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The Weekend Read: Mar 5

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Enterprise Ethereum Alliance

The Enterprise Ethereum Alliance formally kicked off earlier this week with an all day meet up in JP Morgan’s Brooklyn offices. The group consists of Ethereum-focused startups and large companies, with a focus on developing standards for private Ethereum deployments. The reaction by the press was curious, as many picked up a theme of Microsoft and IBM waging a proxy war via EEA (Microsoft) and the Hyperledger project (IBM). For example, American Banker noted “the IBM-led Linux Foundation Hyperledger Project” and their use of “a mainframe in a cloud” vs Microsoft as “more focused on openness — letting organizations choose the combinations of technology that work best for them.” Coindesk followed up with an article on the decentralized nature of the new group:

Still, while the board is also designed to give members a sense of accountability, more experimental governance models are also being considered. “Everything starts as an idea, with one person,” said Lubin. “That happened. But Ethereum is moving towards decentralization.”

The press loves a simple narrative (see below for a fine example), but both groups are very diverse and seek to move the whole industry forward, as we ALL have a lot of work to do to make this technology real for business users. One theme that did persist at Tuesday’s EEA launch was the desire to keep aligned, and in some minds perhaps eventually merged, with the public Ethereum chain (not to be confused with Ethereum Classic, or Ethereum Classic Classic!). This and Bitcoin’s recent price surge are most likely what is behind the recent ramp up in the price of ether. For an older, somewhat related article on public Ethereum, I recommend this Aeon article.

Et Tu, Blockchain?

The only good thing to come out of the R3 non-story was this new Tim Swanson meme...
The only good thing to come out of the R3 non-story was this new Tim Swanson meme…

Over the last two weeks, a blockchain butterfly flapped its wings, and the next thing we knew, R3 was caught in the oddest of fake-news hurricanes. In short: a tweeted pic from a Corda meetup was coupled with the quote “GAME OVER” (perhaps an early tribute to the great Bill Paxton?) and the next thing we knew, there were all sorts of nonsense articles and blog posts. For a run down, you can read Chris Skinner’s take (and yes, his is an intentional fake news headline…) and this Bank Innovation piece (Dave Birch: I would love to meet your tailor). In shorter: it was all complete BS. Which was disappointing, but not surprising. I just finished the Michael Lewis book The Undoing Project and the one thing the book taught me was that we are all “confirmation bias” machines. Or as The New Yorker put it: Why Facts Don’t Change Our Minds

As David Rutter pointed out in his blog post last week:

Humans are creatures of habit. As time went on, the term blockchain came to be associated with any type of distributed ledger, even as the technology matured and evolved to meet the needs of different groups of users. This isn’t an issue unique to our space. The marketing team at Canon must have spent countless hours working out how to stop people referring to all copy machines as Xeroxs.

We can see this in two other thoughtful articles that were recently published. Our very own Antony Lewis has a great take on Distributed Ledger Technology for post trade published in Tabb Group…yet the title chosen by the editors was “Applying Blockchain to Post-Trade Derivatives Processing.” Another from CFO magazine includes yours truly and does a great job in explaining why CFOs should pay attention to distributed ledger technology…which they term “Betting on Blockchain.”

Lost in the noise was the release of an 80 page report by the Aite Group. This Coindesk review of the report gives a flavor of the market landscape that Aite explored, including this key quote:

“A growing trend, adopted by five chaintech platforms and spearheaded by R3,” writes Paz, “calls for consensus taking place at the transaction level, requiring the consent of at least two counterparty nodes.”

Another bit lost was our new intro video to Corda, which declares in very plain language what Corda is (and isn’t):

But don’t just trust our word on it. Sign up for Corda training or sign up to our Slack, and see (and debate) for yourself!

Links

The Weekend Read: Feb 19

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by Todd McDonald

R3 in the News

Our CEO David Rutter sat down with Financial News for a very entertaining (and paywalled, sorry) interview that gives more than a few anecdotes on R3 and how we attempted to surf the blockchain hype cycle…all while trying to not get snared in the ‘reef of inflated expectations’ that hides just below the surface. But as Dave says, it is the hardest any of us have ever worked in our careers and yet the most fun any of us have ever had.

Credit Suisse Corda Hackathon in full flight
Credit Suisse Corda Hackathon in full flight

Over the last two weeks, we have talked about our recent work with Credit Suisse on their triple time zone Corda Hackathon, we were very pleased to announce our newest Regulatory Member: Hong Kong’s Securities and Futures Commission, and to read the lessons learned from Bank of Canada’s Carolyn Wilkins on the work dubbed “Project Jasper”, the collaboration w BOC, Payments Canada, R3 and R3 Member Banks to experiment w a DLT wholesale payments system. I wanted to highlight her take aways for the business case below:

We’ve also gained some other important insights that will be relevant to the business case for this type of DLT application:

1. Most cost savings appear unlikely to come in the core system itself, but rather more likely through reducing bank reconciliation efforts. The initial design is quite collateral intensive while the current system is already highly efficient.
2. There’s the potential for more savings if other applications could be built on top of a core cash payment distributed ledger system (eg financial asset clearing and settlement, trade finance).
3. In an actual production system, trade-offs will need to be resolved between how widely data and transactions are verified by members of the system, and how widely information is shared.
4. While DLT may aim to reduce concentration of risk, a substantial amount of centralization would still be required (eg permissioning of nodes and setting of operational standards) if applied to wholesale payments systems.

And a shout out to my colleague, and provider of Slack-Avatars-as-a-service, Gavin Thomas for his post on how he PM’ed the #### out of the Corda open source release: DON’T LOOK DOWN, A PROJECT MANAGER’S SHORT STORY OF OPEN-SOURCING

Industry News

CoinDesk has continued their reporting on the upcoming announcement of Enterprise Ethereum, with two articles this past week, as the group readies for an official announcement soon. We are glad to see that the enterprise blockchain space, both within Hyperledger and the new Enterprise Ethereum, has started to focus on the core requirements of scalability and confidentiality. To echo what our CEO said above, there will be no shortage of hard work involved as the new group “state channels” their inner cat herder.

In another CoinDesk article, Swift’s Global Payments Initiative (GPI) Program Director Wim Raymaekers describes how the project has aimed to improve the current Swift architecture and make payments more transparent by layering on new business rules and a GUI. Raymaekers provided both hope and shade to the blockchain crowd, saying:

[B]lockchain developers will be given access directly to the GPI as part of a hackathon. “We’re going to open those APIs for fintech and blockchain designers to come up with … new ideas,” Raymaekers said.

Overall, while Raymaekers is optimistic about the possibility that blockchain might improve some products, he ultimately sees the need for the tech as limited. He concluded: “We think blockchain today is not ready for wholesale cross-border payments. We are improving that with GPI, so it’s no longer a problem.”

Lots of Links

Here is a quick rundown of other stories from the last few weeks, which features such FoTWR celebs as The Blockchain Beard, lil’ Buterin, The Swanny, and my Snark Sensei

The Weekend Read: Nov 27

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by Todd McDonald

How do you write a summary of the weekly news when you are the news? I have been thinking about that for the last few days. I have mentioned in the past that one of the lessons that I took from my trading days is that everyone is talking their book, always, even if they don’t realize it (or won’t admit it). I try to guard against that in this blog, but it is inevitable to some degree. I also don’t want to pull a ‘Zuckerberg in China‘ gambit and ‘erase’ the news. So, for a selection of articles on R3 this week, click a few of these links.

With the Thanksgiving holiday here in the US, I was in a reflective mood on all the things that I am thankful for this year. I am thankful to be part of a wider ecosystem that is trying hard, in many diverse ways, to find the next thing. I am thankful to work with a team that has the strongest collective resolve I have ever witnessed. I am thankful for creative Tim Swanson memes. I am thankful to work with folks like Richard, James, Mike and our whole tech/product team who are focused on building things (instead of with those focused on trying to tear things down from the sidelines of life). I am thankful to be working harder than I ever have in my life and enjoying (almost) every minute of it. On to the links.

Corda Open Source

This Wednesday, November 30 is the day for Corda open source. Richard Brown weighed in with another update/preview of what is to come:

Distributed ledger technologies will have such phenomenally powerful network effects that it is unthinkable that serious institutions would deploy base-layer ledger software that is anything other than fully and wholeheartedly open. And it’s why we’ve been committed all along to releasing Corda just as soon as we were sure it was heading in the right direction. It is and so we are.

We’re really proud of Corda and its progress to date. But, that said, Corda is far from finished. Mike Hearn will soon be publishing a “warts and all” description of quite how much work we still have to do. This is true for all other platforms in this space, of course, but I feel a particular responsibility to be transparent given the ambitions we have for Corda and the uses to which it will be put.

How to get Corda on November 30: Corda’s home will be corda.net. Head over…for links to the codebase, simple sample applications and a tutorial to get started writing your own CorDapps.

Corda is still young, but to echo what Hyperledger’s Brian Behlendorf states below, we feel it is better to open up early rather than late. Now is the time to invite contributions from outside. As the code matures further in the coming months and reaches a stable enough point where detailed code review makes sense, we’ll be looking forward to analysis and review from the industry’s leading experts. And others.

American Banker has a fantastic review of open source in DLT, highlighting both the advantages and risks to this approach. It is worth a read in full:

“Let’s say someone wishes to connect a Chain network that has digital assets running on it with a Corda contract,” [Adam] Ludwin said. “If those projects are open source and well documented, and that documentation is public, then whoever might be building the interfaces or connectors for these networks and services will have a much easier time doing so. That’s why open source is a boon for interoperability.”

[SNIP] Moreover, it is a way for engineers to give back to the engineering community.

“When external engineers can review the architecture and code, they can assess the quality of the projects companies are working on. This serves as a great recruiting tool,” said Max Levchin, CEO of the digital lending startup Affirm and a co-founder of PayPal. “When you open-source, it allows third parties to build applications on top of yours, [a process] which acts as a distribution channel for your own product.”

Ethereum Forks

As the article points out above, open source is hard. This week saw Ethereum initiate a planned fork on Tuesday, which lead to an unplanned fork a few days later, which the Ethereum community rushed to fix. This seems to have led to a bit of schadenfreude twitter style from the Bitcoin community. as they reposted this article in quite a few threads. Meanwhile, earlier in the week the head of strategy for Ethereum-based Consensys penned this article entitled What Venture Capitalists Got Wrong About Bitcoin:

Instead, the infrastructure built for bitcoin can increasingly be co-opted for use by new tokens. These new tokens don’t necessarily add any value for the venture capitalists who originally invested in bitcoin. To illustrate what is happening: Imagine if a railroad company in the 1800’s spent millions laying tracks, only to see a second (and third, and fourth) railroad come along and use the finished tracks for free, to ship more cargo in faster and safer cars.

Interesting to see the perspectives of the two sides, with some viewing all this activity as zero-sum, winner (chain) takes all…while others share our view that success in one ‘camp’ can serve as a positive multiplier across the whole space.

RegTech (cont.) and LegalTech

This week saw the big finale of R3’s initial global regulatory tour, culminating in Eltville am Rhein, where our very own Charley Cooper spoke to the Deutsche Bundesbank’s Central Banking conference devoted exclusively to blockchain technology. For those curious about the participants, see this link. Here is Charley’s report:

The conference lasted for four days and covered a wide range of topics, with my remarks focused on the importance of public/private collaboration as a driver of technology innovation in the highly regulated financial services industry. In the lead up to that event, Isabelle Corbett and I barnstormed through four other countries in seven days, meeting one-on-one with Swiss and Nordic regulators as part of our relentless efforts to involve government agencies and oversight bodies in our work from the outset. A huge thanks to Credit Suisse, UBS, Danske Bank, Nordea, and OP Financial for helping us navigate their home turf. R3 representatives have now met with regulators in almost all of our member jurisdictions, including central banks, securities and derivatives overseers, consumer protection agencies, law enforcement, tax authorities, NGOs, trade associations and legislators. It feels good to be home.

Risk Magazine posted a very thoughtful piece as a follow up to R3’s Smart Contract Template Summit (it is even worth the pain of signing up for a free trial!). Our partners at Norton Rose Fulbright announced the publication of our joint white paper on the legality and enforcability of smart contracts. You can request a copy of the paper here or members can contact R3 directly.

Announcements

Swift announced this week that they would become more open and vocal about their exploration into DLT, which is very welcome news. They also announced some details on their latest POC.

Damien Vanderveken, head of R&D at Swift Labs, says: “Swift has been targeted in the press as a legacy incumbent that will be doomed by DLT. But we believe Swift can leverage its unique set of capabilities to deliver a distinctive DLT platform offer for the community.”

Congrats to our friends at the JP Morgan Blockchain Center of Excellence for their open sourcing of Quorum, which you can access here. This is yet another example that the above American Banker article highlighted of the growing acceptance of open source within finance, and the advantages that even the world’s biggest banks see in an open source approach. We look forward to exploring Quorum more during the upcoming Hyperledger events in December.

And finally, we are very happy to welcome China’s Minsheng Bank to the R3 consortium, as another member in our growing network China and North East Asia.

The Weekend Read: Sept 25

All those other chains are low energy...

All those other chains are low energy…

Another fun and busy week in Blockchainland. Many thanks to the folks at Finance Montreal for hosting me on Tuesday and Wednesday and for putting up with my Trumpchain jokes during my panel session…The market is gearing up for another barnburner as Sibos kicks off in Geneva. Stop by the jauntily named “Conference Room 3” on Tuesday to catch a panel with our CEO David Rutter.

R3 in the News

It was gratifying to see the interest* in our announcement this week on the application of DLT to the management of reference data. We partnered with Axoni and SIFMA, along with seven buy and sell side institutions including AB (Alliance Bernstein), Citi, Credit Suisse and HSBC, to demonstrate how multiple actors can manage and agree upon key reference data facts without having to rely upon a traditional (centralized) data aggregation model. As FoTWR Emmanuel Aidoo says below, we run the risk of getting so focused on the allure of ‘instant settlement’ that we overlook some of the other powerful and, arguably, more achievable applications of DLT:

“Using Blockchain and Distributed Ledger Technology as a shared reference data backbone for the industry makes intuitive sense. Our vision is to demonstrate how distributed ledgers applicability can go beyond settlement and help reduce duplicate reference data costs and improve data latency which will ultimate lower costs and reduce operational risks,” said Emmanuel Aidoo, who heads the Distributed Ledger and Blockchain effort at Credit Suisse.

[*Request to WSJ editors: please please please stop referring to things being “bitcoin-like” when they have nothing to do with the bitcoin blockchain!]

R3 (and many others) in China

Our man Tim “The Swanny” Swanson was kind enough to send the following field report from the backseat of an Uber-like car service somewhere in Asia:

This past week I attended two events in East Asia: SmartCloud in Seoul and BlockchainWeek in Shanghai. BlockchainWeek included Devcon 2, the official Ethereum developers conference. 

From the TimTroll collection of menswear

From the TimTroll collection of menswear

The fact that the organizers invited me to formally present speaks volumes of how inclusive the Ethereum community is. While I do not necessarily agree with their governance decisions (cue Groucho Marx and club memberships!), their inclusivity has led to a very healthy diversity of opinions as shown by the fact I wasn’t booed off the stage for discussing topics like regulated clouds and data custody laws.

Altogether about 800 attendees came to the event which is pretty impressive considering that Ethereum as an idea is only about 2.5 years old. The first few days the attendees were mostly expats/foreigners while the final two had more Chinese attendees than laowai.

Notable notables: I was talking to a small group of bankers from South Africa in the main lobby of the event (as one does). They were peppering me with questions about zero-knowledge proofs. As I glanced around the lobby, I noticed that the creator of Zcash, Zooko Wilcox O’Hearn, was less than 20 meters away. I waved him down and he sauntered over to explain how to handle/track multiple assets with a ZK proof system to a circle of people that grew as he spoke. It was that kind of event: you could just bump into alot of brain power everywhere you went.

Reports and Releases

Congrats to our friends at RBS for announcing Emerald, an open source “Clearing and Settlement Mechanism (CSM) based on the Ethereum distributed ledger and smart contract platform.” Watch this space for more soon.

The Roubini ThoughtLab released a report entitled Wealth and Asset Management 2021 which focused on the adoption curve for asset managers (see above on ref data) with new tech. The headline was “nearly two-thirds (64%) of asset managers [surveyed] expect to use blockchain technology within the next five years.”

SWIFT released a short paper on smart contract standards, a theme that we and others have spent quite a bit of time on…but one thing I haven’t had time to do was give this a careful reading, due to being unavoidably detained on the Wooden Warrior this weekend, so we will post more on this next week.

BackspaceChain

Accenture announced their patented “editable blockchain” this week and, well, I just dont get it. Some folks seem excited. Others, not so much:

Accenture says it addresses the issue by allowing the trusted authority to edit individual pieces of the chain, subject to validation by the participants. In other words, Accenture has solved the blockchain’s immutability problem by creating a giant, horribly inefficient Excel spreadsheet. Which raises another question: When will financial institutions stop to ask themselves why they need a blockchain at all?

Maybe this is the real world fulfillment of the aforementioned Trumpchain: a shared ledger that has a very loose definition of what is and isn’t a fact…

The Weekend Read: July 24

1. Blockchain Report Bonanza

If only he had a blockchain

If only he had a blockchain

BoE has been exploring the topic of central bank digital currency (CBDC) for many months. Their report this week focused less on the technical aspects of CBDC in favor of exploring monetary policy implications. In short, would CBDC enable a central bank to perform quantitative easing (QE) directly to ‘end users’ and individuals? This could help prevent what some claimed happened in past QE episodes, especially during the Euro crisis, where banks were not “passing on” QE to the “real economy.” Said another way, blockchains could helps central bankers move beyond indiscriminate helicopter drops and instead deploy drone-like deliveries of QE goodness. Our research team has a much more nuanced review of the paper, so please contact us if you would like to learn more.

This is a very well done and welcomingly brief report that attempts to drag asset managers “off the sidelines” and into the blockchain arena. It is also novel in that it argues for both cost reductions and revenue generation.

Both of these reports serve as a nice review from different perspectives. The EY report highlights opportunity and risk from the perspective of tech companies instead of financial institutions. Couple it with this interview with Microsoft and IBM on their blockchain cloud strategies. The Bain piece reviews the payments opportunity, highlighting the oft-cited correspondent banking opportunity but also bringing into focus the ability to achieve cost savings in trade finance. This is an emerging area of focus for banks and for R3, as there is much room for improvement. This article gives just one example of commodity invoice fraud: “Trade misinvoicing is costing some developing countries two-thirds of the value of certain commodity exports.”

Taken together, the four reports show the potential and sketch out some of the challenges, all contributing to answer the “why?” that we hear often from financial institutions. Yet there was another short article that never even mentions “the B word” that answers the why (and why now) question most emphatically: a Reuters piece that highlights “the stubborn costs banks can’t erase.”

But as time marches on, it’s become increasingly difficult to find fat to trim. Long-suffering shareholders have gotten excited about these initiatives only to find they do not move the needle much. Banks are still struggling to meet targets they set, ranging from net interest margins to efficiency ratios and returns on equity.

“It’s tough to take out costs meaningfully from here,” said Patrick Kaser, a portfolio manager at Brandywine Global who invests in bank stocks.

As a result, bank executives are being forced to fundamentally rethink the way they operate and staff their businesses to make them less expensive – without also limiting the amount of revenue they can produce. As they hold the magnifying glass up to the expense ledger – especially in retail banking – they are finding some costs to be particularly rigid.

2. Ethereum Fork and the Death Throes of Classic

The Ethereum community has moved forward to execute the previously discussed hard fork. Our Tim Swanson weighed in on this earlier in the week in his post Archy and Anarchic Chains:

Perhaps the most controversial [issue] is that simply: there is no such thing as a de jure mainnet whilst using a public blockchain.  The best a cryptocurrency community could inherently achieve is a de facto mainnet.

What does that mean?

Public blockchains such as Bitcoin and Ethereum intentionally lack any ties into the traditional legal infrastructure.  The original designers made it a point to try and make public blockchains extraterritorial and sovereign to the physical world in which we live in.  In other words, public blockchains are anarchic.

As a consequence, lacking ties into legal infrastructure, there is no recognized external authority that can legitimately claim which fork of Bitcoin or Ethereum is the ‘One True Chain.’  Rather it is through the proof-of-work process (or perhaps proof-of-stake in the future) that attempts to attest to which chain is supposed to be the de facto chain.

However, even in this world there is a debate as to whether or not it is the longest chain or the chain with the most work done, that is determines which chain is the legitimate chain and which are the apostates.

Speaking of apostates, it looks like there is a bit of an internecine attack brewing against the “Ethereum Classic” chain. Never a dull moment!

[ed. note: I will be handing over this space to the deep bench of the R3 team through the end of the summer. Enjoy the attacks, forks and twitter battles without me and see everyone after Labor Day]