CROSS-SECTOR SECTOR IN-DEPTH 21 July 2016 TABLE OF CONTENTS Blockchain explained2 Weighing blockchain&39;s benefits against key outstanding hurdles6 Potential use cases abound across industries and the official sector7 Blockchain&39;s supporters and adopters are increasing9 Appendix 1- Selected potential blockchain use cases11 Appendix 2- Selected blockchain projects by rated issuers17 Appendix 3- Selected blockchain support and projects by regulators25 Moody&39;s related research27 Key references27 Analyst Contacts Nick Caes212-553-1382 Analyst nick.caes@moodys Robard Williams212-553-0592 Senior Vice President robard.williams@moodys Elena H Duggar212-553-1911 Associate Managing Director elena.duggar@moodys Gregory W. Bauer212-553-1498 Managing Director - Global Banking gregory.bauer@moodys Credit Strategy – Blockchain Technology Robust, Cost-effective Applications Key to Unlocking Blockchain&39;s Potential Credit Benefits Blockchain technology, originally created as a platform for the Bitcoin ‘cryptocurrency’, is now being studied and pursued for applications across various transaction-tracking contexts. Tangible, fully implemented blockchain applications beyond cryptocurrencies are some distance away, with a range of hurdles still to be cleared, including developing solutions to systems compatibility issues and questions around regulatory treatment and legal enforceability. Nevertheless, the potential to provide efficient, fast, secure, reliable and auditable transactions is driving investment in this technology. Applications of blockchain technology go far beyond financial services. In this report, we identify 25 use cases for the technology that could improve existing processes and capabilities in sectors ranging from capital markets and trade finance, healthcare and energy, to government taxation. Many rated issuers are actively pursuing blockchain technology. Issuers are assessing ways in which blockchain could be applied in their businesses and are actively developing ‘proofs of concept’. Our survey identifies more than 120 ongoing blockchain projects among Moody’s-rated issuers – spanning investments and partnerships with start-ups, internal projects, and industry collaborations – and there are likely many others yet to reach the public domain. Regulators’ stance is generally supportive but no definitive view on ultimate treatment. Regulatory bodies across the globe are monitoring developments and potential applications, with an eye to encouraging innovation while also upholding their fundamental mandates, be those financial safety and soundness, consumer and investor protection, or preserving a competitive marketplace. At the same time, a number of agencies have also noted the potential for blockchain to help improve regulatory oversight processes. Credit implications will evolve with the rollout of blockchain technology. As the technology is deployed in various processes, credit implications for rated issuers will depend on whether the positives in terms of more streamlined processes and reduced costs outweigh the negatives in terms of the potential to create competitive pressure from incumbents and new entrants that improve processes by leveraging blockchain technology. MOODY&39;S INVESTORS SERVICECROSS-SECTOR This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on moodys for the most updated credit rating action information and rating history. 221 July 2016Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain&39;s Potential Credit Benefits Blockchain explained Blockchain, as the name suggests, is a “chain of blocks of encrypted information” that form a database or &39;ledger&39;. Each block can be thought of as record of some transaction between two-or-more parties, which all have real-time access to the shared database. As encrypted blocks are added to the chain, it becomes prohibitively expensive to alter the record of a particular transaction because every block added after that particular block must be unencrypted. Blockchain arrived on the scene over seven years ago when the bitcoin ‘cryptocurrency’ became available as an alternative payment system that, among other things, eliminated the need for either a trusted middleman or a centralized institution for payment transactions (so-called decentralized trust).1 To function as designed, bitcoin requires a transfer process that ensures the sender of a particular asset is the true owner and has sufficient assets to make the transfer; blockchain serves this function.(see Exhibit 3, “Overview of blockchain technology”, pages 3 and 4 below). Although bitcoin opened horizons for wider adoption of cryptocurrencies, that outlook has been clouded by regulatory challenges, currency volatility, questions regarding scalability and instances of illegal use. However, the new money is on alternative applications of blockchain technology Whatever the future may hold for cryptocurrencies, the underlying transaction-tracking and certifying technology of blockchain2 holds considerable promise. Cryptocurrencies can theoretically be deployed as an alternative in “any transaction” where a third party is currently needed to certify the integrity of the transaction. By sharing a real-time ledger among participants and/or removing third parties from a transaction, blockchain can increase the speed, affordability, security, reliability and/or auditability of various business processes within and outside of financial services. The technology holds particular promise for the transfer of assets as well as other services centered around trust and security. While blockchain start-ups multiply, large diversified companies are actively assessing the technology. Many blockchain start-ups are attracting venture capital (VC), increasingly from interested corporate investors. As of mid-July 2016, around 149 bitcoin and blockchain start-ups had raised aggregate VC investments of more than $1.2 billion (Exhibit 1). In addition, over the first quarter of 2016, blockchain and hybrid companies3 raised more VC investment (84%) than cryptocurrency start-ups (16%), as more ‘pure play’ blockchain start-ups launched and existing cryptocurrency start-ups pivoted toward providing broader blockchain solutions (Exhibit 2). Exhibit 1 Venture Capital Investment in Blockchain and Cryptocurrency Start-ups Is Growing Rapidly Exhibit 2 Pure Play Blockchain Companies Taking Venture Capital Share from Cryptocurrency Companies Note: Data includes start-ups focusing on both cryptocurrency and non-cryptocurrency blockchain technology. Source: Coindesk, Moody’s Investors Service Note: Hybrid companies include start-ups focusing on both cryptocurrency and non- cryptocurrency blockchain technology. Source: Coindesk, Moody’s Investors Service MOODY&39;S INVESTORS SERVICECROSS-SECTOR 321 July 2016Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain&39;s Potential Credit Benefits Overview of blockchain technology Exhibit 3 MOODY&39;S INVESTORS SERVICECROSS-SECTOR 421 July 2016Credit Strategy – Blockchain Technology: Robust, Cost-effective Applications Key to Unlocking Blockchain&39;s Potential Credit Benefits Source: Bitcoin, Deloitte University, Evry, Bank of England, Moody’s Investors Service A blockchain can be developed in a public, private or consortium context.4 For each use case an appropriate type should be selected. of control, is open to everyone in the network and lets anonymous members, without trust established among each other, participate in the ledger (e.g., bitcoin). Given the absence of trust, consensus methods (e.g., proof-of-work5) generally slow down the transaction-validation process and use lots of electricity. Validation by trusted members, is much easier and cheape