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Smart Contracts in Financial Services:  Getting from Hype to Reality

Executive Summary

The potential of smart contracts – programmable contracts that automatically execute when pre-defi ned conditions are met – is the  subject of much debate and discussion in the fi nancial services industry.

Smart contracts, enabled by blockchain or distributed ledgers, have been held up as a cure for many of the problems associated  with traditional fi nancial contracts, which are simply not geared up for the digital age. Reliance on physical documents leads to  delays, ineffi ciencies and increases exposure to errors and fraud. Financial intermediaries, while providing interoperability for the  fi nance system and reducing risk, create overhead costs for and increase compliance requirements.

In this report, we aim to cut through the speculation and hype around the potential of smart contracts. We have conducted detailed  discussions with fi nancial services industry professionals, prominent smart contract startups, and academics (see Research Methodology  at the end of this paper). Our study confi rms that smart contract adoption will lead to reduced risks, lower administration and service  costs, and more effi cient business processes across all major segments of the fi nancial services industry. These benefi ts will accrue  from technology, process redesign as well as from fundamental changes in operating models, as they require a group of fi rms to share  a common view of the contract between trading parties. Consumers will benefi t from more competitive products, such as mortgage  loans and insurance policies, along with simpler processes that are free of many of the hassles of today’s customer experience.

To realize those benefi ts – and build a smart contract strategy and approach – executives will need to answer a number of questions. ▪ What are the potential benefi ts of smart contracts for fi nancial institutions and their customers? ▪ What groundwork is required for smart contracts to enter the mainstream?

▪ When will smart contracts become a reality?

▪ How can banks and insurers realize the true potential of smart contracts?

What are the potential benefi ts of smart contracts for fi nancial institutions and their customers? There are inherent benefi ts to smart contracts, as specifi c use cases highlighta:

Investment banking: In trading and settlement of syndicated loans, corporate clients could benefi t from shorter settlement  cycles. Rather than the current 20 days or more, smart contracts could bring this down to 6 to 10 days. This could lead  to an additional 5% to 6% growth in demand in the future, leading to additional income of between US$2 billion and $7  billion annually. Investment banks in the US and Europe would also see lower operational costs.

Retail banking: The mortgage loan industry will benefi t signifi cantly by adopting smart contracts. Consumers could  potentially expect savings of US$480 to US$960 per loan and banks would be able to cut costs in the range of US$3  billion to $11 billion annually by lowering processing costs in the origination process in the US and European markets.

Insurance: Usage of smart contracts in the personal motor insurance industry alone could result in US$21 billion annual  cost savings globally through automation and reduced processing overheads in claims handling. Consumers could also  expect lower premiums as insurers potentially pass on a portion of their annual savings to them.

What groundwork is required for smart contracts to enter the mainstream?

Smart contracts require a number of technical, legal, and organizational enablers to be in place:

▪ There are challenges with the security and privacy of data stored on public blockchains and permissioned ledgers, which  a number of startups are trying to tackle. Interoperability with legacy systems and the scalability of transaction processing  needs resolving.

▪ Regulation and legal frameworks will need to catch up. In the US, the state of Vermont is taking initial steps to recognize  blockchain contracts in a court of law.

▪ Recent hacks of smart contracts on public blockchains, such as The DAOb, have highlighted the technical complications  with smart contracts in general and the critical need for strong governance that protects the interests of lawful participants.

When will smart contracts become a reality?

Considering the scale of this digital upheaval, it will be at least three years before smart contracts enter the mainstream. Yet,  industry practitioners who are leading blockchain and permissioned ledger initiatives at fi nancial institutions are upbeat about  smart contract adoption. Smart contracts that do not require distributed ledgers could be viable by the end of 2017. We  anticipate mainstream adoption to begin in the early years of the next decade.

How can banks and insurers realize the true potential of smart contracts?

Financial institutions must start preparing themselves for the arrival of smart contracts, readying existing systems and processes and  experimenting with the basic functionality offered. Financial organizations need to carefully evaluate the business need and then take  a strategic and portfolio approach, launching a range of collaborative initiatives such as labs, incubators, and startup partnerships.

a Indicative estimates based on our analysis of the cost elements existing in today’s technology, process and regulatory environment. As the system evolves, these  estimates are likely to change as well. For details, refer to the Assumptions and Calculations section at the end.

b The Decentralized Autonomous Organization

2

Will Smart Contracts Reshape  Financial Services?

Over 4  million  Number of

faxes received  by syndicated  loan custodians  in 2012

Large fi nancial services organizations are saddled  with complicated and antiquated IT systems. Banks,  for instance, continue to receive thousands of  orders every month on a technology that has largely  been abandoned almost everywhere else – the fax  machine. And many fi nancial services companies  have thousands of manual interventions on trades  every day.

This context of fragmented and ineffi cient systems  partly explains why there is so much interest in the  potential of blockchain and smart contracts. Smart  contracts are, in their simplest form, contracts  that can also execute part of the functions of the  contract itself. And when these smart contracts are  put on the blockchain or a distributed ledger, there  is a strong element of permanence and immutability  attached to them.

The industry’s interest is piqued by this potential.  In recent months, a Smart Contract Alliance  has formed1, banks and industry consortia have  introduced prototypes2, and technology fi rms have  launched working groups to bolster technology3.  Bank executives have started taking it seriously  as well. Roberto Mancone, MD and Global Head  Disruptive Technologies and Solutions, Private  Wealth & Commercial Clients Division, Deutsche  Bank AG, is upbeat about smart contracts. “Smart  contracts technology has great potential and could  transform the business model of many segments of  the banks, solving many of the problems banks and  regulators are facing,” he says. But he also warns of  the need to cut through some of the hype around  the topic, saying: “The industry still has to test and  ensure that these are as robust, autonomous and  secure as they are promised to be and the adoption  will vary according to geography, regulatory  frameworks and complexity of assets managed.”4

Many Limitations to Physical  Contracts

Existing Commercial Contracts Unfi t  for the World of Real-Time Commerce

In the trillion-dollar syndicated loan market, it is still  common for participants to communicate via fax  machine, with more than four million faxes received  by loan custodians in 20125. For Fabian Vandenreydt,  Global Head of Securities Markets, Innotribe and The  SWIFT Institute, this is a signifi cant shortcoming.  “There are still large parts of the securities industry,  such as syndicated loans and others, that haven’t  transformed to digital and operate mainly via faxes  and physical documents,” he says. “I think it is time  for industry players to break out of this ineffi ciency  and consider new technologies (like smart contracts)  as an opportunity to fi rst digitize in the short term  and also leverage reduced operational costs and  new business models in the long run.”6

Ineffi cient and opaque processes entrap market  participants and lock up capital. For example,  investors committed $1.2 billion in October 2013 to  fund a loan for a junk-rated fi rm. They did not receive  any interest for 10 months7. This example refl ects  the growing problems that the industry is facing with  traditional fi nancial contracts (see Figure 1).

Centralized Authorities like

Clearinghouses Introduce Delays and  Costs

Across asset classes, clearinghouses have  signifi cantly helped in reducing trading risks in the  wake of the 2007 fi nancial crisis. Following the  2007-09 fi nancial crisis, central counterparties  have increasingly taken positions between market  participants to reduce the risk of contagion and a  domino effect of institutional failures. Although this  serves to make the fi nancial system interoperable  and reduces risks, it also leads to delays in clearing  and settlement of fi nancial contracts – plus increased  compliance requirements.

For instance, settlements of fi nancial contracts rarely  happen in real-time. In addition, there are costs  related to the administration and servicing of central  institutions in the market. ASX, the leading stock  exchange in Australia, estimates that Australian  equity markets have about AUD $4 billion to $5  billion of end-to-end costs, which are ultimately paid  for by the issuers and end investors8.

3

Figure 1. Examples of Rising Problems with Traditional Financial Contracts

Antiquated and

An nd t O Co on  

Inefficient  Processes

Settlement  Delays

Fraud Overheads Concentration  of Risks

Smart

Contracts

Programmable  contracts which  are capable of  automatically  enforcing

themselves

upon

occurrence of

4+ million

faxes received by  syndicated loan  custodians in 2012i

Average settlement  time for a syndicated  loan in the USii

20+ days

In Europeiii

48 days

$40+ billion  per year

The FBI estimate  for the total cost  of non-health

insurance fraudiv

$2 billion

Cost of fraud to the  diamond industry in  London alonev

$4-$5 billion  ASX estimate of  end-to-end costs in  Australian equity  markets which are  ultimately paid for  by the issuers and  end-investorsvi

£277 billion  per day

Volume handled by  UK’s RTGS payment  system that went  offline for ten hours  in 2014, delaying  deals worth

billionsvii


pre-defined  conditions

ASX = Australian Securities Exchange located in Sydney; RTGS = Real-Time Gross Settlement – a fund transfer system where the transfer  of money between banks takes place on a real-time basis.

i Bloomberg, “With Loan Market Still Using Faxes, Settlement Times Trail Goal”, April 2015; ii Bloomberg, “Dirty Secret of $1 Trillion Loans  Is When You Get Money Back”, September 2014; iii Markit, “Markit European loan volume survey”, October 2015; iv FBI, “Reports and  Publications: Insurance Fraud”, Accessed May 2016; v TechCrunch, “Everledger Is Using Blockchain To Combat Fraud, Starting With Diamonds”, June 2015; vi J.P. Morgan, “Australia Quantitative and Derivatives Strategy”, March 2016; vii The Telegraph, “Mark Carney  launches investigation after real-time payment system crash delays house purchases”, October 2014

What Would Smart Contracts  Change?

Smart contracts are programmable contracts that  are capable of automatically enforcing themselves  when pre-defi ned conditions are met (see Figure 2).  Smart contracts can be implemented in a distributed  ledger as well as a non-distributed ledger system.

Blockchains are one type of such distributed  ledger systems that, when suffi ciently secured,  make it impossible for a single party or group of

parties to reverse transactions once recorded  on this database. This eliminates the need for  trusted intermediaries to authenticate and settle  transactions. As a result of these properties, smart  contracts on distributed ledgers could have a high  degree of immutability and security, guaranteeing  execution based on coded terms. While Nick Szabo  coined the smart contracts concept in the 1990s9,  implementing smart contracts on distributed ledgers  came to the fore with the advent and maturing of the  Bitcoin blockchain post 2009.  

4

What do smart contracts enable today?

Smart contracts have been designed to automate transactions and allow parties to agree  with the outcome of an event without the need for a central authority. Key features of smart  contracts are: programmability, multisig authentication escrow capability and oracle inputs:

▪ A smart contract automatically executes based on programmed logic

▪ Multisig allows two or more parties to the contract to approve the execution of a transaction  independently – a key requirement for multi-party contracts

▪ Escrow capability ensures the locking of funds with a mediator (e.g. a bank or an online  market) which can be unlocked under conditions acceptable to contracting parties.  Sometimes, external inputs such as prices, performance, or other real-world data may  be required to process a transaction, and oracle services help smart contracts with inputs  such as these.

Source: Coincenter.org, “What are Smart Contracts, and What Can We do with Them?”, December 2015; Ethereum  and Bitcoin Community Forums

We believe that a permissioned, distributed ledger10  smart contract system would make most sense  for the fi nancial services industry in the majority of  cases (see Figure 2). It assures a secure, private, and  scalable platform connecting all key stakeholders:

▪ The transacting parties: they can be individuals  or institutions that intend to enter into a  contract

▪ Banks, capital markets players and insurers:  they can get involved depending on the use  case, and act as custodians of assets and  validators of all transactions

▪ Regulators: they can obtain access to read  records of all transactions to keep a watch on  the system

5

Figure 2. How Smart Contracts Work in a Permissioned Blockchain System Smart Contracts

Physical Contracts

Alice Bob Physical Contract

1

2

3

4

5

6

7

Alice Bob

Smart Contract

1

2

3

4

5

6

7

Lower operational

overheads and costs leading  to economical financial products

Smart Contract

1

Smart Contract

1

2

3

4

5

6

7

Banks, Insurers,  Capital Markets

Act as custodians of  assets, validators and  authorizers of all contracts  

Blockchain/permissioned ledger,  Programming and Encryption

Faster, simpler and  hassle-free processes, reduced settlement times

2

3

4

5

.

.

.

.

10

A software program  on the distributed  ledger, allowing an  immutable,

verifiable and

secure record of all  contracts and

transactions

Smart Contract

1

2

3

4

5

6

7

and transactions

Reduced

administration and

service costs owing   to automation and

and ease of

compliance and

reporting

Alice Bob

Transacting parties  Individuals or Institutions

Regulators/Auditors

Central authorities that keep

a tab on the system with a

wide-ranging read-access

to blockchain

Smart Contract Lifecycle

Record the terms Evaluate Self-Execute Connect with internal and external systems

Alice Bob Transacting parties

A smart contract  records the terms  of a contract

between Alice and  Bob on a distributed  ledger shared

between all

participants and

validated by

validators

Oracle

Services

The smart contract  connects with

banks’ internal  systems or external  world, e.g. account  balance, share  prices etc.

The contract waits for  external triggers to  evaluate pre-defined  conditions

Provides data for  compliance and

reporting

Alice Bob

The contract

self-executes upon  fulfilment of

conditions via triggers

Provides data for  compliance and

reporting

Regulators/ Auditors

Banks, Insurers,  Capital Markets

Regulators/ Auditors

Source: Capgemini Consulting Analysis

6

3 Key

Benefits: Risk reduction Costs Savings

Enhanced

Efficiencies

The benefi ts of this model will extend to all major  segments of the fi nancial services industry, across  value chains, and drive signifi cant value in three key  areas: risk reduction, cost savings, and enhanced  effi ciencies.

Distributed Ledgers offer a higher  degree of trust and reduced risks

Contracts or records stored on blockchains or  permissioned ledgers eliminate the need for a central  intermediary to provide trust in the system. For  markets that do not use intermediaries, it still a higher  degree of trust than current operations:

Corporate Finance and Investment  Banking: Distribution of private equity of small  and medium businesses in a crowdfunding or  an IPO sale

Structured Finance: Trading and settlement  of large, collateralized loans such as syndicated  loans between a group of banks, mutual funds,  and pension funds

Insurance: Automated processing of travel  insurance claims in case of events that can be  automatically verifi ed, such as fl ight delays or  cancellations.

Positive bottom line impact through  reduced administration and service  costs

By automating parts of business processes in the  short run and possibly entire processes in the long  run, smart contracts would signifi cantly reduce the  costs associated with areas such as compliance,  record keeping, and manual intervention.

“The real benefi t and power of the technology is  more around reducing costs, risks, error rates and  reconciliation processes while allowing everyone  to have a shared mutualized infrastructure. It frees  up capital and aids with compliance and regulatory  reporting.” Dan O’Prey, Chief Marketing Offi cer,  Digital Asset11

Smart contracts and distributed  ledgers have the potential to weed out  ineffi cient business processes

Most securities, for instance, have a delayed  settlement, with settlement times of T+2 or longer  being common. Smart contracts have the potential  to bring this down to minutes. This would also free up  capital in the system by reducing mandatory collateral  requirements for the trading of loans and derivatives  and would thereby improve return on capital.

Thomas Hardjono, CTO Connection Science at MIT,  sees signifi cant potential benefi ts in this approach. “It  takes, two to three days for the actual trade to settle  and the process involves a lot of paperwork in the  back room,” he explains. “With smart contracts, we  could make that workfl ow more effi cient by providing  each of the people or stations in the workfl ow with  greater visibility into the state of a particular asset in  the workfl ow. At the next level, we could make this  happen among a group of companies with proper  governance. Ultimately, when these smart contracts  become admissible in courts, it would make the  entire system operational and effi cient.”12

7

Smart Contracts: The Legal Perspective

Technology often outpaces regulatory frameworks and the law – a trend that is borne out in the  area of smart contracts as well. To make smart contracts interoperate with the existing legal  system, designers of smart contract systems are actively working on several nuances from a legal  standpoint:

Immutability – Smart contracts written as software programs on distributed ledgers would mean  that the contracts, once agreed upon, cannot easily be modifi ed. This would cause practical  problems in many real-world scenarios and Cornell University Professor Ari Juels is exploring how  the terms of the contract could be modifi ed once it is in place. “Contract law makes provisions  for the modifi cation, amendment or annulment of contracts. Technical mechanisms in smart  contracts can achieve analogous goals,” he says. “One possible approach is what we often  refer to as an `escape hatch,’ a preprogrammed way of changing the terms of a smart contract.  Ensuring that the right permissions are incorporated into the escape hatch itself is tricky, though,  as is ensuring its correct implementation.”

Contractual Secrecy – Normally, a copy of smart contracts executed on a blockchain or a  permissioned ledger is shared with the chain’s members. The anonymity of the parties can be  secured, but the secrecy of contract execution is not necessarily secured. Thomas Hardjono,  CTO Connection Science at MIT, believes that this is an area that is receiving attention and where  progress will be made. “MIT Enigma is a project that is trying to solve the problem of privacy

preserving data sharing within organizations, and between organizations, by use of advanced  cryptographic structures,” he says. Similarly, a concept known as “zero knowledge proofs” is being  explored to devise a way to separate the way of verifying a transaction from seeing the content of  that transaction.

Legal enforceability and adjudication – The fi nancial services industry is highly regulated, and  specifi c licenses and approvals are issued to fi rms to participate in a distributed ledger-based market.  For instance, the US Securities and Exchange Commission recently approved the internet retailer  Overstock.com to issue company stock on a platform on top of the Bitcoin blockchain. However,  the legality of fi nancial smart contracts is yet to be established. Initial steps have been taken in  the US, by the State of Vermont, to recognize distributed ledgers in the state courts. Similarly, the  US State of Delaware recently launched a program to provide an enabling regulatory and legal  environment for the development of blockchain technology. Accurate translation of legal terms and  conditions into software logic is another key aspect to consider. Startups such as CommonAccord  are working on a system that auto-translates legal documents into smart contracts, simplifying their  interpretation by both lawyers and developers.

Legislators, regulators and governments have begun to realize the potential for distributed ledgers  in increasing transparency and ease of compliance and reporting. The push from these authorities  will be instrumental in soon overcoming legal and administrative hurdles.

Source: Capgemini Consulting Interviews, June-July 2016; American Banker, “Yellen Reportedly Urges Central Banks  to Study Blockchain, Bitcoin”, June 2016; CoinDesk, “UK Government Highlights Benefi ts of Blockchain Tech”, October  2015; Oded Goldreich, “Zero-Knowledge: a tutorial by Oded Goldreich”, Accessed August 2016; Bloomberg, “Overstock  Wins SEC’s Nod To Upend How Companies Issue Shares”, December 2015; STEP, “US state of Vermont to recognize  blockchain data in courts”, May 2016, PR Newswire, “Governor Markell Launches Delaware Blockchain Initiative”, May  2016

8

What do Banks, Insurers and their  Customers Stand to Gain from Smart  Contracts?

Smart contracts will likely fi nd early application in at least ten specifi c use cases across sectors in fi nancial  services (see Figure 3).

Figure 3. Smart Contracts’ Key Use Cases for the Financial Services Industry

Capital Markets and  Investment Banking

Commercial and

Retail Banking Insurance

Corporate Finance:

Trade Finance:

Automated claims processing  

Over 10  specific  use

cases

Initial Public Offers (IPOs),   Private equity

Structured Finance: Syndicated  loans, leveraged loans

Stock exchange market  infrastructure

Supply-chain documentation,  invoicing and payments

Mortgage Lending

Loans and crowdfunding for  startups and small and medium  enterprises

Regulatory reporting and compliance;

in motor insurance, crop  insurance, etc.

Fraud prevention in luxury  goods

New products: insurance for  the sharing economy,

autonomous vehicles,

peer-to-peer insurance, cyber  insurance

Know Your Customer (KYC) and Anti-Money Laundering (AML)

Source: Capgemini Consulting Analysis

“We have been looking at the applications of  distributed ledger technologies and the big picture  of what can it mean in terms of smart contract use  cases. Crowdfunding for private equities stocks in  startups is one of the key blockchain use cases  that we are prioritizing.” Philippe Denis, Head of CIB  Blockchain Initiatives, BNP Paribas13

“We are currently working on clearing and settlement  use cases. Specifi cally, we are working with the ASX  for the clearing and settlement of cash equities, with  the DTCC on US Treasury repo and SIX Securities  Services on security lifecycle processes”. Dan  O’Prey, Digital Asset14

To model the size of the prize, we have analyzed  three use cases that we believe will generate the  most impact. Our business case analysis estimates  that automation using smart contracts adoption, and  associated process and organizational changes15,  could be able to generate substantial benefi ts (see  Figure 4). Please refer to the Assumptions and  Calculations section at the end for details. These  are only indicative and rough estimates based on  our analysis of technology, processes and regulatory  cost elements that exist in today’s environment. As  the system evolves, these estimates will change as  well.  

9

Figure 4. Smart Contracts Could Offer Substantial Benefits to Customers and Financial  Services Firms

Syndicated Loans Business

Faster Trade

Settlement in

Increased fee income

US $2 - $7 billion

per annum globally Clients 6 - 10 days per loan in the US Investment Banks


Mortgage Loan Origination


Lower Processing Fees

$480 - $960

Customers savings per loan in the US Banks

Lower operations costs

US $3 - $11 billion per annum in the US and EU

$149

Motor Insurance Policy Servicing

Lower claims  

billion

Lower Insurance Premiums

$45 - $90

Customers Insurers Savings per annum in the US and EU

settlement cost

US $21 billion per annum globally

Additional

Source: Capgemini Consulting Analysis; refer to the Assumptions and Calculations section at the end for details

leveraged loan  volume growth  with a reduction  in settlement  times

Example Use Case 1: Savings and  upsides from reducing syndicated  loans settlement time

The Leveraged Loan market faces acute settlement  issues. While the High-Yield Bond trades are settled  in T+3 days16, the settlement period for Leveraged  Loans often extends to almost 20 days17. This  creates greater risk and a liquidity challenge in the  Leveraged Loan market, hampering its growth and  attractiveness. Since 2008, the global Leveraged  Loan market has witnessed negative growth,  whereas the High-Yield Bond market grew by 16%18.  We believe that smart contracts could reduce the  delay in processes such as documentation, buyer  and seller confi rmation and assignment agreement,  and KYC, AML and FATCA checks, with the help  of a permissioned ledger19. The settlement period  for Leveraged Loans could thus be reduced to the  range of T+6 to T+10 days, making the Leveraged  Loan market more liquid than it is currently.

We estimate that with the reduction in settlement  times, if the growth of Leveraged Loans can be at  least a third of the High-Yield Bond market growth (i.e.  between 5% and 6%), it would amount to an additional  $149 billion of loan demand in the market. These loans  typically carry 1% to 5% arranger fees, translating  into additional income of $1.5 billion to $7.4 billion  for investment banks20. In addition, operational costs,

regulatory capital requirements and costs associated  with delayed compensation payments during the  settlement of Leveraged Loans will be reduced with  the shortening of the settlement cycle21.

Example Use Case 2: Mortgage  industry to benefi t from adoption  of smart contracts

The mortgage loan process relies on a complex  ecosystem for the origination, funding, and servicing  of the mortgages, adding costs and delays.  Roberto Mancone, MD and Global Head Disruptive  Technologies and Solutions at Deutsche Bank AG,  says that it is high time that some of the systemic  issues in mortgage processing are resolved. “The  loans are one of the main drivers of growth, but  at the same time also of operational complexity in  the retail banking industry,” he says. “This creates  an enormous need to enhance the effi ciency of  internal services and processes.”22 Smart contracts  could reduce the cost and time involved in this  process through automation, process redesign,  shared access to electronic versions of physical legal  documents between trusted parties, and access to  external sources of information such as land records.

Our earlier research on banking back-offi ce  automation23 suggests that mortgage lenders can  expect savings between 6% and 15% from Business  

10

Process Management systems, core banking  platforms, and document management systems.  These numbers, coupled with our experience and  discussions with industry experts, helped us estimate  expected savings for each of the processes involved  in loan origination. For instance, in the US housing  market, nearly 6.1 million homes were sold in 201524.  Based on historical averages, 64% of these were  purchased by home owners with a mortgage25. We  estimate that minimum savings of $1.5 billion could  be achieved by loan providers through the automation  of tasks within their organizations (see Figure 5).  Further, savings of $6 billion could be achieved once  external partners such as credit scoring companies,  land registry offi ces, and tax authorities become  accessible over a blockchain to facilitate faster  processing and reducing costs.

We also estimate that mortgage customers could  expect a 11% to 22% drop in the total cost of  mortgage processing fees charged to them in  case smart contracts are adopted. In absolute  terms, this amounts to savings of $480 to $960  on the average processing fees of $4350 on every  mortgage loan26. The total of outstanding mortgage  loans across the US and European Union countries  in 2014 was valued at $20.98 trillion27. Based on the  US mortgage market case, smart contracts could  potentially save between $3 billion and $11 billion  in the new mortgage origination process across the  US and EU28.

$6

billion

Figure 5: Potential Cost Savings for Mortgage Lenders from the Use of Smart Contracts Reject application and  

Maximum

savings that can  be generated  by the US

Credit History Identity Check KYC & AML check

No

inform the customer Yes

mortgage banks  through the

use of smart  contracts

Customer Fills mortgage  application with

income, tax and

property details

Mortgage advisor

creates loan workflow  and updates credit,  identity, KYC, AML data  in bank’s loan workflow

Are property documents  valid and lien status in  order?

Check income

and property

LTV

rejected

approved

Reject loan application  and inform the customer

Credit mortgage  acount post

verification of  previous steps

Register bank’s  lien on property

Signatures verified and mortgage  account created

Customer signs the  mortgage document   along with the witness

Mortgage Document  created

Calculation of the cost savings potential from the use of smart contracts in the US mortgage industry

Mortgage Loan  Origination Cost US$

Minimum Savings US$ Minimum Savings US$

Per loan processing cost for an average  loan of $200,000 in the US (2015)

Opportunity for mortgage origination  based on sale of 6.1 million homes of  which 64% are being sold on mortgage

4,349.5 17 billion

396.3 (9.1%) 1.5 billion

1,528.4 (35.1%) 6 billion

Source: Capgemini Consulting Analysis; Capital One, “Home Loans - Be in the know about your closing costs”, Accessed June-July 2016

11

$1.67  billion  Maximum  savings

Example Use-Case 3: Claims  processing cost savings in the  motor insurance industry

We believe that, in the motor insurance industry,  smart contracts that bring insurers, customers and  third parties to a single platform will lead to process  effi ciencies, and reduced claim processing time and  costs. Also, third-parties such as garages, transport  providers and hospitals – once they are part of the  distributed ledger – will be able to provide quicker  support against claims to customers and can expect  faster settlement of claims.

The UK motor insurance industry processed 3.7  million claims and spent $13.3 billion in claim costs  and expenses (see Figure 6)29. We calculate that  approximately $1.67 billion, or 12.5% of the total  costs, could be saved by adopting smart contracts.  Based on the UK motor insurance market, we  estimate that annually $21 billion could be saved by  the global motor insurance industry through the use  of smart contracts30.

A percentage of savings could be passed on to the  customers via lower premiums on motor insurance  policies. We estimate that the cost savings  amounts to a reduction of $90 on average on every  premium payment if the insurers pass on all of the  savings generated from smart contracts adoption  to consumers, and $45 per premium in case the  insurers choose to pass on only 50% of savings31.

that can be  generated by  the UK motor

Figure 6. Potential Savings in the Motor Insurance Claims Settlement Process with the  Use of Smart Contracts  

insurers

through the  use of smart  contracts

Customer

Claim submitted  to the Insurer

No

Damage resolved Yes

Is the claim

handled by a

registered

vendor?

Payment request  raised on

blockchain

Smart Contract

Payment made based  on programmed

trigger within shortest  time

Damage resolved

registers the requestAssessment done

Payment request

raised manually

Payment approved  

Insurance agent

by authroized assessor

Insurer

post verification

Calculation of the cost savings potential from the use of smart contracts in the UK motor insurance industry Total Expected  

Number of Motor  Insurance Claims in

Claims cost and  Expenses

Savings in Claims  Costs and Expenses  

Year-2015

the UK (A)

in $ million (B) % Savings (C/B) $ million (C)

Total 3,733,000 13, 320 1,665 12.5% Source: Capgemini Consulting Analysis

12

What Needs to Happen Before the Financial  Industry Adopts Smart Contracts?

The technology behind smart contracts is evolving rapidly. Basic smart contracts with functionalities such as  multi-signature payments, escrow services, and so on are already in place (see “What do smart contracts  enable today?”). However, there are several challenges that need to be overcome before complex smart  contracts can become mainstream (see Figure 7).

Figure 7. Key Challenges Hindering Smart Contracts Adoption

Technological Challenges Scalability

Legal Challenges

Organizational Challenges Governance  

in speed of execution Regulatory Challenges in applicable laws Interoperability

with legacy systems

Common Challenges

Privacy and Security

of users and transactions

Source: Capgemini Consulting Analysis

of blockchains

Lack of Talent

in smart contracts

Inflexibility

of smart contracts

Interoperability with Legacy Systems  and External Data

Smart contracts need to be integrated with the  industry’s existing systems, raising signifi cant  questions about the effort involved and the  investment that will be required. Thomas Hardjono,  CTO at MIT Connection Science, believes that it is  a key cost component that needs to be factored  in early on. “When a company, a big bank or a big  company is trying to bring in new technology, this  integration is a cost item,” he says. “And people  evaluate the ROI by also building in this cost of  integration. So, with blockchain technology how  is this going to work? What is the capital cost to  businesses running this? Is it worth it?”32 Smart  contracts will also need to be able to work with

trusted external data sources if they are to utilize  external information. Smart contracts can achieve  this with the help of oracles – programs providing  smart contracts with the data they need from the  external world or carrying the commands they need  to send to other systems. Sergey Nazarov, Co

founder and CEO, smartcontract.com – a startup  specializing in building oracles – outlines how  connectivity with real-world data will be key. “We  have been focusing on creating smart contracts  that are able to deal with real world data,” he says.  “Most contracts have something to do with data  that comes from the external world – shipments,  weather, temperature, customs etc. To handle that  data, a smart contract network is going to need  Oracles to connect smart contracts with secure  and reliable data sources.”33 There are substantial  challenges in connecting to such external oracles in  a reliable way.

13

BitLicense A custom-made  regulatory

framework

established

by New York  for bitcoin and  digital currency  businesses

More fl exible contracts

Smart contracts are programmed logic and are  immutable during the course of execution of a  transaction. However, real-world contracts can  be modifi ed as long as the parties in the contract  agree. Techniques need to be explored to upgrade  contracts as necessary during the term of a contract.

Scalability of transactions

For transactions such as syndicated loans or  mortgages, where high speeds are not an issue,  permissioned blockchains are, certainly for now,  the preferred path. This is because there tends to  be fewer participants to the consensus, decreasing  the time needed for consensus on transactions and,  hence, execution time. However, as transaction  volumes grow, this is an area that Professor Ari  Juels believes needs attention. “Established  industry players are likely to use permissioned  blockchains, rather than permissionless ones, for  several reasons,” he says. “First, permissioned  blockchains make it easier to achieve regulatory  compliance. Second, they provide more robust  consensus and governance mechanisms. Finally,  high throughput is essential for many applications.  While new techniques will be needed to scale both  permissioned and permissionless blockchains up  to throughputs required for many applications,  permissioned blockchains today already have a  considerable performance advantage.”

In addition, experiments are underway in consensus  mechanisms that allow for parallel processing  of transactions. Thomas Hardjono, CTO at MIT  Connection Science, says: “We need a new  consensus algorithm for blockchain systems that are  geared for smart contracts. That is a challenge. One  of the areas of research that we are very interested  in here in MIT is future consensus algorithms for  blockchain technology and smart contracts”.34

Talent Pool

There is a dearth of smart contract and blockchain  talent and capabilities within fi nancial services fi rms.  For example, companies may need to recruit “coder lawyers” – a very rare combination of skills that  combines a solid understanding of both law and  computer programming. Organizations need to put  in place skills development programs for their existing

resources, and some startups have started to  provide training support on their platforms, as Brian  Crain, Head of Business Development at Monax,  outlines. “Acquiring knowledge and skills is crucial  at this stage. We designed training for developers to  understand blockchain, smart contracts and how to  build enterprise-grade smart contract applications.”

he says35. Working with academia to further research  and talent growth is a potential solution. Leading  universities such as Stanford36, Oxford37, MIT38 and  Cornell39 have dedicated research groups focused on  smart contracts and blockchain, and some of them  have also begun to offer courses in this fi eld.

Mature Regulation

The regulatory environment will need to catch up with  the speed of development in smart contracts and  distributed ledgers. For example, in the US, states  such as New York have already enacted regulations  for digital currency businesses. Its BitLicense is  a custom-made regulatory framework for bitcoin  and digital currency businesses, which has been  established by its Department of Financial Services40.  For contracts to be enforceable, the identity of the  parties has to be confi rmed to a degree that the legal  system and regulators consider appropriate, and  electronic signatures need to be considered valid (see  “Smart Contracts: A Legal Perspective” for more legal  aspects). Regulators ought to favor increased adoption  of smart contracts as they stand to gain from simplifi ed  regulatory compliance and reporting.

Contract Secrecy and Security Needs

Secrecy of contracts may be a challenge for  enterprise-related smart contracts depending on the  type of permissioning put in place on blockchains.  Since transaction records can potentially be  visible to all participants, banks will be reluctant to  collaborate on a common smart contract platform  if security and privacy of data are not taken into  account. Cryptographic key management is crucial  to hide transaction details from unknown parties.  Security hacks at, for example, Bitfi nex (2016),  Mt. Gox (2013) and The DAO (2016)41 have raised  industry concerns. There are therefore a range of  questions that need to answered. What data should  be shared with all participants? How do we ensure  the authenticity and security of data supplied by  oracle services? And so on.

14

Early

2020s  Estimated start  of mainstream  adoption

of smart

contracts

in practical

applications

Governance

Smart contracts on distributed ledgers eliminate  the need for a trusted intermediary, as the required  authority is provided by the transparency and the  consensus among the participants (see “The DAO  Incident: Governance Lessons for the Financial  Services Industry”). This model requires that multiple  banks, consumers and potentially regulators come  together on one platform and agree on aspects of  data access, dispute resolution and limitations of  liability42. Gideon Greenspan, CEO and Founder of  MultiChain, a private blockchain platform says, “In  a shared resource such as a distributed ledger, you  need rules about who owns and accesses which  piece of data and what kinds of transactions are  permitted,”43. He adds, “For private blockchains,  several prominent startups like R3CEV and Digital  Asset Holdings are working on ‘contract description  languages’ to allow the conditions of a complex  fi nancial contract to be represented formally and  unambiguously in a computer readable format,  while avoiding the shortcomings of Ethereum-style  general purpose computation.”

How soon can smart contracts  become mainstream within  fi nancial services industry?

Based on our discussions with industry experts from  major banks, startups and academia, we estimate  that mainstream adoption is a few years away (see  Figure 8). Industry experts leading distributed ledger  initiatives at their fi rms are positive about a quick  emergence of early applications:

“I think any product that a smart contract can  manage, can be developed without waiting for  readiness on a distributed ledger technology  (DLT), and it could be viable by the end of 2017.  For instance, smart contracts can record loan  originations through contract digitization, self

execution of contracts and reduction of operational  overhead in the internal business processes during  its entire life cycle. After this stage, when the fi nancial  industry will have consensus on the DLT, the smart  contract used for the origination can be further  extended for repackaging and trading of these loans  in a capital market environment that will be ready  for a DLT environment.” Roberto Mancone, MD and  Global Head Disruptive Technologies and Solutions  at Deutsche Bank AG44

“We’re a couple of years away from in-production  systems in a bank or a group of banks. We may see  some small pilot-scale implementations in the next  12 months, but for mainstream we are two to three  years away.” John Whelan, Director of Innovation,  Banco Santander45

While mainstream adoption may well be at least 3  years away, fi nancial services companies should not  stand still. They ought to begin by identifying the  changes that will be required, including to IT systems,  processes and change management policies. They  should also begin the process of carefully building  their external ecosystem, choosing critical new  players in the value chain. Our recent research on  innovation centers46 found that the fi nancial services  industry has overtaken other industries in terms of  opening new innovation centers and that Fintech  is one of the top focus areas for new innovation  centers. The industry must capitalize on this  momentum and focus on smart contracts as part of  the broader Fintech innovation ambit.  

15

Figure 8. Timeline of Blockchain Evolution and Smart Contract Implementation

Mainstream

adoption begins

Origin

Experimentation

2015-17

Take-off

2018-2019

Regulations and  laws to bring  blockchain and

2020

Mainstream

adoption of smart  contracts begins

Emergence of  new products and  

1997

Nick Szabo coins  the idea of smart  contracts

2009

Satoshi Nakamoto  introduces the  concept of

blockchain

2012-14

Basic smart

contract

capabilities added  to Bitcoin

2014-15

Smart Contract  solutions

introduced

Banks and other  companies set up  labs to develop  proofs-of-concept (POCs)

R3CEV initiative  consortium of  banks, insurers  and IT service  providers is

formed

Several POCs  succeed,

implementation  gathers speed

smart contracts  under the purview  of law arrive on  scene

Expected first  in-production

implementation of  smart contracts  by financial

services firms

services enabled  by smart

contracts

Source: Capgemini Consulting Analysis

The DAO Incident: Governance Lessons for the Financial Services Industry

On 17 June 2016, a smart contract on Ethereum’s public, permissionless blockchain was hacked and a share of investors’  funds, valued at nearly $50 million, was moved to a sub-contract controlled by the hacker. While the funds could not be  immediately accessed by the hacker because of checks built into the contract, the hack has had far-reaching implications.  While such an attack is less likely to occur in a permissioned ledger network, the incident has served as an alarm for smart  contract practitioners. Amidst highlighting the technical complications and diffi culties with implementing smart contracts, the

event also highlighted the signifi cance of strong governance. For instance:

Roles of participating institutions: The fi nancial institutions that come together to operate on one smart contract platform  must have clearly defi ned roles and responsibilities and ensure that all norms related to creation, execution and annulment of  smart contracts are well-defi ned. According to Trent McConaghy, Founder and CTO of BigchainDB, “Governance shouldn’t  be an afterthought. It should be at least 50% of the conversation. When you don’t design for governance, the result is not no  governance. The result is bad governance.”

Checks and balances: Due to a security feature of the Ethereum smart contract, the hacker was not able to move the  hacked funds for 27 days, giving the community precious time to act, rewrite the rules and rollback the attack. Economic  impact of failures should be proactively gauged and features need to be built-in to ensure corrective action can be taken by  authorities to avert or limit losses to the transacting parties. These checks will have to be designed while keeping in mind the  need for seamless execution.

Source: Ethereum and Slock.it blogs; Capgemini Consulting Interviews, June-July 2016

16

How can Banks and Insurers Realize the  Full Potential of Smart Contracts?  

[…] many

proposed

blockchain  use-cases  can be

implemented  efficiently via  traditional or  distributed

databases as

Be Prepared for the Arrival of Smart  Contracts

The fi nancial services industry is following  developments in the smart contracts space with  a keen eye. Innovators among banks and insurers  have started experimenting with smart contracts and  several of them are optimistic about the evolution  and mainstream adoption of smart contracts within  the next few years. Philippe Denis, Head of CIB  Blockchain Initiatives, BNP Paribas, says, “Now is  the time to start experimenting with smart contracts  in a sandbox environment. By 2017, we will begin  to see early-stage contracts enabling practical use cases and also connecting to legacy platforms. And  by 2019, we might even begin to see consumer  adoption ramping up.”47 Sergey Nazarov, Co-founder  and CEO, smartcontract.com says, “Now is a good  time to get your existing infrastructure ready to interact  with smart contract based securities. The scenario a  large organization doesn’t want to be in is having to  quickly modernize its entire fi nancial infrastructure in  order to keep up with the rapid adoption of a smart  bond, or smart contract derivative as a preferred  security by a large part of their clients.”48

Critically Evaluate Your Needs – Do We  Really Need Smart Contracts?

The hype around smart contract technology should  not cloud the thought processes behind whether  smart contracts are needed in the fi rst place and  what purpose they will serve (see Figure 9). Gideon  Greenspan, CEO and Founder of MultiChain,  a private blockchain platform, highlights the  importance of use case selection. “Use-cases must  be carefully evaluated as many proposed blockchain  use-cases can be implemented effi ciently via  traditional or distributed databases as well,” he  says49. “We see clear applications for banks and  other fi nancial institutions. Respectively, these are:  small trading circles, provenance for trade fi nance,  bilateral contract notarization and the aggregation of  AML/KYC data.”

well.

Gideon Greenspan,  CEO and Founder,

Figure 9. Critically Assess Your Needs Before Embarking on a Smart Contract Use Case A

Is current business  

MultiChain

process/ product/  service dependent on  manual processes and  multiple intermediaries?

Yes

Can it be implemented  via traditional software  (apps/databases)?

No

Do central authorities,  such as regulators, need  to be involved?

No Yes

No Yes

Are terms of  contracts  simple and  standard?

Yes

Is required  confidentiality  high or low?

High

Use smart contracts  on permissioned  blockchain

No Low

Does it involve  creation of new  lines of

business?

Yes

No

You may not  need smart  contracts

Explore smart  contracts on  permissionless  blockchain

Go to A

Source: Capgemini Consulting Analysis

17

Conceptualize New, Smart Contract Enabled Products and Services

Banks and insurers can also focus on  conceptualizing entirely new products and services  that are underpinned by smart contracts. For  instance, one of the startups we spoke to has been  working with an insurer on a cybersecurity insurance  product. In this case, the smart contract between an  enterprise client and the insurer monitors the client’s  digital properties (websites, apps) and dynamically  calculates the cybersecurity risk to adjust the payable  premium amount. New products and services lend  themselves to early experimentation and an agile  process of tests, trials and rapid iterations. Also,  minimal or no contact with legacy systems can  avoid integration and interoperability challenges.

Build Capabilities and Fast-Forward  Smart Contract Innovation with  Strategic Partners

It is imperative that the fi nancial institution moves  beyond challenges related to talent and smart  contract innovation by forging strategic partnerships  with experts in the space. To make an informed  decision on partnering with the smart contract  startup ecosystem, it is crucial that banks and  insurers develop an understanding of the smart  contract landscape (see Figure 10).

Take a Portfolio Approach to Smart  Contract Experimentation

The best results are likely to accrue from a range of  collaborative smart contract initiatives. Collaboration  between innovation labs, incubators, startups and  industry consortia is as crucial as proprietary innovation  efforts. For instance, Deutsche Bank, in addition to its  labs in London, Berlin and Silicon Valley, is also involved  with the R3 banking consortium to further research on  distributed ledger technology50.

Conclusion

Smart contracts present an exciting, transformative  opportunity for the fi nancial services industry. However,  as with all breakthrough innovations, organizations  need to be careful about differentiating between what  is hype and what is reality in the smart contracts  space. By focusing time and energy on understanding  the potential of smart contracts, and plotting a long

term, robust and pragmatic strategy, organizations  can realize the potential on offer to reimagine fi nancial  contracts for a digital age.

18

Figure 10. Smart Contracts Industry Landscape and with Select Startups and  Technology Providers

“BigchainDB

combines the best of

distributed databases,  

“Symbiont was formed

with a purpose of using

smart contracts and

distributed ledger

technology to solve a

variety of problems in

financial institutions and

capital markets”

Louis Stone, Managing

Director-Head of Business

Development, Symbiont

Microsoft

Azure

BaaS

Ethereum

Symbiont

such as scalability

and queries, and

blockchain

technology, such as  immutability and

decentralized control”

Trent McConaghy, Founder  and CTO of BigchainDB

BigchainDB

IBM Bitcoin

Smart Contract and  Blockchain Capability  Providers

“At Credits, we have

built a framework for

building interoperable

blockchains primarily

for regulated areas

such as financial

services and

government”

Nick Williamson, CEO and

Founder, Credits

Counterparty

Rootstock

Credits

“Eris is an open source  platform with tools to  develop

enterprise-grade smart

Monax

Multichain

BrainBot

Hyperledger

“BrainBot’s HydraChain  is a permissioned  ledger that is an  

contract applications

as well as a set of

pre-developed smart

contract modules and

libraries”

Brian Fabian Crain, Head of

Business Development at

Monax

Source: Capgemini Consulting Analysis

“MultiChain’s

approach is only to  immutably embed  data in a blockchain,  because keeping the  code for interpreting  that data in the node  or application layer  yields superior

performance”

Gideon Greenspan, CEO and  Founder of MultiChain

extension to

Ethereum’s

technology”

Jacob Stenum Czepluch,  Consultant at BrainBot  Technologies AG

19

Research Methodology

Focus interviews – We conducted detailed discussions with banking and insurance industry  professionals who are leading blockchain and smart contract initiatives at their fi rms, as well  as academics focused on this fi eld. We also interviewed 19 startups that have experience  and credentials in smart contracts. We shortlisted these startups from databases such as CB  Insights, CrunchBase and Iterate. Our interviews included executives from:

Financial Services

Industry Smart Contracts Startups Academics

Banco Santander BNP Paribas

Deutsche Bank The SWIFT Institute

Augur, BigchainDB, BitShares, Blockchain  Tech Ltd., BrainBot, Chain, CoinPrism,  CommonAccord, ConsenSys, Credits,

Digital Asset Holdings, Epiphyte, Monax,  Everledger, HitFin, Inspheer, MultiChain,  SmartContract, Symbiont

Bar-Ilan University  (Israel)

Cornell University ESILV (Paris)

Harvard University MIT

Quantitative Analysis – We also undertook comprehensive web-based research of the smart  contracts space to complement the fi ndings of the primary research with overall industry trends.  This research also involved an in-depth analysis of the markets and processes in the highlighted  use cases of syndicated loans, mortgage loans and motor insurance. We analyzed individual  sub-processes that make up each of these use cases and analyzed the potential for cost  savings and upsides upon the introduction of smart contracts for each of them. This allowed us  to arrive at a rough estimate of savings given the current state of cost technology, processes and  regulation. As the system evolves, these estimates will as well.

20

Assumptions & Calculations – Mortgage Industry Lender Savings

Data – 1) Mortgage fees - https://home.capitalone360.com/home-loans/closing-costs. In the  US, the average fees of $4,350 for $200,000 mortgage were charged to the customers

2) New housing in the US - Wall Street Journal, “U.S. Housing Market Tracker”, Published  October 2014, Accessed June-July 2016. 6.1 million homes were sold in 2015

3) New housing fi nanced through a mortgage loan - Fivethirtyeight.com, “How Many  Homeowners Have Paid Off Their Mortgages?” December 2014. 64% homes were mortgage  fi nanced. Hence, 3.9 million (6.1 million*64%) homes were funded through mortgage loans

4) Size of the US and European mortgage markets - European Mortgage Federation, “HYPOSTAT  2015 A review of Europe’s mortgage and housing markets”, September 2015. The EU28 and  US market was approx $20.98 trillion

Assumptions – We estimate that lenders can save 9.1% through automation of tasks within the  organization and 35.1% could result once external partners become accessible over blockchain.  Smart contracts will automate tasks, provide electronic versions of physical legal systems such  as mortgage deeds, as well as incorporate external sources of information in the process

Analysis – In the US market , minimum savings $4,350*9.1%*6.1*10^6*64% = $1.5 billion,  maximum savings $4,350*35.1%*6.1*10^6*64% = $6 billion

Comparing the outstanding mortgage industry of EU28 ($9.2 trillion) and US ($11.8 trillion).  The savings for EU28 area is estimated to be between $1.17 billion (minimum) and $4.7 billion  (maximum). Adding the savings across the two markets ~ $3 billion and $11 billions

Consumer Savings

Data – In the US, on an average $4,350 (Capital One, “Home Loans - Be in the know about your  closing costs”, Accessed June-July 2016) is paid by customers per average loan of $200,000  towards processing fees

Assumptions – 1) We estimate that lenders can save 9.1% through automation of tasks  within the organization and 35.1% could result once external partners become accessible over  blockchain. Smart contracts will automate tasks, provide electronic versions of physical legal  systems such as mortgage deeds, as well as incorporate external sources of information in the  process

2) Cost structures for mortgage lenders are assumed to be similar across the US and European  markets

Analysis – We estimate that the customers can expect between 50% to 100% of the  average savings of 22.1% ((9.1%+35.1%)/2)) generated by lenders to be passed on to them.  Hence, customers can expect to save between 11% ($480=$4,350*22.1%*50%) and 22.1%  ($960=$4,350*22.1%*100%)

21

Assumptions & Calculations – Insurance Industry Insurer Savings

Data – Total motor insurance policies held by private motor vehicle owners in the UK (2015) -  10.42 million

Claims processed by the UK motor insurance industry (2015) - 3.7 million Proportion of claims as total number of active policies - 3.7/10.42 = 35.8% Claims cost and expenses - $13.3 billion

Assumption: Expected savings in claims costs and expenses owing to smart contract  automation, reduced documentation, quicker support against claims, faster claims settlement  etc. - $1.67 Billion

Analysis – Proportion of savings in the UK motor insurance industry - 1.67/13.3 = 12.5% Global motor insurance industry, (gross written premiums, 2014) - $460.1 billion Total potential savings - $460.1 billion*35.8%*12.5% = $21 billion

Consumer Savings

Data – 1) Average motor insurance premium – US - $907.4 (https://www.valuepenguin.com/ average-cost-of-insurance)

2) Average motor insurance premium – UK - $707.8 (https://www.abi.org.uk/News/Industry dataupdates/2016/04/ABI-average-motor-insurance-premium-tracker-Q1-2016-data)

3) Average motor insurance premium – 10 European countries including France, Germany,  Netherlands among others - $637.3 (http://www.insuranceeurope.eu/sites/default/fi les/ attachments/European%20motor%20insurance%20markets.pdf)

4) Average motor insurance premium across the US, the UK, and ten large European markets  = $726

Note: All fi gures converted to USD at 2014 exchange rates

Assumptions – We are assuming that insurers will pass on 50% to 100% of these savings  (12.5%) on to the end-customers

Analysis – Savings for customers in case insurers pass on 50% of savings to consumers =  $726*12.5%*50% = $45

Savings for customers in case insurers pass on 100% of savings to consumers =  $726*12.5%*100% = $90

22

Assumptions & Calculations – Syndicated Loans Industry Investment Bank Savings:

New Revenue Potential for Investment Banks

Data – 1) Settlement times in the High-Yield Bond (HYB) Market = T+3 – Van Eck Global, “An  Alternative to Bank Loans”, Accessed August 2016

2) Settlement times in the Leveraged Loan (LL) Market = T+20 – Bloomberg, “With Loan Market  Still Using Faxes, Settlement Times Trail Goal”, April 2015

3) Growth in the HYB market (CAGR) = 15.5% ($0.8 trillion in 2008 to $2.2 trillion in 2015).  Growth in the LL market in the same period = -2.4% ($3.2 trillion in 2008 to $2.7 trillion in 2015)

– Stone Harbor Investment Partners, “The Globalization of the High Yield Market”, March  2015 Update; CVC Credit Partners, “SUB-INVESTMENT GRADE DEBT CAPITAL MARKETS”,  Accessed August 2016

Assumptions – We estimate that smart contracts would be able to bring down the settlement  times in the LL market to 6 to 10 days, making it more attractive than it is currently, spurring  demand. We expect the growth rate of the LL market could be between 5 and 6% as a result  of this increased demand. The assumption here is that the growth in the LL market could be at  least a third of the HYB market (since the settlement time of 10 days will be nearly three times  of 3 days in HYB market).

Analysis – Increased demand due to reduced settlement time = $2.7 trillion * 5.5% = $149  billion

Fees charged by investment banks to arrange leveraged loans = 1% to 5% - Expert estimates;  Leveregaedloan, http://www.leveragedloan.com/primer/#!whatisaleveragedloan, Accessed  August 2016; S&P Report, “A Guide To The U.S. Loan Market”, September 2013

Additional income for investment banks = $149 billion * 1% = $1.5 billion to $149 billion * 5%  = $7.5 billion

Client benefi ts

Expected faster settlement of leveraged loan between 6-10 days

23

References

1 Chamber of Digital Commerce, “Chamber of Digital Commerce Launches Smart Contracts Alliance”, July 2016 2 CoinDesk, “How Barclays Used R3’s Tech to Build a Smart Contracts Prototype”, April 2016

3 CoinDesk, “Microsoft Launches Smart Contracts Security Working Group”, September 2016

4 Capgemini Consulting Interview, June-July 2016

5 Bloomberg, “With Loan Market Still Using Faxes, Settlement Times Trail Goal”, April 2015

6 Capgemini Consulting Interview, June-July 2016

7 Bloomberg, “Dirty Secret of $1 Trillion Loans Is When You Get Money Back”, September 2014 8 J.P. Morgan, “Australia Quantitative and Derivatives Strategy”, March 2016

9 Nick Szabo, “The Idea of Smart Contracts”, 1997

10 A permissioned distributed ledger system allows the participants to agree on who can create, transact, validate and view  smart contracts. This is done using rules and permissions granted to the participants in the system in advance. For instance,  banks can be granted rights to validate transactions; and regulators can be granted access to view transaction details and so  on.

11 Capgemini Consulting Interview, June-July 2016

12 Capgemini Consulting Interview, June-July 2016

13 Capgemini Consulting Interview, June-July 2016

14 Capgemini Consulting Interview, June-July 2016

15 Organizational changes refer to the fundamental changes in operating model where a group of firms share a common view  of the contract between trading parties, as opposed to silo-ed, unilateral, multiple or even contradictory versions of contracts  that exist today

16 Van Eck Global, “An Alternative to Bank Loans”, Accessed August 2016

17 Bloomberg, “With Loan Market Still Using Faxes, Settlement Times Trail Goal”, April 2015

18 Stone Harbor Investment Partners, “The Globalization of the High Yield Market”, March 2015 Update; CVC Credit Partners,  “SUB-INVESTMENT GRADE DEBT CAPITAL MARKETS”, Accessed August 2016

19 Know Your Customer (KYC), Anti-Money Laundering (AML) and Foreign Account Tax Compliance Act (FATCA) 20 Expert estimates, Leveregaedloan, http://www.leveragedloan.com/primer/#!whatisaleveragedloan S&P Report, “A Guide To The U.S. Loan Market”, September 2013

21 Lexology, “LSTA Imposes New Rules for Par Trades in the Secondary Bank Loan Market”, July 2016 22 Capgemini Consulting Interview, June-July 2016

23 Capgemini Consulting, “Backing up the Digital Front: Digitizing the Banking Back Office”, November 2013 24 Wall Street Journal, “U.S. Housing Market Tracker”, Published October 2014, Accessed June-July 2016 25 Fivethirtyeight.com, “How Many Homeowners Have Paid Off Their Mortgages?”, December 2014 26 Capgemini Consulting Analysis, In the US, on an average $4,350 (Capital One, “Home Loans - Be in the know about your

closing costs”, Accessed June-July 2016) is paid by customers per average loan of $200,000 towards processing fees Assumptions – 1) We estimate that lenders can save 9.1% through automation of tasks within the organization and 35.1%  could result once external partners become accessible over blockchain. Smart contracts will automate tasks, provide  electronic versions of physical legal systems such as mortgage deeds, as well as incorporate external sources of information  in the process

2) Cost structures for mortgage lenders are assumed to be similar across the US and European markets Analysis – We estimate that the customers can expect between 50% to 100% of the average savings of 22.1%  ((9.1%+35.1%)/2)) generated by lenders to be passed on to them. Hence, customers can expect to save between 11%  ($480=$4,350*22.1%*50%) and 22.1% ($960=$4,350*22.1%*100%)

27 European Mortgage Federation, “HYPOSTAT 2015 A review of Europe’s mortgage and housing markets”, September 2015 1EUR = 1.1032178 USD in 2014, http://www.x-rates.com/average/?from=EUR&to=USD&amount=1&year=2014 28 Capgemini Consulting Analysis.

1) Mortgage fees -https://home.capitalone360.com/home-loans/closing-costs. In the US, the average fees of $4,350 for  $200,000 mortgage were charged to the customers

2) New housing in the US - Wall Street Journal, “U.S. Housing Market Tracker”, Published October 2014, Accessed June-July  2016. 6.1 million Homes were constructed in 2015.

24

References

3) New housing financed through a mortgage loan - Fivethirtyeight.com, “How Many Homeowners Have Paid Off Their  Mortgages?” December 2014. 64% homes were mortgage financed. Hence, 3.9 million homes were funded through  mortgage loans

4) Size of the US and European mortgage markets - European Mortgage Federation, “HYPOSTAT 2015 A review of Europe’s  mortgage and housing markets”, September 2015. The EU28 and US market was approx $20.98 trillion.  Assumption - We estimate that lenders can save 9.1% through automation of tasks within the organization and 35.1% could  result once external partners become accessible over blockchain. Smart contracts will automate tasks, provide electronic  versions of physical legal systems such as mortgage deeds, as well as incorporate external sources of information in the  process

Analysis - In the US market , minimum savings $4,350*9.1%*6.1*10^6*64% = $1.5 billion, maximum savings  $4,350*35.1%*6.1*10^6*64% = $6 billion

Comparing the outstanding mortgage industry of EU28 ($9.2 trillion) and US ($11.8 trillion). The savings for EU28 area is  estimated to be between $1.17 billion (minimum) and $4.7 billion (maximum).

Adding the savings across the two markets ~ $3 billion and $11 billions

29 ABI/MINTEL, “Motor Insurance UK”, March 2015; Note: All figures converted to $ from £ , 1£ = 1.649828 $ in 2014,  Source:- http://www.x-rates.com/average/?from=GBP&to=USD&amount=1&year=2014

30 Number rounded off

31 Capgemini Consulting Analysis,

Motor insurance premiums across different countries :-

For US - https://www.valuepenguin.com/average-cost-of-insurance. For UK - https://www.abi.org.uk/News/Industry-data  updates/2016/04/ABI-average-motor-insurance-premium-tracker-Q1-2016-data. For 10 European Countries (pp 39-40)-  http://www.insuranceeurope.eu/sites/default/files/attachments/European%20motor%20insurance%20markets.pdf  Assumption – We are assuming that insurers will pass between 50% to 100% of these savings (12.5%) on to the customers  Analysis - Average premium paid by customers across US ($905), UK ($707.8), 10 European countries ($637.3) in 2014 was  $726 in 2014.

Calculation – Based on the average premium of $726, savings for customers will be between $45(12.5%*50%*$726) and  $90(12.5%*100%*$726)

32 Capgemini Consulting Interview, June-July 2016

33 Capgemini Consulting Interview, June-July 2016

34 Capgemini Consulting Interview, June-July 2016

35 Capgemini Consulting Interview, June-July 2016

36 Stanford University, “Cryptocurrencies, blockchains, and smart contracts”, Accessed September 2016 37 Oxford University, “Smart Contracts: Bridging the Gap Between Expectation and Reality”, July 2016 38 MIT, “Enigma: Run Code on Encrypted Data”, Accessed September 2016

39 Cornell Tech, “The Initiative for Cryptocurrencies and Contracts”, Accessed September 2016

40 CoinDesk, “BitLicense: Who Has Applied and Who Has Left New York?”, August 2015

41 IT World Canada, “As a blockchain-based project teeters, questions about the technology’s security”, July 2016 42 The Conversation, “Blockchain could challenge the accepted ways we shape and manage society”, January 2016 43 Capgemini Consulting Interview, June-July 2016

44 Capgemini Consulting Interview, June-July 2016

45 Capgemini Consulting Interview, June-July 2016

46 Capgemini Consulting, “Digital Dynasties: The Rise of Innovation Empires Worldwide”, June 2016 47 Capgemini Consulting Interview, June-July 2016

48 Capgemini Consulting Interview, June-July 2016

49 Capgemini Consulting Interview, June-July 2016

50 Coindesk, “Deutsche Bank Seeks Real-World Impact With Blockchain Strategy”, April 2016

51 Coindesk, “AXA Eyeing Bitcoin for Remittance Market”, September 2015

52 Axa, “AXA Strategic Ventures invests in blockchain technology”, February 2016

53 Caisse des Dépôts, “Launch of a market initiative on the block chain with 11 partners, December 2015”

25

About the Authors

Bart Cant

Blockchain Community Leader, Capgemini

bart.cant@capgemini.com

@bartcant

Amol Khadikar

Senior Consultant, Digital Transformation Institute

amol.khadikar@capgemini.com

@amolkhadikar

Antal Ruiter

Head, Capgemini Consulting’s Blockchain initiative

antal.ruiter@capgemini.com

@AntaRui

Jakob Bolgen Bronebakk

Managing Consultant, Capgemini Consulting

jakob.bronebakk@capgemini.com

@jbbronebakk

Jean Coumaros

Senior Vice President, Capgemini Consulting

jean.coumaros@capgemini.com

Jerome Buvat

Head, Digital Transformation Institute

jerome.buvat@capgemini.com

@jeromebuvat

Abhishek Gupta

Senior Consultant, Capgemini Consulting

abhishek.l.gupta@capgemini.com

@abhigupta15

Bart is a Principal for Capgemini’s Transformation Practice in Financial  Services. He is the founder of Capgemini’s Blockchain, Crypto  Currency and Permissioned Ledgers user community. Bart has been  investigating the potential of Blockchain as an innovative technology  within Financial Services for the last 3 years.

Amol is a senior consultant at the Digital Transformation Institute. He  keenly follows the role played by mobile, software and data science in  digitally transforming organizations.

Antal is Head of Capgemini Consulting’s Blockchain initiative. He has  more than 15 years of experience in corporate and retail banking,  compliance, operational risk management and innovation. He has  worked in Europe, Latin America and Australia and is now based in the  Netherlands.

Jakob is a managing consultant in the banking and insurance practice  of Capgemini Consulting, focusing on fi nancial risk management,  digital banking and distributed ledger. His background is in capital  markets and derivatives.

Jean Coumaros is a Senior Vice President and the head of Capgemini  Consulting’s Global Financial Services practice. Jean has more than  24 years of experience working with leading banks, credit specialists  and insurance companies on such topics as digital transformation, risk  management, customer experience or IT strategy.

Jerome is head of Capgemini’s Digital Transformation Institute.  He works closely with industry leaders and academics to help  organizations understand the nature and impact of digital disruptions.

Abhishek is a senior consultant at Capgemini Consulting in India. He  likes to follow emerging technologies and their impact on shaping the  dynamics of businesses at large.

Digital Transformation Institute

DIGITAL dti.in@capgemini.com

TRANSFORMATION INSTITUTE

The Digital Transformation Institute is Capgemini’s research center on all things digital.

The authors would like to extend a special thanks to all fi nancial industry executives, startup entrepreneurs and academics who participated in our interviews for their insights and expertise, especially:

Philippe Denis (BNP Paribas), Roberto Mancone (Deutsche Bank), John Whelan (Banco Santander), Fabian Vandenreydt (Innotribe  and The Swift Institute), Ari Juels (Cornell University), Thomas Hardjono (MIT), Dan O’Prey (Digital Asset), Brian Fabian Crain (Monax)  Gideon Greenspan (MultiChain), Sergey Nazarov (smartcontract.com), Trent McConaghy (BigchainDB), Louis Stone (Symbiont),  Nick Williamson (Credits), and Jacob Stenum Czepluch (BrainBot)

The authors would also like to thank Subrahmanyam KVJ from Capgemini Consulting’s Digital Transformation Institute, Alan Walker,  Surinder Raju and Julie Sammons from Capgemini Consulting UK, Markus Vogg and Stefan Huch from Capgemini Consulting  Germany, Jan-Willem Burgers from Capgemini Netherlands, Cliff Evans, Roderick Wilkins, Michael Donnary, Mahendra Nambiar,  Kevin Tran and Nilesh Vaidya from Capgemini US, Nick Meyne, Graham Taylor and Sam Hunt from Capgemini UK, Menno van  Doorn and Sander Duivenstein from Sogeti, and M. A. Kishen Kumar from Capgemini India

26

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27

For more information, please contact:

Global

Jean Coumaros

jean.coumaros@capgemini.com

Asia Pacific

Deepak Sahoo

Deepak.Sahoo@capgemini.com  Marin Mignot

Marin.Mignot@capgemini.com Philip Gomm

Philip.gomm@capgemini.com Rishabh Shah

Rishabh.shah@capgemini.com

Norway

Jon Waalen

jon.waalen@capgemini.com

Belgium

Robert van der Eijk

robert.van.der.eijk@capgemini.com

China

Kevin Zhu

kevin.zhu@capgemini.com

Singapore / Hong Kong

Frederic Abecassis

frederic.abecassis@capgemini.com

Sweden/ Finland

Johan Bergstrom

johan.bergstrom@capgemini.com

France

Christophe Vergne

Christophe.vergne@capgemini.com Geoffroy de saint Amand geoffroy.de-saint-amand@capgemini.com Stanislas de Roys

stanislas.deroys@capgemini.com

North America

Alan Walker

alan.walker@capgemini.com

Andrew Diaper

Andrew.Diaper@capgemini.com Bart Cant

Bart.Cant@capgemini.com

Kartik Ramakrishnan

Kartik.Ramakrishnan@capgemini.com Mahendra Nambiar

Mahendra.Nambiar@cagpemini.com Shane Cassidy

Shane.Cassidy@capgemini.com Yves Bettan

yves.bettan@capgemini.com

Netherlands

Freek Roelofs

freek.roelofs@capgemini.com

Spain

Christophe Mario

christophe.mario@capgemini.com David J Brogeras

david.brogeras@capgemini.com Lucia Gonzalez

Lucia.gonzalez@capgemini.com

United Kingdom

Andrew Diaper

Andrew.Diaper@capgemini.com Bart Cant

Bart.Cant@capgemini.com

Kartik Ramakrishnan

Kartik.Ramakrishnan@capgemini.com Kevin Simmons

kevin.simmons@capgemini.com Mahendra Nambiar

Mahendra.Nambiar@cagpemini.com Shane Cassidy

Shane.Cassidy@capgemini.com

Europe

Jorge Sabrino

Jorge.Sabrino@capgemini.com

Germany, Austria and Switzerland Christian Kroll

christian.kroll@capgemini.com Detlev Froese

detlev.froese@capgemini.com Klaus-Georg Meyer

Klaus.georg meyer@cagpemini.com Michael Zellner

michael.zellner@capgemini.com

Capgemini Consulting is the global strategy and transformation  consulting organization of the Capgemini Group, specializing  in advising and supporting enterprises in significant  transformation, from innovative strategy to execution and with  an unstinting focus on results. With the new digital economy  creating significant disruptions and opportunities, the global  team of over 3,000 talented individuals work with leading  companies and governments to master Digital Transformation,  drawing on their understanding of the digital economy and  leadership in business transformation and organizational  change.

Find out more at: www.capgemini-consulting.com  Rightshore® is a trademark belonging to Capgemini

About Capgemini and the

Collaborative Business Experience

With more than 180,000 people in over 40 countries, Capgemini  is a global leader in consulting, technology and outsourcing  services. The Group reported 2015 global revenues of EUR 11.9  billion. Together with its clients, Capgemini creates and delivers  business, technology and digital solutions that fit their needs,  enabling them to achieve innovation and competitiveness. A  deeply multicultural organization, Capgemini has developed its  own way of working, the Collaborative Business ExperienceTM,  and draws on Rightshore®, its worldwide delivery model.

Learn more about us at www.capgemini.com.

Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group. The information contained in this document is proprietary.  © 2016 Capgemini. All rights reserved.