Distributive Ledger and the Credit Union Industry PRESENTED BY JOHN BEST OF BEST INNOVATION GROUP

AND KIRK KORDELESKI CEO OF THE EDGE CONSULTING GROUP

Polling Question # 1 • What is Blockchain? oA) A literal Chain of Blocks oB) I have no idea oC) A database that maintains a continuously-growing list

of data records hardened against tampering and revision.

5 Key Points about Distributed Ledger technology • 1. It is more than bitcoin.

• 2. A shared distributed ledger is a linked set of transaction records.

• 3. All transactions are independently verified by others and held on a distributed ledger.

• 4. Its value is in increased efficiency and safety.

• 5. “Smart contracts” concept will bring efficiencies and speed to lending and trading.

Gartner Hype Cycle

The Reality : JP Morgan wouldn’t spend billions of dollars on hype…

Distributed Ledger 101 • DISTRIBUTED LEDGER IS NOT BITCOIN

• WHY IS DISTRIBUTED LEDGER VALUABLE?

Distributed Ledger Is NOT Bitcoin It’s the elegant underlying technology that enables BITCOIN.

It is also known as ◦ Shared Ledger ◦Distributed Ledger

CU A

CU B

1. Credit Union A sends money to Credit Union B

2. Transaction is converted to a encrypted block

3. The Ledger is broadcast to every part of the network

Validator Nodes

Validator Nodes

4. Each Node approves the transaction – Consensus is achieved

5. The ledger is then added to the chain which provides a indelible record of the event

6. Credit Union B receives the transaction

How the Ledgers are chained up • Each Ledger is tied to the previous Ledger via a hash (a unique ID)

• The next Ledger references the previous Ledger hash (unique

id)

• Each Ledger could contain 1 or 1000’s of transactions , or any other kind of data

• Entities that need the transaction information are identified through cryptography o Public Key’s and Private Key’s for entities

Polling Question # 2 • Does your Credit Union have a

Blockchain Strategy? oA) Yes oB) No oC) Thinking about it

Permissioned versus Permissionless 5 questions to help you determine which is which

5 QUESTIONS

1. Who maintains it?

PERMISSIONED

Anyone that wants to

PERMISSIONLESS

A group of permissioned 2. How are they incentivized to do it right

3. Who produces the underlying data or can send transactions ?

4. Who has access to that data?

5. Where is it stored?

Reputational Risk

Permissioned and vetted entities Credit unions and third party providers

Small group of trusted entities and data owners

Servers on a known network

Rewards, carrot and stick, cash

Anyone that wants to

Anyone , transparency

Massively distributed

Bitcoin Ethereum

Permissionless Permissioned

Public

Private

Validation Ac

cess

N/A

Sovrin

Corda (R3)

Algorithmic (code)

Permissionless Permissioned

Public

Private

Validation Ac

cess

N/A

Algorithmic + Human

Human (agreements)

Example: Bitcoin/Ethereum Example: Sovrin

Example: Corda

Ethereum/DAO hack • Hacker exploited open source code

• Network is the Alt-coin network also known as Ethereum

• PUBLIC PERMISSIONED NETWORK

• 27 day wait to get the money

• Money hasn’t changed hands yet.

Why are Distributed Ledgers Valuable? • Stored data is guaranteed availability

• You can run applications on them and be guaranteed an extremely high uptime

• You can run applications on them, and be guaranteed an extremely high uptime going very far into the future

• You can run applications on them, and convince your users that the application’s logic is honest and is doing what you are advertising that it does

• You can run applications on them, and those applications can talk to each other with 100% reliability – even if the underlying platform has only 99.999% reliability

• You can build applications that very easily and efficiently take advantage of the data produced by other applications (eg. combining payments and reputation systems is perhaps the largest gain here)

Why this tech is a perfect fit for our industry

Bank network CU Network

Security key points • Data encrypted by the most current encryption standards

• Data is broken up and spread across many nodes also encrypted

• Actual transaction data is encrypted by sender for reciever

Distributed Ledger’s Potential • FINANCIAL

• NON – FINANCIAL

Things NOT to use a Distributed Ledger for

• Storing Pictures or any kind of large data

• Internal workflow projects such as collections

• Running a home banking system

• Analytics or Machine learning

Distributed ledger’s Potential – Financial • Smart Contracts o Indirect Lending

• Smart Asset o Titles

• Clearing and Settlement o Instant reconciliation o Its possible to have no

more holds

• Payments o ME2B

• Digital Identities

•Member •Contract Signed

Member App

•Crypto Key

BC Client •Contract •Key Match

Blockchain

•Contract Sense •Response

Credit Union

•Member •Contract

Update

Member App

•Smart Contract Key Match

Ledger •Contract

Attributes •Crypto Key

BC Client

•Contract Sense •New Attributes

Credit Union

Polling Question #3 • You can use Blockchain technology to help

prevent against fraud oA) True oB) False

Introduction To The CU Ledger Initiative A CONCEPT TO CREATE A DISTRIBUTED LEDGER NETWORK FOR CREDIT UNIONS

The CULedger Industry Research Project

Concept • Explore creating a specialized Credit

Union Ledger • Goals o Remove barriers for entry for all Credit

Unions o Normalize platform before we start using o Create interoperability among all Credit

unions regardless of Cores Third Party products Platforms

o Reach adoption and implementation sooner rather than later

Private permissioned credit union Distributed Ledger network industry governance

CREDIT UNIONS CUSO’s LEAGUES TRUSTED PARTNERS EVERYONE PARTICIPATES The more nodes we have the more secure and reliable the network will be.

www.CULedger.com Concept CU Ledger Website Products ◦ HYPERLEDGER ◦ RIPPLE ◦ SOVRIN ◦ CORDA

CU/CUSO Participation ◦ Programmers ◦ Designers ◦ Product management ◦ Researchers ◦ Funding

CU portal for signing up and getting involved

Christopher Allen Christopher Allen is a veteran of the Crypto Wars

with a wealth of knowledge about the history of internet cryptography, including both successes and paths not taken.

Co-authored the IETF TLS 1.0 standard and produced the first commercial SSL and TLS toolkits.

After Consensus merged with elliptic-curve pioneer Certicom, Christopher worked on early smart contract technology as the company’s CTO

Recently, Christopher was VP of Developer Relations for the secure smartphone company Silent Circle.

He has also taught at Blockchain University, advised multiple organizations on privacy and security, and produced a design workshop on the Web of Trust.

Now at Blockstream, he is Principal Architect, working especially on distributed ledger standards, decentralized identity and new engines of trust.

Distributed Ledger Gateway technology •Create new integration points for the Credit Union

•An entry and exit point for the ledger that is secure.

•Uses CUFX as a its standard

•Connects to various systems at the Credit Union to achieve integration

•Plug and play model

CU A

CU B

1. Credit Union A sends money to Credit Union B

2. Credit Union goes through CUFX Gateway to Distributed Ledger network

Gateway Node

3. Transaction is converted to a encrypted block

4. The ledger is broadcast to every part of the network

Validator Nodes

Validator Nodes

5. Each Node approves the transaction – Consensus is achieved

6. The ledger is then added to the chain which provides a indelible record of the event

7. The gateway is notified of a transaction for Credit Union B 8. Credit Union B receives the

transaction

Turn your Credit Union into a Test “Node”

• Installation is simple

• Step by step instructions provided

• No connectivity to your network or your host (at this time)

• Test node only

• Research on transactions will be conducted and shared with the initiative

• Node will be supported by initiative (No extra work after setup for the IT department)

• Can be Cloud based

Types of distributed network applications to review

• Identity o Federated or universal Identity is rapidly emerging as one of the most important

use cases for the Distributed ledger networks. The initiative will review identity as a possible application of the Culedger network.

• Lending o The term, smart contract, refers to any contract capable of automatically

enforcing itself, without a third party between individual participants. Smart contracts are written as computer programs rather than in legal language on a printed document. This technology was largely unrealized due to the infrastructure needed to support it. Now that Blockchain and Crypto technology has evolved there has been great movement in this area. The initiative will review lending options and look into other contract based transactions

• Money Movement o Many of the initiatives such as ripple are designed to move funds between

individuals and institutions. The intitiative will explore options in this area as well.

Identity Key Points • There is a growing password crisis , this will get resolved somehow

someday.

• Identity as a platform is a disruptor and it’s a hot topic in every industry

• All other identity plays have failed so far o Google, Microsoft, Facebook, LinkedIn and many more

• Banks have explored this but failed because they wouldn’t work together

• This opportunity is wide open – No one has solved this

• Even if we fail to grow this beyond the Credit Union industry it is still a win.

Pieces of your identity everywhere

Too many usernames, passwords

ID theft, fraud New address? Expired/lost card?

Manually update everywhere

“Honeypots” of valuable data

We’re tracked, our data harvested and sold without our consent

Billions of people “unbanked”

“Sovrin” identity is now possible A presence you own and control Other people/entities link to you You become the source for:

Proof of identity Your correct info, data Your preferences for anything Your consent Your rules

An “inversion of control”

Private, super-secure

Irrevocable

Credit Union’s as the “Authenticators” We checked your license

We checked OFAC

We checked your credit

We performed KYC

We looked in to your eyes in person most of the time

We can attest to each of these things on your behalf

How can we leverage this? WE ALREADY KNOW AND LOVE YOU ! YOU ARE OUR PRECIOUS MEMBER!

Why is this worth considering? • Normalizing our authentication methods will o Reduce integration cost for digital platforms o Reduce call center calls regarding passwords o Improve speed to market for all products o Improve security drastically o Increase interoperability between organizations

• If other industries like health care or the government adopt the platform Credit Unions will become the sponsors of this technology and leaders of the privacy movement o Credit Unions can sponsor members on to the network o As a sponsor the Credit Union logo will remain as the top position of the

member forever

• It has the potential to bring non-interest income to the industry o “Ledgerchange” could offset interchange compression

Now