tradit
ional trust providers based on the model of central choke
point regulations because the blockchain based on the model of decentralization has changed the
nature of trust itself. Thus, it cannot be regulated as centralized entities a priori requiring centra
l
authorities to enhance innovation in regulations.

Adjustors need to know what to regulate
especially when a new technology is in its infancy of adoption and that is only possible after
good observation of the subject.

Talking about bitcoin blockchain, t
he legal status varies from country to country while the
majority of them do not define the usage of bitcoin as illegal
(with the exceptions of:
Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Nepal)
. The US law authorities are the market
leaders while T
he U
.S. Treasury

has already

classified bitcoin as a convertible decentralized
virtual currency

according to the
Statement of Jennifer Shasky Calvery, Director Financial
Crimes Enforcement Network United States Department of the Treasury Before the United
Stat
es Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on National
Security and International Trade and Finance Subcommittee on Economic Policy

on 19
th

November

2013. The Internal Revenue Service

declares

that virtual currency is treated a
s
property for U.S. federal tax purposes.

General tax principles that apply to property transactions
apply to transactions using virtual currency.
” Also
SEC

(
The

U.S.

Securities and Exchange
Commission
)

recognition that some tokens are securities
:


The
SEC's Report of Investigation
found that tokens offered and sold by a "virtual" organization known as "The DAO" were
securities and therefore subject to the federal securities laws

-

is a

sensible approach that will
encourage the best ideas to continue in

a

sandbox, while less
-
innovative projects will face more
scrutiny.

That means that the US
regulatory structure consist
s

of tax regulations
, financial crimes
regulations, combating domestic and international money laundering and terrorist financing for
fin
ancial exchanges and the individuals and corporations
, is mostly ready to manage all
necessary stages for nearest future implementation.

On the other hand,
The European Union
does not have specific legislation
relative to the status of
the bitcoin as a cu
rrency
, while t
he European Banking Authority
in their Annual Report,
advised
European banks
not to manage their operations with digital currencies
until a regulatory
framework

would be developed.

The example of China is one the most contradicted experienc
e currently appeared on the market.
On 5 December 2013, People's Bank of China prohib
ited

financial institutions from handling
bitcoin transactions

and later they
ordered commercial banks and payment companies to close
bitcoin trading accounts

according to

the
British Broadcasting Corporation
(BBC) and World
Street Journal (WSJ)
.

Recently the cryptocurrency world was shocked by the news that
the
Chinese regulators had “asked the major currency exchanges to close the program,”
right
after
authorities banned
initial coin offerings on 5
th

September.

Coindesk says that a
fter this
regulation
implementation
several exchanges shifted to over
-
the
-
counter market introducing p2p
trading platforms supporting fiat currencies with an idea of expansion to overseas market.


Situation in Russia is contradicted by the sanctions still restricting access to capital markets,
while digital currency and ICOs is a great deal for several financial institutions to attract equity.
Russia
C
entral
B
ank head Elvira Nabiullina
during the
banking association forum
has
declared

it
is “categorically against” regulating cryptocurrency money or equating it with foreign currency

adding: “
Because, as I

ha
ve said more than once before, we understand there

i
s foreign currency,
states which issue
it, economics, central banks supporting it. Here the phenomenon (of
cryptocurrency) is less understood
.
” One month later the Russian president Vladimir Putin on the
arrangement with top finance officials
called for building a “regulatory environment”
till
1
st

July,
2018,
based on international experience that would defend the interests of business and the state,
as well as provide legal guarantees for those using the instruments.
He also highlighted:
“It

is
s
also important not to put up too many barriers.”

Thus, official Kremlin says “Yes” to financial
technologies and starts the mechanism of regulations development. The total list of instructions
on the results of the meeting is published on the official Kremlin web site
.
As fact matters the
Russian presid
ent has a briefly meeting with etherium inventor Vitalik Buterin at the St.
Petersburg International Economic Forum which took place between this summer in June. Later,
Russian State Duma announced an offer to carry out a research about blockchain technolo
gy and
cryptocurrency which was won by the
Financial University under the Government of the Russian
Federation
. The relevance of the research is based on the increased emergence and spread of new
financial technologies among the global financial institutio
ns that
dictates the need to enhance
the role of the state in the legislative provision of their regulation and implementation in
economic life.

The purpose of the research is to conduct analysis of newest financial
technologies, to
explore
the background
of
their appearance, assess their prospects for the
domestic market and the possibility of further integration of the Russian and
global financial
markets under different
regulating
approach

of
this

particular

sphere.


Obviously, most governance
does

not k
now what
they are

dealing with so they can not regulate a
black box. Therefore, r
egulators and policy makers

all over the world

commonly
react in three
different ways
:



Firstly, they simple do nothing without interference, waiting till the market become mor
e
mature,

and accumulating

information.



Secondly,
c
ontrolling the key moments
:
cryptocurrency exchanges
,
software providers
required to get licensed
and
pay taxe
s
.



Finally
, completely or particularly shutting down access to the market

Blockchain technolog
ies will be the subject of
further
government scrutiny but early interference
can send wrong signals to policy makers and market itself. At this point states authorities should
work hand in hand with business medium to protect interests of all
stakeholders, clarifying their
position and preventing uncertainty.

In the end there several tough challenges facing the blockchain technology and slowing its
market penetration while it is very similar to the route overcome by the Internet smashing all th
e
barriers one by one. The biggest barriers concern technical issues especially concerning the
development of its ecosystem and increase of its future scalability, business adaptive vision for
modern innovations and regulative concerns of states and its co
llaborative work with industry
requirements and preferences in order to create united international legal field.


Conclusion of
C
hapter 1.

Summarizing the first
chapter,
the blockchain is a layer of technology

sitting

on top of the
Internet, like the Wo
rld Wide Web.
In order to confirm the validity and execution of transactions
is that the role of existing traditional intermediaries will be redefined, while ne
w ones will be
possibly created, thus disrupting the traditional boundaries of value. Therefore, the blockchain
has ten characteristics, and they all need to be

understood in a holistic manner

while current
barriers could be possibly overcome by the collab
orative work of global business leaders,
blockchain community representatives and state representatives. Thus, the blockchain
technology has multiple capabilities and big chances to create the biggest technological
breakthrough of the century.



Chapter 2
.
Financial
revolution.


The future of blockchain technology for financial institutions depends on how banks themselves
will manage the new opportunity to flourish. From the FinTech’s

and Internet’s experience some
blockchain start
-
ups will go after financial businesses. Indeed, it is a perfect technology for
aligning most of banking operations. The greatest challenge is to set up the foundation for the
industry for its future success.

In this chapter the key tasks for financial industry would be
targeted, there will be conducted market analysis of the blockchain industry considering most
recent equity investments, which use cases and initiatives has been already taken by financial
serv
ices and classification of possible use of future blockchain applications will be defined.


Blockchain:

The

new

innovation

for

financial

services

A complete overhaul coming up in financial industry contributes to imposing of a vulnerable
blockchain techno
logy. In order to try out a new approach for internal and external business
processes financial institutions among the globe keep track on a new aspect of information
technology. Industry changes drumming up from start
-
ups, technology and services companie
s
and on the other hand financial institutions by themselves start to explore the market and coming
up with shortlists of cases and initiatives for future implementation. Who will lead the pace gets
ive advantage. This part will be about
usability of the blockchain technology and setting up new strategies for financial business.

Since long time financial services institutions cooperate hand in hand with information
technologies focusing towards runni
ng back
-
end operations, processing payments, supporting
global interconnection, delivering financial products. However, the heyday of FinTech
-
forward product approach
started shining in 20
13 in case of lack of radical innovation from bankers when the whole
FinTech movement has started.

However, the very first modern disruptor of financial sector was
described in the David Kidder’s
and Reid Hoffman’s "
-

PayPal in early 2000s and its moment
ous decision to focus on the money
service and its future collaboration with the eBay
.

The main idea behind PayPal that day was to
use encryption software to allow individuals and businesses to make financial transfers
electronically. With 218 million acti
ve users and $114 billion (+29% YoY Growth) total
payments volume by the end of q3, 2017

as shown in the
PayPal Q3
-
17 Investor Update, PayPal
is “committed to democratizing financial services and empowering people and businesses to join
and thrive in the g
lobal economy…available in more than 200 markets around the world, the
PayPal platform, including Braintree, Venmo and Xoom, enables consumers and merchants to
receive money in more than 100 currencies, withdraw funds in 56 currencies and hold balances
in
their PayPal accounts in 25 currencies.” Thus, PayPal works indirect with local banks around
the world, cutting cost and time for transaction and it makes them the only global financial
services provider that virtually knows no boundaries. Another viable e
xample is an invention of
ApplePay as an executive intermediary between the banks and their customers, setting other
intermediaries aside. These two examples demonstrate that alternative financial services
companies could be viable, just by building bridge
s and ramps into incumbent banking
institutions.

Banks should figure out how they will serve their customers better using blockchain, and not just
how they will serve themselves better. Banks should innovate more by dreaming up use cases
that we have not
thought about yet, preferably in the non
-
obvious category.

As banking system relies on trust, current system became cost excessive due to regulations and
required complex integrations what is one of the reason why financial industry have to adopt

Banking sector s
hould decide whether they amplify their internal system with the blockchain
technology or start
-
ups and early adopters will provide the complete overhaul of the banking
industry itself as cryptocurrency become a new generation of financial networks


Blockc
, 2016
-
2017
.

As blockchain technology evolves thriving with different cases and practices blockchain market
evolves rapidly transforming from initial phase to the stage of growth and establishment focusing
on developing robust
applications. There are strong direct investments in blockchain while
matured financial institutions are also funding internally with an active participation in
blockchain syndicates and consortia. Bitcoin and other cryptocurrencies had a great year in
val
uation terms, though mainstream use cases for the technology have yet to fully emerge.
Combined public blockchain token valuation (initially c
ryptocurrency market
capitalization)

rallies by $200 billion when aggregation value of blockchain tokens skyrocket
ed
11x
to all time
high

on the 15
th

November, 2017

above $214 billion
, shown on figure 4.


Figure
4

Cryptocurrency total market capitalization (Coinmarket.com
, 15
th

November, 2017
)

The blockchain space recorded a roller coaster 2
016
-
2017. Bitcoin has gained 125% during
2016, and more than 700% as on 15
th

November, 2017 reaching al
-
time record breaker $7693.18
earlier that month.

Furthermore, daily transactions are n
early $108 billion in November
2017
,

up
886% year over year (YoY)
growth denoting a deeper and more liquid market.

In 2016 a number of promising blockchain protocols emerged such as Monero and Steem. The
Monero (XMR) cryptocurrency increased over 25x yearly due to the darkweb marketplace
AlphaBay. The Steem blockchain pr
ovides a distributed ledger for content creators to monetize
their work on the Steemit platform, a blogging and social networking site similar to Reddit.
Obviously, the market expects innovative uses for new blockchains like Steem to pop up because
the mar
ket gets bored with only transactional use cases.

protocol which allows
creating

applications including smart contracts and Internet
-
of
-
Things.
Instead bitcoin
a Turing
-
complete distributed platform or blockchain
-
as
-
a
-
ptocurrency.

-
profile
application The DAO (Distributed Autonomous Organization) over $150 million worth that
time,
a smart contract system that was designed to function
as a community managed venture
fund, wi
thout the need of any employees

was hacked tri
ggering losses of $64 million.
The
Ethereum community lightning fast responded with a “hard fork” (a radical change to the
protocol
commonly occurs when non
-
upgraded nodes

can’t validate blocks created by upgraded
nodes that follow newer consensus rules
blockchains. According to PitchBook, a financial data and software company they anticipate
that” Ethereum will remain a m
ajor platform for blockchain innovation in 2017 and beyond”
highlighting that the bitcoin and other early blockchains were not able to code more robust
applications. Inferring that “distributed computing systems like Ethereum are the future of
blockchain”
the PitchBook notices “a shift in funding from consumers and hobbyists focused
businesses to start
-
ups targeting enterprise use cases for blockchain.”

According to PitchBook’s “
3Q 2017 Fintech Analyst Note: Blockchain

-

“equity investments in
blockchain
companies has remained relatively flat” as shown on the figure 5.


Figure
5

Equity investments in blockchain companies

The jumbo came to the scene as the British financial software provider firm Mysis owned by
private equity group

Vista Equity Partners (takeover in 2012 for
£1.29bn
) merged with Canadian
fintech rival D+H corp. for roughly $3.6 billion forced to create the third largest fintech software
ing this giant
deal, private investment into blockchain industry has remained fairly consistent. However, there
are two major drivers of this trend. Firstly, biggest part of the investment into blockchain sector
occurs on corporate balance sheets while ban
ks and other entities set up blockchain working
the market. Another driver is about rising popularity of ICOs and an opportunity to raise
financing easily with
a few information about its business. Thus, CoinDesk states that
“blockchain tokens sales raise $729 million as compared to $235 million of total venture capital
(VC), record setting ICO quantities and deal sizes.”

Initial Coin Offering is a new form of r
aising capital via issuing a blockchain
-
based token or
coin bursting into the public consciousness. No more angel
investors

or venture capitalists
needed for funding because of this new unregulated option. Therefore,
Autonomous Next has
analysed Initial Co
in Offerings (ICOs) in 2017

and declares that over

$1.2 billion was raised in
token sales across 56 ICOs

with top of them with categorisation shown on figure 6, while t
he
highest funding was raised by
b
lockchain start
-
up Tezos at $208 million. The company
offers a
Point
-
of
-
Sale smart contract platform with an emphasis on security through formal verification.
Other companies, such as EOS.IO and BANCOR,
closes top
-
3
at $200 million and $153 million
token sales respectively
.
This year b
lockchain companies have

successfully
raised $22.6 million

on average

and the number of
ICOs
to continue growing throughout 2017

while issuing

precedents are
shifting from
cryptocurrency and
core technology to use cases like

financial

markets, investment products, media and ident
ity

that is a great example of diversification and
the rising usability of blockchain technology.



Figure
6

Top ICOs by category, 2017 (
Autonomous NEXT analysis
, 2017)

In 2013 bitcoin accounted for 95% of all deals while only few

of them did not involve the bitcoin
protocol. As a result of the 2017
th

shift, blockchain excluding bitcoin investments have weighty
and expectation of more money flowing into blockchain to continue.

In order to find out what is the most valuable for the market and what for investors are read
y to
pour fortunes, Top
-
5 ICOs and all
-
time breakers is presented above with company names, total
amount of raised capital, date of ICO closing and short description.

1.

EOS.io, total capital raised $516,6 million, July, 2017.

EOS.IO is software that introdu
ces a blockchain architecture designed to enable vertical
and horizontal scaling of decentralized applications. 70% of the total amount of EOS
Tokens to be distributed) will then be split evenly into 350 consecutive 23
-
hour periods
the amount of raised cap
ital is still increasing. The EOS.IO software enables blocks to be
produced exactly every 3 seconds and exactly one producer is authorized to produce a
block at any given point in time.

The software is part of a holistic blueprint for a globally
scalable b
and governed.

2.

Filecoin, total capital raised $262 million, September, 2017.

Decentralized storage network turns cloud storage into an algorithmic market. Miners
earn tokens by providing storage to clients like rent hard drives, disks, etc. using end
-
to
-

3.

Tez
os, total capital raised $228,8 million, July, 2017. Tezos has issued a cryptocurrency
that does not exist and funded development of a transaction system that has no clear end
date.
Tezos organizers have

been hit with second lawsuit over cryptocurrency fun
draiser.
There is lack explains and understandings where money went.

4.

Bancor, total capital raised $153 million, June, 2017.

Bancor protocol has an idea to provide instant liquidity for any cryptocurrency. It is a
decentralized network for smart contract ba
sed tokens to enable continuous convertibility
between them.

5.

The DAO, total capital raised $150 million, April, 2016.

The DAO (Decentrali
z
ed Autonomous Organisation) is a smart contract system that was
designed to function as a community managed venture fu
nd, without the need of any
becoming the largest ICO at the time, although market cap fell dramatically when the
system was hacked and was shut down shortly afterwards, leading

the market
capitalisation to fall to 0. The Smart Contract system allowed companies to make
proposals for funding. These would be white
-
listed by the DAO ‘curators’ and the token
holders would vote on proposals.

Concluding the blockchain market overview f
irstly bitcoin still paces the industry however
blockchain. At the same time VCs pouring the market with money using emerging opportunities
of ICOs


What

are

bl
ockchain

use

cases

and

initiatives

taken

by

financial

services

industry?

Typically, we use traditional banking networks to transfer any type of

money
, take credits and
loans
.
As being a
millennial today
,

prodigies are able to use many alternative financial

services
instead of traditional banking due to FinTech innovations. In the nearest future
blockchain

infrastructure

could be widely used

to transfer any money, including cryptocurrency and

fiat

currency

via smartphones, applications directly without banki
ng engagement
.
There is an
assumption that sovereign money would be
adapted

to cryptocurrency wallets and exchanges
faster that cryptocurrency itself toward
traditional online

banking accounts.

While mobile
applications build on decentralized ledgers exten
d financial entities, banking institutions will
contribute to the
innovation potential of the blockchain as they

mature their understanding with
this new

technology.


Blockchain

various

concepts
.

Blockchain

itself

is

divided

up

to

3

concepts:

public,

private

and

hybrid

blockchain

concept.

1.

A

public

blockchain

is

fully

decentralized

where

anyone

is

able

to

read

or

write

to

the

platform

and

was

fully

described

at

the

Chapter

1.

Examples:

a.


-

a

provider

of

a

decentralized

platform

and

programming

la
nguage

that

helps

running

smart

contracts

and

allows

developers

to

publish

distributed

applications.

b.

Blockstream

-

a

provider

of

sidechain

technology,

focused

on

extending

capabilities

of

bitcoin.

The

company

has

started

experimenting

on

providing

accounti
ng

(considered

a

function

to

be

done

on

private

blockchain)

with

the

use

of

public

blockchain

technology.

2.

A

private

blockchain

instead

of

being

fully

public

and

decentralized

network

provides

an

opportunity

where

the

owner

has

rights

to

modify

the

blockcha
in,

withdraw

transactions

while

maintaining

partial

authenticity,

reducing

existing

costs

and

increasing

efficiency.

Examples:

a.

Blockstack



a

provider

of

private

blockchain

allowing

entities

to

execute

back

office

operations,

including

clearing

&

settlement.

b.

Chain

Inc

-

a

provider

of

blockchain

APIs

(
A
pplication

Programming

Interface)

Chain

partnered

with

Nasdaq

OMX

Group

Inc.,

to

provide

a

platform

that

enables

trading

private

company

shares

with

the

blockchain.

3.

The

third

type

is

a

hybrid

blockchain

concept

where

a

consortium

blockchain

able

to

run

both

the

public

and

private.

While

a

possibility

to

modify

and

create

new

blocks

could

be

extended

to

a

certain

number

of

people/nodes

this

type

provides

an

opportunity

for

groups

of

organization
s

or

firms

work

together

by

collaborating

with

each

other.

Thus
,

gaining

a

restricted

access

to

the

blockchain

they

are

able

to

carry

out

solutions

and

maintain

intellectual

propert
y

rights

within

the

consortium.

The R
3 is an enterprise software firm
launc
hed in September 2015
working with over 100
financial entities among the globe including such tycoons as
UBS Group AG
,
Deutsche Bank
AG, Barclays Plc
,
Bank of America Corp

(while
Goldman Sachs Group Inc
,
Banco Santander
SA, Morgan Stanley

and National
Australian Bank left the group in quick succession in late
2016

with the latest
JPMorgan Chase & Co

abandon in April, 2017


all of them are involved in
blockchain projects)
to develop
its own distributed ledger platform called Corda which could be
referre
d as the largest hybrid blockchain in financial markets. R3 has primarily

focused on
specific areas of blockchain, including derivatives trading, payments, and trade settlements



some of the most cumbersome and expensive processes. R3 states that with


Co
rda, participants
can transact without the need for central authorities, creating a world of frictionless commerce.

PitchBook concludes that
R3’s evolution
presents

the growing recognition that
the
blockchain
expansion


needs to be well
-
attuned in order t
o ensure ongoing development progress and,
hopefully, rapid commercialization.


On the other hand, t
he insurance industry

possibly, would not be affected by lethargy
tak
ing

a
big step towards introducing
b
lockchain technology into reinsurance transactions

introducing
the
Blockchain Insurance Industry Initiative (B3i), which includes

23 participants as

Zurich
Insurance Group
, Allianz, Liberty Mutual, Aon, etc
.
The insurance industry’s largest blockchain
syndicate will begin testing a new reinsurance focused
blockchain prototype, growing rapidly
and still adding new participants.

including BP, Microsoft, Intel, Credit Suisse, UBS, J.P.Morgan, Deloitte, Accenture, BNY
Mellon,

Banco Santander, ING, Samsung SDS, Toyota Research Institue, MasterCard, SberBank
and OTP Bank (both Russian) etc. “
learn
ing

from and build upon the only smart contract
supporting blockchain currently running in real
-
world production




to defin
e
enterprise
-
grade software capable of handling the most complex, highly demanding applications
at the speed of business.



Remarkably, while R3, EEA and B3i may be the most prosperous global syndicates, there are
state conglomerates like t
he main Spanish
banking, energy and telecommunications companies,
among other sectors, have
recently
established Alastria

-

the world’s first regulated national
network based on blockchain

aimed at developing blockchain ecosystem inside Spain, BBVA
states. Singapore is le
ading the path of supporting and development blockchain hub, UAE and
Kazakhstan are also keeping the track.


Financial

and

non
-
financial

use

cases

of

blockchain
.

As blockchain became very popular financial institutions paying lots of attention considering
that there are many different ways where traditional
already
to the blockchain and further traded digitally.
Various banks
, a
lliances and consortiums

have
shown

their

interest and started experimenting with the blockchain.

Figure 7 (full infographic on
the Appendix 1) presents

a snapshot of
organizations and both financial and non
-
financial
applications
already provided
over blo
ckchain.


Figure
7

Blockchain use cases (GrowthPraxis, 2017)

According to financial institutions blockchain provides opportunities in several segments and
perhaps the most complex is about smart contracts.

Smart contracts

would pr
ogram business
routine using

blockchains and potentially replace some of the functions currently executed by
financial institutions
.
smart contracts
has

been gaining
popularity
space since bitcoin. Its Turing
-
complete protocol allows
completing

any calculation performed
by the computer. It
has the highest number of projects that are being bu
ilt on a blockchain
platform
. Features about smart contracts:



A smart contract controls a real
-
world valuable property via “digital means” by enforcing
implementation of a particular requirement means that they are not looping infinitely
once achieving its

finality.



A smart contract is not a law it is a technology that can
prove if terms of legal agreement
were followed or not.



Smart contract is a part of decentralized blockchain applications and is easy to code and
use.



Smart contracts are ideal for int
eracting with real
-
world assets, smart property, Internet of
Things (IoT), and financial services instruments. They are not limited to money
movements

and applied

to almost anything that
modifies

its state over time, and could
have a value attached to it.

Another segment for financial industry
is

s
mart
o
racle
s
.
Smart oracles

are data sources that send
actionable information to smart contracts.
While smart contracts are

based

on the blockchain

smart oracles able to contain real
-
time information and direct f
irst ones to behave in a certain
way.
For example, a smart contract that concerns itself with a Know Your Customer (KYC)
function could interact with a smart oracle that contains identity information.

Remittance
,
Peer
-
to
-
peer transactions

and
Digital curr
ency wallets

are

the most visible and
popular segments of the blockchain because everybody except intermediary desires
to perform
faster
transactions with lower costs
.

Finally,
t
rading and investment platform
s
inclu
d
ing
capital markets and
exc
h
anges

increase its
significance
while investors all over the world are optimistic about the use of blockchain in this
sector.

There have been multiple use cases where the financial services industry has shown keen
interest. Therefore, there are
two

main platfo
rms where integrations or projects being built

on
blockchains

As talking about financial industry, firstly
Ripple

is being put under consideration.
Ripple

has its
own product suites while aiming to reach Internet of Value. xCurrent is th
e name of its enterprise
software which allows banks to instantly settle cross
-
border payments and end
-
to
-
end tracking.
xRapid is account for institutional and payment providers reducing liquidity costs
us
ing

its own
form of cryptocurrency, XRP,
helping ba
nks
to facilitate large
-
scale transfers

for international
payments

with real time settlement
.
RippleNet is an element of xVia which is targeting banks,
payment providers and corporates who try to send payments across networks. Such global banks
as
Barclays
, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG
Santander are
already in Ripple team.
The system relies on a consensus rather than proof
-
of
-
work to verify
payment on a centralized ledger.

Ripple provides: cross
-
currency settlements includin
g fiat
-
currency, FX m
arket making, consumer wallets, trading

and investment platforms.

Secondly,

is a platform providing an opportunity to build next generation distributed
applications allowing to
codify, decentralize, secure and trade just about

anything: voting,
domain names, financial exchanges, crowdfunding, company governance, contracts and,
intellectual property and smart property.

open
-
source,
decentralized market prediction platform
allowing
trading

on the out
come of events providing
forecasting power of a global user base.

Most recent blockbuster is OmiseGo a very popular
payment management platform with their moto “Unbank the banked with Ethereum.” This
financial platform aims digital wallets that enable real
-
time, p2p value exchange and payment
services across fiat and digital currencies.

Other use cases that the author wants to highlight are also several blockchain start
-
ups disrupting
current financial industry and one private fund.

Bithumb


the largest c
ryptocurrency exchange according to the average daily market volume
with $1.3 billion based in South Korea. It accounts for nearly 10% of the global crypto trading
and about 80% in South Korea
allow
ing

exchanging

Liteco
in, Dash, and other popular currencies.

Dash


another open source p2p cryptocurrency with
decentralized governance and budgeting
system (DAO) that aims to become the most user friendly digital cash providing an easy setup on
the blockchain to do e
-
commerc
e. It is in Top
-
10 cryptocurrencies by market cap with $3.2
biilion however with the lowest circulating supply around of coins 7.7 million while bitcoin has

Bitfury


founded in 2011, it builds hardwar
e and software solutions for enterprises,
governments and individuals to conduct blockchain
-
based asset transfers. Remarkably, the
government of the Republic of Georgia has partnered with BitFury to develop a blockchain
-
powered land registry, the first of
its kind.

Chain


a

San
-
Francisco based technology company building, deploying and operating custom
blockchain networks providing the delivery of financial products and services. The company
built an internal B2B transaction for Visa, as well as blockchai
n exchange projects for the
Australian Stock Exchange and Nasdaq Private Markets


the first notable collaboration with
established exchange.

Andreessen Horowitz is a private American venture capital firm founded in 2009 by Marc
Andreessen and Ben Horowit
z one of the most famous VSs in Silicon Valley. The fund was
established
to invest in and advise both early
-
stage start
-
ups and more established growth
companies in high technology
. Andreessen Horowitz has invested in such bitcoin and blockchain
projects a
s OpenBazaar (e
-
commerce), TradeBlock, Filecoin, and Chain.



Conclusion
of
Chapter 2.

Financial institutions are commonly aware of arising blockchain popularity especially they
understand that it is an open
-
sourced thus anyone can attack their positions.

Moreover, all
internal and external banking functions are under scrutiny and sooner or later would be released
on the blockchain platforms using decentralized applications while traditional operational
segments like remittance, transactions, investing and

trading platforms are in danger because of
appearance new payment systems, customer digital wallets, cryptocurrency exchange platforms
and arise of investing opportunities for different funds. It is possible that several traditional
entities will fail to
adapt to new changes especially while cryptocurrency market presents a great
year in valuation with combined public blockchain token market capitalization skyrocketed 11x
times reaching $200 billion, flooding the market with alternatives currencies and get
ting a
momentum for future development. This is possible because of a new form of raising capital via
issuing some blockchain
-
based tokens while direct investments are no more needed because of
this new unregulated option. Therefore, all
-
time breakers have

not been waiting for long when
start
-
ups like EOS.io, Filecoin, Tezos and Bancor have raise more than $1.5 billion along mostly
during last several months. Indeed, mobile applications build on decentralized ledgers using
public, private or hybrid blockcha
in concept are already able to transfer any money, including
cryptocurrency and fiat currency via smartphones directly p2p without banking engagement.
Remarkably, while R3, EEA and B3i may be the most prosperous global consortiums integrating
largest banki
ng entities, several agreements to develop internal complex blockchain systems are
already reached on a state level of several countries like Spain and Singapore. Basically,
answering the main question what is blockchain good for financial industry the fou
ndation was
defined. Thus, main segments where the blockchain technology would be the most applicable for
implementation are remittance and settlements operation, transaction transferring and new
payments systems, investing and trading platforms, smart con
tracts, internal and external
compliance operations. Implementation of new progressive technology would reduce overall
around the globe providing an access to f
opportunity to tap into the scene of world finance. In this chapter the key task for financial
industry was targeted


to endorse new costly effective opportunity, market analysis of the
blockchain ind
ustry considering most recent equity investments was conducted, use cases and
initiatives were presented and possible routes and segments for future integration with financial
institutions were defined.



Conclusion.


overall definition of the blockchain technology. The blockchain is a new layer of technology
sitting on top of the Internet, like the World Wide Web, which a
lready redefines the role of
existing traditional financial intermediaries, creating new ones, thus disrupting the traditional
boundaries of value. Financial institutions are commonly aware of arising blockchain popularity
especially they understand that i
t is an open
-
sourced thus anyone can attack their positions.
Indeed, mobile applications build on decentralized ledgers using public, private or hybrid
blockchain concept are already able to transfer any money, including cryptocurrency and fiat
currency vi
a smartphones directly p2p without banking engagement. Remarkably, while R3,
EEA and B3i may be the most prosperous global consortiums integrating largest banking
entities, several agreements to develop internal complex blockchain systems are already reach
ed
on a state level of several countries like Spain and Singapore. Basically, answering the main
question what is blockchain good for financial industry the foundation was defined.

Moreover, all internal and external banking functions are under scrutiny a
nd sooner or later
would be released on the blockchain platforms using decentralized applications while traditional
operational segments like remittance, transactions, investing and trading platforms are in danger
because of appearance new payment systems,

customer digital wallets, cryptocurrency exchange
platforms and arise of investing opportunities for different funds. Therefore, the blockchain has
ten characteristics, and they all need to be understood in a holistic manner while current barriers
could b
e possibly overcome by the collaborative work of global business leaders, blockchain
community representatives and state representatives. Thus, main segments where the blockchain
technology would be the most applicable for implementation are remittance and

settlements
operation, transaction transferring and new payments systems, investing and trading platforms,
smart contracts, internal and external compliance operations. Implementation of new progressive
technology would reduce overall costs for whole fina
ncial industry, time consuming and
part of society who previously had a luck opportunity to tap into the scene of world finance.

It is possible that several tra
ditional entities will fail to adapt to new changes especially while
cryptocurrency market presents a great year in valuation with combined public blockchain token
market capitalization skyrocketed 11x times reaching $200 billion, flooding the market with
alternatives currencies and getting a momentum for future development. This is possible because
of a new form of raising capital via issuing some blockchain
-
based tokens while direct
investments are no more needed because of this new unregulated option. Th
erefore, all
-
time
breakers have not been waiting for long when start
-
ups like EOS.io, Filecoin, Tezos and Bancor
have raise more than $1.5 billion along mostly during last several months.

Preparing a forecast of the future dissertation research results or

Master’s Thesis, literature
analysis carried out in the Term Paper brought me to the key target for the world financial
system for solving certain management problems. The key task for financial industry was
targeted


to endorse new costly effective oppo
rtunity, market analysis of the blockchain
industry considering most recent equity investments was conducted, use cases and initiatives
were presented and possible routes and segments for future integration with financial institutions
were defined. Thus, t
he blockchain technology has multiple capabilities and big chances to
create the biggest technological breakthrough of the century.


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1.

Arkhipov, I., Tanas, O., Biryukov, A. and Baraulina, A. (2017). Putin Backs
Cryptocurrency Rules and

Warns of ‘Serious Risks’. [online] Bloomberg.com. Available at:
https://www.bloomberg.com/news/articles/2017
-
10
-
10/putin
-
is
-
said
-
to
-
hold
-
first
-
meeting
-
on
-
cryptocurrency
-
rules [Accessed 6 Nov. 2017].

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Autonomous NEXT. (2017). Analysis of Notable ICOs in
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-
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-
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-
icos
-
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-
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-
is
-
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-
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].

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BBC News. (2017). Top China Bitcoin exchange to stop trading. [online] Available at:
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Ben Martin (2017). Misys boss to lead fintech giant after merger with DH. [online] The
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Appendi
x 1
.

Blockchain use cases
.


Figure
8

Blockchain use
cases (GrowthPraxis, 2017)


Appendix

2.

ICO

Tracker



Provided

by

Autonomous

Next,

2017


2014
-
2015


Figure
9

ICO Tracker: 2014
-
2015 (Autonomous Next, 2017)

2016


Figure
10

ICO
Tracker: 201
6
(Autonomous Next
, 2017
)

2017

-

1


Figure
11

ICO Tracker: 201
7 (1/4)
(Autonomous Next
, 2017
)

2017

-

2


Figure
12

ICO Tracker: 2017 (
2
/4) (Autonomous Next
, 2017
)

2017



3


Figure
13

ICO Tracker: 2017 (
3
/4) (Autonomous Next
, 2017
)

2017

-

4


Figure
14

ICO Tracker: 2017 (
4
/4) (Autonomous Next
, 2017
)




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