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Exclusive: Blockchain at the Stage of Tech Convergence

Exclusive interview with Paul Sin: Part 2

How does Deloitte Blockchain Lab envision the future of blockchain? Dr. Paul Sin believes that blockchain is at the stage of technology convergence with IoT, big data and artificial intelligence. He also explained the three challenges for enterprises to implement their own blockchain and various blockchain auditing services offered by Deloitte.

From your experience, what are the pain points for enterprises in implementing their own blockchain?

Since these are enterprise permissioned blockchains, one of the challenges is the commercial model. We need to figure out how these people share the cost of the platform. Going forward, [we need to look at] how they can recover their investments.

The second challenge is regulatory concerns, we need to comply with all the different regulations such as the GDPR in Europe, China’s cybersecurity law, Hong Kong’s PDPO. Liability issues are also a concern. If you are creating a KYC network, for example, if Bank A opens an account for terrorists and Bank B finances the terrorists based on the records from Bank A, who will bear the liability for terrorist financing? This will also be something we will need to sort out. We classify these problems as the governance model.

The third challenge will be the interoperability of the technologies being used by more than 20 platforms on trade finance and supply chain across the world that are in production. You need to exchange data across different distributed ledger technologies, you need to interoperate on Corda, Hyperledger, Ethereum, and also connect the Internet of Things (IoT) with blockchain so that the physical products can be linked to the digital record of the blockchain. You also need to create advanced analytics models that will make use of the data on the blockchain. There is a lot of technology convergence happening at the moment in the market. This is a challenge but also an interesting part of the technology.

Which blockchain-as-a-service (BaaS) platforms are the most popular from your experience working with enterprises, and what are the reasons behind choosing them?

We generally recommend open-source platforms for our clients because it enhances adoption. Even though we deploy blockchain on hybrid cloud infrastructure, we try not to use managed blockchain services unless they are truly open. Some cloud providers have BaaS with open-source technology; those would be the ones we are more comfortable working with. Some blockchain services providing blockchain on a proprietary platform—if one party is on that platform, the whole ecosystem must be using that vendor—those are not recommended. If you see some corporations working with certain well-known vendors who provide proprietary managed blockchain on the cloud, they will have a lot of challenges with adoption. A corporation may find that only they are on the blockchain and no other corporations are willing to join, mostly because the platform is proprietary. This is the reason why it is not attractive from the perspective of supporting the whole ecosystem.

From a corporate perspective, it can certainly save time developing and deploying the technology, so using blockchain managed by the cloud is understandable.

How do you envision the future of blockchain and what is your outlook for enterprise blockchain adoption?

We are now getting to the stage of convergence, as I mentioned earlier, it is now feasible to exchange data with each other without compromising on the authenticity and authorization mechanism. We are also working on technology convergence, where IoT puts data on the blockchain to share among exclusive members, we create a big data pool for the whole ecosystem and we run AI engines on top of that to create insights for analytics. This is what we are working on at the moment.

Other Big Four auditing firms—PwC, KPMG, EY— have launched blockchain auditing services. Does Deloitte have blockchain auditing services currently?

Yes, we have blockchain auditing services. Blockchain auditing is a very confusing term, there are different kinds of blockchain auditing. If a company has certain assets, stored in a crypto format, you will need financial auditing, which is a kind of blockchain auditing. There are also ICOs, STOs, stablecoin issuances, etc., and those need audit firms to audit liquidity, for example. We also conduct IT audits for blockchain platforms, to make sure they are not breaching any technology risks or guidelines, from regulators as well as data privacy auditors.

What are your views on consensus as a service?

I believe this is more for public blockchains because in public blockchains, consensus is very resource-consuming, and it does not make sense to build ASIC server farms in order to create consensus. For permissioned blockchains that we use, the underlying consensus mechanism is very light in terms of power consumption. Many new permissioned blockchains support plug-and-play consensus mechanisms, all of which are open-source, and do not need to do any outsourcing for them.

EY: How Blockchain Revolutionizes Tax Operations for Businesses in 2 Ways

Following Part 1 of the interview, we looked at Ernst & Young’s perspective on how blockchain can be an effective tool for huge tax savings. Jimmy also shared the progress of Nightfall, zero-knowledge proof technology on the role of privacy transactions on public blockchains.

According to Rod Roman, EY Global Marketing and Capital Markets Tax Leader: Blockchain has huge tax potential especially as it relates to smart contract, can you explain how smart contracts enable huge tax potential?

It is expected that blockchain will significantly impact the world of tax.

Dennis Post, EY Global Blockchain Tax Leader, says:

“We basically see two developments where tax will be significantly impacted by blockchain (besides crypto). Firstly, we see that blockchain will help to create more robust tax systems, for example in the financial services sector (withholding tax) or in global trade (VAT, customs). At EY we are fully embracing the opportunity blockchain brings in reducing manual labor and paper-based processes, and we are in the process of developing blockchain platforms that solve tax problems. Secondly, we are building solutions that can connect to commercial blockchains to calculate tax consequences of these transactions. Smart contracts will facilitate the transfer of digital assets and in the future also payments. With EY OpsChain Tax Engine, businesses can embed tax calculations and payment options directly into business transaction flow, driven by tokens and smart contracts. Instead of calculating tax days or sometimes even months after the transaction has taken place, tax calculations and payments can now happen in real-time. Applying blockchain to withholding tax or basically any transaction tax can really drive efficiency gains for enterprises.”

EY has partnered with Guardtime to improve transparency and efficiency through blockchain, how does blockchain reduce risk in maritime insurance?

EY & Guardtime’s joint venture, Insurwave, uses blockchain technology to drive efficiencies across the marine insurance industry. Marine insurance brokers and insurance providers struggle with obtaining accurate asset values, leading to the risk of under or over insurance. They are burdened by compliance and KYC checks – client asset and organization information, licenses, and credit checks. If there was a solution to accurately capture dynamic risk data, adjust asset value (and premiums), understand live vessel data (machinery performance, engine, oil, routes), and securely share this information among all relevant players, an enormous value could be achieved.

The technology significantly reduces risk along the insurance lifecycle as it digitizes shipping documentation on the blockchain while smart contracts automate procedures and controls when handling claims. Everyone has access to the same documents and information along with a complete record of transactions.

Today, Insurwave manages the risk of over 1000 Maersk commercial vessels generating half a million transactions on the blockchain.

EY Blockchain Team developed ‘Nightfall’ which leverages zero-knowledge proof technology in order to make transactions on the public blockchain more secure and private? Could you explain how Nightfall and ZKP work together and also why it is necessary to leverage public blockchains instead of creating a private one for your clients?

The true value proposition of blockchain lies in its ability to integrate different businesses together on a single platform without assigning a central intermediary. If every company had their own private blockchain consortium, doing business between consortiums would be unscalable and unmaintainable. Just like industry portals at the start of the Internet age (MSN, AOL, etc) we are seeing consortiums follow the same route. It is EY’s belief that a truly scalable universal business infrastructure connecting different business platforms together requires a shared public platform where barriers to entry are completely removed. The technology that most closely aligns with our vision is the public Ethereum blockchain, which is completely decentralized and supports complex smart contract logic.

To support our vision, there are certain technologies that are required; namely being able to perform completely private transactions on a public blockchain while still ensuring that the transaction itself has been properly validated. ZKP is a technology that allows for privacy in transactions and we are actively improving the protocol for large-scale adoption by heavily reducing the transaction fees required.

EY released Nightfall to the public domain in April 2019 to help advance blockchain privacy standards. The main component of Nightfall allows for secure, private transfers and payments on the public Ethereum network.

“The most efficient way to maximize blockchain adoption is to release this work to the community as a true contribution, with no strings attached. The only way that blockchains deliver upon their true promise to the world is if public blockchain networks are the preferred path for enterprises and investors.” – Paul Brody, EY Global Blockchain Leader

As a simple enterprise example serving as a basis for privacy in business ecosystems, take the large multi-national company which acts as an anchor buyer and manages contracts with hundreds of suppliers all competing against another for business. Contract negotiations and terms agreed upon between the two parties are extremely sensitive. Suppliers do not want their competitors to know the terms or pricing of their products. Privacy is essential for businesses to transact on public blockchains.

What plans do the EY Blockchain Team have for 2020?

The EY Blockchain team has three main initiatives for 2020: 1) Improve our EY OpsChain platform and continue to build more applications on it enabling enterprises to transact on the public blockchain 2) Extend the functionality our EY Blockchain Analyzer to provide even more insights on blockchain transactions 3) Continue to scale our privacy solution EY Nightfall for the public domain.

Regarding the last initiative, EY recently released our latest version of EY Nightfall which includes batching and optimistic rollup of transactions.

“This is the first of several new updates that will be coming from us in this area in the coming months. For those of you keeping score at home, this [initial upgrade] represents a 400-fold improvement in gas efficiency since our OpsChain Public Edition prototype just over one year ago.” – Paul Brody, EY Global Blockchain Leader

Over the last year, our transaction costs have reduced from $10 USD to around $0.24 USD for a batch of 20 private transactions. We are working tirelessly to scale and optimize our privacy tool for enterprise use on the public Ethereum blockchain.

EY Increases Its Investments in The Blockchain Market

One of the Big Four auditing firms, Ernst & Young (EY), has increased its investments in blockchain technology, with a new injection of $100 million in funding.

As announced by the firm, the decision to increase investments is due to the rise in demand for blockchain-based products. The funds will be used to fund blockchain and crypto-asset research, engineering, and services.

For about 5 years now, EY has had its hands full with its engagements in blockchain technology. In that time span, the company has built several unique products including the EY OpsChain Traceability, an infrastructure that helps enhance the global supply chain. The firm is now aiming to dive deeper into the growing decentralized finance (DeFi) ecosystem, through the creation of new products, improve user experience and increase market adoption.

“Over the past five years, we have been investing in blockchain and have developed innovative solutions, establishing EY as a leader in this emerging industry. As blockchain adoption continues to grow and we see more demand from EY clients, we are excited about further EY investment to respond to their challenges and needs,” says EY Global Chairman, Carmine Di Sibio.

Among the proposed products that will be introduced is the DeFi smart contract testing service through the EY Blockchain Analyzer suite of tools. The company said it will build on this platform, first unveiled back in 2019, and has so far supported over 100 ERC-20 compatible smart contracts. EY, in its ongoing effort to carve a niche for itself in the blockchain space, has onboarded Birra Peroni, the Italian beer company part of Asahi Group, the first industrial client to utilize the EY OpsChain Traceability platform. NFTs will be created for every successful batch of beer traced.

EY’s pursuit of digital initiatives is further capped by the move in which the firm led a consortium that placed a bid to develop the Central Bank Digital Currency (CBDC) project for South Korea.

Ernst & Young’s Blockchain Technology to Create NFTs for Award-Winning Italian Film

A blockchain-as-a-service dubbed EY OpsChain under big-four accounting and auditing firm Ernst & Young will create non-fungible tokens (NFTs) for the award-winning Italian film La Leggenda Di Kaspar Hauser.

Per the announcement:

“EY teams worked with CinTech to design a disruptive business vision for the entertainment industry to help filmmakers reach new audience and drive additional revenue streams.”

CinTech, an Italian-based blockchain startup, tasks to create 62 NFTs using EY OpsChain for the 22 main scenes of the Italian film.

Non-fungible tokens’ ownership is pegged on their uniqueness. Therefore, NFTs are different from typical crypto tokens because of fungibility. Fungible tokens can be exchanged for another, whereas NFTs cannot be based on their finite nature.

Giuseppe Perrone, EY’s blockchain leader, noted:

“We are proud to support a new and innovative way of driving value for the film industry. It demonstrates the tremendous potential to leverage blockchain and truly exhibits how the technology can provide benefits across various sectors.”

Conversely, CinTech founders acknowledged:

“With this initiative, we are showcasing how digital content or assets can innovate business models by creating new revenue streams and financing sources.”

NFTs have emerged as a booming sector in the crypto ecosystem. For instance, Coca-Cola recently announced the launch of NFT collectables in the form of virtual wearables that were to be used to celebrate International Friendship Day.

Furthermore, Stoner Cats, an adult animated short series sold as NFTs, recently clogged the Ethereum network making hourly fees surged to $2.53 million because of high demand.

On the other hand, OpenSea, a popular marketplace, processed $95 million worth of NFT transactions in two days compared to the cumulative volume of $21 million recorded in the entirety of 2020.

The platform’s co-founder & CEO, Devin Finzer, acknowledged that the NFT boom was insane, given that it represented a unique application of blockchain technology.

QuadrigaCX Bankruptcy Trustee Announces Interim Distribution of Funds

QuadrigaCX’s bankruptcy trustee, Ernst & Young, has announced an interim distribution of funds to creditors of the now-defunct Canadian cryptocurrency exchange. The announcement was made in consultation with estate inspectors, and a Notice to Affected Users will be posted soon with further details about the distribution process.

QuadrigaCX became insolvent in February 2019, following the death of its co-founder, Gerald Cotten. Cotten had taken the private keys to QuadrigaCX’s offline storage systems to his grave, leaving the exchange unable to access its funds. According to the Ontario Securities Commission (OSC), QuadrigaCX owes its affected clients an estimated $160 million.

Since then, Ernst & Young has been working as the bankruptcy trustee for QuadrigaCX and has been attempting to recover any assets it can for the exchange’s creditors. So far, the trustee has recovered $34.3 million worth of assets.

The interim distribution of funds provides some relief to QuadrigaCX’s creditors, who have been waiting for over two years to receive any compensation for their losses. However, the trustee has also stated that a small number of affected users may receive a Notice of Disallowance of Claim, meaning that their creditor’s claim has been revised or disallowed in the bankruptcy process.

If users receive a Notice of Disallowance, they have the right to appeal the decision. Miller Thomson, the law firm representing QuadrigaCX users, has advised affected users to review the reasons for the revision or disallowance and gather any necessary evidence to support their claim.

The collapse of QuadrigaCX was a major blow to the Canadian cryptocurrency market, raising concerns about investor protection and regulatory oversight. The QuadrigaCX case highlighted the need for proper safeguards and measures to protect investors and prevent similar incidents from happening in the future.

Ernst & Young’s announcement of the interim distribution of funds is a significant step in the bankruptcy proceedings of QuadrigaCX. However, it remains to be seen how much creditors will actually receive and how long the proceedings will continue. The bankruptcy trustee continues to work towards recovering any additional assets for the exchange’s creditors.