R3: Redefining the Foundations of Finance Blockchain/Distributed Ledger

R3: Redefining the Foundations of Finance Blockchain/Distributed Ledger

R3: Redefining the Foundations of Finance Blockchain/Distributed Ledger Technology R3s Global Reach What began as an exploratory exercise by a small group of investment banks, has developed into a world wide connected consortium spanning finance, banking, insurance, and payments With 100+ R3 professionals combined with the DLT teams from over 80+ members resulting in an unparalleled team of over 1400 people across 22 countries dedicated to DLT collaboration R3 Lab & Research Centre - confidential. R3 has a fast growing team with offices in: New York London Sydney Taipei Seoul Singapore Tokyo Washington DC Switzerland World Economic Forum Report on DLT R3 Lab & Research Centre - confidential. World Economic Forum Report on DLT

R3 Lab & Research Centre - confidential. World Economic Forum Report on DLT. R3 Lab & Research Centre - confidential. Why now: Financial Services is changing Structural change capital,regulation, cost Emergence of FinTech Startups Source: Business Insider The Fintech Ecosystem Report Source: ECB challenges for European banking industry, 2016 Hype Cycle: awareness, investment Source: Gartner's 2016 Hype Cycle for Emerging Technologies R3 Lab & Research Centre - confidential. Pattern Shared data and process Source: On Distributed Communications Networks, Paul Baran, 1962 The R3 Ecosystem. Clearing Houses Sovereign Wealth Asset Managers Not-for-Profits Startup

Community Reinsurance Technology Companies Insurance Industry Organizations Academic Institutions Central Banks Exchanges Banks Regulators R3 Lab & Research Centre - confidential. p7. Evolution from blockchains to Distributed Ledgers in Finance. Bitcoin Release Meta Protocols, Colored Coins, and Tokenization 2009 R3 Consortium begins Corda open

sourced Today 2015 Altcoin Rush Extends the concept in Bitcoin of decentralized storage to decentralized computer Towards blockchain inspired technologies DLT Corda V1 R3 LTD - confidential. p8. How it works? Consensus Agreement mechanisms evaluate information provided by participants to ensure consent among all relevant parties in an entry Distributed ledgers Records of agreement(consensus), with a secure (cryptographic) audit trail, maintained and validated by several separate computers (network nodes). Immutable Record Visibility

When a transaction is added to the ledger, the network is almost-instantly privy to this new version Distributed ledgers leave behind a cryptographically assured audit trail and timestamp All parties in the network keep a copy of their view of the ledger R3 Lab & Research Centre - confidential. Distributed Ledgers at a Glance. Ledgers Distributed Ledgers Cryptography to ensure identity authentication for each transaction Non-repudiation/immutability to preserve integrity of data and create an audit trail Blockchains Smart contracts for the automatic execution of business logic when certain criteria are met Cryptocurrency Shared ledger so each participant sees the same view of the same data, updated in real time, subject to permissioning Distributed consensus to ensure the state of the ledger represents the agreed-upon truth of all stakeholders R3 Lab & Research Centre - confidential. The Significant Evolutionary Step of DLT. R3 Lab & Research Centre - confidential. p11. The Fourth Industrial Revolution. 4th 3rd 2nd

1st Confluence of emerging technologies Computer, automation & networking Mass production, assembly line, electricity Mechanization, water power, steam power R3 Lab & Research Centre - confidential. p12. R3 Mission. We are redefining the foundations of finance by harnessing the power of collaborative networks. Internet Economy Summit HK 2017 Benefits of Distributed Ledgers in Financial Markets Distributed ledgers can replace legacy networks by validating, registering & tracking complex transactions in a dynamic, virtual and near real-time marketplace Current State Highly fragmented Transactions take days to confirm and validate Liquidity risk is pervasive Regulatory reporting is onerous and suffers from human error

t+x R3 Lab & Research Centre - confidential. Future State Unified by one ledger Transactions validated in nearreal time Regulators can use the cryptographically assured audit trail made by the ledger passively Public vs Permissioned Ledger. Corda DLT Broadcast Blockchain Bank As Ledger Bank Bs Ledger Bank As Ledger Bank Bs Ledger ID Fact ID Fact ID Fact ID

Fact 1 Bank A pays bank B $5. 1 Bank A pays bank B $5. 1 Bank A pays bank B $5. 1 Bank A pays bank B $5. 2 Bank B purchases bond X from issuing bank A. 2 Bank B purchases bond X from issuing bank A. 2 Bank B purchases bond X from issuing bank A. 2 Bank B purchases bond X from issuing bank A. 3 Bank C purchases bond X from bank B. 3

Bank C purchases bond X from bank B. 3 Bank C purchases bond X from bank B. 4 Bank C enters a credit default swap with bank D. 4 Bank C enters a credit default swap with bank D. 5 Bank D owes bank B $10. 5 Bank D owes bank B $10. 5 Bank D owes bank B $10. A A B 1 B 2 3 D

C 5 C D 4 Bank Cs Ledger Fact ID Fact 1 Bank A pays bank B $5. 1 Bank A pays bank B $5. 2 Bank B purchases bond X from issuing bank A. 2 Bank B purchases bond X from issuing bank A. 3 Bank C purchases bond X from bank B. 3 Bank C purchases bond X from bank B. 4

Bank C enters a credit default swap with bank D. 4 Bank C enters a credit default swap with bank D. 5 Bank D owes bank B $10. 5 Bank D owes bank B $10. R3 Lab & Research Centre - confidential Bank Ds Ledger Bank Cs Ledger Bank Ds Ledger ID ID Fact 3 Bank C purchases bond X from bank B. 4 Bank C enters a credit default swap with Bank D. ID Fact

4 Bank C enters a credit default swap with Bank D. 5 Bank D owes bank B $10. p15. The DLT Calendar. R3 Lab & Research Centre - confidential. 2014 The Year of Enlightenment 2015 The Year of the Hype 2016 The Year of the PoC 2017 The Year of the Pilot 2018 The Year of Production Industry Business Case. Financial Services spend $2.6 trillion annually on operating costs Financial institutions spend approx. 15-20% of total costs on IT Distributed Ledger Technology (DLT) could save $60-$80 billion across 4 use cases alone (AML/KYC, Cross-border payments, repos and OTC derivatives process) Costly/inefficient KYC/AML management collection/verification/monitoring due to manual data

B2B cross border payments is costly, inefficient and not transparent Fragmented, manual, non-standard OTC derivatives processing Wait and see strategy is risky for market participants R3 LTD - confidential. p17. Centre of Excellence for Insurers In partnership with the Association for Cooperative Research and Development (ACORD), a global nonprofit standards body, whos goal is to improve data quality and information exchange for the insurance industry, R3 is launching a Centre of Excellence for Insurers & Reinsurers. The Centre will provide a dedicated environment for both R3 and ACORDs members to research, experiment and design Distributed Ledger Technology (DLT) applications that improve the efficiency of insurance processes such as claims handling and data management. Why Insurance? Centre of Excellence Offering Insurance involves many activities requiring contracts, claims filing, and payouts DLT seems like a natural solution to automate many processes that are now manual, paper-heavy, slow, and error-prone Access to the R3 Wiki (a giant repository of research and resources collected by R3 members) A dedicated insurance portal that will allow ACORD and R3s members to discuss their DLT projects among themselves and with other industries Insurance processes are often multi-party affairs, requiring a diverse range of players to reach a consensus DLT's ability to give multiple parties access to a single, centralized record

would prove especially valuable within the industry DLT education to C-suite, management, and technology personnel R3 will also leverage its existing regulator contacts to run a regulatory outreach program, enabling ACORD members to invite relevant regulators to participate in and oversee any DLT projects initiated within the centre R3 Lab & Research Centre - confidential. p18. Distributed Ledgers in the Retirement Space Margin pressures: Increasing as competition rises, causing a reduction in provider fees. Transparency: employers and employees are demanding fee transparency and product simplication. Consumers: Want to look at their retirement holistically and provide an integrated solution package. Regulatory pressures Changes in communication: digital technologies are changing how consumers interact, consume information and transact, as well as how providers develop products, sell them and service them. R3 Lab & Research Centre - confidential. 19 Use Case: Plan and Record Management Challenge: Retirement providers maintain a large number of plan documents such as plan contracts and service agreements. Documents are reviewed by multiple departments within

the provider, and are then signed by responsible parties. 0 Get Getclients clients basic basicdata data (Suggest (Suggest changing changingto to Disclosures) Disclosures) Client Clientdata data Benefits: Streamline plan document review process, Secure document storage, sharing of documents. Portfolio Construction Client Discovery PRIIPS PRIIPS 1 Get Getclients clients

investment investment&& risk riskprofile profile KYC KYC 2 Define Defineclients clients investment investment objectives objectives&& its itsrisk risktolerance tolerance 3 Financial Financialsituation situation (incl. (incl.risk riskability) ability) 4 Implement, Implement, monitor, monitor, report reportand

and rebalance rebalance portfolio portfolio Portfolio Portfoliosolution solution Confirmation Confirmation&&trade trade execution execution Constraints Constraints&& Preferences Preferences Investment Investment objectives objectives Optimal Optimalportfolio portfolio Monitoring Monitoring&& rebalancing rebalancing Investor Investortype type Risk Risktolerance

tolerance Preferences Preferences (Instrument) (Instrument) MIFID MIFIDIIII--Best Best Execution Execution Investment Investment behavior behavior MIFID MIFIDIIII--Suitability Suitability and and Appropriateness Appropriateness Research Research Payment Payment Accounts Accounts MIFID MIFIDIIII--Client Client Categorization Categorization private and confidential. Develop

Develop personalized, personalized, risk-verified risk-verified optimized optimized portfolios portfolios Monitoring & Rebalancing 20 Insurance Pain Points, and R3 Solutions to Tackle Them Information Gathering Pain Point Pricing and Underwriting Manual/time intensive KYC information gathering Fragmented data DLT Use Case Store client data/evidence of validation from issuing authority while enabling client to maintain control of records Benefit Data security/integrity Data access granted by consumer in real time

R3 Related Projects KYC Theme LEIA Heatwave Payments Poor risk profiling Lack of integration with new modeling processes Poor invoicing, billing, and payment validation Smart contract-enabled underwriting process executed by insurer to fetch customer data from third party system/oracle Instant transfer of currency asset Reduced identity/claims fraud thereby lowering rates and increasing coverage Asset Modeling Theme Project Sentinel (adaptable to insurance) Reduce cost and increase speed of payments Cash Theme Xenon Claims

Regulatory Assessment Claims processing very manual, requiring extensive central validation (subjectivity and errors) Smart contract executes policy conditions with claim process and shares report with claims administration for final settlement Reduce fraud and claims administration Improve identification of claim events Insurance Theme Sibi Reference Data Theme Project Conrad and Camelot Regulatory filings duplicate existing work, paper-based Real-time access to regulators Solvency surveillance via real time remote auditing Reduce administration costs Regulatory Theme Maison R3 Lab & Research Centre - confidential R3 Lab & Research Centre - p21. Illustrative Applications Leveraging DL Technology.

Distributed ledger technology has a multitude of potential applications Financial Institutions Four of the high-potential FI use cases could alone generate $6080bn in cost savings Cross Border Payments Anti-Money Laundering / Know Your Client Derivatives Clearing Repo Clearing Claims Processing FX Settlement Loan Settlement

Collateral Management R3 Lab and Research Centre - Confidential. Source: McKinsey 2016 Findings From Research Into Distributed Ledger Technology Regulators Operations Individuals Anti-Money Laundering / Know Your Client Client Onboarding Virtual Identity Intracompany Settlement Credit Scoring Compliance Reporting

Cross Border Remittance Risk Visualization Normalize Reference Data Timestamping Vault/Escrow Services Basel III Compliance Account Portability Customer Deposit Cost Client Fund Transparency Broker Fraud Identification

Peer-to-Peer Insurance and Lending Trade Reporting Securities Agreements as Smart Contracts R3s Vision and Path. Global presence Cross-industry use cases LRC Community & Project Collaboration Projects 100+ 100+ Path Towards Production Members Reusable Components Repeatable Projects to other Regions and industries Shared Lessons / Reviews Non-R3 projects with members expected Technology Pilot

Production 80+ 80+ R3 Expansion Strategy Prototypes 200+ 200+ Permission Separate Member Use Cases shows additional learning 200+ Members Proof of Concepts Vendors IN FINANCIAL SERVICES BLOCKCHAIN CENTER OFINNOVATION GRAVITY Proven Collaboration - DLT - AI - Cloud - Big Data - FI - Insurance - Healthcare

- Auto Industry Se rv 2,500+ contacts Growing Dev Community Focus on Enterprise Integration ice s - Research - Infrastructure - Whitepapers - Education - R3 Lab & Research Centre - confidential. p23. R3 Vision. We will revolutionize outdated infrastructures to create shared truths that enable anyone to contract seamlessly and without error for any purpose. R3 Lab & Research Centre - confidential Appendix How DLT Can Improve Processes.

Insurance Verification on a DL Identity on a DL Patient arrives at Doctors office Biometric fingerprint scan identifies patient and sends identity information located on DL to office admin team Golden Copy Patient Receives Treatment Proof of insurance is tied to identity and is stored with it on the ledger As patient is identified, insurance information is sent to office admin team Patient authorizes release of golden copy medical records to doctor Doctor reviews records RELEASE Once prescription is filled, a smart contract sends an alert

to patient READY After review of medical records, doctor assesses condition Doctor prescribes medication and writes script Script entered onto ledger, which is accessible by Rx once patient authorizes Medical records are updated Identity & Insurance on a DL Patient Releases Script Patient releases prescription to preferred Rx, requesting it be filled Smart Contract Patient uses biometric iris scan at pharmacy Identity is verified to Rx Insurance information is sent to Rx Smart Contract & Real Time Payment

Smart contract determines copay based on legal prose within insurance plan Bank account, which is linked to identity, releases copay in real-time Receive prescription R3 Lab & Research Centre - confidential. p26. Blockchain/DLT Primer Blockchain is a ledger distributed across a network (e.g., the Internet) and available to all users in the network to view and edit the transactions in a secure way using cryptography technology. Each transaction is registered in the ledger building the history of that particular transaction, and validated for its authenticity by the users. Blockchain provides integrity, auditability, governance and transfer of ownership capabilities. This provides businesses with faster and more efficient processing, lower cost of operation and greater resilience against system failure. R3 Lab & Research Centre - confidential. p27. McKinsey Report on DLT. What does R3 do? Platform

R3 Lab & Research Centre - confidential. Services A unique shared ledger approach Blockchain-inspired: takes best attributes from Bitcoin, Ethereum, and others. Enterprise grade: built specifically for financial markets. Data privacy: transactions info propagated only to relevant nodes. Consensus: achieved at individual deal level, rather than system level. Supports a variety of consensus mechanisms. Regulator-focused: design directly enables regulatory/supervisor observer nodes. Smart contract: strong link between legal prose and smart contract code. Easy integration: reuse existing developer skills and make integration with bank systems easy and safe. Query and join the ledger to existing DBs with SQL, and code contracts in modern, standard languages like Java. Internet Economy Summit HK 2017 30 R3 Platform Vision. CorDapps (Top of Stack Corda-Based Applications) R3Net Services Corda Enterprise (Proprietary) Corda Core Components (Open Source)

R3 Lab & Research Centre - confidential. 31 Ryan Rugg, Director of Business Development Email: [email protected] R3 Lab & Research Centre - confidential.

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