Lexpert Magazine

58 LEXPERT MAGAZINE | SEPTEMBER 2016 | IN-HOUSE ADVISOR – FINTECH | Uber, Amazon, iTunes and Ticketmaster have done to the incumbents within their industries. e aforementioned are just a few examples of companies whose prosper- ity comes from being a more efficient con- duit to consumers. "In-house counsel better understand what the issues are, because many of their companies will have to adapt," says eo Ling of Baker & McKenzie LLP in To- ronto. "Once they've identified the issues, they need to do the proper due diligence and analysis on the steps their clients are taking to confront the blockchain chal- lenge, identify the potential risk and move to mitigate." CRYPTOCURRENCIES When it comes to blockchain technology, fintech is where the stakes are highest. "Financial services are such a cornerstone of the economy," Ling says. "It's all about the money." But not necessarily money as we know it. Consider the Ethereum Project, which features a decentralized cryptocurrency known as "Ether," which rivals Bitcoin. It launched in July 2015 and, less than a year later, had a market capitalization in excess of US$1 billion. But Ethereum is not just a cryptocurrency developer: it's a decentral- ized application platform that has the po- tential to extend blockchain beyond peer- to-peer money systems. Peer-to-peer is the key: blockchain tech- nology and its Ethereum enhancements do not need a centralized server in order to function securely. e technology casts aside centralized financial institutions and replaces them with self-directed computer networks whose core is a transparent but unchangeable distributed ledger open to all members of the network. "In many ways, blockchain is a different version of Napster [the music-sharing technology], in the sense that it's virtual and peer-to-peer," Ling says. Each unit of Ether is unique and iden- tifiable. It cannot be copied and can only be transferred once. Transfers occur when a holder signs a transaction with a private digital key and records it on the shared ledger. e transactions can be seen, but not altered, by anyone on the network. But they occur anonymously, keeping the identities of the payer and payee from pry- ing eyes while at the same time verifying the legitimacy of a transaction through a decentralized consensus mechanism that traces the unchangeable provenance of the currency from the time it was first issued (see In-house Insight on page 63). "It's a fundamentally different way of re- cording and verifying transactions, where multiple computers widely dispersed across the planet execute an algorithm initiated by one of them, but confirmed by them all, through an answer that is held in the blockchain," says Ross McGowan of Bor- den Ladner Gervais LLP in Vancouver. "It's very difficult to interfere, because someone trying to do that would have to get to all of the computers involved." Going forward, then, the services of banks and other intermediaries will not necessarily be required to keep track of money and ensure that it has actually been transferred to legitimate parties. In the blockchain, total strangers can keep an ac- curate ledger of records without resort to trusted third parties or middle men. GROWING PAINS To be sure, the technology has its chal- lenges — scalability and security foremost among them. In June 2016, hackers breached Ethe- reum's decentralized autonomous orga- nization (DAO), which acts as a type of investor-directed venture-capital fund. e DAO had been launched only about 45 days before the hack, aer being financed by a US$120-million crowdfunding cam- paign, the largest in history. e fund had 11,000 investors, with the largest holding only a four-per-cent stake. e hackers gained control of 3.6 mil- lion Ethers, worth about US$50 million at the time. Although the funds were put into an account subject to a 28-day hold- ing period under the terms of the govern- ing Ethereum contract, and therefore likely not lost, the breach led to calls that the DAO be shut down. Despite the problems, blockchain tech- nology continues to represent a significant threat to traditional financial institutions. McKinsey & Co.'s Global Banking Annual Review 2015 predicted that up to 60 per cent of banks' retail profits could be lost by 2025 to nimble fintech firms. In Canada, similar sentiments prevail. "We think [the banks] face a material threat to their most profitable business line, Canadian P&C Banking, from innovators who intend to fleece their Golden Geese," says a report from National Bank Financial Equity Research. e pickings, it seems, are already there for the taking. "Within five years, Gen- eration Z will make up some 50 per cent of Canadians, and a lot of the millenni- als who have been watching the economic downturns don't trust banks," says Chan- tel Chapman, National Financial Fitness Coach with Mogo Finance Technology, a Vancouver-based online lender whose stated goal is to create a digital financial brand that emulates what the ride-sharing app Uber has done in the taxi business. "Fintech is a very big subject of discussion today, especially on social media." ROSS MCGOWAN > BORDEN LADNER GERVAIS LLP It's a fundamentally different way of recording and verifying transactions, where multiple computers widely dispersed across the planet execute an algorithm initiated by one of them, but confirmed by them all, through an answer that is held in the blockchain. It's very difficult to interfere, because someone trying to do that would have to get to all of the computers involved.

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