Blockchain and Distributed Ledger Technology: Innovation, Operation, and Legal and Regulatory Implications Consumer Protection on the Blockchain Emily Goodman Binick Vice President & Senior Counsel American Express Company April 14, 2016

Blockchain & Virtual Currency “A” (versus “the”) blockchain is a ledger of transactions between parties on a network. “The” blockchain is the public ledger on which bitcoin rides. Think of distributed ledger technology as a protocol / layer on which applications can be built. The difference between a blockchain and a traditional database is that the ledger is “distributed.” Each party on the network maintains a complete copy of the ledger. The parties all participate collectively in the validation and recordation of transactions via a computerized consensus protocol. A value transfer system based on a distributed ledger and cryptographic controls that allows parties to transact directly without the need for a trusted third party. There is no clearinghouse or trusted intermediary required to clear and settle those transactions. Potential applications are – or at least seem, right now – endless. “This is the distributed trust network that the Internet always needed and never had.” – Marc Andreessen

Blockchain & Virtual Currency A distributed ledger can take over many of the functions performed by central third parties, by enabling the network itself to be the intermediary (see figure 1, above). This attribute is particularly relevant for financial services, a field in which third parties are widely used to create trust and decrease risk. The trade = the settlement Source: Tabb Forum

Blockchain & Virtual Currency Source: Dilbert by Scott Adams “Got a leaky gutter? Put a blockchain on it.” – Michael Casey

Blockchain & Virtual Currency There are many virtual currencies, but the most popular and well-known is a decentralized currency known as Bitcoin (BTC). BTC is an open-source peer-to-peer system and is not underwritten by a government or central authority. Instead, it is based upon a cryptographic scheme that aims to provide security, privacy, and trust in the currency by recipients. The Bitcoin Ecosystem originated from software released in January 2009 and is thought to have been invented by an unknown programmer or group of programmers who go by the pseudonym “Satoshi Nakamoto.” The BTC software is now maintained by volunteer open-source community. Regulation of virtual currency Within US: NY BitLicense; Uniform Law Commission; State Money Transmitter Law; wait-and-see approach. Outside of US: Range of approaches from banning virtual currency to wait-and-see approach.

Blockchain & Virtual Currency

Blockchain - Activity & Asset Focused Regulation Look to activity and asset that is leveraging blockchain technology What are consumer protection concerns? Are those concerns addressed in an existing regulatory regime? If (maybe) yes, does the activity fit within the scope of that existing regulatory regime? If (maybe) no, will that scope be re-defined to include that asset / activity? E.g., In New York, would the inclusion of virtual currency into money transmitter law re-define “money” in NY? E.g., In other states, does the inclusion of storage / wallet activity re-define “money transmission activity”?

Existing, Regulated FI Perspective Regulatory uncertainty can lead to a degree of product development paralysis for existing, regulated FIs… Innovator’s Dilemma Institutional reluctance to apply consumer protections in a way that could be viewed as inconsistent Certain characteristics inherent to public, permissionless blockchain are at odds with existing regulatory regimes that may apply to blockchain activity E.g., irreversibility / irrevocability; decentralized; pseudonymous; caveat emptor Prioritizing offensive and defensive use cases

Existing, Regulated FI Perspective Just a few examples of opportunities… Benefit of consortiums / industry standards Consistent user experiences contributes to learnings of what the “reasonable consumer” is in blockchain apps UDAAP is always top of mind, even if regulatory treatment of underlying activity isn’t settled Identity as a smart asset  democratization and ownership of customer information Reimagining customer consents Multi-signature apps / customer control over accounts Fraud prevention  one perspective is that it will allow companies to treat legitimate claims from “good guys” more effectively

Thank you! Emily Goodman Binick Vice President & Senior Counsel Contact Information Emily Goodman Binick Vice President & Senior Counsel American Express Company emily.h.goodman.binick@aexp.com www.linkedin.com/in/emilygoodmanbinick